U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act Of 1934 for the fiscal year ended December 31, 1999
Or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act Of 1934 for the transition period
from_________ to ___________
COMMISSION FILE NO. 0-245424
CONTINENTAL CHOICE CARE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEW JERSEY 22-3276736
(State or other jurisdiction of (I.R.S. Employer
corporation or organization Identification No.)
44 ASPEN DRIVE, LIVINGSTON, NEW JERSEY 07039
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973-422-1666)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
Common Stock
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $1,692,662.
As of March 6, 2000, 3,267,500 common shares were outstanding, and the aggregate
market value of the common shares of Continental Choice Care, Inc. held by
non-affiliates was approximately $12,343,125.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED PART OF REPORT
BY REFERENCE INTO WHICH INCORPORATED
Proxy Statement for 2000 Annual Meeting
of Shareholders Part III
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X ]
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FORWARD LOOKING STATEMENTS
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 regarding events, conditions and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results and financial position. Current stockholders and
prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. Such factors are
described under the headings "Business - Dry Cleaning Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ITEM 1. BUSINESS
OVERVIEW
FORMATION
The Company was incorporated as a New Jersey corporation in 1993.
DRY CLEANING BUSINESS
During the second quarter of 1998, the Company established a
subsidiary, United Dry Cleaning, L.L.C. ("United") for the purpose of acquiring
and operating dry cleaning facilities initially in the Phoenix, Arizona area.
This area was selected for its rapid growth in construction and development and
increase in population, which, management believed, would provide United with
growth potential. The Company committed an aggregate of $1,000,000 to fund
United's initial operations. By early 1999, United owned and operated dry
cleaning plants and stores from eleven locations in the Phoenix area. Commencing
in the first quarter of 1999 the Company began to divest itself of the retail
dry cleaning business in order to concentrate on providing services to the
hospitality industry.
Ownership of dry cleaning establishments has historically been
concentrated within a small business "mom and pop" environment. These businesses
historically concentrated primarily on the retail consumer market. The average
dry cleaner is either stand-alone or privately owned as part of a very small
group, i.e., two or three locations. Single store cleaners generally contain
their own cleaning plant while multiple unit cleaners generally have more than
one cleaning plant and may have additional "drop only" stores.
ACQUISITION OF DRY CLEANING BUSINESSES
In May 1998, United acquired substantially all of the assets of
Ultimate Cleaners, Inc.("Ultimate"), an Arizona corporation, other than
Ultimate's cash and accounts receivable. The assets acquired from Ultimate
included dry cleaning operations at six facilities, which included two dry
cleaning plants and four drop stores. All facilities were located at leased
locations in Arizona. Except for Ultimate's obligation under certain of its real
property leases, United assumed substantially no liabilities.
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The original aggregate purchase price for the assets of Ultimate was
$1,420,000, of which $350,000 was paid as cash consideration at closing and
$20,000 was payable over a period of 20 months. The remainder was paid in the
form of a promissory note (the "Ultimate Note") in the principal amount of
$1,050,000 bearing interest at a rate of 10% per annum with a term of ten years.
Under the terms of a Mutual Release and Settlement Agreement ("Settlement
Agreement") entered into between Ultimate and United in November 1998, the
outstanding principal amount due under the promissory note was reduced by
$165,493 and the term of the promissory note was reduced to seven and one half
years. In addition, United agreed to pay approximately $3,166 per month over the
six months immediately following the date of the Settlement Agreement in
settlement of all other sums due or claimed to be due by Ultimate under the
Asset Purchase Agreement and otherwise. The obligations of the parties pursuant
to an Employment Agreement between United and the former principal of Ultimate
were also terminated. Following the settlement, United refused to make payments
under the Ultimate Note and the former owners of Ultimate have commenced an
action against United. See "Item 3. Legal Proceedings."
In May 1998, United also acquired substantially all of the assets of
Cleaner Headquarters, Inc., an Arizona corporation. Cleaner Headquarters, Inc.
conducted dry cleaning operations from one location in Arizona. The all cash
purchase price for the assets was $15,000.
In July 1998, United acquired substantially all of the assets of G & P
Associates, Inc. an Arizona corporation, which conducted dry cleaning operations
from two leased locations in Arizona. The aggregate purchase price for the
assets was $165,750, of which $95,750 was paid at closing and $70,000 was paid
in the form of a promissory note bearing an interest rate of 10% per annum with
a term of two years.
In August 1998, United acquired substantially all of the assets of
Alyssa's Magic Touch, an Arizona proprietorship, which conducted dry cleaning
operations from a leased location in Arizona. The aggregate purchase price for
the assets was $224,000, of which $115,000 was paid at closing and $109,000 was
paid in the form of a promissory note bearing an interest rate of 10% per annum
with a term of five years.
These acquisitions were accounted for as purchases and have been
included in the Company's consolidated financial statements since the dates of
acquisition.
DISPOSITION OF RETAIL BUSINESS
During the first three quarters of 1999, United closed six of the
eleven retail facilities it had acquired or formed during 1998. During the same
period, United sold three retail facilities back to the original sellers. The
sales were made in consideration of the release of United's obligations under
the purchase price promissory notes executed in connection with the original
purchases. The aggregate amount of principal and interest outstanding under the
promissory notes at the time of the sales was $168,307.
The Company recognized a net loss from sale of business related to
these transactions of $453,662 in 1999, which included net fixed assets of
$161,029, a write-off of net goodwill of $423,198 and the recording of rental
obligations of $37,742 offset by a reduction in notes payable and accrued
interest of $168,307.
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HOSPITALITY BUSINESS
Since inception, the Company's sales and margin from its dry cleaning
operations have been below levels originally anticipated by the Company. This
reduced level of sales and margin, directly related to increased costs and
competition in the retail drop store market, resulted in lower than planned cash
flow. As a result, the Company arranged for a $200,000 secured line of credit
from a bank, which was subsequently repaid in 1999 by the liquidation of assets
under a guarantee with a company in which the Chairman of the Company is the
founding partner. The line had an interest rate of Prime less 1/2 % and was to
mature January 31, 2000. In 1999, the Company arranged additional financing with
lines of credit aggregating $350,000 to fund the dry cleaning daily operations.
Both lines of credit are with companies owned by the Chairman of the Company.
The lines of credit bear interest at a rate of 8% per annum and are payable on
demand. Although the Company's retail drop store business underperformed,
through a sales and marketing campaign, the Company increased its number of
total hotel customers from approximately 35 at acquisition of the business to
approximately 145 hotel customers as of March 6, 2000. Hotel customers require
guest, drapery and linen services and the Company believes it can develop this
niche within the Phoenix, Arizona dry cleaning market. Through December 31,
1999, the Company recorded $741,973 in sales to hotel customers, representing
55% of total sales. Management has concluded that in order for the Company's dry
cleaning business to be successful, the Company must continue to focus on its
existing hotel customer base as well as seek out new hotel customers.
On November 16, 1999, the Company sold its majority interest in United
to UDC Acquisition Corp, Inc. ("UDC Acquisition"), an Arizona corporation,
pursuant to terms of a Stock Purchase Agreement. At the time of the sale, United
operated a single plant and drop store from a leased location. The majority of
the outstanding common stock of UDC Acquisition was purchased by Jeffrey M.
Trenk, brother of Steven L. Trenk, son of Alvin S. Trenk and nephew of Martin G.
Jacobs M.D., (collectively, the "Certain Executive Officers.") The aggregate
purchase price for the Company's stock interest, $10,000, was offset against
amounts due to Jeffrey M. Trenk from the Company. The sale included net fixed
assets of $199,292, a write-off of net goodwill of $588,959 offset by a relief
from liabilities of $1,544,015.
At the time of sale, United had fixed assets of approximately $200,000,
primarily machinery and equipment acquired by United from Ultimate. However, the
former owner of Ultimate is currently seeking to foreclose on the assets which
it sold to United as a result of United's non-payment on the note issued in
connection with the purchase of Ultimate. See Item 3. Legal Proceedings.
In November 1999, the Company formed a new subsidiary, Valet-USA, Inc.
("Valet") to provide dry cleaning services to focus primarily on the hospitality
industry in the Phoenix, Arizona area. Valet purchased certain capital assets
from United as well as certain inventory related to the hotel business
pursuant to the terms of an Asset Purchase and Sale Agreement dated November 15,
1999. Except for United's obligations under a property lease relating to a dry
cleaning plant and drop store, Valet assumed substantially no liabilities from
United. In connection with the transaction, the Company forgave $200,000 of debt
due from United to the Company. Due to the nature of the transaction, no gain or
loss on the transaction was recorded by either subsidiary company. Valet
currently operates a single plant and drop store from a leased location.
Valet was formed as part of the Company's focus on servicing the
hospitality industry, as opposed to the retail customer market. Management
believes they can generate higher revenues from the hospitality business than
previously derived from the retail business. Further, management believes the
Company will benefit from a reduction in employee payroll and benefit expenses,
as well as the elimination of most retail advertising.
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TELECOMMUNICATIONS MERGER
On February 5, 1999, the Company and TelaLink Network, Ltd., a
privately held Delaware corporation ("TelaLink") executed an Agreement and Plan
of Merger ("Merger Agreement") to merge the two companies in a stock-for-stock
transaction (the "Merger"). TelaLink is a telecommunications company which was
formed for the purpose of acquiring, consolidating and operating rural telephone
companies known as rural local exchange carriers ("RLECs"). Under the terms of
the Merger Agreement, TelaLink was to merge into Quorum Communications, Inc.
("Quorum"), a wholly owned subsidiary of the Company. On June 30, 1999, the
merger was approved by the Company's stockholders.
On September 21, 1999, the Company terminated the Merger Agreement upon
determining that financing for the proposed transaction would not be available
on terms acceptable to the Company. During 1999, the Company recorded $272,173
in failed acquisition costs consisting primarily of legal and accounting
expenses relating to the merger.
As of the date of termination, the Company had loaned a total of
$1,027,000 to TelaLink and its affiliates to provide working capital pursuant to
promissory notes. The notes bore interest at a rate of 12% and were due and
payable on April 30, 2000.
In addition to amounts loaned to TelaLink, the Company also entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") by and among
the Company, Pine Tree Telephone and Telegraph Company ("PTTC") and the
principal (95%) stockholder of PTTC, whereby the Company agreed to purchase not
less than 95% of PTTC's issued and outstanding capital stock. PTTC is a
telecommunication services provider to areas near Lewiston and Portland, Maine.
To secure the Company's rights under the Stock Purchase Agreement, the Company
deposited the sum of $915,000 in an escrow account. The deposit was to be
treated as a non-refundable deposit against the purchase price to be paid by the
Company at closing, or otherwise in accordance with the Stock Purchase
Agreement.
At a closing on January 19, 2000, the Company received $1,463,800 and
subsequently received $1,538 pursuant to the terms of an Inter-Party Agreement
by and among the Company, Quorum, TelaLink and Country Road Communications, Inc.
("Country Road"), The Prudential Insurance Company of America and various other
third parties. Under the terms of the agreement, the Company sold its interest
in the various TelaLink notes totaling $1,027,000 to Country Road for a purchase
price of up to $1,100,000, of which $500,000 was paid at closing and the balance
will be paid in the form of a promissory note. The note bears interest at a rate
of 6.5% per annum and matures on January 19, 2005. Interest is due and payable
in annual installments payable on January 19, 2001 and on each anniversary
thereafter up to and including the maturity date. Country Road has the right to
prepay the note. If Country Road makes aggregate payments equal to $500,000 plus
accrued and unpaid interest thereon prior to the second anniversary of the note
date, then the obligation will be considered to be deemed satisfied in full.
Under certain conditions, Country Road may be required to prepay a principal
amount of $500,000 plus accrued and unpaid interest.
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At the closing, the Company received reimbursement of the $915,000 PTTC
deposit plus accrued interest of $50,338 accrued at a rate of 8% from the date
of deposit, in exchange for the Company assigning all of its rights and
obligations under the Stock Purchase Agreement. Interest of $46,528 relating to
1999 has been recorded by the Company in 1999 and offset against failed
acquisition costs relating to the merger.
In connection with the closing and as part of a separate settlement
agreement, the Company became obligated at the time of closing to issue 100,000
shares of the Company's common stock to a third party equity investor of
TelaLink Network, Ltd. in exchange for the release of any and all claims and
liens that it may have the right to assert against Telalink and the Company.
Additionally, as part of the Inter-Party Agreement, the Company
assigned its rights and obligations under its current office space lease to
Country Road. The Company also executed a sublease pursuant to which the Company
sublet its current office space from Country Road for a term ending on
March 28, 2000.
RECENT DEVELOPMENTS
PROPOSED ALLIANCE
On March 22, 2000, the Company executed a letter of intent to form a
strategic alliance with Alliant Technologies, Inc. ("Alliant"). Through this
proposed alliance, the Company expects to invest in early stage Internet
companies. Alliant is a provider of Internet technology solutions for businesses
that offer a complete range of services, including strategic business
consulting, e-commerce application development, business process engineering and
infrastructure engineering. Under the terms of the letter of intent, (i) Alliant
would provide the Company and its clients with discounted services; (ii) the
Company would obtain 25 percent of the outstanding securities of Little
Universe, LLC, a start-up Internet Portal; and (iii) the Company would be given
the opportunity to purchase up to two percent of the equity of Technology
Keiretsu, LLC, an Internet technology Company. The Company would pay an
aggregate of $250,000 and issue a warrant to Alliant to purchase 50,000 shares
of the Company's common stock at a price of $3.00 per share. Further, any
investment in Technology Keiretsu is expected to be made at a pre-investment
valuation of that company of $25 million. The letter of intent, which is not a
legally binding obligation of the parties, is subject to the preparation and
execution of definitive agreements. No assurance can be given that such
definitive agreements will be executed or that any definitive agreements will
not contain substantially different terms and conditions than those contained in
the letter of intent.
DISCONTINUED OPERATIONS
FORMER DIALYSIS TREATMENT BUSINESS
Until October 1997, the Company was engaged primarily in the dialysis
treatment business. The Company and its subsidiaries provided equipment,
services and supplies to individuals in their homes and other residential
alternative sites, including prisons and nursing homes and provided acute care
dialysis placement services. The Company also owned and operated a center to
train individual
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patients in the self-administration of peritoneal dialysis treatments. The
Company was also engaged in providing consulting and administrative services to
customers (the "Consulting Customers") that provide dialysis treatments to
patients at and from in-center facilities owned and operated by the customers.
The Consulting Customers included Upper Manhattan Dialysis Center, Inc.
("UMDC"), Alpha Administration Corp. ("Alpha") and Continental Dialysis Center
of the Bronx, Inc. ("CDBI"), each of which is a New York corporation. All of the
outstanding common stock of Alpha and CDBI and 50% of the outstanding common
stock of UMDC is owned by Alvin S. Trenk, Steven L. Trenk and Martin G. Jacobs,
M.D., the Company's Chairman, President and Corporate Medical Director,
respectively (collectively, "Certain Executive Officers"). The Company sold
substantially all of its assets relating to the dialysis treatment business in
October 1997. Alpha and CDBI also sold substantially all of their respective
assets at that time. UMDC, the Company's remaining Consulting Customer, sold
substantially all of its assets in January 1998, subject to state regulatory
approval (which is still pending). The Company also established an 80% owned
subsidiary, Renal Management, Inc. ("RMI"), to engage in renal disease and
nephrology practice management. RMI did not conduct any substantive business nor
enter into any agreements with customers. In December 1998, the Company sold its
interest in RMI to Renal Disease Management, Inc. in exchange for shares of that
company's common stock.
UMDC SALE OF ASSETS
At a closing effective on January 29, 1998 (the "First RRI Closing"),
UMDC sold substantially all of its assets to Renal Research Institute, LLC
("RRI") pursuant to the terms of an Asset Purchase Agreement (the "RRI Purchase
Agreement") among UMDC, RRI and the shareholders of UMDC. RRI is a joint venture
between Fresenius Medical Care, N.A. and Beth Israel Medical Center.
At the First RRI Closing, RRI paid approximately $4,174,000, in partial
payment of an aggregate purchase price (inclusive of payments for a covenant not
to compete) of approximately $7,984,000, for the assets of UMDC. UMDC retained
its accounts receivable, cash and cash equivalents in the transaction, as well
as certain liabilities of UMDC outstanding as of the date of the First RRI
Closing. Under the terms of the RRI Purchase Agreement, Beth Israel Medical
Center has applied for state regulatory approval (the "NY Approval") to own and
operate the in-center dialysis facility currently operated by UMDC. In the event
the NY Approval is received, RRI is expected to promptly pay the remainder of
the purchase price for the assets of UMDC at a second closing (the "RRI Second
Closing"). The aggregate purchase price paid as of the RRI Second Closing is
expected to be reduced by the net value of certain current assets retained by
UMDC as of the RRI Second Closing.
