<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997
REGISTRATION NO.
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TALTON HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4825 75-2680266
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
----------------
1209 W. NORTH CARRIER PARKWAY, SUITE 300 GRAND PRAIRIE, TEXAS 75050 (972) 988-
3737
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN A. CROOKS, JR. TALTON HOLDINGS, INC. 1209 W. NORTH CARRIER PARKWAY, SUITE
300 GRAND PRAIRIE, TEXAS 75050 (972) 988-3737
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
WITH A COPY TO:
GLEN HETTINGER HUGHES & LUCE, L.L.P. 1717 MAIN STREET, SUITE 2800 DALLAS,
TEXAS 75201 (214) 939-5500
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11% Series B Senior
Notes Due 2007........ $115,000,000 100% $115,000,000 $34,848.48
</TABLE>
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----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
(EACH OF THE FOLLOWING SUBSIDIARIES OF TALTON HOLDINGS, INC., AND EACH OTHER
SUBSIDIARY THAT IS OR BECOMES A GUARANTOR OF CERTAIN OF THE SECURITIES
REGISTERED HEREBY, IS HEREBY DEEMED TO BE A REGISTRANT).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIMARY STANDARD
STATE OR OTHER INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME INCORPORATION NUMBER NUMBER
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
AmeriTel Pay Phones, Inc.... Missouri 4825 43-1581010
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Talton Telecommunications
Corporation................ Alabama 4825 63-0654966
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Talton Telecommunications of
Carolina, Inc.............. Alabama 4825 63-1093356
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Talton STC, Inc............. Delaware 4825 43-1782898
</TABLE>
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<PAGE>
TALTON HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501 OF REGULATION S-K, SHOWING THE LOCATION IN
THE PROSPECTUS OF THE INFORMATION REQUIRED TO BE INCLUDED THEREIN IN ACCORDANCE
WITH PART I OF FORM S-4.
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS
-------------------------------- -------------------------------------
<C> <S> <C>
1. Forepart of Registration
Statement and Outside Front Forepart of Registration Statement;
Cover Page of Prospectus...... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front and Outside Back Cover
Pages of Prospectus
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other Forepart of Prospectus; Prospectus
Information................... Summary; Risk Factors; Summary
Consolidated Financial and Operating
Information; Selected Consolidated
Financial and Operating Information
4. Terms of the Transaction....... Prospectus Summary; The Exchange Offer;
Description of Senior Notes; Certain
Federal Income Tax Considerations; Risk
Factors
5. Pro Forma Financial Selected Consolidated Financial and
Information................... Operating Information; Summary
Consolidated Financial and Operating
Information
6. Material Contracts with Company *
Being Acquired................
7. Additional Information Required
for Reoffering by Persons and *
Parties Deemed to be
Underwriters..................
8. Interests of Named Experts and *
Counsel.......................
9. Disclosure of Commission
Position on Indemnification *
for Securities Act
Liabilities...................
10. Information with Respect to S-3 *
Registrants...................
11. Incorporation of Certain *
Information by Reference......
12. Information with Respect to S-2 *
or S-3 Registrants............
13. Incorporation of Certain *
Information by Reference......
14. Information with Respect to
Registrants Other Than S-3 or Prospectus Summary; Summary Consolidated
S-2 Registrants............... Financial and Operating Information;
Selected Consolidated Financial and
Operating Information; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Legislation and Regulation
15. Information with Respect to S-3 *
Companies.....................
16. Information with Respect to S-2 *
or S-3 Companies..............
17. Information with Respect to
Companies Other Than S-3 or S- *
2 Companies...................
18. Information if Proxies,
Consents or Authorizations are *
to be Solicited...............
19. Information if Proxies,
Consents or Authorizations are Management; Certain Relationships and
not to be Solicited or in an Transactions; The Exchange Offer
Exchange Offer................
</TABLE>
- --------
* Item is omitted because the answer is negative or the item is inapplicable.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR +
+AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT +
+BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION +
+STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO +
+SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF +
+THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD +
+BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 14, 1997
OFFER TO EXCHANGE
11% SERIES B SENIOR NOTES DUE 2007
FOR ANY AND ALL OUTSTANDING 11% SENIOR NOTES DUE 2007
OF
TALTON HOLDINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED
Talton Holdings, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange a principal amount of 11% Series B Senior Notes due 2007 of the
Registrants (the "New Notes") for an equal principal amount of the issued and
outstanding 11% Senior Notes due 2007 (the "Old Notes," and collectively with
the New Notes, the "Senior Notes"). Interest on the Senior Notes is payable
semi-annually commencing January 1, 1998 with a final maturity date of June 30,
2007. As of the date of this Prospectus, $115,000,000 aggregate principal
amount of the Old Notes is outstanding. The terms of the New Notes and the Old
Notes are identical in all material respects, except for certain transfer
restrictions and registration rights and except that holders of New Notes are
not entitled to receive an increase in interest rate that holders of the Old
Notes are entitled to receive in certain circumstances. See "Description of
Senior Notes--Exchange Offer; Registration Rights."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is August 14, 1997
<PAGE>
The Exchange Offer is being made to satisfy certain obligations of the
Registrant under the Registration Rights Agreement, dated as of June 27, 1997,
among the Registrant, the Subsidiary Guarantors (as defined and, together with
the Company the "Registrants"), and the Initial Purchaser (as defined) (the
"Registration Rights Agreement"). Upon consummation of the Exchange Offer,
holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes, and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend on the Old
Notes.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Registrants believe that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold, and otherwise transferred by any holder of such New Notes
(other than any such holder that is an "affiliate" of the Registrants within
the meaning of Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act")) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business, such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Notes, and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that it will deliver a prospectus in connection with
any resale of its New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of the
New Notes received in exchange for the Old Notes acquired by the broker-dealer
as a result of market-making activities or other trading activities. The
Registrant has agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period of 365
days after the Exchange Date (as defined) or, if earlier, until all
participating broker-dealers have so resold. See "Plan of Distribution."
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of Senior Notes."
There will be no cash proceeds to the Registrant from the Exchange Offer. The
Senior Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all current and future senior indebtedness
of the Company and senior to all current and future subordinated indebtedness
of the Company. The Subsidiary Guarantees will be senior unsecured obligations
of the Subsidiary Guarantors and will rank pari passu in right of payment with
all current and future senior indebtedness of the Subsidiary Guarantors and
senior to all current and future subordinated indebtedness of the Subsidiary
Guarantors. The Senior Notes will be jointly and severally guaranteed
(collectively, the "Subsidiary Guarantees"), by each direct and indirect
Restricted Subsidiary (as defined) of the Company existing on the closing date
of the Offering.
The Old Notes were originally issued and sold on June 27, 1997 in an
offering of $115,000,000 aggregate principal amount of Old Notes (the
"Offering"). The Offering was exempt from registration under the Securities
Act under the exemptions provided by Rule 144A and Regulation S under, and
Section 4(2) of, the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold, or otherwise pledged, hypothecated, or transferred in the
United States unless so registered or unless an exemption from the
registration requirements of the Securities Act and applicable state
securities laws is available.
The Registrants have not entered into any arrangement or understanding with
any person to distribute the New Notes to be received in the Exchange Offer,
and, to the best of the Registrants' information and belief, each person
participating in the Exchange Offer is acquiring the New Notes in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1997, unless extended (as
it may be so extended, the "Expiration Date"), provided that the Exchange
Offer will
2
<PAGE>
not be extended beyond 30 business days from the date of this Prospectus. The
date of acceptance for exchange of the Old Notes for the New Notes (the
"Exchange Date") will be the first business day following the Expiration Date.
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to the Expiration Date; otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the Senior
Notes. If a market for the New Notes should develop, the New Notes could trade
at a discount from their initial offering price. The Company does not intend
to apply for listing of the New Notes on any securities exchange or in any
automated quotation system. There can be no assurance that an active trading
market for the New Notes will develop.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 under the Securities Act with respect to
the Exchange Offer. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Exchange Offer, reference is
made to such Registration Statement and the exhibits and schedules filed as
part thereof. The Registration Statement and the exhibits and schedules
thereto filed with the Commission may be inspected without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained
from the Public Reference Section of the Commission upon payment of certain
prescribed fees. Electronic registration statements made through the
Electronic Data Gathering, Analysis, and Retrieval system are publicly
available through the Commission's Web site (http://www.sec.gov), which is
maintained by the Commission and which contains reports, proxy, and
information statements and other information regarding registrants that file
electronically with the Commission.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE REGISTRANT ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES LAWS OF SUCH JURISDICTION.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including notes) appearing elsewhere in this Prospectus. Except as otherwise
stated or unless the context otherwise requires, the information set forth in
this Prospectus gives effect to the STC Acquisition (as defined), and
references to the "Company" are to Talton Holdings, Inc. and its consolidated
subsidiaries and the historical operations and activities of certain
predecessor companies, including AmeriTel Pay Phones, Inc. ("AmeriTel") and
Talton Telecommunications Corporation ("Talton Telecommunications"), each of
which became wholly owned subsidiaries of the Company in December 1996, Tri-T,
Inc. ("Tataka"), the inmate telecommunications operations of which were
acquired by the Company in May 1997, and STC (as defined). References in this
Prospectus to the "STC Acquisition" are to the acquisition by the Company of
substantially all of the assets of Security Telecom Corporation, a Texas
corporation ("STC"), in a transaction that closed simultaneously with the
closing of the Offering.
THE COMPANY
The Company is the largest independent provider of inmate telecommunications
services to correctional facilities operated by city, county, and state
authorities and other types of confinement facilities such as juvenile
detention centers, private jails, and halfway houses. As of March 31, 1997, the
Company owned and operated inmate telephones in 1,157 correctional facilities
in 33 states. Management believes that the Company provides inmate
telecommunications services to over 75% of the county correctional facilities
in the states of Alabama, Iowa, Kansas, Missouri, Nebraska, and Utah and to
over 50% of the county correctional facilities in the states of Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota. For the year ended December
31, 1996 and the three months ended March 31, 1997, the Company generated pro
forma operating revenues of $80.9 million and $21.2 million, respectively, and
pro forma Adjusted EBITDA (as defined) of $20.2 million and $5.2 million,
respectively.
The corrections industry has experienced dramatic growth over the last decade
as a result of societal and political trends. Recent anti-crime legislation,
including mandatory sentencing guidelines, limitations on parole, and spending
authorizations for crime prevention and construction of additional correctional
facilities have contributed to this industry growth. The U.S. has one of the
highest incarceration rates of any country in the world. The number of inmates
incarcerated in federal and state prisons and in city and county correctional
facilities increased from approximately 1.1 million at June 30, 1990 to
approximately 1.6 million at June 30, 1996, according to U.S. Department of
Justice statistics.
The inmate telecommunications industry is characterized by the specialized
telecommunications systems and related services required to address the unique
needs of the corrections industry. Security and public safety concerns
associated with inmate telephone use require that correctional facilities have
the ability to control inmate access to telephones and to certain telephone
numbers, and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for inmate
telephone usage have also led to the development of systems and procedures
unique to this industry. Inmate telephones in the U.S. are operated by a large
and diverse group of service providers, including local exchange carriers
("LECs"), regional bell operating companies ("RBOCs"), interexchange carriers
("IXCs") such as AT&T, MCI, Sprint, and LDDS/Worldcom, and independent public
pay telephone and inmate telephone companies.
The Company's inmate telecommunications business consists of owning,
operating, servicing, and maintaining a system of telephones located in
correctional facilities and providing related services. The Company enters into
multi-year agreements with the correctional facilities pursuant to which the
Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights, the
Company pays a commission to the correctional facility based upon inmate
telephone use.
4
<PAGE>
The Company installs and generally retains ownership of the telephones and
related equipment. In addition, the Company provides services that are tailored
to the specialized needs of the corrections industry and to the requirements of
the individual correctional facility, such as a specialized law enforcement
management system, call activity reporting, and call blocking. The Company also
generates revenues from public pay telephones that are ancillary to its inmate
telecommunications business.
The Company was formed in November 1996 to consummate the acquisitions of
AmeriTel and Talton Telecommunications, thereby combining the unique strengths
of two leading independent providers of inmate telecommunications services. The
Company was formed by EUF Talton, L.P. ("EUF Talton"), an affiliate of Engles
Urso Follmer Capital Corporation ("EUFCC"), a private investment banking and
consulting firm, the principals of which are experienced in acquiring and
integrating the operations of companies in consolidating industries. With the
acquisition of AmeriTel, the Company acquired a management team with extensive
experience in identifying, consummating, and integrating acquisitions in the
inmate telecommunications industry; with Talton Telecommunications, the Company
acquired a billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a competitive
advantage in the industry. With the acquisition of STC, the Company augmented
its information technology and services offered with, among other assets, a
specialized law enforcement management information system ("LEMS"). The Company
believes this system will be instrumental in retaining STC's customers and will
assist the Company in retaining existing and obtaining new customers.
RECENT DEVELOPMENTS
In August of 1997, the Company acquired Correctional Communications Corporation
("CCC"). With this acquisition, the Company acquired CCC's proprietary call
processor technology, which management believes will reduce the Company's
installation and operating costs. CCC generated revenues of approximately $9.6
million in 1996. The Company has recently been awarded the contract with the
Department of Corrections of the State of North Carolina to provide inmate
telephone services. The agreement covers 96 correctional facilities with a
current inmate population of approximately 32,000. The Company will also
provide coin telephone service for 1,600 telephones throughout North Carolina
in connection with this contract.
BUSINESS STRATEGY
The Company was formed to capitalize on consolidation opportunities that the
Company believes exist within the highly fragmented inmate telecommunications
industry. The Company's primary business objectives are to be a cost-efficient,
high-quality provider of telecommunications services to correctional facilities
in the U.S. and to continue to expand its installed base of inmate telephones.
The Company has developed and is implementing the following strategies to meet
these objectives:
. Target the corrections industry with specialized products and
services. The Company has developed specialized telecommunications
systems and services to focus on the unique needs of the corrections
industry. In addition to telecommunications services, the Company offers
a computer-based law enforcement management system, which includes jail
management, victim notification, and prisoner profile software packages.
The Company markets its telecommunications system and services through a
sales force consisting largely of former law enforcement officials and
others with experience in the corrections and telecommunications
industries. The Company also maintains a staff of trained field service
technicians and independent telecommunications service contractors, which
enables the Company to respond quickly (typically within 24 hours) to
service interruptions. In each of the last three years, the Company has
retained in excess of 95% of its beginning of the year customer base
through contract extensions or renewals.
5
<PAGE>
. Reduce operating costs and bad-debt expense. The Company has developed a
billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a
competitive advantage in the inmate telecommunications industry.
Management believes that, through the use of the Company's system, which
was developed by Talton Telecommunications, the Company has achieved
levels of billing and collection costs and bad-debt expense that are
generally lower than those experienced by other competitors in the inmate
telecommunications industry. Management is currently implementing this
system throughout the Company's existing operations and intends to
implement this system in future acquired operations.
The Company also utilizes direct billing agreements with LECs to bill and
collect a majority of its operating revenues. Under the direct billing
agreements, the LEC includes charges for the Company's services on the
local telephone bill sent to the recipient of inmate collect calls.
Management believes that direct billing arrangements with LECs are
advantageous because they eliminate the costs associated with third party
billing arrangements that are utilized by a majority of independent inmate
telecommunications companies, expedite the billing and collection process,
increase collectibility, and reduce account charge-offs. As of November
30, 1996, the Company had negotiated direct billing agreements with
BellSouth and GTE South, which enabled the Company to direct bill
approximately 46% of its pro forma operating revenues. The increased
telecommunications traffic that resulted from the combination of AmeriTel
and Talton Telecommunications enabled the Company to enter into new direct
billing arrangements, which, as of June 1997, enabled the Company to
direct bill in excess of 85% of its operating revenues.
. Expand through internal growth. The Company actively seeks to increase
cash flow by installing additional telephones with current customers that
are expanding and by securing new contracts. From January 1997 through
May 1997, the Company signed 39 new contracts for facilities that
management expects will generate monthly revenues of approximately
$490,000, including contracts for the state of Alaska and state of North
Dakota prison systems and a new 1,500-bed facility in Ohio that is
privately managed by Corrections Corporation of America ("CCA"). Through
its sales force, the Company emphasizes the knowledge, experience, and
reputation of the Company in the inmate telecommunications industry, its
high level of service, and the additional specialized products and
services offered by the Company to its correctional facility customers.
Historically, the Company has focused on providing telecommunication
services to small and medium-sized correctional facilities (typically
city or county facilities with fewer than 250 beds). From June 30, 1990
to June 30, 1996, the inmate population in city and county jails
increased at an average annual rate of approximately 4.2%, to
approximately 518,000 of the 1.6 million individuals incarcerated in the
U.S. The Company also intends to selectively pursue additional state and
federal contracts that become available for bid.