Subject to the NY Approval, the Company expects to receive an aggregate
of approximately $4,500,000 from UMDC from the proceeds of the transaction and
from the operations of UMDC. At the time of the First RRI Closing, the Company
received approximately $2,665,000. In 1998, the Company received additional
payments aggregating $310,000 from UMDC. There were no additional
payments in 1999.
Pending the NY Approval, RRI and UMDC have entered into a Consulting
and Administrative Services Agreement (the "RRI Consulting Agreement") pursuant
to which RRI is providing UMDC with the use of the assets sold by UMDC to RRI
and RRI is providing certain other enumerated services to UMDC in exchange for a
consulting fee. RRI's fee is not payable, and accrues to the extent not paid,
during any month in which UMDC does not retain a minimum of $28,000 of cash from
net income.
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UMDC has advised the Company that in 1998 and 1999, respectively, UMDC earned
aggregate net income of approximately $308,000 and $336,000 under the RRI
Consulting Agreement. In February 2000, the Company was notified that UMDC
received payment of $672,000 from RRI representing all amounts accrued under the
RRI Consulting Agreement through January 31, 2000.
Pursuant to the terms of an agreement among the Company, UMDC and the
stockholders of UMDC, the parties agreed that all amounts payable to UMDC after
the First RRI Closing would generally be distributed first to the Company in the
amount of $516,663, second to the physician shareholders of UMDC in the amount
of $135,000, third to the Company in the amount of $270,000 and thereafter 50%
of each dollar will be paid to the Company. The agreement provides that 50% of
amounts in excess of $5,000,000 are to be paid to Certain Executive Officers.
Certain Executive Officers generally assigned such monies to the Company and the
Company agreed to indemnify the Certain Executive Officers for any tax liability
arising from such assignment.
Upon the occurrence or failure of certain other events, UMDC and RRI
may extend the term of the RRI Consulting Agreement or may enter into a joint
sale of UMDC. If the RRI Consulting Agreement is terminated, UMDC will be
required to repurchase its assets at a fixed monthly rate over a term of years,
unless sooner paid.
No assurance can be given that the transactions contemplated by the RRI
Purchase Agreement or the RRI Consulting Agreement will be completed or that
regulatory authorities will not seek to modify or terminate the arrangements
between UMDC and RRI.
SALE OF ASSETS TO IHS OF NEW YORK, INC.
The Company, other than Renal Management, Inc. ("RMI"), as well as CDBI
and Alpha, (collectively, the "IHS Sellers") sold substantially all of their
respective assets to IHS of New York, Inc., a New York corporation ("IHS") at a
closing effective October 8, 1997.
The purchase price for the assets was $5,120,000, of which $125,000
remains in an escrow to secure the indemnity obligations of the IHS Sellers to
IHS. IHS asserted a claim of approximately $142,000 for indemnification of
certain liabilities not assumed by IHS as part of the IHS Purchase Agreement.
The Company has responded to IHS's claim and is currently defending against the
claim.
The Company and IHS entered into a consulting agreement (the "IHS
Consulting Agreement"). Under the terms of the IHS Consulting Agreement, the
Company provided the consulting services of certain Executive Officers to IHS
for a period of three years from the closing date in exchange for aggregate
payments of $1,000,000 from IHS to the Company payable over the term of the IHS
Consulting Agreement. The IHS Consulting Agreement may be terminated by IHS in
the event the Company is unable to provide the services of two or more of the
Certain Executive Officers or upon a breach by the Company or the Certain
Executive Officers of the terms of the IHS Consulting Agreement.
NON COMPETITION AGREEMENTS
The Company and the Certain Executive Officers agreed not to compete in
the dialysis treatment and certain related businesses (i) in the case of IHS,
within 25 miles of any business acquired by IHS for a period of five years
following October 8, 1997 and (ii) in the case of RRI, generally within the
Borough of Manhattan, New York for a period of ten years following January 29,
1998. Further, the Company and
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Certain Executive Officers remain subject to a covenant not to compete which
obligates each of them to refrain from competing with Renal Treatment Centers,
Inc. and certain of its subsidiaries in New Jersey within 35 miles of Cape May
Court House, New Jersey in certain businesses for a term of seven years.
GOVERNMENTAL REGULATION
GENERAL HEALTH CARE REGULATION
The Company's former business operations were, and the operations of
UMDC are subject to extensive governmental regulations at the federal, state and
local levels. The laws, rules and regulations which govern its consulting
customers are very broad and are subject to continuing change and
interpretation. There is also an absence of regulations or decisions
specifically addressing the dialysis business. Thus, it is possible that certain
of the Company's or UMDC's past or present contractual arrangements or business
practices might be challenged, and if so successfully challenged, there can be
no assurance that the Company would not be adversely affected.
The Company provided consulting services to certain facilities that are
administered by corporations and/or physicians who are not under the direct
control of the Company. Because the Company does not have control over the
actions of such corporations and physicians who render services, the Company is
subject to the risk that such corporations or physicians may have violated
federal, state or local laws and regulations including Medicare and Medicaid
laws without the knowledge or consent of the Company. Limited violations may
have occurred at such facilities in the past.
ENVIRONMENTAL LAWS
The Company's former operations were and its current dry cleaning
operations are subject to various state hazardous waste disposal laws. The
Company disposed of its medical waste through hazardous waste vendors which are
primarily responsible for compliance with such laws. Those laws in effect during
the period in which the Company was engaged in the provision of dialysis related
services did not classify most of the waste produced during the provision of
dialysis services to be hazardous, although disposal of non-hazardous medical
waste is also subject to regulation. The dry cleaning business uses various
cleaning chemicals which are classified as hazardous substances under applicable
state and federal regulations. Management believes that all hazardous substances
used in the dry cleaning operations are handled in accordance with applicable
laws, rules and regulations.
In its role as owner and/or operator of properties or facilities, the
Company may be subject to liability for investigating and remedying any
hazardous substances that have come to be located on the property, including any
such substances that may have migrated from, or emitted, discharged, leaked,
escaped or been transported from the property. Management is not aware of any
such events. Further, management is not aware of any pending or threatened
claim, investigation or enforcement action regarding such environmental issues
that, if determined adversely to the Company, would have material adverse
consequences.
The Company's former dialysis operations were subject to a wide variety
of other federal, state and local environmental laws and regulations. Among the
types of general regulatory requirements faced by health care providers are as
follows: air and water quality control requirements; waste management
requirements; specific regulatory requirements applicable to asbestos,
polychlorinated biphenyls, and radioactive substances; requirements for
providing notice to employees and members of the public about hazardous
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materials and wastes; and certain other requirements.
The Company believes that it is and was in substantial compliance with
all applicable environmental regulatory requirements, and is not aware of any
noncompliance with applicable environmental regulatory requirements which could
have a material adverse effect on the Company.
COMPETITION
The Company's dry cleaning business faces competition from many
individual and franchised cleaners. The cost of entry into the dry cleaning
business is relatively low. It requires only a low or semi skilled labor force
which management believes is generally available at low to moderate wages in the
Phoenix, Arizona area. The Company believes it can compete by targeting the
hospitality industry. Nonetheless, the Company's dry cleaning business faces
substantial local competition from smaller and similar sized competitors.
EMPLOYEES
As of March 6, 2000, the Company employed 6 full-time employees,
including officers, at its corporate offices. In addition, as of that date,
Valet employed 25 full-time and 1 part-time employees. No employees are covered
by collective bargaining agreements, and the Company considers its employee
relations to be good.
LIABILITY INSURANCE
The Company carries property, general liability and professional
liability insurance in amounts and coverage deemed adequate by management.
However, there can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that
liability insurance will continue to be available at a reasonable cost.
ITEM 2. PROPERTIES
The Company's corporate headquarters during 1999 consisted of 3,500
square feet of leased office space located in Morristown, New Jersey. The lease
provided for a base annual rent of approximately $70,000, and expired January
31, 2006. As part of the Inter-Party Agreement executed at the January 19, 2000
closing, (see "Telecommunications Merger"), the Company assigned its rights and
obligations under this lease. The corporate headquarters currently consists of
approximately 1,000 square feet located in Livingston, New Jersey. This space is
part of the personal residence of the Chairman of the Company and is not subject
to a lease. The Company's subsidiary, Valet, conducts dry cleaning operations
from a single leased plant and store location comprising approximately 3,600
square feet. The lease provides for a base annual rent of $69,223 and expires
February 29, 2004. Management believes that alternative facilities are readily
available in the location in which Valet conducts business.
ITEM 3. LEGAL PROCEEDINGS
In November 1998, United delivered a promissory note in the principal
amount of approximately $850,000 to Ultimate Cleaners, Inc. in connection with
the Settlement Agreement (See "Item 1. Business - Dry Cleaning Business"). The
former owners of Ultimate Cleaners, Inc. have brought an action in Arizona
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state court to accelerate the promissory note and for certain related costs. The
plaintiff also seeks to foreclose on the assets which it sold to United. United
is defending against the claim and has raised counterclaims. The Company is not
currently a party to any material pending legal proceeding.
Many aspects of the former businesses of the Company and its
subsidiaries involved risks of potential liability. The Company and its
subsidiaries and affiliates may be subject to actions by patients and are
subject to actions by employees in the normal course of the Company's and the
subsidiaries' respective former businesses, including actions grounded in
personal injury. Further, the Company and its subsidiaries may, from time to
time, be involved in proceedings with, and investigations by, governmental
agencies relating to licensure and to the Federal, state and local laws, rules
and regulations under which the Company and its subsidiaries operated.
Management believes that the outcome of these proceedings will not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMPANY COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Effective October 30, 1998, Nasdaq caused 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) to cease trading on the Nasdaq National Market
and to commence trading in the NASDAQ SmallCap Market. On July 20, 1999, the
Company's warrants that were issued in connection with the Company's initial
public offering on July 27, 1994 expired. There were approximately 24 holders of
record of the Company's common stock as of March 2, 2000. The following table
sets forth the closing high and low bids for each of the securities for each
quarter following the quarter ended December 31, 1997. The figures set forth
below were obtained from the National Association of Securities Dealers (NASD)
"Monthly Market Summary Reports".
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS UNITS
THREE MONTHS ENDED (CCCI) (CCCIW) (CCCIU)
- - ------------------ ------ ------- -------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 2-7/16 2 N/A N/A N/A N/A
September 30, 1999 3-1/8 2-7/8 N/A N/A N/A N/A
June 30, 1999 4-1/16 3-3/4 13/32 1/8 4-3/8 4
March 31, 1999 2-11/16 2-1/4 3/16 3/32 2-25/32 2-11/32
December 31, 1998 2-1/4 1-27/32 1/8 1/32 2-9/32 1-15/16
September 30, 1998 2-1/4 1-11/16 1/8 1/32 2-1/4 1-11/16
June 30, 1998 2-7/16 1-13/16 1/8 1/32 2-7/16 2-1/32
March 31, 1998 2-1/4 1-7/16 1/16 1/32 2-1/16 1-5/16
</TABLE>
On April 26, 1999, the Company granted warrants to purchase up to an
aggregate of seventy-five thousand (75,000) shares of its common stock to a
10
<PAGE>
financial services provider at an exercise price of $2.625, which was
the fair market value on the date of grant. The Company recorded $50,000 in
expense related to these warrants in selling, general and administrative
expenses in the accompanying Consolidated Statements of Operations. This sale
was a private placement exempt from registration pursuant to section 4(2) of the
Securities Act of 1933, as amended (the "Act").
On January 3, 2000, the Company granted warrants to purchase up to an
aggregate of one hundred thousand (100,000) shares of its common stock to a
financial services provider in which the Chairman is a founding partner at an
exercise price of $2.00, which was the fair market value on the date of grant,
in exchange for professional services to assist the Company in future
transactions. This ales was a private placement exempt from registration
pursuant to section 4(2) of the Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared With Year Ended December 31,
1998.
At the IHS Closing on October 8, 1997, the Company completed the sale
of its New Jersey, New York, Connecticut and Pennsylvania dialysis business
assets to IHS. Following the IHS Closing, the Company's sources of revenue
included amounts payable for consulting services available to IHS through
October 2000, at a rate of $27,777 per month. In 1999 and 1998, the Company
recognized $333,324 per year for consulting services under this agreement.
In January 1998, UMDC, a Consulting Customer of the Company that is 50%
owned by Certain Executive Officers, sold substantially all of its assets to
RRI. As a result, the Company and UMDC terminated the UMDC Consulting Agreement
(the "UMDC Agreement"). The Company received from UMDC approximately $2,665,000
at the First RRI Closing and a subsequent payment of $310,000 in 1998. There
were no additional payments in 1999. The Company recognized revenues in 1999 and
1998, respectively, of $0 and $310,000 from UMDC. Additionally, the Company and
certain of UMDC's shareholders became entitled to receive repayments of other
amounts due from UMDC and its shareholders, to receive amounts to be earned by
UMDC in connection with its continuing business and to receive amounts payable
by UMDC pursuant to the Company's Consulting Agreement with UMDC. See "Item 1.
Business - Discontinued Operations."
The proceeds from the IHS Closing, the IHS Consulting Agreement and the
RRI Transaction were invested by the Company in U.S. Government securities and
money market funds. No assurance can be given that the Company will continue to
receive income from the IHS Consulting Agreement or from the continued
operations of UMDC.
Beginning in May 1998, the Company began acquiring dry cleaning
businesses through a newly formed subsidiary, United Dry Cleaning, L.L.C.
("United") in the Phoenix, Arizona area. This area was selected for its rapid
growth in construction and development and increase in population, which
provided United with growth potential. United's objective was to capitalize on
the trend toward consolidation of small closely held companies where critical
mass could be achieved with limited capital expenditure.
During the first three quarters of 1999, United closed six of the
eleven retail facilities it had acquired or formed during 1998. During the same
period, United sold three retail facilities back to the
11
<PAGE>
original sellers. The sales were made in consideration of the release
of United's obligations under the purchase price promissory notes executed in
connection with the original purchases. The aggregate amount of principal and
interest outstanding under the promissory notes at the time of the sales was
$168,307. The Company recognized a net loss from sale of business related to
these transactions of $453,662 in 1999, which included net fixed assets of
$161,029, a write-off of net goodwill of $423,198 and the recording of rental
obligations of $37,742 offset by a reduction in notes payable and accrued
interest of $168,307. On November 16, 1999, the Company sold its majority
interest in United to UDC Acquisition, pursuant to terms of a stock purchase
agreement.
In November 1999, the Company formed a new subsidiary, Valet-USA, Inc.
("Valet"), to provide dry cleaning services to focus primarily on the
hospitality industry in the Phoenix, Arizona area. As of March 6, 2000, Valet
provides guest, drapery and linen dry cleaning services to approximately 145
hotel customers in the Phoenix area. The Company believes that it can generate
higher revenues from the hospitality business than it derived from the retail
business. Further, management believes the Company will benefit due to a
reduction in personnel, supplies, capital equipment lease obligations and real
property leases as a result of the sale of the retail business. Valet currently
operates a single plant and drop store from a leased location.
REVENUES
Prior to the IHS and RRI First Closing, the Company provided certain
services in New York through consulting, administrative, or subcontracting
service arrangements with the Consulting Customers. The Consulting Customers
were partially or 100% owned by the Certain Executive Officers. Under the
Company's agreements with its Consulting Customers, the Company provided various
administrative and consulting services in addition to equipment and supplies. In
exchange for these services, the Company was entitled to a monthly fee, as well
as reimbursement of the Company's direct costs for equipment and supplies. The
Company's Consulting and Service Agreements with UMDC, Alpha and CDBI provided
for payments of $33,333, $20,000 and $20,000 per month, respectively. In 1998,
the Company recorded $310,000 in additional revenues related to payments from
UMDC subsequent to the First RRI Closing, not previously recorded due to
realization uncertainties. Such amount has been included in income from
discontinued operations in the accompanying Consolidated Statement of
Operations.
The Company does not expect to receive future operating revenues
related to its former dialysis based businesses or from the business of its
former Consulting Customers other than such amounts as it may receive under its
consulting agreement with IHS, the consulting agreement between RRI and UMDC and
amounts due from UMDC pending consummation of the second closing.