Management also believes that the growth of the private corrections
industry provides the Company opportunities for further expansion. The
private corrections industry has experienced dramatic growth over the last
several years, with the rated capacity of privately managed adult
correctional facilities in the U.S. increasing from 10,973 beds at
December 31, 1989 to 77,584 beds at December 31, 1996, representing an
annual growth rate of approximately 32.2%. As the largest provider of
inmate telecommunication services to CCA, the largest private prison
management company in the U.S., the Company believes it is positioned to
continue to benefit from the growth in the private corrections industry.
. Pursue selective consolidating acquisitions. Management believes that the
inmate telecommunications industry is highly fragmented, which affords
significant opportunities for consolidation. Independent inmate telephone
companies are generally small, local, or regional operators that may lack
the financial resources and infrastructure necessary to achieve the
efficiencies and economies of scale necessary to develop new systems and
services to compete effectively for new customers and, as such, present
attractive acquisition opportunities for the Company. In addition,
management believes that the Telecommunications Act of 1996 (the "Telecom
Act"), which requires RBOCs to decouple their pay
6
<PAGE>
phone operations from their local telephone businesses, will contribute to
the consolidation opportunities existing in the market.
Management believes that the Company's experience in acquiring independent
inmate telecommunication companies will be instrumental in identifying
acquisition candidates, negotiating favorable terms, and integrating the
acquired operations into the Company. Since January 1993, the Company has
successfully completed 26 acquisitions ranging from the purchase of
relatively small local inmate telecommunication service providers to the
acquisition of larger groups of inmate facility telecommunications
contracts and related assets, including those of Peoples Telephone
Company, Inc. for a seven state region in the midwestern U.S. In May 1997,
the Company acquired the inmate telecommunications operations of Tataka,
the leading independent inmate telecommunications service provider in the
state of Utah. In addition, in August 1997 the Company acquired
substantially all of the assets of CCC.
. Increase geographic concentration/clustering. The Company seeks to
increase market penetration in the states in which it operates. High
market penetration contributes to operating efficiencies through
economies of scale and enables the Company to provide better customer
service and more meaningful call activity reports to its correctional
facility customers. The Company currently serves all of the state
operated correctional facilities and 63 of 72 county correctional
facilities in Alabama, 83 of 95 county correctional facilities in Iowa,
82 of 94 county correctional facilities in Kansas, 104 of 108 county
correctional facilities in Missouri, 52 of 67 county correctional
facilities in Nebraska, 21 of 26 county correctional facilities in Utah,
and over half of the county correctional facilities in Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota.
. Capitalize upon economies of scale. Management believes that the
combination of AmeriTel and Talton Telecommunications, in addition to the
completion of the STC Acquisition, has improved operating efficiencies,
and that additional improvements in efficiency will result from future
acquisitions. As a result of the increased telecommunications traffic and
greater market leverage obtained by the Company in connection with its
acquisitions of AmeriTel and Talton Telecommunications, the Company
negotiated more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. To
the extent that the Company is successful in further increasing its
telecommunications traffic through new installations or acquisitions, the
Company expects to be able to negotiate even more favorable terms from
its long distance providers. Management also believes that the continuing
deregulation of local exchange services will enable the Company to
negotiate more favorable rates from incumbent LECs and competitive local
exchange carriers. In addition, management believes that the Company's
existing infrastructure allows the Company to operate new and acquired
inmate telephones in its existing markets without significant incremental
field service, collection, and other general and administrative costs.
Management believes that the expansion of the Company's installed base of
inmate telephones will also allow the Company to enter into additional
direct billing agreements, thereby decreasing billing and collection
costs and bad-debt expense, and increasing the effectiveness of the
Company's call validation process.
The Company's executive offices are located at 1209 W. North Carrier Parkway,
Suite 300, Grand Prairie, Texas 75050. The phone number for the Company is
(972) 988-3737.
7
<PAGE>
THE EXCHANGE OFFER
Securities Offered..........
Up to $115,000,000 aggregate principal amount of
11% Series B Senior Notes due 2007 of the Company
(the "New Notes," and collectively with the Old
Notes, the "Senior Notes"). The terms of the New
Notes and the Old Notes are identical in all ma-
terial respects, except for certain transfer re-
strictions, registration rights, and interest
payments relating to the Old Notes that will not
apply to the New Notes. See "Description of Se-
nior Notes."
The Exchange Offer.......... The Company is offering to exchange a principal
amount of New Notes for an equal principal amount
of Old Notes. See "The Exchange Offer" for a de-
scription of the procedures for tendering Old
Notes. The Exchange Offer satisfies the registra-
tion obligations of the Registrant under the Reg-
istration Rights Agreement. Upon consummation of
the Exchange Offer, holders of Old Notes that
were not prohibited from participating in the Ex-
change Offer and did not tender their Old Notes
will not have any registration rights under the
Registration Rights Agreement with respect to
such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the re-
strictions on transfer contained in the legend on
the Old Notes.
Tenders, Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1997, or such later
date and time to which it is extended, provided
that the Exchange Offer will not be extended be-
yond 30 business days from the date of this Pro-
spectus. Tenders of Old Notes pursuant to the Ex-
change Offer may be withdrawn and retendered at
any time prior to the Expiration Date. Any Old
Notes not accepted for exchange for any reason
will be returned without expense to the tendering
holder as promptly as practicable after the expi-
ration or termination of the Exchange Offer.
Federal Income Tax The Exchange Offer will not result in any income,
Considerations.............. gain, or loss to the holders of Senior Notes or
the Company for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Use of Proceeds.............
There will be no proceeds to the Company from the
exchange of New Notes for the Old Notes pursuant
to the Exchange Offer.
Exchange Agent.............. U.S. Trust Company of Texas, N.A., the Trustee
under the Indenture, is serving as exchange agent
(the "Exchange Agent") in connection with the Ex-
change Offer.
8
<PAGE>
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) that
exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer
their New Notes for resale, resell their New Notes, and otherwise transfer
their New Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided such New Notes are acquired
in the ordinary course of the holders' business, such holders have no
arrangement with any person to participate in a distribution of such New Notes,
and neither the holder nor any other person is engaging in or intends to engage
in a distribution of the New Notes. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of its New Notes. See "Plan
of Distribution." To comply with the securities laws of certain jurisdictions,
it may be necessary to qualify for sale or register the New Notes prior to
offering or selling such New Notes. The Company is required, under the
Registration Rights Agreement, to register the New Notes in any jurisdiction
requested by the holders, subject to certain limitations. Upon consummation of
the Exchange Offer, holders that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes, and accordingly, such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend on the Old
Notes. In general, Old Notes may not be offered or sold, unless registered
under the Securities Act and applicable state securities laws. See "The
Exchange Offer--Consequences of Failure to Exchange."
9
<PAGE>
SUMMARY DESCRIPTION OF SENIOR NOTES
Securities Offered..........
Up to $115,000,000 principal amount of 11% Series
B Senior Notes due 2007 of the Company. The terms
of the New Notes and the Old Notes are identical
in all material respects, except for certain
transfer restrictions, registration rights, and
interest payments relating to the Old Notes,
which will not apply to the New Notes. See "De-
scription of Senior Notes."
Maturity.................... June 30, 2007
Interest.................... The Senior Notes will bear interest at the rate
of 11% per annum, payable semi-annually in cash
in arrears on January 1 and July 1 of each year,
commencing January 1, 1998.
Subsidiary Guarantees.......
The Senior Notes will be jointly and severally
guaranteed (collectively, the "Subsidiary Guaran-
tees"), by each direct and indirect Restricted
Subsidiary (as defined) of the Company existing
on the closing date of the Offering (the "Closing
Date") and by all other Restricted Subsidiaries
of the Company formed or acquired thereafter
(collectively the "Subsidiary Guarantors"). The
Subsidiary Guarantors' liability under the Sub-
sidiary Guarantees will be limited as described
in this Prospectus, and the Subsidiary Guarantees
will be released automatically in connection with
certain asset sales and dispositions. See "De-
scription of Notes--Subsidiary Guarantees."
Ranking..................... The Senior Notes will be senior unsecured obliga-
tions of the Company and will rank pari passu in
right of payment with all current and future se-
nior indebtedness of the Company and senior to
all current and future subordinated indebtedness
of the Company. The Subsidiary Guarantees will be
senior unsecured obligations of the Subsidiary
Guarantors and will rank pari passu in right of
payment with all current and future senior in-
debtedness of the Subsidiary Guarantors and se-
nior to all current and future subordinated in-
debtedness of the Subsidiary Guarantors. The
Company's subsidiaries (the "Subsidiaries") will
be parties to the Senior Credit Facility and all
obligations under the Senior Credit Facility will
be secured by a first priority lien on substan-
tially all of the assets of the Company (includ-
ing the capital stock of the Subsidiaries) and
such Subsidiaries. Although on the date of this
Prospectus there is no secured indebtedness of
the Company or the Subsidiary Guarantors that
ranks senior to the Senior Notes and the Subsidi-
ary Guarantees, the Indenture permits the Company
and its Subsidiaries to incur additional indebt-
edness, including secured indebtedness, subject
to certain limitations.
Optional Redemption.........
At any time on or after June 30, 2002, the Senior
Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption
prices set forth in this Prospectus plus accrued
and unpaid interest, if any, to the date of re-
demption. Notwithstanding the foregoing, at any
time prior to June 30, 2000, the Company may
10
<PAGE>
redeem up to 30% of the original aggregate prin-
cipal amount of the Senior Notes with the net
cash proceeds of one or more Equity Offerings at
a redemption price equal to 111% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of redemption; provided,
that, after any such redemption, at least
$80,000,000 aggregate principal amount of Senior
Notes originally issued remains outstanding. See
"Description of Senior Notes--Optional Redemp-
tion."
Change of Control...........
Upon a Change of Control, the Company will be re-
quired to offer to purchase the Notes at a pur-
chase price in cash equal to 101% of the aggre-
gate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
See "Description of Senior Notes--Change of Con-
trol Offer."
Certain Covenants........... The indenture governing the Notes (the "Inden-
ture") contains certain covenants that, among
other things, limit the ability of the Company
and its Restricted Subsidiaries (i) to pay the
dividends and make other Restricted Payments (as
defined) or investments; (ii) to incur additional
Indebtedness; (iii) to incur certain liens; (iv)
to enter into transactions with Affiliates (as
defined); (v) to engage in sale- leaseback trans-
actions; (vi) to issue stock of Restricted Sub-
sidiaries to third parties; (vii) to enter into
agreements restricting the ability of Restricted
Subsidiaries to pay dividends and make distribu-
tions; (viii) to merge or consolidate with any
other entity; and (ix) to transfer or sell as-
sets. In addition, under certain circumstances,
the Company will be required to offer to purchase
Senior Notes at a price equal to 100% of the
principal amount of such Senior Notes, plus ac-
crued and unpaid interest, if any, to the date of
purchase with the Net Proceeds (as defined) of
certain Asset Sales (as defined). These covenants
are subject to a number of important exceptions.
See "Description of Senior Notes--Certain Cove-
nants."
Use of Proceeds.............
There will be no proceeds to the Company from the
exchange of New Notes for the Old Notes pursuant
to the Exchange Offer.
RISK FACTORS
Prospective participants in the Exchange Offer should consider all of the
information contained in this Prospectus in connection with the Exchange Offer.
In particular, prospective participants should consider the factors set forth
herein under "Risk Factors."
11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following unaudited summary pro forma financial data for the year ended
December 31, 1996 and the three months ended March 31, 1997 give effect to (i)
the acquisitions of AmeriTel, Talton Telecommunications, and Tataka; (ii) the
STC Acquisition; and (iii) the Offering and the application of the net proceeds
therefrom, as if all such transactions had been consummated on January 1, 1996.
The pro forma balance sheet data give effect to (i) the acquisition of Tataka
and the STC Acquisition; and (ii) the Offering and the application of the net
proceeds therefrom, as if such transactions had been consummated on March 31,
1997. The summary pro forma financial data is for illustrative purposes only
and should not be viewed as a projection or forecast of the Company's
performance for any future period. Such pro forma data should be read in
conjunction with "Pro Forma Financial Data"; "Management's Discussion and
Analysis of Financial Condition and Results of Operations"; and the financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
OPERATING DATA:
Operating revenues................................... $80,912 $21,244
Operating expenses:
Telecommunication costs............................ 33,520 8,653
Facility commissions............................... 20,497 5,203
Field operations and maintenance................... 3,292 1,023
Selling, general, and administrative............... 5,667 1,560
Depreciation....................................... 1,893 481
Amortization of intangibles........................ 11,786 2,782
Non-recurring expenses............................. 250 --
------- -------
Total operating expenses......................... 76,905 19,702
------- -------
Operating income..................................... 4,007 1,542
Other (income) expense:
Interest expense, net.............................. 11,758 2,941
Other, net......................................... (78) (23)
------- -------
Total other (income) expense..................... 11,680 2,918
Income (loss) before income taxes.................... (7,673) (1,376)
Income tax expense................................... (1,296) --
------- -------
Income (loss) from continuing operations............. $(6,377) $(1,376)
======= =======
OTHER DATA:
Adjusted EBITDA(1)................................. $20,207 $ 5,229
Capital Expenditures(2)............................ 4,760 547
Ratio of Adjusted EBITDA to net cash interest ex-
pense............................................. 1.8x 1.9x
Ratio of Net Debt to Adjusted EBITDA(3)............ 4.3 4.2
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT
MARCH 31, 1997
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 27,927
Total assets................................................... 129,038
Total debt (including current maturities)...................... 115,500
Total stockholders' equity..................................... 2,264
</TABLE>
(see notes on the following page)
12
<PAGE>
NOTES TO SUMMARY PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation, amortization, and non-recurring expenses.
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principles, the Company has included
information concerning EBITDA in this Prospectus because it is commonly
used by certain investors and analysts as a measure of a company's ability
to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, operating income,
net income, or cash flow as an indicator of the Company's operating
performance. Pro forma EBITDA reflects the following adjustments:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Historical EBITDA................................ $13,985 $3,999
Pro forma adjustments:
Billing and collection savings................. 2,954 765
Long distance savings.......................... 603 18
Elimination of selling, general, and
administrative costs of acquired businesses... 453 37
Elimination of minority interest............... 19 9
------- ------
Pro forma EBITDA................................. $18,014 $4,828
======= ======
</TABLE>
The following adjustments to pro forma EBITDA reflect various tariff
increases and decreases implemented during 1996 and reduction in bad-debt
expense based on management's business and operating strategy. These
adjustments are based on estimates and assumptions made and believed to be
reasonable by the Company and are inherently uncertain and subject to
significant business, economic, and competitive contingencies, many of
which are beyond the control of the Company, and are based on assumptions
with respect to future business decisions that are subject to change. See
"Special Note Regarding Forward-Looking Statements." The following
calculations should not be viewed as indicative of actual or future results
and were not prepared with a view towards compliance with published
guidelines of the Commission or the AICPA with respect to prospective
financial information and have not been examined or compiled by any
certified public accountant.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
<S> <C> <C>
Pro forma EBITDA................................. $18,014 $4,828
Effect of net tariff rate increase(a)............ 1,342 --
Effect of full implementation of the Company's
billing and bad-debt management system(b)....... 851 401
------- ------
Adjusted EBITDA.................................. $20,207 $5,229
======= ======
</TABLE>
--------
(a) Reflects net effect of increases in revenues and expenses associated
with various tariff rate increases and decreases that were implemented
during 1996 as if such changes were implemented on January 1, 1996.
(b) Reflects net effect of the implementation of the internally developed
billing and bad-debt management system that is estimated to result in
(i) decreased revenues due to call blocking and decreased facility
commissions, billing and collection costs and long distance charges
correlated to the decreased revenue; (ii) reduced bad-debt expenses;
(iii) increased validation costs; and (iv) increased selling, general,
and administrative costs.
(2) Capital expenditures include only amounts expended for purchase of
property and equipment and the installation of facility contracts.
(3) Net Debt represents total debt less cash equivalents. For purposes of
calculating this ratio for the three months ended March 31, 1997, Adjusted
EBITDA has been annualized.
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Effective December 1, 1996, the Company became the holding company for the
operations of AmeriTel and Talton Telecommunications. The Company accounted for
these acquisitions using the purchase method of accounting. Accordingly, the
Company's consolidated financial statements include the operations of AmeriTel
and Talton Telecommunications only for periods after December 1, 1996.