The Company's dry cleaning business recorded revenues of $1,359,338 in
1999 and $965,700 from the period of acquisition to December 31, 1998. Of these
revenues, approximately $617,365 or 45% and $616,000 or 64% related to retail
dry cleaning services provided by stores in 1999 and 1998, respectively, while
the remaining $741,973 and $349,700 related to dry cleaning services provided to
hotel customers. The Company anticipates that hotels will be the primary source
of revenue for Valet. Valet continues to target additional hotels in the
Phoenix, Arizona area to maximize plant capacity.
12
<PAGE>
COST OF SERVICES
Cost of services was $1,281,682 and $678,761 or 94% and 70% of revenues
attributable to the Company's dry cleaning business in 1999 and 1998,
respectively. Cost of services is mostly comprised of $923,736 and $532,154 in
salaries and other payroll expenses as well as $157,735 and $111,578 for
supplies in 1999 and 1998, respectively. In addition, $40,328 and $25,171 of
depreciation expense attributable to the dry cleaning business machinery and
equipment has been allocated to cost of services in 1999 and 1998, respectively.
This increase in cost of services as a percentage of sales is due primarily to
sales being below levels originally anticipated with a lesser corresponding
reduction in staff. The Company expects costs related to the dry cleaning
business to decline due to a reduction in personnel, supplies, capital equipment
lease obligations and real property leases as a result of the sale of the retail
dry cleaning business.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $2,460,757 in 1999, as
compared with $2,021,662 for 1998. The net increase of $439,095 is primarily
comprised of an increase of $228,257 relating to the Company's dry cleaning
businesses, the issuance of 30,000 shares of Common Stock valued at $70,500 to a
Director of the Company and the issuance of 75,000 warrants valued at $50,000 to
a financial services provider, offset by a reduction of $159,082 in salaries and
other office expenses due to a reduction in corporate staff resulting from the
IHS transaction. In connection with the IHS transaction, the Company retained
substantially all of its accounts receivable and accounts payable. Accordingly,
during the period immediately following the IHS Closing, the Company maintained
its accounts receivable and accounts payable personnel. The number of employees
employed in those departments decreased throughout 1998 and 1999.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
A provision for doubtful accounts was recorded to the extent deemed to
be adequate to absorb possible losses resulting from uncollectible receivables.
The Company reviews individual accounts and a reserve is established to reflect
any amounts considered doubtful of collection based on the Company's knowledge
of specific payors, an analysis of the aging of the accounts, as well as past
experience with the accounts under review.
As of December 31, 1999 and 1998, the Company's dry cleaning business
had accounts receivable of $96,581 and $107,957, respectively. As a percentage
of receivables outstanding, the allowance relating to the dry cleaning business
was 14% and 49%, respectively.
Management continues to evaluate the collectibility of all accounts and
believes the stated allowance as of December 31, 1999 is adequate to absorb
possible losses resulting from uncollectible receivables.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for 1999 totaled $206,850, of
which $40,328 of depreciation expense relating to the dry cleaning business is
included in cost of services. The increase
13
<PAGE>
of $60,258 from 1998 is due to amortization and depreciation of fixed and
intangible assets related to dry cleaning stores and plants purchased by United
during 1998.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income was $58,576 in 1999 and $285,568 in 1998. The net
decrease of $226,992 is related primarily to the issuance of notes payable in
connection with the acquisition of dry cleaning stores and plants by United as
well as a reduction of investment income due to cash used in the operating and
investing activities of the Company. Interest expense on the Company's debt
obligations in both periods was offset by interest earned on the proceeds from
the sale of assets to IHS and RRI.
PROVISION FOR INCOME TAXES
The provision for Federal and state income taxes as well as the
effective income tax rate was 0% in 1999 and 1998, respectively. All of the
Company's deferred tax assets as of December 31, 1999 have been offset by a
valuation allowance as a result of the Company's operating results.
YEAR 2000
The Company believes it has resolved the potential impact of the Year
2000 on its processing of date-sensitive information and network systems. As of
March 6, 2000, the Company has not experienced any significant negative effects
due to the Year 2000 problem, either internally or with its customers or
vendors. The Company's Year 2000 efforts involved a review of all information
systems, both hardware and software, and installing various upgrades to its
computer systems. The Company's costs related to its Year 2000 systems review
and upgrade were not significant. There can be, however, no assurance that the
Company will not incur any additional unforeseen expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a negative net cash flow of $2,966,659 in 1999.
Net cash used in operating activities of $1,404,054 related primarily to the
1999 net loss of $2,883,558 including a loss on sale of businesses of $453,662,
depreciation and amortization of $206,850 and an increase of $508,969 in accrued
expenses. Net cash used in investing activities of $1,622,235 reflects the
issuance of notes to TelaLink and payment of amounts held in escrow relating to
the PTTC Stock Purchase Agreement. Net cash provided by financing activities of
$59,630 reflects the proceeds from borrowing on Valet's lines of credit offset
by principal payments on notes issued in connection with the Company's 1998
acquisition of dry cleaning businesses.
The Company has made advances to certain affiliates and consulting
customers. As of December 31, 1998, the Company had advanced $370,264 to
TechTron, Inc. ("TechTron"). During 1999, the Company advanced an additional
$134,303 to TechTron. The majority of the outstanding securities of TechTron are
held by Certain Executive Officers. The Company has obtained demand promissory
notes from TechTron for all of the advances, of which the majority of notes
issued bear an 8% rate of interest per annum. Interest of approximately $75,000
has accrued through December 31, 1999, but has not been recorded due to
TechTron's lack of sufficient revenues to make payment. Payments on the notes
are not anticipated in 2000 due to the fact that TechTron does not expect to
earn sufficient
14
<PAGE>
revenues to make payment. All amounts due from TechTron are unsecured, but are
guaranteed by Certain Executive Officers.
In conjunction with the sale of UMDC assets to RRI, substantially all
amounts due to the Company from UMDC for loans, advances, supplies and equipment
were paid in January 1998. As of December 31, 1999, amounts due to the Company
from UMDC totaled approximately $1,738,000 including $1,389,000 for fees
generated pursuant to the UMDC Consulting Agreement. To the extent that the RRI
Second Closing is consummated, the Company expects to recognize some or all of
the consulting and services fees due from UMDC which were not previously
recorded due to realization uncertainties. The physician stockholders of UMDC
unaffiliated with the Company continue to owe the Company $100,000 in principal
plus interest due pursuant to loans from the Company. The Company expects that
the fees due from the unpaid services and the principal due under the physician
loans will be paid during fiscal year 2000 as part of the RRI Second Closing.
The Company advanced funds to CDBI for the construction of a new
in-center dialysis facility in the Bronx, New York. Amounts due from CDBI under
its Consulting and Services Agreement with the Company, together with amounts
advanced for supplies and equipment were all substantially repaid in 1997.
However, there was inadequate cash flow to pay $200,000 in consulting fees which
have not been recorded by the Company due to realization uncertainties.
The Company expects that its cash, cash equivalents and investments in
U.S. Government securities will be sufficient to fund the Company's operations
through 2000.
In 1998, the Company committed an aggregate of $1,000,000 to fund
United's initial operations. During 1999, the Company arranged for a $200,000
line of credit with a bank to provide additional financing. This line was
primarily secured by all of United's assets and further secured by assets of a
company in which the Chairman of the Company is a founding partner. In 1999, all
amounts due under the line of credit were repaid by the liquidation of the
assets underlying the guarantee which secured the line. In 1999, the Company
arranged for a $100,000 line of credit for United to fund the daily operations.
The line bore interest at a rate of 8% per annum and was payable on demand. The
line of credit was with a company owned by the Chairman of the Company. In 1999,
the Company also arranged for a $250,000 line of credit for Valet to fund the
daily operations. The line bears interest at a rate of 8% per sannum and is
payable on demand. The line of credit is also with a company owned by the
Chairman of the Company. As of December 31, 1999, $180,000 of debt availability
remained on the line.
In connection with United's acquisition of dry cleaning stores in
Arizona, United incurred notes payable in the aggregate of approximately
$1,064,000. In connection with United's sale of substantially all of the assets
of three stores back to their previous owners, United was released from $168,307
of principal and accrued interest due on the notes as of the time of sale. As
discussed in Item 3. Legal Proceedings, Ultimate Cleaners, Inc. has demanded
acceleration and full payment of the note delivered by United in connection with
the settlement agreement (See "Item 1. Business - Dry Cleaning Business") and
Note 3 in Notes to Consolidated Financial Statements.
ITEM 7. FINANCIAL STATEMENTS
15
<PAGE>
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change in accountants or disagreement requiring disclosure pursuant
to applicable regulations took place within the Company's two most recent fiscal
years or in any subsequent interim period.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (C) OF THE EXCHANGE ACT
The material contained in "Election of Directors" and "The Board of
Directors and Executive Officers" of the Company's definitive proxy statement
(to be filed pursuant to the Securities Exchange Act of 1934, as amended) for
the 2000 annual meeting of Shareholders of the Company is hereby incorporated by
reference.
ITEM 10. EXECUTIVE COMPENSATION
The material contained in "Executive Compensation" of the Company's
definitive proxy statement (to be filed pursuant to the Securities Exchange Act
of 1934, as amended) for the 2000 annual meeting of the Shareholders of the
Company is hereby incorporated by reference.
ITEM 11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material contained in "Security Ownership of Certain Beneficial
Owners," "Election of Directors," and "The Board of Directors and Executive
Officers" of the Company's definitive proxy statement (to be filed pursuant to
the Securities Exchange Act of 1934, as amended) for the 2000 annual meeting of
the Shareholders of the Company is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material contained in "Certain Relationships and Related
Transactions" of the Company's definitive proxy statement (to be filed pursuant
to the Securities Exchange Act of 1934, as amended) for the 2000 annual meeting
of the Shareholders of the Company is hereby incorporated by reference.
16
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10. The Inter-Party Agreement among the Company, Quorum
Communications, Inc., TelaLink Network, Ltd., Country Road
Communications, Inc., The Prudential Insurance Company of
America and various other third parties, dated January 19,
2000, is incorporated herein by reference. The Exhibit is
included in this report beginning on page 1 of the exhibits.
(b) The Agreement and Plan of Merger among the Company, TNL
Acquisition Corp. and TelaLink Network, Ltd. dated February 5,
1999, filed as an exhibit to a report on Form 8-K filed by the
Company on February 19, 1999, is incorporated herein
by reference.
No reports on Form 8-K were filed by the Company during the
fiscal quarter of the Company ended December 31, 1999.
17
<PAGE>
CONTINENTAL CHOICE CARE, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants...................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
1998...............................................................F-3
Consolidated Statements of Operations for the Years
Ended December 31,1999 and 1998....................................F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999 and 1998.............................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.........................................F-6
Notes to Consolidated Financial Statements............................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and
Board of Directors of
Continental Choice Care, Inc.:
We have audited the accompanying consolidated balance sheets of
Continental Choice Care, Inc. (a New Jersey corporation) and subsidiaries as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Continental Choice
Care, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 8, 2000 (except for Note 11
as to which the date is March 22, 2000)
F-2
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
---- ----
Current Assets:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 118,245 $ 3,084,904
Investments in U.S. Government securities.............................. 1,580,220 1,965,430
Accounts receivable, less allowance for doubtful accounts
of $13,543 in 1999 and $67,000 in 1998............................ 83,038 60,295
Pine Tree escrow deposit............................................... 915,000 -0-
Notes receivable....................................................... 1,027,000 -0-
Other current assets................................................... 223,239 202,295
------------ ----------
Total current assets............................................... 3,946,742 5,312,924
Amounts due from affiliates............................................ 504,567 370,264
Amounts due from officer............................................... 330,000 385,000
Property and equipment, at cost, less accumulated depreciation......... 134,592 560,236
Goodwill and other intangibles, less accumulated amortization.......... 198,214 1,306,352
Other assets........................................................... 50,579 17,581
------------ ----------
$5,164,694 $7,952,357
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit......................................................... $ 70,000 $ -0-
Accounts payable....................................................... 771,773 423,415
Accrued expenses....................................................... 1,560,429 984,976
Current portion of notes payable....................................... -0- 931,807
------------ ----------
Total current liabilities.......................................... 2,402,202 2,340,198
------------ ----------
Notes payable, less current portion.................................... -0- 86,609
------------ ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock 5,000,000 shares authorized, none issued or outstanding -0- -0-
Common stock, no par value, 10,000,000 shares authorized,
3,267,500 and 3,237,500 shares issued and outstanding at
December 31, 1999 and 1998, respectively........................... 5,645,061 5,524,561
(Accumulated deficit) retained earnings................................ (2,882,569) 989
------------ ------------
Total stockholders' equity......................................... 2,762,492 5,525,550
------------ ------------
$ 5,164,694 $ 7,952,357
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Revenues from continuing operations:
<S> <C> <C>
Consulting services .................................. $ 333,324 $ 333,324
Dry cleaning services ................................ 1,359,338 965,700
----------- -----------
1,692,662 1,299,024
----------- -----------
Costs of services ......................................... 1,281,682 678,761
General and administrative expenses ....................... 2,460,757 2,021,662
Loss on sale of businesses ................................ 453,662 -0-
Costs of failed acquisition ............................... 272,173 -0-
Depreciation and amortization ............................. 166,522 121,421
Interest expense .......................................... 86,371 57,876
Interest income ........................................... (144,947) (343,444)
----------- -----------
Total costs and expenses ............................. 4,576,220 2,536,276
----------- -----------
Loss before benefit for income taxes ...................... (2,883,558) (1,237,252)
Benefit for income taxes .................................. -0- (154,790)
----------- -----------
Loss from continuing operations ........................... (2,883,558) (1,082,462)
----------- -----------
Discontinued operations (Note 1):
Income from discontinued operations (less applicable income
taxes of $154,790 in 1998) ......................... -0- 300,474
----------- -----------
Net loss ............................................. $(2,883,558) $ (781,988)
=========== ===========
Basic and diluted (loss) income per share:
Continuing operations ................................ $ (.88) $ (.33)
Discontinued operations .............................. -0- .09
----------- -----------
Net loss per share ................................... $ (.88) $ (.24)
=========== ===========
Basic and diluted weighted average shares outstanding ..... 3,262,404 3,237,500
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
ACCUMULATED RETAINED
OTHER EARNINGS TOTAL
COMMON COMPREHENSIVE (ACCUMULATED COMPREHENSIVE
STOCK INCOME (LOSS) DEFICIT) TOTAL (LOSS)
----- ------------- -------- ----- -------------
Balance,
<S> <C> <C> <C> <C> <C>
December 31,1997 $5,524,561 $ 25,137 $ 782,977 $6,332,675
Net loss (781,988) (781,988) $(781,988)
Other comprehensive
income:
Realized gain on
investments (25,137) (25,137) (25,137)
-----------
Total comprehensive
(loss) (807,125)
------------ ------------ ------------- ------------- ===========
Balance,
December 31,1998 5,524,561 -0- 989 5,525,550
Issuance of Common
Stock 70,500 70,500
Issuance of Warrants 50,000 50,000
Net loss (2,883,558) (2,883,558) $(2,883,558)
------------ ------------ ------------- ------------- ===========
Balance,
December 31, 1999 $5,645,061 $ -0- $(2,882,569) $2,762,492
========== ============ ============ ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
---- ----
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss ................................................................. $(2,883,558) $ (781,988)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization ............................................ 206,850 146,592
Provision for doubtful accounts .......................................... 13,598 61,207
Stock grants and warrants issued ........................................ 120,500 -0-
Loss on sale of businesses ............................................... 453,662 -0-
Income from discontinued operations, net ................................. -0- (300,474)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ........................... (36,341) 75,631
(Increase) decrease in other assets .................................. (53,942) 503,028
Increase in amounts due from affiliates .............................. (134,303) (134,400)
Increase (decrease) in accounts payable .............................. 348,358 (247,125)
Increase in accrued expenses ......................................... 506,122 20,876
Decrease in income taxes payable ..................................... -0- (87,000)
Repayments from (loans to) officer ................................... 55,000 (350,000)
----------- ------------
Net cash used in operating activities of continuing operations ..... (1,404,054) (1,093,653)
Net cash provided by discontinued operations ....................... -0- 159,549
----------- ------------
Net cash used in operating activities of continuing operations ................ (1,404,054) (934,104)
----------- ------------
Cash Flows From Investing Activities:
Issuance of notes receivable ............................................. (1,027,000) -0-
Pine Tree escrow deposit ................................................. (915,000) -0-
Purchases of dry cleaning businesses ..................................... -0- (594,000)
Amounts repaid by consulting customers ................................... -0- 2,805,105
Purchases of U.S. Government securities .................................. (6,027,439) (10,635,707)
Proceeds from sale or maturity of U.S. Government securities ............. 6,412,649 12,265,715
Purchases of property and equipment ...................................... (65,445) (183,923)
----------- ------------
Net cash (used in) provided by investing activities ........................... (1,622,235) 3,657,190
----------- ------------
Cash Flows From Financing Activities:
Net borrowings under line of credit ...................................... 70,000 -0-
Principal payments on notes payable ...................................... (10,370) (45,091)
----------- ------------
Net cash provided by (used in) financing activities ...................... 59,630 (45,091)
----------- ------------
Net (decrease) increase in cash and cash equivalents .......................... (2,966,659) 2,677,995
Cash and cash equivalents, beginning of year ............................. 3,084,904 406,909
----------- ------------
Cash and cash equivalents, end of year ................................... $ 118,245 $ 3,084,904
----------- ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for income taxes ............................... $ 4,941 $ 63,174
=========== ============
Cash paid during the year for interest ................................... $ 14,196 $ 57,876
=========== ============
Non-Cash Disclosures:
Notes payable issued in connection with acquisitions..................$ .. -0- $ 1,063,507
=========== ============
</TABLE>
Loss on sale of businesses consists of net fixed assets of $161,029, net
goodwill of $423,198 and the recording of rental obligations of $37,742
offset by a reduction in notes payable and accrued interest of $168,307.
The Company issued 30,000 shares to an outside Director valued at $70,500
and issued warrants to a financial services consultant in consideration
for professional services valued at $50,000.
The sale of United Dry Cleaning, LLC, included net fixed assets of $199,292
a write-off of net goodwill of $588,959 offset by a relief from
liabilities of $1,544,015.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
<PAGE>
CONTINENTAL CHOICE CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS AND DISCONTINUED OPERATIONS:
Continental Choice Care, Inc. was formed on December 27, 1993 in
connection with the reorganization of the health care related subsidiaries and
affiliates of TechTron, Inc. ("TechTron"). Continental Choice Care, Inc. and
subsidiaries are herein referred to as the Company.
The Company was primarily engaged in the business of providing dialysis
related services, training, equipment and supplies to patients at home, in
prisons and in hospitals. The Company also provided acute dialysis nursing
services and administrative services. The Company is currently engaged in the
dry cleaning service industry and provides consulting services under agreement.
The above and other activities conducted by the Company were and are performed
primarily through the following subsidiaries --
Continental Dialysis, Inc. (CDI) (100% owned)
Dialysis Staffing, Inc. (DSI) (100% owned)
Valet-USA, Inc. (Valet) (100% owned)
Continental Dialysis of Linden, Inc.- (Linden) (100% owned)
Renal Management, Inc. (RMI) (80% owned)
United Dry Cleaning, L.L.C. (United) (97.5% owned)
In October, 1997, the Company, other than RMI, completed the sale of
substantially all of its dialysis related assets to IHS of New York, Inc., a New
York corporation ("IHS"). In addition, Alpha Administration Corp. ("Alpha"), the
operator of the South Bronx Kidney Center, ("Bronx Facility"), and Continental
Dialysis Center of the Bronx, Inc. ("CDBI") sold substantially all of their
respective assets to IHS. All of the outstanding common stock of Alpha and CDBI
is owned by the Company's Chairman, President and Corporate Medical Director
("Certain Executive Officers"). Prior to the sale, the Company provided
consulting and administrative services to Alpha and CDBI. The assets of the
Upper Manhattan Dialysis Center, Inc. ("UMDC"), a New York corporation to which
the Company also provided consulting and administrative services, were not
included in this sale transaction (the "IHS Sale"). The aggregate price paid by
IHS at the closing of the IHS Sale was approximately $5,120,000. The $5,120,000
purchase price was allocated $2,620,000 to the Company, $900,000 to Alpha and
$1,600,000 to CDBI. Substantially all amounts due the Company by Alpha and CDBI
for consulting and administrative fees and other amounts have been paid to the
Company. However, as of December 31, 1999, approximately $200,000 of consulting
fees due from CDBI had not been recorded due to realization uncertainties.
The Company and IHS entered into a consulting agreement pursuant to which
the Company is providing certain consulting services to IHS over the three-year
term of the agreement in consideration of an aggregate of $1,000,000 payable by
IHS to the Company over the term of the agreement. The Company also entered into
a Non-Competition Agreement with IHS pursuant to which the Company, CDBI, Alpha
and certain officers and directors of each of these companies agreed not to
engage in
F-7
<PAGE>
certain activities in competition with IHS in certain specified geographic areas
for five years from October 8, 1997.
During the second quarter of 1998, the Company established a subsidiary,
United Dry Cleaning, L.L.C. ("United") for the purpose of acquiring and
operating dry cleaning facilities initially in the Phoenix,Arizona area,
operating as one segment. This area was selected for its rapid growth in
construction and development and increase in population, which, management
believed, would provide United with growth potential. The Company committed an
aggregate of $1,000,000 to fund United's initial operations. By early 1999,
United owned and operated dry cleaning plants and stores from eleven locations
in the Phoenix area. Commencing in the first quarter of 1999, the Company began
to divest itself of the retail dry cleaning business in order to concentrate on
providing services to the hospitality industry. See Note 3.
The operating results and the gain on the disposition of the Company's
dialysis-related businesses have been segregated from continuing operations and
reported as separate line items in the Consolidated Statements of Operations.
Revenue from discontinued operations was $310,000 in 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION -- The consolidated financial statements include the accounts
of the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the recorded amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents. The carrying amount of cash equivalents approximates fair value.
F-8
<PAGE>
ACCOUNTS RECEIVABLE AND ALLOWANCES -- The allowance for doubtful accounts
consists of management's estimate of amounts that may prove uncollectible.
Actual results could differ from these estimates.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is provided using the straight line method based on the estimated
useful lives of individual assets ranging from two to ten years. Leasehold
improvements are depreciated over the estimated useful lives or lease term.
Costs of maintenance and repairs are charged to expense as incurred.
The Company reviews the recoverability of its long-lived assets when events
or certain changes to circumstances may indicate a possible impairment. The
assessment for potential impairment is based primarily on the Company's ability
to recover the unamortized balance of its long-lived assets from expected future
cash flows from its operations on an undiscounted basis. See Note 3.
INTANGIBLES -- The Company amortizes on a straight line basis the excess
cost of net assets acquired over periods not exceeding 14 years.
REVENUE RECOGNITION -- Revenue is recognized upon the performance of
services or shipment of equipment and supplies. Consulting services provided as
well as equipment and supplies sold to related parties are recorded once
management has determined that collection is probable.
INCOME TAXES -- The Company and its subsidiaries file a consolidated
Federal income tax return. The Company and each subsidiary file separate state
income tax returns. Deferred income taxes are recognized for tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial reporting and tax basis of assets and liabilities.
INCOME (LOSS) PER SHARE -- Statement of Financial Accounting Standards No.
128 "Earnings Per Share" ("SFAS No. 128") requires the presentation of basic
earnings per share and diluted earnings per share. Basic earnings (loss) per
share represents net income (loss) divided by the weighted average shares
outstanding. Diluted earnings (loss) per share represents net income (loss)
divided by the weighted average shares outstanding adjusted for the incremental
dilution of outstanding employee stock options and awards, if dilutive.
As of December 31, 1999 and 1998, the basic and diluted weighted average
common shares outstanding was 3,262,404 and 3,237,500, respectively. As of
December 31, 1999, there were 1,493,350 of outstanding stock options issued to
Directors, officers and employees of the Company as well as 75,000 warrants
issued to a financial services provider which were excluded from diluted net
income (loss) per share for both periods because the effect would be
antidilutive.
STOCK-BASED COMPENSATION -- Stock-based compensation is recognized using
the intrinsic value method. For disclosure purposes, pro forma net income (loss)
and income (loss) per share are provided as if the fair value method had been
applied.
F-9
<PAGE>
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1998
financial statements in order to conform to the 1999 presentation.
(3) ACQUISITION AND SALE OF BUSINESSES:
Effective May 14, 1998, United acquired substantially all of the
assets, primarily machinery and equipment, of Ultimate Cleaners, Inc., an
Arizona corporation ("Ultimate"), other than cash and accounts receivable. The
assets acquired consisted of six facilities, which included two dry cleaning
plants and four drop stores. All facilities were located at leased locations in
Arizona. United assumed Ultimate's obligation under certain of its real property
leases.
The original aggregate purchase price for the assets of Ultimate was
$1,420,000, of which $350,000 was paid as cash consideration at the closing and
$20,000 was payable over a period of 20 months. The remainder of the purchase
price was paid in the form of a promissory note in the principal amount of
$1,050,000 bearing interest at a rate of 10% per annum with a term of ten years.
Under the terms of a Mutual Release and Settlement Agreement ("Settlement
Agreement") entered into between Ultimate and United in November 1998, the
outstanding principal amount due under the promissory note and goodwill were
reduced by $165,493 and the term of the promissory note was reduced from ten to
seven and one half years. In addition, United agreed to pay approximately $3,166
per month over the six months immediately following the date of the Settlement
Agreement in settlement of all other sums due or claimed to be due by Ultimate
under the Asset Purchase Agreement. The obligations of the parties pursuant to
an employment agreement between United and the former principal of Ultimate were
also terminated. Following the settlement, United refused to make payments under
the promissory note and the former owners of Ultimate have commenced an action
against United.
In May 1998, United acquired substantially all of the assets of Cleaner
Headquarters, Inc., an Arizona corporation. Cleaner Headquarters, Inc. conducted
dry cleaning operations from one location in Arizona. The all cash purchase
price for the assets was $15,000.
In July 1998, United acquired substantially all of the assets of G & P
Associates, Inc. ("G&P"), an Arizona corporation which conducted dry cleaning
operations from two leased locations in Arizona. The aggregate purchase price
for the assets was $165,750, of which $95,750 was paid at closing and $70,000
was paid in the form of a promissory note bearing an interest rate of 10% per
annum with a term of two years.
In August 1998, United acquired substantially all of the assets of
Alyssa's Magic Touch
F-10
<PAGE>
("Alyssa's"), an Arizona proprietorship, which conducted dry cleaning operations
from a leased location in Arizona. The aggregate purchase price for the assets
was $224,000, of which $115,000 was paid at closing and $109,000 was paid in the
form of a promissory note bearing an interest rate of 10% per annum with a term
of five years.
These acquisitions were accounted for as purchases and results of these
companies have been included in the Company's consolidated financial statements
since the dates of acquisition. The excess of net assets acquired of
approximately $1,221,295 was recorded and amortized over fourteen years.
Additionally, the Company paid approximately $153,000 to the former owners of
these businesses as part of a covenant not to compete. However, as discussed
below, net goodwill and intangibles of $1,012,157 was written-off in the sale
and closing of certain plants and stores.
The following unaudited pro forma information represents a summary of
the Company's consolidated results of operations adjusted for the acquired dry
cleaning business as if the acquisitions occurred on January 1, 1998. The
information presented for the 1998 fiscal year was developed using information
supplied by the prior owners of these businesses. Management has presented this
information as required by generally accepted accounting principles. However,
management believes that the information provided by certain prior owners of
these businesses may be inaccurate. Accordingly, management suggests that the
reader use appropriate caution in determining whether to rely upon the
information.
FISCAL YEAR
-----------
1998
----
Revenues:......................................... $2,028,736
Net loss from continuing operations:.............. (1,289,639)
Basic and diluted loss per share.................. $ (.40)
===============
During the first three quarters of 1999, United closed six of the
eleven retail facilities it had acquired or formed during 1998. During the same
period, United sold three retail facilities back to the original sellers. The
sales were made in consideration of the release of United's obligations under
the purchase price promissory notes executed in connection with the original
purchases. The aggregate amount of principal and interest outstanding under the
promissory notes at the time of the sales was $168,307.
The Compay recognized a net loss from the sale of business related to
these transactions of $453,662 in 1999, which included net fixed assets of
$161,029, a write-off of net goodwill of $423,198 and the recording of rental
obligations of $37,742 offset by a reduction in notes payable and accrued
interest of $168,307.
In November 1999, the Company formed a new subsidiary, Valet-USA, Inc.
("Valet") to provide dry cleaning services primarily to the hospitality industry
in the Phoenix, Arizona area. Valet purchased certain remaining assets from
United including accounts receivable and certain furniture and fixtures and
other equipment pursuant to the terms of an Asset Purchase and Sale Agreement
dated November 15, 1999. Due to the nature of this transaction, no gain or loss
was recorded by either subsidiary company. Valet currently operates a single
plant and drop store and provides dry
F-11
<PAGE>
cleaning services to certain hotels.
On November 16, 1999, the Company sold its majority interest in United
to UDC Acquisition Corp, Inc. ("UDC Acquisition"), an Arizona corporation,
pursuant to terms of a Stock Purchase Agreement. The majority of the outstanding
common stock of UDC Acquisition is owned by Jeffrey M. Trenk, brother of Steven
L. Trenk, who is the President and Chief Operating Officer of the Company, son
of Alvin S. Trenk, who is the Chairman of the Company, and nephew of Martin G.
Jacobs M.D., who is the Corporate Medical Director of the Company, collectively,
the Certain Executive Officers. The aggregate purchase price for the Company's
stock interest, $10,000, was offset against amounts due to Jeffrey M. Trenk from
the Company (See Note 7). The sale included net fixed asset of $199,292, a
write-off of net goodwill of $588,959 offset by a relief from liabilities of
$1,544,015.
Under the terms of the sale, UDC Acquisition acquired substantially all of
the assets and substantially all of the liabilities of United at the time of
sale. The Company did not recognize any gain or loss related to the transaction.
(4) PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Furniture and fixtures..................... $ 5,983 $ 21,668
Office equipment........................... 179,175 225,289
Dry cleaning machinery and equipment... 56,741 347,492
Vehicles................................... 32,000 52,392
Leasehold improvements..................... 2,012 67,763
---------- ---------
275,911 714,604
Less -- Accumulated depreciation........... (141,319) (154,368)
--------- ---------
$134,592 $560,236
-------- ========
</TABLE>
Depreciation expense was $110,869 and $78,649 in 1999 and 1998,
respectively.
(5) NOTES PAYABLE:
In connection with the acquisitions of dry cleaning businesses, United
issued notes payable to the sellers aggregating $1,063,507 with original terms
ranging from two to seven and one half years and bore interest at a rate of 10%
per annum. In connection with United's sale of substantially all of the assets
of three stores back to their previous owners, United was released from $162,854
of principal and accrued interest due on the notes at the time of sale. As
discussed in Note 3, the former owners of Ultimate Cleaners, Inc. have demanded
acceleration and full payment of the note. See Note 7. Additionall, as discussed
in Note 3, this note was assumed by UDC Acquisition in connection with the sale
of United in November 1999.
During 1999, the Company financed a directors and officers insurance
policy aggregating $36,500. The note required an initial payment of $7,300 and
the remaining balance of $29,200 payable over nine months at an interest rate of
9.75%.
In 1999, United obtained a $200,000 line of credit from a bank which
was subsequently repaid in 1999 by the liquidation of the assets under a
guarantee with a company in which the Chairman of the Company is a founding
partner. The line had an
F-12
<PAGE>
interest rate of Prime less 1/2%. In 1999, the Company arranged for a
$100,000 line of credit for United to provide additional financing. The line
bore interest at a rate of 8% per annum and was payable on demand. The line of
credit was with a company owned by the Chairman of the Company. Additionally,
the Company obtained a $250,000 line of credit to fund the operations of Valet.
The line bears interest at a rate of 8% per annum and is payable on demand. The
line of credit is with a company owned by the Chairman of the Company. As of
December 31, 1999, $180,000 of availability remained on the line of credit. The
line is primarily secured by all of Valet's assets.
(6) INCOME TAXES:
The benefit for income taxes relating to continuing operations for the
years ended December 31, 1999 and 1998 consists of the following:
1999 1998
---- ----
Current:
Federal........................... $ -0- $(154,790)
State............................. -0- -0-
---------- ----------
-0- (154,790)
Deferred:
Federal........................... -0- -0-
State............................. -0- -0-
---------- ----------
$ -0- $(154,790)
---------- ==========
At December 31, 1999 and 1998, the Company had a current deferred tax
asset of $1,532,200 and $403,900, and a deferred tax liability of $0 and $3,000,
respectively. The deferred tax asset is reduced by a valuation allowance of
$1,532,200 and $403,900, respectively as of December 1999 and 1998. The deferred
tax asset is primarily related to the allowance for doubtful accounts of $5,400
and $27,000 as of December 31, 1999 and 1998 and net operating loss carryforward
of approximately $2,956,600 and $372,000 as of December 31, 1999 and 1998, while
the deferred tax liability is primarily related to depreciation and
amortization.