The following consolidated financial data for the Company for the one month
ended December 31, 1996 and combined financial data of AmeriTel and Talton
Telecommunications for the years ended December 31, 1994 and 1995 and for the
eleven months ended November 30, 1996, have been derived from the audited
consolidated financial statements of the Company and AmeriTel and Talton
Telecommunications. The financial data do not purport to indicate results of
operations as of any future date or for any future period. The combined
financial data of the Company's predecessors for the three months ended March
31, 1996 and the consolidated financial data of the Company for the three
months ended March 31, 1997 are unaudited and, in the opinion of management,
reflect all adjustments (consisting only of normal recurring accruals) that are
necessary to present fairly the combined or consolidated financial statements
for such periods. Such summary historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS THE COMPANY PREDECESSORS THE COMPANY
------------------------------- ------------ ------------ ------------
YEARS ENDED ELEVEN MONTHS ONE MONTH THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED ENDED ENDED ENDED
---------------- NOVEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
1994 1995 1996 1996 1996 1997
------- ------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $23,892 $40,326 $53,663 $5,506 $13,154 $15,056
Operating expenses:
Telecommunication
costs................. 11,761 18,673 23,317 2,299 5,988 6,195
Facility commissions... 3,901 9,595 13,962 1,455 3,345 4,005
Field operations and
maintenance........... 1,044 1,467 1,816 219 430 588
Selling, general, and
administrative........ 2,571 4,089 3,921 372 994 1,096
Depreciation........... 965 1,359 1,538 111 380 299
Amortization of intan-
gibles................ 1,392 1,605 1,746 741 443 2,220
Non-recurring ex-
penses................ -- -- 684 -- -- --
------- ------- ------- ------ ------- -------
Total operating ex-
penses................ 21,634 36,788 46,984 5,197 11,580 14,403
------- ------- ------- ------ ------- -------
Operating income........ 2,258 3,538 6,679 309 1,574 653
Other (income) expense:
Interest expense, net.. 745 1,360 1,469 612 397 1,877
Other, net............. (134) (52) 27 (20) 21 16
------- ------- ------- ------ ------- -------
Total other (income)
expense............... 611 1,308 1,496 592 418 1,893
------- ------- ------- ------ ------- -------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 2,230 5,183 (283) -- (1,240)
Income tax expense
(benefit).............. (11) 891 1,917 (23) -- 68
------- ------- ------- ------ ------- -------
Income (loss) before
extraordinary loss..... 1,658 1,339 3,266 (260) 677 (1,308)
Extraordinary loss...... -- -- 52 -- -- --
------- ------- ------- ------ ------- -------
Net Income (loss)....... $ 1,658 $ 1,339 $ 3,214 $ (260) $ 677 $(1,308)
======= ======= ======= ====== ======= =======
OTHER DATA:
EBITDA(1)............... $ 4,749 $ 6,554 $10,620 $1,181 $ 2,376 $ 3,156
Capital expendi-
tures(2)............... 3,223 4,669 2,804 269 1,057 429
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31,
1997
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 424
Total assets....................................................... 80,333
Total debt (including current maturities).......................... 65,045
Total stockholders' equity......................................... 5,054
</TABLE>
(see notes on the following page)
14
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL DATA
(1) For purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation, amortization, and non-recurring expenses.
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principles, the Company has included
information concerning EBITDA in this Prospectus because it is commonly
used by certain investors and analysts as a measure of a company's ability
to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, operating income,
net income, or cash flow as an indicator of the Company's operating
performance.
(2) Capital expenditures includes only amounts expended for purchases of
property and equipment and the installation of facility contracts.
15
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business in connection with the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable
state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission with
respect to similar transactions, the Company believes that the New Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by any holder of such New Notes (other than any such
holder that is an "affiliate" of the Registrant within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes, and neither the holder nor any other
person is engaging in or intends to engage in a distribution of the New Notes.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes must acknowledge that it will deliver a prospectus in connection
with any resale of its New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of the
New Notes received in exchange for the Old Notes acquired by the broker-dealer
as a result of market-making activities or other trading activities. The
Company has agreed that it will make this Prospectus available to any broker-
dealer for use in connection with any such resale for a period of 365 days
after the Exchange Date or, if earlier, until all participating broker-dealers
have so resold. See "Plan of Distribution." The New Notes may not be offered
or sold unless they have been registered or qualified for sale under
applicable state securities laws or an exemption from registration or
qualification is available and is complied with. The Registrant is required,
under the Registration Rights Agreement, to register the New Notes in any
jurisdiction requested by the holders, subject to certain limitations.
ABSENCE OF A PUBLIC MARKET
Prior to this Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, the New Notes could trade
at a discount from their principal amount. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no
assurance that an active public market for the New Notes will develop.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company has significant debt and debt service obligations. At March 31,
1997, the Company had approximately $65.0 million of long-term debt
outstanding (including current maturities). In addition, for the three months
ended March 31, 1997, the Company's earnings were insufficient to cover fixed
charges by approximately $1.2 million. After giving effect to the acquisition
of Tataka, the STC Acquisition, the Offering, and the application of the net
proceeds therefrom, the Company has, as of March 31, 1997, $115.5 million of
long-term debt (including current maturities) and $2.3 million of stockholders
equity.
The significant leverage of the Company will have several important
consequences to holders of the Senior Notes, including, but not limited to,
the following: (i) the Company will incur significant interest expense and
16
<PAGE>
principal repayment obligations in connection with the Senior Notes, the
Senior Credit Facility, and other permitted indebtedness thereby reducing the
funds available for its operations, capital expenditures, and other purposes;
(ii) the Company's leveraged position and the covenants contained in the
Senior Credit Facility and the Indenture will limit the Company's ability to
obtain additional financing and dispose of assets; and (iii) the Company's
substantial leverage may make it more vulnerable to economic fluctuations,
limit its ability to withstand competitive pressures, and reduce its
flexibility in responding to changing business and economic conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Senior
Notes."
The Company will be required to pay the principal of the Senior Notes at
maturity in 2007. The Company's ability to make scheduled principal payments
or to refinance its obligations with respect to its indebtedness, and to pay
interest thereon, will depend on its financial and operating performance,
which in turn is subject to prevailing economic conditions and to certain
financial, business, and other factors beyond its control.
The Senior Credit Facility and the Indenture contain numerous restrictive
covenants including, among others, limitations on the ability of the Company
to incur additional indebtedness, to create liens and other encumbrances, to
make certain payments and investments, to sell or otherwise dispose of assets,
or to merge or consolidate with another entity. The Senior Credit Facility
also requires the Company to meet certain financial tests on a consolidated
basis, some of which may be more restrictive in future years. The Company's
failure to comply with its obligations under the Senior Credit Facility or the
Indenture, or in agreements relating to indebtedness incurred in the future,
could result in an event of default under such agreements, which could permit
acceleration of the related debt and acceleration of debt under other
financing arrangements that may contain cross-acceleration or cross-default
provisions. In addition, because interest under the Company's Senior Credit
Facility accrues at floating rates, the Company remains subject to interest
rate risk with respect to a significant portion of its indebtedness.
The Senior Notes are and will be senior obligations of the Company ranking
pari passu in right of payment with all current and future senior indebtedness
of the Company, including indebtedness under the Senior Credit Facility and
any refinancing of the Senior Credit Facility. The Senior Notes are and will
be unsecured obligations, however, and substantially all of the assets of the
Company (including the capital stock of the Subsidiaries) and the Subsidiaries
will be pledged to secure the obligations of the Company and its Subsidiaries
under the Senior Credit Facility. Indebtedness under the Senior Credit
Facility and any other current and future secured indebtedness of the Company
will effectively rank senior to the Senior Notes to the extent of the
collateral securing such indebtedness in the event of a realization upon the
collateral or a dissolution, liquidation, reorganization, or similar
proceeding related to the Company. After any such realization or proceeding,
there can be no assurance that there will be sufficient proceeds or other
assets available for holders of the Senior Notes to recover all or any portion
of their claims against the Company under the Senior Notes and the Indenture.
See "Capitalization"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources";
"Description of the Other Indebtedness--Senior Credit Facility"; and
"Description of Senior Notes."
HOLDING COMPANY STRUCTURE
The Company is a holding company, the assets of which consist principally of
the stock of its Subsidiaries, through which it conducts substantially all of
its operations. The Company's ability to pay interest on the Senior Notes and
to satisfy its other obligations will depend upon dividends or other
distributions of funds from its Subsidiaries. The future operating performance
of its Subsidiaries will be affected by economic conditions, and financial,
business, and other factors, many of which are beyond the Company's control.
The Company has pledged all of the outstanding capital stock of its
Subsidiaries to secure its obligations under the Senior Credit Facility. The
Senior Credit Facility and all obligations thereunder are also secured by a
first priority lien on substantially all of the assets of the Company's
Subsidiaries, including future Subsidiaries. There can be no assurance that
the operating cash flow of the Company's Subsidiaries will be sufficient to
meet the Company's
17
<PAGE>
operating expenses and debt service obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company is pursuing a strategy of expanding its installed base of inmate
telephones through acquisitions of inmate telecommunications service
providers. The Company evaluates specific acquisition opportunities based on
market conditions and economic factors existing at the time and intends to
pursue favorable opportunities as they arise. The Company may encounter
increased competition for acquisitions in the future, which could result in
acquisition prices the Company does not consider acceptable. There can be no
assurance that the Company will find suitable acquisition candidates at
acceptable prices, have sufficient available capital resources to realize its
acquisition strategy, be successful in entering into definitive agreements for
desired acquisitions, or that any such acquisitions, if consummated, will
prove to be advantageous to the Company. See "--Substantial Leverage;
Restrictive Covenants"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; and "Business--Business Strategy."