Realization of the net deferred tax asset is dependent on generating
sufficient taxable income prior to expiration of the loss carryforward and the
timing of the reversal of other temporary differences. As of December 31, 1999
and 1998, full valuation allowances have been provided against the deferred tax
asset.
The following is a reconciliation of the statutory Federal income tax
rate to the effective rate as a percentage of income before benefit for income
taxes as reported in the consolidated financial statements for the years ended
December 31, 1999 and 1998:
F-13
<PAGE>
1999 1998
---- ----
U.S. Federal income tax rate........................ (34%) (34%)
Non-deductible expenses............................. -0- 2
Net operating loss for which no tax benefit
is currently available......................... 34 19
------- --------
Effective income tax rate........................... 0% (13%)
======= ========
(7) RELATED PARTY TRANSACTIONS:
As of December 31, 1998, the Company had advanced $370,264 to TechTron,
Inc. ("TechTron"). During 1999 the Company advanced an additional $134,303 to
TechTron. The Company has obtained demand promissory notes from TechTron for all
of the advances. The majority of outstanding shares of TechTron are owned by
Certain Executive Officers of the Company. The majority of the notes issued in
connection with these advances bear interest at a rate of 8% per annum. All
notes have been guaranteed by Certain Executive Officers. Payments on the notes
are not anticipated in 2000 due to the fact that TechTron does not expect to
earn sufficient revenues to make payment. All amounts due from TechTron are
unsecured and are guaranteed by Certain Executive Officers.
In 1998 and 1997, respectively, the Company loaned $350,000 and $35,000
to the Company's President and Chief Operating Officer. The President and Chief
Operating Officer executed promissory notes for these advances which were due
and payable in full within one year. In 1999, the Company received $55,000
representing payment of the 1997 loan and partial payment of the 1998 advances.
The notes relating to the 1998 advances bear interest at a rate imputed by the
Internal Revenue Service for instruments having a maturity of one or more years
(4.33% to 5.58%). The Company has extended the term of the notes to be payable
prior to December 31, 2000.
On January 29, 1998, UMDC sold substantially all of its assets to Renal
Research Institute, LLC ("RRI") pursuant to the terms of an Asset Purchase
Agreement (the "RRI Purchase Agreement") among UMDC, RRI and the shareholders of
UMDC for an aggregate purchase price of approximately $7,984,000 (the "RRI
Sale"). Fifty percent of the outstanding common stock of UMDC is owned by
Certain Executive Officers. UMDC retained its accounts receivable, cash and cash
equivalents in the transaction, as well as certain liabilities of UMDC
outstanding as of the date of the First RRI Closing. At the January 29, 1998
closing (the "First RRI Closing"), RRI paid approximately $4,174,000 in partial
payment for the assets of UMDC.
Under the terms of the Purchase Agreement, Beth Israel Medical Center
applied for approval from the New York State Department of Health (the "NY
Approval") to operate the in-center dialysis facility currently operated by
UMDC. In connection with the grant of the NY Approval, which is currently
expected to occur in 2000, RRI is expected to pay additional amounts aggregating
approximately $3,810,000, less the net value of certain current assets to be
retained by UMDC.
The Company previously loaned monies to and incurred additional
non-bank liabilities on behalf of UMDC and certain of its shareholders, of which
approximately $3,452,000 was outstanding as of the date of the First RRI
Closing. Further, as of the date of the sale, UMDC owed the Company
approximately $1,389,000 in various accrued consulting and service fees. At the
time of the First RRI
F-14
<PAGE>
Closing, the Company received approximately $2,665,000 from UMDC. In 1998, the
Company received additional payments aggregating $310,000 from UMDC subsequent
to the First RRI Closing. There were no additional payments in 1999. Through
December 31, 1999, the Company has not recorded certain transactions relating to
the above approximating $1,866,000 due to realization uncertainties. In 1998,
the Company recorded $310,000 in additional revenue related to payments from
UMDC subsequent to the first RRI Closing not previously recorded due to
realization uncertainties.
Upon the occurrence of certain events, the RRI Consulting Agreement may
be terminated, in which event UMDC will be required to repurchase its assets at
a fixed monthly rate over a term of years, unless sooner paid as specified in
the agreement. In addition, UMDC and its stockholders, including Certain
Executive Officers, have indemnified RRI against damages arising from certain
breaches of the RRI Purchase Agreement.
Although the Company expects to receive an aggregate of approximately
$4,500,000 from UMDC from the proceeds of the transaction and from the
operations of UMDC, no assurance can be given that the NY Approval will be
granted or that the transactions contemplated by the RRI Purchase Agreement or
the RRI Consulting Agreement will otherwise be consummated. As of December 31,
1999, there are no net amounts due the Company from UMDC as the Company has not
recorded certain transactions due to realization uncertainties. In the event of
a breach of covenant not to compete, no assurance can be given that Certain
Executive Officers will not incur costs, expenses, liabilities or damages which
are subject to indemnity by the Company in connection with the RRI Purchase
Agreement or any covenant not to compete.
As of December 31, 1999 and 1998, $109,829 and $115,681, respectively,
was payable to Alpha. At December 31, 1999 and 1998, $13,566 and $4,083,
respectively, was due from CDBI. All of the outstanding Common Stock of Alpha
and CDBI is owned by Certain Executive Officers. The Company had a consulting
and services agreement with CDBI which provided for payments of $20,000 per
month. However, there was inadequate cash flow to pay $200,000 in consulting
fees due from CDBI which have not been recorded by the Company due to
realization uncertainties. Amounts payable to Alpha and due from CDBI are
included in accounts payable in the accompanying consolidated balance sheets.
On November 16, 1999, the Company sold its majority interest in United
to UDC Acquisition Corp, Inc. ("UDC"), an Arizona corporation, pursuant to terms
of a Stock Purchase Agreement. The majority of the outstanding common stock of
UDC is owned by Jeffrey M. Trenk, brother of Steven L. Trenk, son of Alvin S.
Trenk and nephew of Martin G. Jacobs, collectively, the Certain Executive
Officers. The aggregate purchase price for the Company's stock interest,
$10,000, was offset against amounts due to Jeffrey M. Trenk from the Company.
Under the terms of the sale, UDC Acquisition acquired substantially all
of the assets and liabilities of United at the time of sale. The Company did not
recognize any gain or loss related to the transaction. The sale included net
fixed assets of $199,292 a write-off of net goodwill of $588,959 offset by a
relief from liabilities of $1,544,015. As of December 31, 1999, the Company had
advanced $34,785 to UDC Acquisition. The Company has obtained a demand
promissory note for the advances . The note bears interest at a rate of 8% per
annum and has been guaranteed by Jeffrey M. Trenk, President of UDC Acquisition.
(8) COMMITMENTS:
EMPLOYMENT AGREEMENTS -- In 1994, the Company entered into compensation
agreements with its Chairman, President and Corporate Medical Director. The
agreements with the Chairman and President
F-15
<PAGE>
have initial terms of five years and are extended automatically after the first
year and thereafter unless such extensions are terminated by the Board of
Directors. The Corporate Medical Director's agreement has a term of one year.
These agreements provide for minimum aggregate compensation of $661,000 in 2000,
$550,000 in 2001, $550,000 in 2002, $550,000 in 2003 and $550,000 in 2004. Each
of the individuals may receive bonuses as determined by the Board of Directors,
except the President whose bonus is equal to 10% of the Company's pretax income
in excess of the prior year's pretax income, limited to 100% of base salary.
There were no bonuses paid for 1999 or 1998. Compensation paid to the Chairman,
President and Corporate Medical Director aggregated $661,000 and $604,884 in
1999 and 1998, respectively.
LEGAL -- The Company is engaged in certain legal proceedings incidental
to its normal course of business activities. Management believes the outcome of
these proceedings will not have a material adverse effect on the Company's
financial position or results of operations. See Note 3 regarding current
legal proceedings.
BENEFIT PLAN -- The Company maintains a 401(k) profit sharing plan. The
Company matches 10% of the employees' contributions up to 6% of base pay.
Company contributions were $2,099 and $2,109 in 1999 and 1998, respectively.
LEASE AGREEMENTS --Rent expense was $325,423 and $238,406 for the years
ended December 31, 1999 and 1998, respectively. The increase of $87,017 is
primarily due to the assumption of leases in connection with United's
acquisition of dry cleaning stores during 1998. Lease commitments for the dry
cleaning store provide for minimum payments aggregating $69,223 in 2000, $72,729
in 2001, $75,288 in 2002, $77,548 in 2003 and $12,988 in 2004.
(9) CAPITAL STOCK:
On April 26, 1999, the Company granted warrants to purchase up to an
aggregate of seventy- five thousand (75,000) shares of its common stock to a
financial services provider at an exercise price of $2.625. The Company
recorded $50,000, the estimated value of the services rendered, in expense
related to these warrants in selling, general and administrative expenses in the
accompanying Consolidated Statement of Operations.
On January 3, 2000, the Company granted warrants to purchase up to an
aggregate of 100,000 shares of its common stock to a financial services provider
in which the Chairman is a founding partner at an exercise price of $2.00, which
was the fair market value of the Company's common stock on the date of grant, in
exchange for professional services to assist the Company in future transactions.
The Company adopted the 1994 Long-Term Incentive Award Plan under which
shares of the Company's common stock as well as incentive and non-qualified
stock options to purchase the Company's common stock and stock appreciation
rights may be awarded or granted to senior executives. The Company has reserved
300,000 shares of its common stock for this plan. The plan terminates in 2004.
The Company has also adopted a Directors' Stock Option Plan under which each
nonemployee director will annually receive nonqualified stock options to
purchase 10,000 shares of the Company's common stock which commenced July 1,
1994. The exercise price of the options will be the fair market value of the
Company's common stock at the date of grant. The Company has reserved 200,000
shares of its common stock for this plan.
In the first quarter of 1997, the Board of Directors of the Company
adopted the Continental
F-16
<PAGE>
Choice Care, Inc. 1997 Equity Incentive Plan (the "1997 Plan"), a broad-based
employee equity incentive plan. The Board of Directors reserved 1,250,000 shares
of the Company's common stock and granted options to acquire 296,225 shares of
the Company's common stock to officers and employees of the Company. All options
under the 1994 Long- Term Incentive Award Plan were repriced by the Board of
Directors in February 1997 to $1.875 per share or the fair market value of the
Company's common stock at the repricing date.
In the first quarter of 1999, the Board of Directors of the Company
awarded 30,000 shares of common stock to a non-employee Director of the Company.
The Company recorded $70,500 in expense related to this award in selling,
general and administrative expenses in the accompanying Consolidated Statements
of Operations. The Director was also granted options to acquire an additional
20,000 shares of the Company's common stock at $2.06 per share.
<TABLE>
<CAPTION>
Stock Option activity is as follows:
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE FAIR
SHARES PRICE VALUE
------ ----- -----
Options outstanding December 31, 1996
<S> <C> <C> <C> <C>
(190,000 exercisable)...................... 210,000 4.55
Granted.................................... 824,600 1.69 1.45
Canceled................................... (150,000) 5.25 3.89
---------
Options outstanding December 31, 1997
(631,600 exercisable)...................... 884,600 1.93
Granted.................................... 541,500 1.46 1.07
-------
Options outstanding December 31, 1998
(1,426,100 exercisable) 1,426,100 1.76
Granted................................... 67,250 2.61 1.91
-----------
Options outstanding December 31, 1999
(1,493,350 Exercisable).................... 1,493,350 1.80
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF SHARES
RANGE OF OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/99 REMAINING LIFE EXERCISE PRICE
--------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
$1.00-$1.50 705,000 9.0 $1.35
$1.75-$2.50 720,350 7.8 1.92
$3.50-$5.88 70,000 5.8 4.99
----------- --------- ------- ----
$1.00-$5.88 1,493,350 8.3 $1.80
</TABLE>
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the fair market value of option grants is estimated on the date
of grant using the Black-Scholes option- pricing model for pro forma purposes
with the following weighted average assumptions used for grants in 1999 and
1998: dividend yield of 0%, risk-free interest rate of approximately 5.81% and
6% respectively and expected option life of 10 years. Expected volatility was
assumed to be 56.49% and 57% in 1999 and 1998, respectively.
As permitted by SFAS No. 123, the Company has chosen to continue
accounting for stock options at their intrinsic value. Accordingly, no
compensation expense has been recognized for its
F-17
<PAGE>
stock option compensation plans. Had the fair value method of accounting been
applied to the Company's stock option plans, the tax-effected impact would be as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net loss as reported..................................... $(2,883,558) $ (781,988)
Estimated fair value of the option
grants, net of tax as applicable.................... 127,979 586,824
----------------- -----------------
Net loss adjusted........................................ $(3,011,537) $(1,368,812)
================ =================
Adjusted net loss per share.............................. $ (.92) $ (.42)
================= =================
</TABLE>
This pro forma impact only takes into account options granted since
January 1, 1995 and is likely to increase in future years if additional options
are granted and amortized ratably over the vesting period.
(10) TELECOMMUNICATIONS MERGER:
On February 5, 1999, the Company and TelaLink Network, Ltd., a privately
held Delaware corporation ("TelaLink") executed an Agreement and Plan of Merger
("Merger Agreement") to merge the two companies in a stock-for-stock transaction
(the "Merger"). On September 21, 1999, the Company terminated the Merger
Agreement upon determining that financing for the proposed transactions would
not be available on terms acceptable to the Company. During 1999, the Company
recorded $272,173 in failed acquisition costs consisting primarily of legal and
accounting expenses relating to the merger.
As of the date of termination, the Company had loaned a total of $1,027,000
to TelaLink and its affiliates to provide working capital pursuant to promissory
notes. The notes bore interest at a rate of 12% per annum and were due and
payable on April 30, 2000.
In addition to amounts loaned to TelaLink, the Company also entered into a
Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the
Company, Pine Tree Telephone and Telegraph Company ("PTTC") and the principal
(95%) stockholder of PTTC, whereby the Company agreed to purchase not less than
95% of PTTC's issued and outstanding capital stock. PTTC is a telecommunication
services provider to areas near Lewiston and Portland, Maine. To secure the
Company's rights under the Stock Purchase Agreement, the Company deposited the
sum of $915,000 in an escrow account. The deposit was to be treated as a
non-refundable deposit against the purchase price to be paid by the Company at
closing, or otherwise in accordance with the Stock Purchase Agreement.
At a closing on January 19, 2000, the Company received $1,463,800 and
subsequent payment of $1,538 pursuant to the terms of an Inter-Party Agreement
by and among the Company, Quorum Communications, Inc., TelaLink, Country Road
Communications, Inc. ("Country Road"), Prudential Insurance Company of America
and various other third parties. Under the terms of the agreement, the Company
sold its interest in the various TelaLink notes totaling $1,027,000 to Country
Road for a purchase price of up to $1,100,000 of which $500,000 was paid at
closing and the balance paid in the form of a promissory note. The note bears
interest at a rate of 6.5% per annum and matures January
F-18
<PAGE>
19, 2005. Interest is due and payable in annual installments on January
19, 2001 and on each anniversary thereafter up to and including the maturity
date. Country Road has the right to prepay the note. If Country Road makes
aggregate payments equal to $500,000 plus accrued and unpaid interest thereon
prior to the second anniversary of the note date, then the obligation will be
deemed satisfied in full. Under certain conditions, Country Road may be required
to prepay a principal amount of $500,000 plus accrued and unpaid interest.
At the closing, the Company also received reimbursement of the $915,000
PTTC deposit plus accrued interest of $50,338 in exchange for the company
assigning all of its rights and obligations under the PTTC Stock Purchase
Agreement. Interest of $46,528 relating to 1999 has been recorded by the Company
in 1999 and offset against failed acquisition costs relating to the merger.
In connection with the closing and as part of a separate settlement
agreement, the Company became obligated at the time of closing to issue 100,000
shares of the Company's common stock to a third party equity investor of
TelaLink Network, Ltd. in exchange for the release of any and all claims and
liens that it may have the right to assert against TelaLink and the Company.
As part of the Inter-Party Agreement, the Company assigned its rights and
obligations under its current office space lease to Country Road. The Company
also executed a sublease whereby the Company will sublet its current office
space from Country Road for a term ending on March 28, 2000.
(11) SUBSEQUENT EVENT
On March 22, 2000, the Company executed a letter of intent to form a
strategic alliance with Alliant Technologies, Inc. ("Alliant"). Through this
proposed alliance, the Company expects to invest in early stage Internet
companies. Alliant is a provider of Internet technology solutions for business
that offers a complete range of services, including strategic business
consulting, e-commerce application development, business process engineering and
infrastructure engineering. Under the terms of the letter of intent, (i) Alliant
would provide the Company and its clients with discounted services; (ii) the
Company would obtain 25 percent of the outstanding securities of Little
Universe, LLC, a start-up Internet Portal; and (iii) the Company would be given
the opportunity to purchase up to two percent of the equity of Technology
Keiretsu, LLC, an Internet technology company. The Company would pay an
aggregate of $250,000 and issue a warrant to Alliant to purchase 50,000 shares
of the Company's common stock at a price of $3.00 per share. Further, any
investment in Technology Keiretsu is expected to be made at a pre-investment
valuation of that company of $25 million. The letter of intent, which is not a
legally binding obligation of the parties, is subject to the preparation and
execution of definitive agreements. No assurance can be given that such
definitive agreements will be executed or that any definitive agreements will
not contain substantially different terms and conditions than those contained in
the letter of intent.
F-19
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONTINENTAL CHOICE CARE, INC.
Date: _________, 2000 By: /S/ALVIN S. TRENK
-----------------
Alvin S. Trenk, Chairman
In accordance with the Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant in the capacities
and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
--------- ------------------------ ----
/S/ ALVIN S. TRENK Chairman & Director ,2000
- - --- --------------
Alvin S. Trenk (Principal Executive
Officer)
/S/ STEVEN L. TRENK President ,2000
- - --- ---------------
Steven L. Trenk Chief Operating Officer
Director
/S/ MARTIN G. JACOBS, M.D. Corporate Medical Director ,2000
- - --- ----------------------
Martin G. Jacobs, M.D. & Director
/S/ STANLEY B. AMSTERDAM Director ,2000
- - --- --------------------
Stanley B. Amsterdam
/S/ JEFFREY B. MENDELL Director ,2000
- - --- ------------------
Jeffrey Mendell
/S/ MARK N. RAAB Chief Financial Officer ,2000
- - --- ------------
Mark N. Raab (Principal Financial Officer)
F-20
================================================================================
CONTINENTAL CHOICE CARE, INC.,
QUORUM COMMUNICATIONS, INC.
TELALINK NETWORK, LTD.,
BRIDGES TELECOMMUNICATIONS, INC.,
COUNTRY ROAD COMMUNICATIONS, INC.,
WAR ACQUISITION CORP.,
and
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
------------------------------
INTER-PARTY AGREEMENT
------------------------------
------------------------
Dated as of January 19, 2000
------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
SECTION 1. DEFINITIONS....................................................... 1
SECTION 2. TRANSACTIONS AMONG THE PARTIES.................................... 3
Section 2.1. War Acquisition and Pine Tree Assignment............... 3
Section 2.2. Waiver of Claims ...................................... 5
SECTION 3. CLOSING........................................................... 5
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARTIES..................... 6
Section 4.1. Corporate Organization................................. 6
Section 4.2. Authorization and Validity of Agreement................ 6
Section 4.3. No Conflict or Violation............................... 6
Section 4.4. Consents and Approvals................................. 6
Section 4.5. Pine Tree Stock Purchase Agreement..................... 7
Section 4.6. Survival .............................................. 7
SECTION 5. COVENANTS......................................................... 7
Section 5.1. Consents and Approvals................................. 7
Section 5.2. Best Efforts .......................................... 7
Section 5.3. Notice of Breach ...................................... 8
SECTION 6. CONDITIONS TO OBLIGATIONS OF PRUDENTIAL,
COUNTRY ROAD AND ACQUISITION SUB.............................. 8
Section 6.1. Representations and Warranties......................... 8
Section 6.2. Performance of the Obligations......................... 8
Section 6.3. Consents and Approvals................................. 8
Section 6.4. No Violation of Orders................................. 8
Section 6.5. Opinion of Counsel..................................... 9
Section 6.6. Transaction Documents.................................. 9
SECTION 7. CONDITIONS TO OBLIGATIONS OF TELALINK AND BTI.....................10
Section 7.1. Representations and Warranties.........................10
Section 7.2. Performance of the Obligations.........................10
Section 7.3. Consents and Approvals.................................10
Section 7.4. No Violation of Orders.................................11
Section 7.5. War Acquisition Agreement..............................11
SECTION 8. CONDITIONS TO OBLIGATIONS OF CCCI AND QCI.........................11
Section 8.1. Representations and Warranties.........................11
Section 8.2. Performance of the Obligations.........................11
Section 8.3. Consents and Approvals.................................11
Section 8.4. No Violation of Orders.................................11
Section 8.5. Pine Tree Assignment...................................12
SECTION 9. TERMINATION.......................................................12
Section 9.1. Conditions of Termination..............................12
Section 9.2. Effect of Termination..................................13
-ii-
<PAGE>
SECTION 10. MISCELLANEOUS....................................................13
Section 10.1. Successors and Assigns................................13
Section 10.2. Governing Law; Jurisdiction...........................13
Section 10.3. Expenses .............................................13
Section 10.4. Severability .........................................13
Section 10.5. Notices ..............................................13
Section 10.6. Amendments; Waivers...................................14
Section 10.7. Public Announcements..................................14
Section 10.8. Entire Agreement......................................14
Section 10.9. Parties in Interest...................................14
Section 10.10. Section and Paragraph Headings.......................15
Section 10.10.1. Counterparts ......................................15
SCHEDULES:
- - ----------
Schedule 4.4. Consents and Approvals
Schedule 10.5. Addresses for Notices to Parties
EXHIBITS:
- - ---------
Exhibit A. Form of Country Road/CCCI Note
Exhibit B. Form of Benchmark Notes
Exhibit C. Form of Benchmark Release
<PAGE>
INTER-PARTY AGREEMENT
---------------------
THIS INTER-PARTY AGREEMENT, dated as of January 19, 2000 by and among
CONTINENTAL CHOICE CARE, INC., a New Jersey corporation ("CCCI"), QUORUM
COMMUNICATIONS, INC., a Delaware corporation and wholly-owned subsidiary of CCCI
("QCI"), TelaLink Network, Ltd., a Delaware corporation ("TELALINK"), BRIDGES
TELECOMMUNICATIONS, INC., d/b/a WAR TELECOMMUNICATIONS, INC., a West Virginia
corporation and wholly-owned subsidiary of TelaLink ("BTI"), COUNTRY ROAD
COMMUNICATIONS, INC., a Delaware corporation ("COUNTRY ROAD"), WAR ACQUISITION
CORP., a Delaware corporation and wholly-owned subsidiary of Country Road
("ACQUISITION SUB") and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a mutual
insurance company organized under the laws of the State of New Jersey
("PRUDENTIAL").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, TelaLink owns all of the outstanding shares of capital stock
of BTI, a company engaged in the business of providing telecommunications
services to rural customers in the State of West Virginia;
WHEREAS, Country Road desires to purchase substantially all of the
assets of BTI, and TelaLink and BTI desire to sell such assets to Country Road,
in each case upon the terms and subject to the conditions set forth in the War
Asset Purchase Agreement (as defined below);
WHEREAS, CCCI has entered into the Pine Tree Stock Purchase Agreement
(as defined below) pursuant to which CCCI will purchase not less than
ninety-five percent (95%) of the outstanding shares of capital stock of Pine
Tree Telephone and Telegraph Company ("PINE TREE");
WHEREAS, CCCI desires to assign all of its rights and delegate all of
its obligations under the Pine Tree Stock Purchase Agreement to Country Road,
and Country Road desires to accept such assignment and assume such obligations;
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements hereinafter contained, the parties hereto hereby agree
as follows:
SECTION 1. DEFINITIONS.
-----------
As used in this Agreement (including the recitals and
Schedules hereto), the following terms shall have the following meanings (such
meanings to be applicable equally to both singular and plural forms of the terms
defined):
-1-
<PAGE>
"AIRPORT ROAD LEASE" shall mean that certain Lease, dated as of January
2, 1986, by and between Airport Park, Inc., as lessor, and Gemini Consulting,
Inc., a successor in interest to United Research Company, as lessee, as amended,
relating to the Airport Road Property.
"AIRPORT ROAD SUBLEASE" that certain Sublease of the Airport Road
Lease, dated as of March, 1999, by and between Gemini Consulting, Inc., as
sublessor, and CCCI as sublessee, as amended, relating to the Airport Road
Property.
"AIRPORT ROAD PROPERTY" shall mean the premises located at 35
Airport Road, Suite 120, Morristown, New Jersey 07960.
"BENCHMARK" shall mean Benchmark Equity Group, Inc., a Delaware
corporation.
"BENCHMARK NOTES" shall have the meaning set forth in Section 2.1(b)
hereto.
"BREACHING PARTY" shall have the meaning set forth in Section 9.1(g)
hereto.
"CCCI SUBLEASE" shall have the meaning set forth in Section 2.1(f)
hereto.
"CLAIMS" shall have the meaning set forth in Section 2.2 hereof.
"CLOSING" shall have the meaning set forth in Section 3 hereto.
"CLOSING DATE" shall have the meaning set forth in Section 3 hereto.
"LEASE ASSIGNMENT" shall have meaning set forth in Section 2.1(e)
hereto.
"MANAGEMENT INVESTORS" shall have the meaning set forth in Section 6.6
hereto.
"NON-BREACHING PARTY" shall have the meaning set forth in Section
9.1(g) hereto.
"PERSONS" shall mean and include any individual, corporation, limited
liability company, partnership, joint venture, association, joint-stock company,
trust, any other unincorporated organization or any federal, state, local or
foreign governmental entity.
-2-
<PAGE>
"PINE TREE ASSIGNMENT" shall mean the assignment and assumption
agreement between CCCI, as assignor, and Country Road, as assignee.
"PINE TREE STOCK PURCHASE AGREEMENT" shall mean that certain Stock
Purchase Agreement and the exhibits and schedules thereto, dated May 15, 1999,
among CCCI, Pine Tree and Tim Hutchison.
"COUNTRY ROAD /CCCI NOTE" shall have the meaning set forth in Section
2.1(a) hereto.
"RELEASED PARTIES" shall have the meaning set forth in Section 2.2
hereof.
"RELEASING PARTIES" shall have the meaning set forth in Section 2.2
hereof.
"TELALINK NOTE" shall mean, collectively: (i) that certain 12%
Promissory Note, dated August 12, 1999, in the amount of $30,000, between
TelaLink, as borrower, and CCCI, as lender; (ii) that certain 12% Promissory
Note, dated August 6, 1999, in the amount of $70,000, between TelaLink, as
borrower, and CCCI, as lender; (iii) that certain Line of Credit Note, dated
July 19, 1999, in the amount of $120,000, between TelaLink, as borrower, and
CCCI, as lender; (iv) that certain Line of Credit Note, dated July 2, 1999, in
the amount of $100,000, between TelaLink, as borrower, and CCCI, as lender; (v)
that certain Line of Credit Note, dated June 16, 1999, in the amount of
$307,000, between TelaLink, as borrower, and CCCI, as lender; and (vi) that
certain Line of Credit Note, dated March 25, 1999, in the amount of $400,000,
between TelaLink, as borrower, and CCCI, as lender.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in Section 6.6
hereto.
"TRIDENT SHARES" shall have the meaning set forth in Section 2.1(g)
hereto.
"WAR ACQUISITION AGREEMENT" shall mean an asset purchase agreement and
the exhibits and schedules thereto by and among TelaLink and BTI, as sellers,
and Acquisition Sub, as buyer.
SECTION 2. TRANSACTIONS AMONG THE PARTIES.
------------------------------
The parties hereto hereby agree to take the actions and enter into the
transactions set forth below.
Section 2.1. WAR ACQUISITION AND PINE TREE ASSIGNMENT.
----------------------------------------
On the Closing Date:
-3-
<PAGE>
(a) Country Road shall purchase from CCCI, and CCCI shall sell to
Country Road, the TelaLink Note for a purchase price of up to $1,100,000, (a)
$500,000 of which will be paid to CCCI on the Closing Date by wire transfer of
immediately available funds to such account as CCCI shall designate in writing,
and (b) the balance of which will be paid to CCCI in the form of a promissory
note to be executed and delivered on the Closing Date, the form of which is
attached hereto as EXHIBIT A (the "COUNTRY ROAD/CCCI NOTE").
(b) Country Road shall pay Benchmark a fee in the amount of $450,000,
(a) $225,000 of which shall be paid to Benchmark on the Closing Date by wire
transfer of immediately available funds to such account as Benchmark shall
designate in writing, (b) $100,000 of which will be paid to Benchmark in the
form of a promissory note to be executed and delivered on the Closing Date, the
form of which is attached hereto as EXHIBIT B-1 and (c) $125,000 of which will
be paid to Benchmark in the form of a promissory note to be executed on the
Closing Date and deposited into escrow pursuant to the Escrow Agreement referred
to in the War Acquisition Agreement, the form of which is attached hereto as
EXHIBIT B-2 (collectively, the "BENCHMARK NOTES").
(c) CCCI and Country Road shall execute and deliver the Pine Tree
Assignment pursuant to which CCCI shall assign all of its rights, and delegate
all of its obligations, under the Pine Tree Stock Purchase Agreement to Country
Road and Country Road shall accept such assignment and assume such obligations.
(d) Country Road shall pay CCCI on the Closing Date by wire transfer of
immediately available funds to such account as CCCI shall designate in writing:
(i) $915,000 representing reimbursement to CCCI of its payment to Pine
Tree of the Deposit Escrow (as defined in the Pine Tree Stock Purchase
Agreement); and
(ii) interest accrued on the Deposit Escrow in an amount calculated by
applying a simple interest of eight percent (8%) per annum from the date
that the Deposit Escrow was deposited.
(e) Country Road and CCCI shall execute and deliver a lease assignment
pursuant to which CCCI shall assign to Country Road, and Country Road shall
assume from CCCI, CCCI's rights and obligations under the Airport Road Sublease
(the "LEASE ASSIGNMENT"), and Country Road shall use its reasonable best efforts
(without expenditure of any funds) to cause Gemini Consulting, Inc. to execute
an new sublease with Country Road as sublessee or to agree to release CCCI and
its officers, directors and employees from all obligations under the Airport
Road Sublease; PROVIDED that if CCCI is not released from its obligations under
the Airport Road Sublease, Country Road shall indemnify CCCI for all losses,
damages, liabilities and other expenses (including reasonable attorney's fees)
arising from a breach by Country Road of, Sections I-C, I.B, V and VI of the
Airport Road Sublease; and
-4-
<PAGE>
(f) Country Road and CCCI shall execute and deliver the CCCI Sublease
pursuant to which CCCI will sublet from Country Road office space located at the
Airport Road Property for a term ending on the earlier of the fourteenth day
after CCCI receives notice from Country Road that such office space has been
sublet to a third party or March 31, 2000 (the "CCCI SUBLEASE").
Section 2.2. WAIVER OF CLAIMS.
-----------------
Effective upon the Closing, each of CCCI, QCI, TelaLink, BTI, Country
Road and Acquisition Sub individually and for each of their respective direct
and indirect parent corporations, subsidiaries, affiliates, subdivisions,
predecessors, directors, officers, employees, successors and assigns
(collectively, the "RELEASING PARTIES"), hereby fully releases and forever
discharges all other parties to this Agreement and their respective direct and
indirect parent corporations, subsidiaries, affiliates, subdivisions,
predecessors, officers, directors, agents, representatives, attorneys, heirs,
executors, administrators, successors and assigns (collectively, the "RELEASED
PARTIES"), of and from, all actions, causes of action, suits, debts, dues, sums
of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages (including
any liability, loss, cost, expense, deficiency, interest, penalty, impositions,
assessments or fines), judgments, executions, claims and demands, of every
nature whatsoever, whether known or unknown, in law or equity, which against the
Released Parties, any of the Releasing Parties ever had, now has or hereafter
can, shall or may have, for, upon or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the date of this Agreement
(collectively, "CLAIMS"), other than Claims that arise out of or relate to a
breach by a Released Party of this Agreement or any of the Transaction
Documents.
SECTION 3. CLOSING.
-------
The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall take place at the offices of Willkie Farr & Gallagher at 787
Seventh Avenue, New York, New York 10019 at 10:00 a.m. on the third Business Day
after all of the conditions set forth in Sections 6, 7 and 8 hereof have been
satisfied or waived, or at such other place and time as may be mutually agreed
to by the parties hereto (the "CLOSING DATE").