The success of the Company's acquisition strategy is also dependent on the
ability of the Company to integrate acquired operations into the Company's
existing operations. The Company is in the process of integrating the
operations of AmeriTel, Talton Telecommunications, Tataka, STC, and CCC. There
can be no assurance that the integration of these operations and future
acquired operations will not require the investment of capital or result in
unforeseen difficulties or absorb significant management resources at levels
higher than that anticipated by management, or that the Company will realize
meaningful economies of scale or operating efficiencies from its acquisitions.
The failure of the Company to successfully integrate acquired operations could
have a material adverse effect on the Company. See "Business--Business
Strategy."
REGULATORY FACTORS
The inmate telecommunications industry is regulated by both the Federal
Communications Commission (the "FCC") and state public utility commissions.
The Company's operations are also significantly affected by the regulation of
other telecommunications businesses, including LECs and IXCs. Changes in the
laws and regulations governing the Company's business or other
telecommunications businesses could have a material adverse effect on the
Company.
At the federal level, the industry is currently in a period of substantial
regulatory change in the aftermath of the Telecom Act, which, among other
things, directed the FCC to change the regulatory framework of the pay
telephone industry, including the inmate telephone industry. Because the FCC
is still in the process of implementing its new regulations, and because
several aspects of rule changes proposed by the FCC are subject to requests
for reconsideration, clarification, and final resolution in related
proceedings, as well as pending court challenges, the ultimate effect of
regulatory changes on the Company's business is uncertain. In particular,
whether the FCC's rules designed to eliminate subsidization and discrimination
by the LECs prove to be effective will significantly affect the level of
competition faced by the Company in the inmate telecommunications market.
Similarly, because the rules have only recently been adopted, it is too early
to assess the LECs' competitive responses to them. See "Business--Regulation--
Federal Regulation."
Under the Billed Party Preference ("BPP") proposal currently pending before
the FCC, the Company could be prohibited from carrying many interstate collect
calls made on the Company's inmate telephones, which could substantially
reduce the Company's operating revenues. Any such reduction in the Company's
operating revenues could have a material adverse effect on the Company. See
"Business--Regulation."
In addition to federal regulation, many states have set maximum rates that
can be charged for inmate collect calls. Because collect calls are generally
the only form of calling permitted from inmate telephones, a reduction in the
maximum rates that may be charged by the Company could have a material adverse
effect on the Company. See "Business--Regulation."
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COMPETITION
The businesses in which the Company operates are highly competitive. The
Company competes with numerous providers of inmate telephone services, LECs,
RBOCs, IXCs, including major long distance carriers such as AT&T, MCI, Sprint,
and LDDS/Worldcom, and independent public pay telephone and inmate telephone
companies. Many of the Company's competitors are larger and better capitalized
and have significantly greater financial resources available than the Company.
The Company believes that the principal competitive factors in the inmate
telecommunications market are (i) system features and functionality; (ii)
system reliability and service; (iii) the ability to customize inmate call
processing systems to the specifications and needs of the particular
correctional facility; (iv) relationships with correctional facilities; and
(v) rates of commissions paid to the correctional facilities.
Historically, federal and state facilities, which are generally bid on a
system-wide basis, have been served by RBOCs, large LECs, and IXCs, which are
able to leverage their existing systems and infrastructure to serve these
large, high volume customers without the need for additional, significant
capital expenditures. These same service providers, however, have generally
not focused on the smaller city and county correctional systems, which are
typically negotiated on a facility-by-facility basis. As a result, a
significant portion of city and county correctional facilities, which
constitute a substantial majority of the Company's customers, is served by
independent inmate telephone and independent public pay telephone companies. A
decision by RBOCs, large LECs, and major long distance companies to pursue
actively contracts with city and county correctional facilities could have a
material adverse effect on the Company. See "Business--Business Strategy" and
"Business--Competition."
GOVERNMENTAL ENTITIES AS CUSTOMERS
The Company's customers include state and local governmental entities
responsible for the administration and operation of correctional facilities.
The Company is subject, therefore, to the administrative policies and
procedures employed by, and the regulations that govern the activities of,
these governmental entities, including policies, procedures, and regulations
concerning the procurement and retention of contract rights and the provision
of services. There can be no assurance that the Company's operations will not
be adversely affected by the policies and procedures employed by, or the
regulations that govern the activities of, these governmental entities or that
the Company will not be limited in its ability to secure additional customer
contracts, renew existing customer contracts, or consummate acquisitions as a
result of such policies, procedures, and regulations.
CONCENTRATION OF ACCOUNTS
The Company serves the entire corrections system operated by the state of
Alabama. Pro forma operating revenues from the state of Alabama totaled
approximately $12.8 million and $2.9 million, respectively, for the fiscal
year ended December 31, 1996 and the three months ended March 31, 1997, or
15.8% and 13.7%, respectively, of the Company's pro forma operating revenues
for such periods. The Company's contract with the state of Alabama expires in
March 1998. The loss of the state of Alabama as a customer could have a
material adverse effect on the Company. In addition, the Company is the
largest provider of inmate telecommunication services to CCA, a private
operator of correctional facilities. Aggregate pro forma revenues from CCA
under these contracts, which are terminable upon 30 days' notice, totaled
approximately $6.6 million and $2.6 million for the year ended December 31,
1996 and the three months ended March 31, 1997, respectively, representing
8.2% and 12.2% of the Company's pro forma operating revenues for such periods,
respectively. The loss of CCA as a customer could have a material adverse
effect on the Company. See "--Provision of Inmate Telecommunications Services
by Private Operators of Correctional Facilities" and "Business--Competition."
DEPENDENCE ON EQUIPMENT VENDORS
The Company obtains the telecommunications equipment used in its operations
from several equipment vendors. Because the Company does not manufacture its
own equipment, the Company is dependent on these vendors for replacement parts
and technical service and support on its existing equipment. Although there
are
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alternative sources for equipment in the market, the inability of more than
one of the Company's equipment vendors to provide replacement parts, service,
or support to the Company could cause an interruption in the services offered
by the Company. Any prolonged interruption of the Company's services could
have a material adverse effect on the Company.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by rapid
technological advancements, frequent new service introductions, and evolving
industry standards. Management believes that its future success will depend on
its ability to anticipate and respond to such changes and new technology.
There can be no assurance that the Company will not be materially adversely
affected by the introduction and acceptance of new technology.
PROVISION OF INMATE TELECOMMUNICATIONS SERVICES BY PRIVATE OPERATORS OF
CORRECTIONAL FACILITIES
The private corrections industry has experienced dramatic growth over the
last several years and is expected to continue to grow for the foreseeable
future. At present, private operators of correctional facilities generally do
not operate their own inmate telecommunications systems. Although the growth
of this industry presents opportunities to the Company, the utilization by
private operators of correctional facilities of their own inmate
telecommunications system could have a material adverse effect on the Company.
See "--Concentration of Accounts" and "Business--Industry Overview."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES
The Company's operations require that its equipment and the equipment of its
service providers be operational 24 hours per day, 365 days per year. As is
the case with other telecommunications companies, the Company's operations may
experience temporary service interruptions or equipment failures, which may
result from causes beyond the Company's control. Any such prolonged event
could have a material adverse effect on the Company.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of certain of its officers and other
management personnel. The loss of the services of one or more of these
individuals could have a material adverse effect on the Company. In addition,
the failure of the Company to attract and retain additional management to
support its business strategy could also have a material adverse effect on the
Company. See "Management."
FRAUDULENT CONVEYANCE RISKS
The Company's obligations under the Senior Notes will be guaranteed, jointly
and severally, on a senior unsecured basis by each of the Subsidiary
Guarantors. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be applied by a court on behalf of any unpaid
creditor or a representative of the Company's creditors in a lawsuit to
subordinate or avoid the Senior Notes or any Subsidiary Guarantee in favor of
other current or future creditors of the Company or a Subsidiary Guarantor.
Based upon financial and other information currently available to it,
management believes that the Senior Notes and the Subsidiary Guarantees are
being incurred for proper purposes and in good faith, and that the Company and
each of the Subsidiary Guarantors (i) is solvent and will continue to be
solvent after issuing the Senior Notes or its Subsidiary Guarantee, as the
case may be; (ii) will have sufficient capital for carrying on its business
after such issuance; and (iii) will be able to pay its debts as they mature.