-5-
<PAGE>
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
---------------------------------------------
Unless otherwise provided, each of the parties to this Agreement
hereby, severally but not jointly, represents and warrants (as to themselves and
no other party) as follows:
Section 4.1. CORPORATE ORGANIZATION.
----------------------
Such party is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of incorporation, and has all
requisite corporate power and authority to own its properties and assets and to
conduct its business as now conducted.
Section 4.2. AUTHORIZATION AND VALIDITY OF AGREEMENT.
----------------------------------------
Such party has all requisite corporate power and authority to enter
into this Agreement and the transactions contemplated hereby and to carry out
its obligations hereunder. The execution and delivery of this Agreement and the
performance of such party's obligations hereunder have been duly authorized by
all necessary corporate action by the Board of Directors and stockholders of
such party, and no other corporate proceedings on the part of such party are
necessary to authorize such execution, delivery and performance. This Agreement
has been duly executed by such party and constitutes such party's valid and
binding obligation, enforceable against it in accordance with its terms, except
as may be limited by applicable bankruptcy, insolvency, moratorium or similar
laws of general application relating to or affecting creditors' rights generally
and except for the limitations imposed by general principles of equity.
Section 4.3. NO CONFLICT OR VIOLATION.
-------------------------
The execution, delivery and performance of this Agreement by such party
does not and will not violate or conflict with any provision of the Certificate
or Articles of Incorporation or By-laws (or equivalent documents) of such party
and does not and will not violate any material provision of law, or any order,
judgment or decree of any court or other governmental or regulatory authority,
nor violate nor will result in a breach of or constitute (with due notice or
lapse of time or both) a default under any material contract, lease, loan
agreement, mortgage, security agreement, trust indenture or other material
agreement or instrument to which such party is a party or by which it is bound
or to which its properties or assets is subject.
Section 4.4. CONSENTS AND APPROVALS.
-----------------------
SCHEDULE 4.4 sets forth a true and complete list of each material
------------
consent, waiver, authorization or approval of any governmental or regulatory
authority, domestic or foreign, or of any other Person, and each declaration to
or filing or registration with any such governmental or regulatory authority,
that is required in connection with the execution and delivery of this Agreement
and each of the Transaction Documents by the parties thereto or the performance
by them of their obligations thereunder.
-6-
<PAGE>
Section 4.5. PINE TREE STOCK PURCHASE AGREEMENT.
-----------------------------------
CCCI represents and warrants that, to its knowledge, all of the
representations and warranties contained in the Pine Tree Stock Purchase
Agreement made by any party thereto are true and correct as of the date they
were made and as of the Closing Date.
Section 4.6. SURVIVAL.
---------
Each of the representations and warranties set forth in this Section 4
shall be deemed represented and made by the respective parties to this Agreement
at the Closing as if made at such time and shall survive the Closing for one (1)
year notwithstanding any investigation on the part of any other party to this
Agreement.
SECTION 5. COVENANTS.
---------
Section 5.1. CONSENTS AND APPROVALS.
----------------------
Each of the parties to this Agreement shall:
(a) use its best efforts to obtain all necessary material consents,
waivers, authorizations and approvals of all governmental and regulatory
authorities, domestic and foreign, and of all other Persons required in
connection with the execution, delivery and performance by it of this Agreement,
including without limitation (i) approval of the Public Utility Commission of
the State of Maine with respect to the Pine Tree Assignment and (ii) approval of
the Public Service Commission of the State of West Virginia with respect to the
transactions contemplated by the War Acquisition Agreement; and
(b) diligently assist and cooperate with the other parties to this
Agreement in preparing and filing all documents required to be submitted by such
other parties to any governmental or regulatory authority, domestic or foreign,
in connection with such transactions and in obtaining any material governmental
consents, waivers, authorizations or approvals which may be required to be
obtained by such other parties in connection with such transactions, including
without limitation (i) documents required to be submitted to the Public Utility
Commission of the State of Maine with respect to the Pine Tree Assignment; and
(ii) documents required to be submitted to the Public Service Commission of the
State of West Virginia with respect to the transactions contemplated by the War
Acquisition Agreement; and promptly furnish every other party hereto with copies
of all written communications received by it or any of its subsidiaries, as well
as all documents or written communications delivered by such party or any of its
subsidiaries to any governmental or regulatory authority in respect of the
transactions contemplated hereby or by the War Acquisition Agreement.
-7-
<PAGE>
Section 5.2. BEST EFFORTS.
-------------
Upon the terms and subject to the conditions of this Agreement, each
party to this agreement will use its best efforts to take, or cause to be taken,
all action, and to do, or cause to be done, all things necessary, proper or
advisable consistent with applicable law to consummate and make effective in the
most expeditious manner practicable the transactions contemplated hereby.
Section 5.3. NOTICE OF BREACH.
-----------------
Through the Closing Date, each party to this Agreement shall promptly
give the other parties hereto written notice with particularity upon having
knowledge of any matter that may constitute a breach of any representation,
warranty, agreement or covenant contained in this Agreement.
SECTION 6. CONDITIONS TO OBLIGATIONS OF PRUDENTIAL, COUNTRY ROAD AND
---------------------------------------------------------
ACQUISITION SUB.
----------------
The obligations of Prudential, Country Road and Acquisition Sub to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment, on or before the Closing Date, of the following conditions, any one
or more of which may be waived by them in their sole discretion:
Section 6.1. REPRESENTATIONS AND WARRANTIES.
-------------------------------
All representations and warranties made herein by CCCI, QCI, TelaLink
and BTI shall be true and correct in all material respects on and as of the
Closing Date as if again made on and as of such date.
Section 6.2. PERFORMANCE OF THE OBLIGATIONS.
-------------------------------
Each of CCCI, QCI, TelaLink and BTI shall have performed in all
material respects all obligations required under this Agreement to be performed
by them on or before the Closing Date.
Section 6.3. CONSENTS AND APPROVALS.
-----------------------
All material consents, waivers, authorizations and approvals of any
governmental or regulatory authority, domestic or foreign, and of any other
Person, required in connection with the execution, delivery and performance of
this Agreement and the transactions contemplated hereby shall have been duly
obtained and shall be in full force and effect on the Closing Date, including
without limitation (a) approval of the Public Utility Commission of the State of
Maine with respect to the Pine Tree Assignment; and (b) approval of the Public
Service Commission of the State of West Virginia with respect to the
transactions contemplated by the War Acquisition Agreement.
Section 6.4. NO VIOLATION OF ORDERS.
-----------------------
No preliminary or permanent injunction or other order issued by any
court or other governmental or regulatory authority, domestic or foreign, nor
any statute, rule, regulation, decree or executive order promulgated or enacted
by any government or governmental or regulatory authority, domestic or foreign,
that declares any of this Agreement invalid or unenforceable in any respect or
which prevents the consummation of the transactions contemplated hereby shall be
in effect.
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<PAGE>
Section 6.5. OPINION OF COUNSEL.
------------------
Prudential shall have received favorable legal opinions, dated as of
the Closing Date, from:
(a) Preti, Flaherty, Beliveau, Pachios & Haley, special counsel to the
CCCI, in form and substance reasonably satisfactory to Prudential and its
counsel substantially to the effect that Prudential will not hold an "affiliated
interest" under Section 707 of Title 35-A of the Maine Revised Statutes
Annotated;
(b) DeMartino Finkelstein Rosen & Virga, special counsel to TelaLink,
in form and substance reasonably satisfactory to Prudential and Country Road;
(c) Willkie Farr & Gallagher, special counsel to Prudential, in form
and substance satisfactory to Prudential and Country Road; and
(d) Lentz & Gengaro, special counsel to CCCI, in form and substance
satisfactory to Prudential and Country Road.
Section 6.6. TRANSACTION DOCUMENTS.
----------------------
On or before the Closing Date, the following documents (the
"TRANSACTION DOCUMENTS") shall have been executed and delivered by the
respective parties thereto, shall be in full force and effect as of the Closing
Date and shall be in form and substance reasonably satisfactory to Prudential,
Country Road and Acquisition Sub:
(a) the Pine Tree Assignment;
(b) the War Acquisition Agreement;
(c) the Lease Assignment;
(d) the CCCI Sublease;
(e) a stockholders agreement among Country Road, Prudential and certain
management investors (the "MANAGEMENT INVESTORS");
(f) a subscription agreement between Country Road and Prudential;
(g) a management subscription agreement between Country Road and the
Management Investors;
(h) a registration rights agreement among Country Road, Prudential and
the Management Investors;
(i) pledge agreements among Country Road and each of the Management
Investors;
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(j) restricted stock award agreements among Country Road and each of
the Management Investors;
(k) employment agreements among Country Road and each of the Management
Investors;
(l) stock option agreements among Country Road and each of the
Management Investors;
(m) a loan agreement between Country Road and CoBank ACB with respect
to the financing of the acquisition of the capital stock of Pine Tree; and
(n) a release of Benchmark in the form attached as EXHIBIT C hereto.
---------
All conditions to the obligations of Prudential, Country Road and
Acquisition Sub under the Transaction Documents to which they are a party shall
have been satisfied or waived prior to the Closing.
SECTION 7. CONDITIONS TO OBLIGATIONS OF TELALINK AND BTI.
---------------------------------------------
The obligations of TelaLink and BTI to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, on or before the
Closing Date, of the following conditions, any one or more of which may be
waived by them in their sole discretion:
Section 7.1. REPRESENTATIONS AND WARRANTIES.
-------------------------------
All representations and warranties made by Prudential, Country Road,
Acquisition Sub, CCCI and QCI shall be true and correct in all material respects
on and as of the Closing Date as if again made on and as of such date.
Section 7.2. PERFORMANCE OF THE OBLIGATIONS.
-------------------------------
Each of Prudential, Country Road, Acquisition Sub, CCCI and QCI shall
have performed in all material respects all obligations required under this
Agreement to be performed by them on or before the Closing Date.
Section 7.3. CONSENTS AND APPROVALS.
-----------------------
All material consents, waivers, authorizations and approvals of any
governmental or regulatory authority, domestic or foreign, and of any other
Person, required in connection with the execution, delivery and performance of
this Agreement and the transactions contemplated hereby shall have been duly
obtained and shall be in full force and effect on the Closing Date, including
without limitation (a) approval of the Public Utility Commission of the State of
Maine with respect to the Pine Tree Assignment; and (b) approval of the Public
Service Commission of the State of West Virginia with respect to the
transactions contemplated by the War Acquisition Agreement.
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Section 7.4. NO VIOLATION OF ORDERS.
-----------------------
No preliminary or permanent injunction or other order issued by any
court or other governmental or regulatory authority, domestic or foreign, nor
any statute, rule, regulation, decree or executive order promulgated or enacted
by any government or governmental or regulatory authority, domestic or foreign,
that declares any of this Agreement invalid or unenforceable in any respect or
which prevents the consummation of the transactions contemplated hereby shall be
in effect.
Section 7.5. WAR ACQUISITION AGREEMENT.
--------------------------
On or before the Closing Date, the War Acquisition Agreement shall have
been executed and delivered by the respective parties thereto and shall be in
full force and effect as of the Closing Date. All conditions to the obligations
of TelaLink and BTI under the War Acquisition Agreement shall have been
satisfied or waived prior to the Closing.
SECTION 8. CONDITIONS TO OBLIGATIONS OF CCCI AND QCI.
-----------------------------------------
The obligations of CCCI and QCI to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, on or before the
Closing Date, of the following conditions, any one or more of which may be
waived by them in their sole discretion:
Section 8.1. REPRESENTATIONS AND WARRANTIES.
-------------------------------
All representations and warranties made by Prudential, Country Road,
Acquisition Sub, TelaLink and BTI shall be true and correct in all material
respects on and as of the Closing Date as if again made on and as of such date.
Section 8.2. PERFORMANCE OF THE OBLIGATIONS.
-------------------------------
Each of Prudential, Country Road, Acquisition Sub, TelaLink and BTI
shall have performed in all material respects all obligations required under
this Agreement to be performed by them on or before the Closing Date.
Section 8.3. CONSENTS AND APPROVALS.
-----------------------
All material consents, waivers, authorizations and approvals of any
governmental or regulatory authority, domestic or foreign, and of any other
Person, required in connection with the execution, delivery and performance of
this Agreement and the transactions contemplated hereby shall have been duly
obtained and shall be in full force and effect on the Closing Date, including
without limitation (a) approval of the Public Utility Commission of the State of
Maine with respect to the Pine Tree Assignment; and (b) approval of the Public
Service Commission of the State of West Virginia with respect to the
transactions contemplated by the War Acquisition Agreement.
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<PAGE>
Section 8.4. NO VIOLATION OF ORDERS.
-----------------------
No preliminary or permanent injunction or other order issued by any
court or other governmental or regulatory authority, domestic or foreign, nor
any statute, rule, regulation, decree or executive order promulgated or enacted
by any government or governmental or regulatory authority, domestic or foreign,
that declares any of this Agreement invalid or unenforceable in any respect or
which prevents the consummation of the transactions contemplated hereby shall be
in effect.
Section 8.5. PINE TREE ASSIGNMENT.
---------------------
On or before the Closing Date, the Pine Tree Assignment shall have been
executed and delivered by the respective parties thereto and shall be in full
force and effect as of the Closing Date. All conditions to the obligations of
CCCI and QCI under the Pine Tree Assignment shall have been satisfied or waived
prior to the Closing.
SECTION 9. TERMINATION.
-----------
Section 9.1. CONDITIONS OF TERMINATION.
-------------------------
Notwithstanding anything to the contrary contained herein, this
Agreement may be terminated at any time before the Closing:
(a) by mutual consent of the parties hereto;
(b) by Prudential or Country Road if the conditions set forth in
Section 6 hereof are not satisfied or waived by the Closing Date;
(c) by TelaLink if the conditions set forth in Section 7 hereof are not
satisfied or waived by the Closing Date;
(d) by CCCI if the conditions set forth in Section 8 hereof are not
satisfied or waived by the Closing Date;
(e) by Prudential if the War Acquisition Agreement is terminated;
(f) by Prudential, TelaLink or CCCI if the Closing shall not have
occurred on or prior to March 31, 2000; and
(g) by any party hereto that is not in material breach of this
Agreement or any Transaction Document to which it is a party (a "NON-BREACHING
PARTY") at any time if
(i) any other party (a "BREACHING PARTY") hereto is in material breach
of its obligations hereunder and such material breach continues uncured
for a period of 10 days or more after receipt by the Breaching Party of
written notice from a Non-Breaching Party specifying the nature of such
breach and requesting that it be cured, or
(ii) any party (other than the Non-Breaching Party) to any Transaction
Document to which the Non-Breaching Party is also a party is in material
breach of such Transaction Document and such material breach continues
uncured for a period of 10 days or more after receipt by the Breaching
Party of written notice from a Non-Breaching Party specifying the nature
of such breach and requesting that it be cured.
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Section 9.2. EFFECT OF TERMINATION.
----------------------
In the event of termination pursuant to Section 9.1 hereof, this
Agreement shall become null and void and have no effect, with no liability on
the part of the parties hereto, or their directors, officers, agents or
stockholders, with respect to this Agreement, except for liability for breach of
this Agreement.
SECTION 10. MISCELLANEOUS.
-------------
Section 10.1. SUCCESSORS AND ASSIGNS.
-----------------------
Except as otherwise provided in this Agreement, no party hereto shall
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the other parties hereto and any such attempted assignment
without such prior written consent shall be void and of no force and effect.
This Agreement shall inure to the benefit of and shall be binding upon the
successors and permitted assigns of the parties hereto.
Section 10.2. GOVERNING LAW; JURISDICTION.
----------------------------
THIS AGREEMENT SHALL BE CONSTRUED, PERFORMED AND ENFORCED IN ACCORDANCE
WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT
TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. THE PARTIES HERETO IRREVOCABLY
ELECT AS THE SOLE JUDICIAL FORUM FOR THE ADJUDICATION OF ANY MATTERS ARISING
UNDER OR IN CONNECTION WITH THIS AGREEMENT, AND CONSENT TO THE JURISDICTION OF,
THE COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK, NEW YORK.
Section 10.3. EXPENSES.
---------
Except as otherwise provided herein, each of the parties hereto shall
pay its own expenses in connection with this Agreement and the transactions
contemplated hereby, including, without limitation, any legal and accounting
fees, whether or not the transactions contemplated hereby are consummated.
Notwithstanding the foregoing, in the event that the Closing occurs, all
expenses of Prudential incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by Country Road.
Section 10.4. SEVERABILITY.
-------------
In the event that any part of this Agreement is declared by any court
or other judicial or administrative body to be null, void or unenforceable, said
provision shall survive to the extent it is not so declared, and all of the
other provisions of this Agreement shall remain in full force and effect.
Section 10.5. NOTICES.
--------
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (i) on
the date of service if served personally on the party to whom notice is to be
given, (ii) on the day of transmission if sent via facsimile transmission to the
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facsimile number given below, and telephonic confirmation of receipt is obtained
promptly after completion of transmission, (iii) on the day after delivery to
Federal Express or similar overnight courier or the Express Mail service
maintained by the U.S. Postal Service or (iv) on the fifth day after mailing, if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid and properly addressed, to the party's
address or facsimile number as set forth on SCHEDULE 10.5 hereto. Any party may
-------------
change its address for the purpose of this Section by giving the other party
written notice of its new address in the manner set forth above.
Section 10.6. AMENDMENTS; WAIVERS.
--------------------
This Agreement may be amended or modified, and any of the terms,
covenants, representations, warranties or conditions hereof may be waived, only
by a written instrument executed by the parties hereto, or in the case of a
waiver, by the party waiving compliance. Any waiver by any party of any
condition, or of the breach of any provision, term, covenant, representation or
warranty contained in this Agreement, in any one or more instances, shall not be
deemed to be nor construed as further or continuing waiver of any such
condition, or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 10.7. PUBLIC ANNOUNCEMENTS.
---------------------
The parties agree that after the signing of this Agreement, no party
shall make any press release or public announcement concerning the transactions
contemplated by the Transaction Documents without the prior written approval of
the other parties unless a press release or public announcement is required by
law. If any such announcement or other disclosure is required by law, the
disclosing party agrees to give the nondisclosing parties prior notice and an
opportunity to comment on the proposed disclosure. Notwithstanding anything to
the contrary contained in this Section 10.7, Prudential and Country Road may
make such advertisements, tombstone announcements and other communications as
are in customary form and in the ordinary course of business, without obtaining
the prior written approval of, or providing prior notice to, the other parties
to this Agreement.
Section 10.8. ENTIRE AGREEMENT.
-----------------
This Agreement and the Transaction Documents, and the exhibits and
schedules hereto and thereto, contain the entire understanding between the
parties hereto with respect to the transactions contemplated hereby and thereby
and supersede and replace all prior and contemporaneous agreements and
understandings, oral or written, with regard to such transactions.
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Section 10.9. PARTIES IN INTEREST.
--------------------
Nothing in this Agreement is intended to confer any rights or remedies
under or by reason of this Agreement on any persons other than (i) the parties
hereto and their respective successors and permitted assigns, and (ii) Benchmark
to the extent of the payment pursuant to Section 2.1(b) hereof. Except as
expressly provided herein, nothing in this Agreement is intended to relieve or
discharge the obligations or liability of any third persons to the parties
hereto. No provision of this Agreement shall give any third persons any right of
subrogation or action over or against the parties hereto.
Section 10.10. SECTION AND PARAGRAPH HEADINGS.
------------------------------
The section and paragraph headings in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.
Section 10.10.1. COUNTERPARTS.
------------
This Agreement may be executed in counterparts and/or by facsimile,
each of which shall be deemed an original, but all of which shall constitute the
same instrument.
[Signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
CONTINENTAL CHOICE CARE, INC.
By:
Name:
Title:
QUORUM COMMUNICATIONS, INC.
By:
Name:
Title:
TelaLink Network, Ltd.
By:
Name:
Title:
BRIDGES tELECOMMUNICATIONS, INC.
By:
Name:
Title:
COUNTRY ROAD COMMUNICATIONS, INC.
By:
Name:
Title:
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<PAGE>
WAR ACQUISITION CORP.
By:
Name:
Title:
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By:
Name:
Title:
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<PAGE>
EXHIBIT A
---------
FORM OF
COUNTRY ROAD COMMUNICATIONS, INC.
PROMISSORY NOTE
$600,000 January 19, 2000
FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged,
COUNTRY ROAD COMMUNICATIONS, INC. ("Maker") hereby promises to pay to
CONTINENTAL CHOICE CARE, INC., a New Jersey corporation ("CCCI"), having an
address at 35 Airport Road, Suite 120, Morristown, New Jersey 07960, at such
address or at such other place as may be designated in writing by the holder of
this Note, or its assigns, the principal amount equal to SIX HUNDRED THOUSAND
DOLLARS ($600,000) on January 19, 2005 (the "Maturity Date"), subject to the
terms and conditions set forth herein. Maker also agrees to pay simple interest
at said office in like money at a rate per annum equal to six and one-half
percent (6.5%) from the date hereof on the unpaid principal amount hereof in
annual installments payable on January 19, 2001 and on each anniversary
thereafter up to and including the Maturity Date.
Maker may prepay this Note in whole or from time to time in part,
without premium or penalty. If Maker prepays, in the aggregate, a principal
amount equal to $500,000 plus accrued and unpaid interest thereon prior to the
second anniversary of the date hereof, then Maker's obligations under this Note
will be deemed satisfied in full and CCCI will have no further recourse against
Maker hereunder.
If Maker (together with its direct and indirect subsidiaries) acquires
telephone access lines at any time prior to the second anniversary of the date
hereof such that it owns and operates an aggregate of 15,000 telephone access
lines, Maker shall, within 60 days of such acquisition, prepay, in the
aggregate, a principal amount equal to $500,000 (which will be deemed to
represent one hundred percent of the outstanding principal hereunder at any such
time), plus accrued and unpaid interest thereon as of the date of such payment.
Any such mandatory prepayment shall be deemed to have satisfied Maker's
obligations under this Note in full and CCCI will have no further recourse
against Maker hereunder.
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<PAGE>
Maker agrees that:
(i) upon the failure to pay when due the principal balance hereunder
and accrued interest thereon or any mandatory prepayment of this Note;
(ii) if Maker (a) commences any voluntary proceeding under any
provision of Title 11 of the United States Code, as now or hereafter
amended, or commences any other proceeding, under any law, now or
hereafter in force, relating to bankruptcy, insolvency, reorganization,
liquidation, or otherwise to the relief of debtors or the readjustment of
indebtedness; (b) makes any assignment for the benefit of creditors or a
composition or similar arrangement with such creditors; or (c) appoints a
receiver, trustee or similar judicial officer or agent to take charge of
or liquidate any of its property or assets; or
(iii) upon the commencement against Maker of any involuntary proceeding
of the kind described in paragraph (ii);
all unpaid principal and accrued interest under this Note shall become
immediately due and payable without presentment, demand, protest or notice of
any kind.
This Note is binding on Maker and Maker hereby waives presentment,
demand, notice and protest and any defense by reason of an extension of time for
payment or other indulgences. Failure of the holder hereof to assert any right
herein shall not be deemed to be a waiver thereof.
Maker shall not assign or transfer any of its obligations hereunder
without CCCI's prior written consent.
[Signature page follows]
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<PAGE>
This Note shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without giving effect to
principles of conflicts of law thereof.
COUNTRY ROAD COMMUNICATIONS, INC.
By:
Name:
Title:
-3-
<PAGE>
EXHIBIT B-1
-----------
FORM OF
COUNTRY ROAD COMMUNICATIONS, INC.
PROMISSORY NOTE
$100,000 January 19, 2000
FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged,
COUNTRY ROAD COMMUNICATIONS, INC. ("Maker") hereby promises to pay to BENCHMARK
EQUITY GROUP, INC., a Delaware corporation ("Benchmark"), having an address at
700 Gemini, Houston, Texas 77058, at such address or at such other place as may
be designated in writing by the holder of this Note, or its assigns, the
principal amount equal to ONE HUNDRED THOUSAND DOLLARS ($100,000) on January 19,
2005 (the "Maturity Date"), subject to the terms and conditions set forth
herein. Maker also agrees to pay simple interest at said office in like money at
a rate per annum equal to six and one-half percent (6.5%) from the date hereof
on the unpaid principal amount hereof in annual installments payable on January
19, 2001 and on each anniversary thereafter up to and including the Maturity
Date.
Maker may prepay this Note in whole or from time to time in part,
without premium or penalty. If Maker (together with its direct and indirect
subsidiaries) acquires telephone access lines at any time prior the Maturity
Date such that it owns and operates an aggregate of 15,000 telephone access
lines, Maker shall, within 60 days of such acquisition, prepay one hundred
percent of the outstanding principal hereunder, plus accrued and unpaid interest
thereon as of the date of such payment.
Maker agrees that:
(i) upon the failure to pay when due the principal balance hereunder
and accrued interest thereon or any mandatory prepayment of this Note;
(ii) if Maker (a) commences any voluntary proceeding under any
provision of Title 11 of the United States Code, as now or hereafter
amended, or commences any other proceeding, under any law, now or
hereafter in force, relating to bankruptcy, insolvency, reorganization,
liquidation, or otherwise to the relief of debtors or the readjustment of
indebtedness; (b) makes any assignment for the benefit of creditors or a
composition or similar arrangement with such creditors; or (c) appoints a
receiver, trustee or similar judicial officer or agent to take charge of
or liquidate any of its property or assets; or
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<PAGE>
(iii) upon the commencement against Maker of any involuntary proceeding
of the kind described in paragraph (ii);
all unpaid principal and accrued interest under this Note shall become
immediately due and payable without presentment, demand, protest or notice of
any kind.
This Note is binding on Maker and Maker hereby waives presentment,
demand, notice and protest and any defense by reason of an extension of time for
payment or other indulgences. Failure of the holder hereof to assert any right
herein shall not be deemed to be a waiver thereof.
[Signature page follows]
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<PAGE>
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of New York, without giving effect to principles of
conflicts of law thereof.
COUNTRY ROAD COMMUNICATIONS, INC.
By:
Name:
Title:
-3-
<PAGE>
EXHIBIT B-2
-----------
FORM OF
COUNTRY ROAD COMMUNICATIONS, INC.
PROMISSORY NOTE
$125,000 January 19, 2000
FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged,
COUNTRY ROAD COMMUNICATIONS, INC. ("Maker") hereby promises to pay to BENCHMARK
EQUITY GROUP, INC. a Delaware corporation ("Benchmark"), having an address at
700 Gemini, Houston, Texas 77058, at such address or at such other place as may
be designated in writing by the holder of this Note, or its assigns, the
principal amount equal to ONE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($125,000) on
January 19, 2005 (the "Maturity Date"), subject to the terms and conditions set
forth herein. Maker also agrees to pay simple interest on the Maturity Date at
said office in like money at a rate per annum equal to six and one-half percent
(6.5%) from the date hereof on the unpaid principal amount hereof.
Maker may prepay this Note in whole or from time to time in part,
without premium or penalty.
Maker agrees that:
(i) upon the failure to pay when due the principal balance hereunder
and accrued interest thereon or any mandatory prepayment of this Note;
(ii) if Maker (a) commences any voluntary proceeding under any
provision of Title 11 of the United States Code, as now or hereafter
amended, or commences any other proceeding, under any law, now or
hereafter in force, relating to bankruptcy, insolvency, reorganization,
liquidation, or otherwise to the relief of debtors or the readjustment of
indebtedness; (b) makes any assignment for the benefit of creditors or a
composition or similar arrangement with such creditors; or (c) appoints a
receiver, trustee or similar judicial officer or agent to take charge of
or liquidate any of its property or assets; or
(iii) upon the commencement against Maker of any involuntary proceeding
of the kind described in paragraph (ii);
-1-
<PAGE>
all unpaid principal and accrued interest under this Note shall become
immediately due and payable without presentment, demand, protest or notice of
any kind.
This Note is subject to rights of offset in favor of Maker pursuant to
the terms of the Asset Purchase Agreement, dated as of January 19, 2000, by and
among Telalink Network, Ltd. Bridges Telecommunications, Inc., War Acquisition
Corp. and Benchmark. This Note is binding on Maker and Maker hereby waives
presentment, demand, notice and protest and any defense by reason of an
extension of time for payment or other indulgences. Failure of the holder hereof
to assert any right herein shall not be deemed to be a waiver thereof.
[Signature page follows]
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<PAGE>
This Note shall be governed by and construed and enforced in accordance
with the laws of the State of New York, without giving effect to principles of
conflicts of law thereof.
COUNTRY ROAD COMMUNICATIONS, INC.
By:
Name:
Title:
-3-
<PAGE>
EXHIBIT C
---------
FORM OF RELEASE
Reference is hereby made to that certain Inter-Party Agreement, dated
as of January 19, 2000 (the "INTER-PARTY AGREEMENT"), by and among The
Prudential Insurance Company of America ("PRUDENTIAL"), Country Road
Communications, Inc. ("COUNTRY Road"), War Acquisition Corp. ("ACQUISITION
SUB"), Continental Choice Care, Inc. ("CCCI"), Quorum Communications, Inc.
("QCI"), TelaLink Network, Ltd. ("TELALINK") and Bridges Telecommunications,
Inc. ("BTI"). As a condition to the obligations of the parties to the
Inter-Party Agreement to consummate the transactions contemplated thereby,
Benchmark Equity Group, Inc. ("BENCHMARK") and the parties listed below hereby
provide the following release. Capitalized terms used herein but not defined
herein shall have the meanings assigned to such terms in the Inter-Party
Agreement.
Effective upon the Closing, each of Benchmark, Country Road,
Acquisition Sub, CCCI, QCI, TelaLink and BTI, individually and for each of their
respective direct and indirect parent corporations, subsidiaries, affiliates,
subdivisions, predecessors, directors, officers, employees, agents,
representatives, successors and assigns (collectively, the "RELEASING Parties"),
hereby fully release and forever discharge each other and Prudential, and their
respective direct and indirect parent corporations, subsidiaries, affiliates,
subdivisions, predecessors, officers, directors, agents, representatives,
attorneys, heirs, executors, administrators, successors and assigns
(collectively, the "RELEASED PARTIES"), of and from, all actions, causes of
action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages (including any liability, loss, cost, expense,
deficiency, interest, penalty, impositions, assessments or fines), judgments,
executions, claims and demands, of every nature whatsoever, whether known or
unknown, in law or equity, which against the Released Parties, any of the
Releasing Parties ever had, now has or hereafter can, shall or may have, for,
upon or by reason of any matter, cause or thing whatsoever from the beginning of
the world to the date of this Agreement (collectively, "CLAIMS"), other than
Claims that arise out of or relate to a breach by a Released Party of the
Inter-Party Agreement or any of the Transaction Documents.
This Release shall be construed, performed and enforced in accordance
with, and governed by, the laws of the State of New York, without giving effect
to the principles of conflicts of laws thereof.
-1-
<PAGE>
This Release may be executed in counterparts and/or by facsimile, each
of which shall be deemed an original, but all of which shall constitute the same
instrument.
BENCHMARK EQUITY GROUP, INC.
By:
Name:
Title:
CONTINENTAL CHOICE CARE, INC.
By:
Name:
Title:
QUORUM COMMUNICATIONS, INC.
By:
Name:
Title:
TelaLink Network, Ltd.
By:
Name:
Title:
BRIDGES tELECOMMUNICATIONS, INC.
By:
Name:
Title:
-2-
<PAGE>
COUNTRY ROAD COMMUNICATIONS, INC.
By:
Name:
Title:
WAR ACQUISITION CORP.
By:
Name:
Title:
-3-
<PAGE>
SCHEDULE 4.4
------------
Public Utility Commission of the State of Maine
Public Service Commission of the State of West Virginia
American Telephone and Telegraph
Sprint Communications Company
US Intelco Networks
Rural Telephone Finance Cooperative
-1-
<PAGE>
SCHEDULE 10.5
-------------
Country Road Communications, Inc.
35 Airport Road, Suite 120
Morristown, NJ 07960
Attn: Chief Executive Officer
Facsimile: (973) 898-9626
War Acquisition Corp.
35 Airport Road, Suite 120
Morristown, NJ 07960
Attn: Chief Executive Officer
Facsimile: (973) 898-9626
Continental Choice Care, Inc.
35 Airport Road, Suite 120
Morristown, NJ 07960
Facsimile: (973) 898-9626
Quorum Communications, Inc.
35 Airport Road, Suite 120
Morristown, NJ 07960
Facsimile: (973) 898-9626
TelaLink Network, Ltd.
c/o Benchmark Equity Group, Inc.
700 Gemini
Houston, TX 77058
Attn: Frank M. DeLape
Facsimile: (281) 461-8972
Benchmark Equity Group, Inc.
700 Gemini
Houston, TX 77058
Attn: Frank M. DeLape
Facsimile: (281) 461-8972
-1-
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