Notwithstanding management's belief, if a court were to find that (i) the
indebtedness represented by the Senior Notes or a Subsidiary Guarantee was
incurred with intent to hinder, delay, or defraud any present or future
creditor of the Company or the Subsidiary Guarantor, as the case may be, or
contemplated insolvency with a design to prefer one or more creditors to the
exclusion in whole or in part of other creditors; or (ii) the Company or a
Subsidiary Guarantor did not receive fair consideration or reasonably
equivalent value for issuing the Senior Notes or a Subsidiary Guarantee, as
the case may be, and the Company or a Subsidiary Guarantor (a) was insolvent,
(b) was rendered insolvent by reason
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of the issuance of the Senior Notes or a Subsidiary Guarantee, (c) was engaged
or about to engage in business or a transaction for which the remaining assets
of the Company or such Subsidiary Guarantor constitute unreasonably small
capital to carry on its business, (d) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they mature, or (e)
was a defendant in an action for money damages or had a judgment for money
damages docketed against it (if in either case, after final judgment, the
judgment is unsatisfied), then in each such case, a court could avoid or
subordinate the Senior Notes or the Subsidiary Guarantee in favor of other
creditors of the Company or a Subsidiary Guarantor, as the case may be. Among
other things, a legal challenge of the Senior Notes or a Subsidiary Guarantee
on fraudulent conveyance grounds may focus on the benefits, if any, realized
by the Company or the Subsidiary Guarantor as a result of the issuance by the
Company of the Senior Notes and the execution by a Subsidiary Guarantor of a
Subsidiary Guaranty.
To the extent that any Subsidiary Guarantee were avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Senior
Notes would cease to have any claim in respect of such Subsidiary Guarantor
and would be creditors solely of the Company and any Subsidiary Guarantor
whose Subsidiary Guarantee was not avoided or held unenforceable. In such
event, the claims of the holders of the Senior Notes against the issuer of an
invalid Subsidiary Guarantee would be subject to the prior payment of all
liabilities of such Subsidiary Guarantor. There can be no assurance that,
after providing for all prior claims, there would be sufficient assets to
satisfy the claims of the holders of the Senior Notes relating to any voided
Subsidiary Guarantee. See "Capitalization"; "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources"; and "Description of Senior Notes--Subsidiary Guarantees."
REPURCHASE OF NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to make an offer to
repurchase all or any part of the Senior Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of repurchase. Certain events involving a Change of Control may
result in an event of default under the Senior Credit Facility and may result
in an event of default under other indebtedness of the Company that may be
incurred in the future. An event of default under the Senior Credit Facility
or other indebtedness could result in an acceleration of such indebtedness, in
which case the Senior Notes would be effectively subordinated to such other
secured indebtedness to the extent of any liens securing such other
indebtedness. See "Description of Senior Notes--Change of Control Offer" and
"Description of Other Indebtedness--Senior Credit Facility." There can be no
assurance that the Company would have sufficient resources to repurchase the
Senior Notes and pay its obligations under the Senior Credit Facility or other
indebtedness upon the occurrence of a Change of Control. These may be deemed
to have anti-takeover effects and may delay, defer, or prevent a merger,
tender offer, or other takeover attempt.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On June 27, 1997, the Registrant issued $115,000,000 aggregate principal
amount of Old Notes to CIBC Wood Gundy Securities Corp. (the "Initial
Purchaser"). The issuance was not registered under the Securities Act in
reliance upon the exemption under Rule 144 and Regulation S under, and Section
4(2) of, the Securities Act. In connection with the issuance and sale of the
Old Notes, the Registrant entered into the Registration Rights Agreement,
which requires the Registrant to cause the Old Notes to be registered under
the Securities Act or to file with the Commission a registration statement
under the Securities Act with respect to an issue of new notes of the Company
identical in all material respects to the Old Notes, to use its best efforts
to cause such registration statement to become effective under the Securities
Act and, upon the effectiveness of that registration statement, to offer to
the holders of the Old Notes the opportunity to exchange their Old Notes for a
like principal amount of New Notes, which will be issued without a restrictive
legend and may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is being made pursuant to the
Registration Rights Agreement to satisfy the Registrants' obligations under
the Registration Rights Agreement.
Based on no-action letters issued by the staff of the Commission to third
parties, the Registrants believe that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold,
and otherwise transferred by any holder of such New Notes (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes, and neither the holder nor any other
person is engaging in or intends to engage in a distribution of the New Notes.
Any holder who tenders in the Exchange Offer for the purpose of participating
in a distribution of the New Notes cannot rely on such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date (as defined). The Company will issue a principal amount of New
Notes in exchange for an equal principal amount of outstanding Old Notes
tendered and accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date.
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions, registration rights, and
interest payments relating to the Old Notes, which will not apply to the New
Notes. See "Description of Senior Notes." The New Notes will evidence the same
debt as the Old Notes. The New Notes will be issued under and entitled to the
benefits of the Indenture pursuant to which the Old Notes were issued.
As of the date of this Prospectus, $115,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes.
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<PAGE>
Holders of Old Notes do not have any appraisal or dissenters' rights under
state law or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Exchange
Act, and the rules and regulations of the Commission under the Exchange Act.
Old Notes that are not tendered and were not prohibited from being tendered
for exchange in the Exchange Offer will remain outstanding and continue to
accrue interest and to be subject to transfer restrictions, but will not be
entitled to any rights or benefits under the Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, on
the Exchange Date the Company will accept all Old Notes properly tendered and
not withdrawn and will issue New Notes in exchange therefor. For purposes of
the Exchange Offer, the Company will be deemed to have accepted properly
tendered Old Notes for exchange when, as, and if the Company had given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purposes of receiving the New Notes
from the Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal, and all other required documents; provided,
however, that the Company reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes or substitute Old Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder as promptly as practicable after the expiration or termination of the
Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," means 5:00 p.m., New York City time, on ,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" will mean the latest date and time to
which the Exchange Offer is extended; provided that the Exchange Offer will
not be extended beyond 30 business days after the date of this Prospectus.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement of the extension, prior to 9:00 a.m., New
York City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer, or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions" has
not been satisfied, by giving oral or written notice of such delay, extension,
or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer. Any such delay in acceptance or extension, termination, or
amendment will be followed as promptly as practicable by oral or written
notice. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of Old Notes
of such amendment.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment, or termination of the
Exchange Offer, the Company will have no obligation to
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<PAGE>
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to an appropriate news agency.
INTEREST ON THE NEW NOTES
New Notes will bear interest at the rate of 11% per annum, payable semi-
annually, in cash, on January 1 and June 1 of each year, commencing January 1,
1998.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any New Notes for any Old Notes, and may terminate or
amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if the Exchange Offer is not permissible under applicable law or Commission
policy.
PROCEDURES FOR TENDERING
The tender of Old Notes by a holder as set forth below and the acceptance
thereof by the Company will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set
forth in this Prospectus and in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must (i) complete, sign, and date
the Letter of Transmittal or a facsimile, have the signatures on the Letter of
Transmittal guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address
set forth in this Prospectus.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES, OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and that wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering of
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership
may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder
that has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National
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Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed in the Letter of Transmittal, such Old Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such Old
Notes, with the signature guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
Any financial institution that is a participant in the book-entry transfer
facility for the Old Notes, The Depository Trust Company ("DTC"), may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account with respect to the Old Notes in accordance
with DTC's procedures for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must, in each case, be, or be deemed to be,
transmitted to and received and confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities, or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company determines. Although the Company intends to notify holders of defects
or irregularities with respect to tenders of Old Notes, neither the Company,
the Exchange Agent, nor any other person will incur any liability for failure
to give such notification. Tenders of Old Notes will not be deemed to have
been made until such defects or irregularities have been cured or waived. Any
Old Notes received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth below under "Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will also represent to the Company that (i) the
New Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder; (ii) neither the holder nor any such person has
an arrangement or understanding with any person to participate in the
distribution of such New Notes; and (iii) neither the holder nor any such
other person is an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company, or that if it is an "affiliate," it will comply with the
registration and prospective delivery requirements of the Securities Act to
the extent applicable.
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GUARANTEED DELIVERY PROCEDURES
Holders that wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) that cannot deliver their Old Notes, the Letter of
Transmittal, or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) that cannot complete the procedures for book-
entry transfer of Old Notes to the Exchange Agent's account with DTC prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes (if possible), and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five business trading days after the Expiration Date, (i) the
Letter of Transmittal (or facsimile) together with the certificate(s)
representing the Old Notes and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, or (ii) that book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC will be effected and confirmation of such
book-entry transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal, or confirmation of book-entry transfer of the Old
Notes into the Exchange Agent's account at DTC, are received by the
Exchange Agent within five business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns, and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred, and exchanged. The holder represents and warrants to
the Company and the Exchange Agent that (i) it has full power and authority to
tender, exchange, assign, and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes; (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges, and encumbrances
and not subject to any adverse claim; (iii) it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment, and transfer of tendered Old
Notes; and (iv) acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor will constitute performance in full
by the Company of its obligations under the Registration Rights Agreement, and
the Company will have no further obligations or liabilities thereunder to such
holders. All authority conferred by the holder will survive the death or
incapacity of the holder and every obligation of the holder will be binding
upon the heirs, legal representatives, successors, assigns, executors, and
administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (ii) is
acquiring the New Notes in the ordinary course of its business; and (iii) has
no arrangement with any person or intent to participate in, and is not
participating in, the distribution of the New Notes.
26
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided in this Prospectus, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
facsimile transmission, or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth in this Prospectus
prior to 5:00 p.m., New York City time, on the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having tendered
the Old Notes to be withdrawn (the "Depositor"); (ii) identify the Old Notes
to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes); (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Trustee with respect to the
Old Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender; and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Old Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form, and eligibility (including
time of receipt) of such notices will be determined by the Company, the
determination of which will be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes that have
been tendered, but not accepted for payment, will be returned to the holder
without cost to such holder as soon as practicable after withdrawal, rejection
of tender, or termination of the Exchange Offer. Properly withdrawn Old Notes
may be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable to the Old Notes under the Indenture. Following
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions upon transfer, and the Company will
have no further obligations to such holders, other than the Initial Purchaser,
to provide for the registration under the Securities Act of the Old Notes held
by them. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A., the Trustee under the Indenture, has been
appointed as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail, By Facsimile:
by hand or by Overnight Courier U.S. Trust Company of Texas, N.A.
U.S. Trust Company of Texas, N.A. Attention: Corporate Trust
2001 Ross Avenue, Suite 2700 Department
Dallas, Texas 75201 (214) 754-1303
Attention: Corporate Trust Confirm by Telephone:
Department (214) 754-1200
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
27
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, or in person by officers, regular
employees, or agents of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses and will pay the
reasonable fees and expenses of holders in delivering their Old Notes to the
Exchange Agent.
The cash expenses of the Company to be incurred in connection with the
Company's performance and completion of the Exchange Offer will be paid by the
Company. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees, and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act and applicable
state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Notes under the
Securities Act. Based on interpretations by the staff of the Commission with
respect to similar transactions, the Company believes that the New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold, and otherwise transferred by any holder of such New Notes
(other than any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes, and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, the holder (i) may not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes must acknowledge that it
will deliver a prospectus in connection with any resale of its New Notes. See
"Plan of Distribution." The New Notes may not be offered or sold unless they
have been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Company is required, under the Registration Rights
Agreement, to register the New Notes in any such jurisdiction requested by the
holders, subject to certain limitations.
28
<PAGE>
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. However, in the event the Company
fails to consummate the Exchange Offer or a holder of Old Notes notifies the
Company in accordance with the Registration Rights Agreement that it will be
unable to participate in the Exchange Offer due to circumstances delineated in
the Registration Rights Agreement, then the holder of the Old Notes will have
certain rights to have such Old Notes registered under the Securities Act
pursuant to the Registration Rights Agreement and subject to conditions
contained in the Registration Rights Agreement.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer. In this regard, the Company will make each person
participating in the Exchange Offer aware (through this Prospectus or
otherwise) that if the Exchange Offer is being registered for the purpose of
secondary resale, any holder using the Exchange Offer to participate in a
distribution of New Notes to be acquired in the registered Exchange Offer (i)
may not rely on the staff position enunciated in Morgan Stanley and Co. Inc.
(avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13, 1988) or
similar letters and (ii) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the Exchange Date.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the New Notes.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
29
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 on an actual basis and on a pro forma basis,
after giving effect to the acquisition of Tataka, the STC Acquisition, and the
Offering, and the application of the net proceeds therefrom. This table should
be read in conjunction with the other financial information appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents..................... $ 424 $ 27,927
Long-term debt, including current maturities:
Existing Credit Facility(1):
Term loan................................. 45,000 --
Revolving loan............................ 7,400 --
Senior Credit Facility:
Revolving loan............................ -- --
Notes offered in the Offering............... -- 115,000
Senior Subordinated Notes (net of
unamortized debt discount of $1,055)....... 7,445 --
Subordinated Talton Note.................... 5,000 --
Other....................................... 200 500
----------- -----------
Total Long-term debt.................... 65,045 115,500
Stockholders' equity:
Preferred Stock(2).......................... 0 0
Common Stock................................ 0 0
Additional paid-in capital.................. 21,611 22,511 (3)
Accumulated deficit......................... (16,557)(4) (20,247)(5)
----------- -----------
Total stockholders' equity.............. 5,054 2,264
----------- -----------
Total capitalization.......................... $ 70,099 $ 117,764
=========== ===========
</TABLE>
- --------
(1) After completion of the Offering, the Company entered into an amendment
and restatement of its Existing Credit Facility (as defined), which
terminated the term loan portion and established a new revolving loan
facility. The Company is also in discussions with its lenders regarding
the establishment of a new acquisition facility. See "Description of Other
Indebtedness--Senior Credit Facility." In addition to certain other
permitted incurrences of indebtedness, the Indenture permits the Company
to incur up to $80.0 million of indebtedness under its Senior Credit
Facility.
(2) The cumulative liquidation value of the outstanding shares of Preferred
Stock is $5.9 million. See "Description of Capital Stock--Preferred
Stock."
(3) Reflects the issuance of 900 shares of Class A Common Stock to STC as part
of the purchase price in the STC Acquisition.
(4) Because certain of the Company's stockholders held ownership interests in
one of the Company's predecessors, their continuing ownership interest in
the Company has been accounted for at their prior historical basis, which
has resulted in a reduction in stockholders' equity of approximately $14.9
million and a corresponding reduction in the fair values assigned to
tangible and identifiable assets, in accordance with the provisions of
Emerging Issue Task Force discussion No. 88-16, "Basis in Leveraged Buyout
Transactions."
(5) Accumulated deficit on a pro forma basis reflects the write-off, net of
tax benefit, of (i) deferred financing costs and (ii) the discount related
to the value of the warrants issued in conjunction with the Senior
Subordinated Notes, associated with the repayment of the Senior
Subordinated Notes, the Subordinated Talton Note, and the Existing Credit
Facility, all of which will be accounted for as an extraordinary loss on
early extinguishment of debt.
30
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma statements of operations data for the year
ended December 31, 1996 and the three months ended March 31, 1997 give effect
to (i) the completed acquisitions of AmeriTel (including the acquisitions of
various inmate facility contracts from other telecommunication companies),
Talton Telecommunications, and Tataka; (ii) the STC Acquisition (including
STC's acquisition of five inmate facility contracts from North American
Intellicom ("NAI")); and (iii) the Offering and the application of the net
proceeds therefrom, as if each such transaction had been consummated on
January 1, 1996. The pro forma balance sheet data as of March 31, 1997 give
effect to (i) the acquisition of Tataka and the STC Acquisition; and (ii) the
Offering and the application of the net proceeds therefrom, as if each such
transaction had been consummated on March 31, 1997.
The purchase prices for the acquired businesses were determined based upon
arm's length negotiations between the Company and the respective sellers and
have been allocated primarily to inmate facility contracts and goodwill. The
Company has completed preliminary purchase price allocations for STC and
Tataka. These preliminary purchase price allocations may change upon the final
determination of the fair market values of the net assets acquired.
The pro forma financial data do not give effect to any events occurring
after consummation of the acquisitions, other than reduced telecommunications
costs associated with a new long distance contract with LDDS/Worldcom
effective January 1997 and new direct billing agreements with various LECs,
which were negotiated by the Company as a result of the higher combined
telecommunications traffic anticipated from the acquisitions of AmeriTel and
Talton Telecommunications, and which were executed after the closing of these
acquisitions. Although management believes that additional cost reductions and
operating expense synergies, including reductions in bad-debt expense
resulting from the full implementation of Talton Telecommunications' billing
and bad-debt management system, will be realized after the Company has
integrated the acquired businesses and has consolidated administrative
functions, these and other possible synergies in overhead expenses have not
been reflected in the pro forma financial data.
The pro forma adjustments, which are described in the accompanying notes,
are based on currently available information and certain assumptions that
management believes are reasonable. Such pro forma financial data and the
notes thereto should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Prospectus.
THE PRESENTATION OF PRO FORMA FINANCIAL DATA IS FOR ILLUSTRATIVE PURPOSES
ONLY, IS NOT NECESSARILY INDICATIVE OF THE RESULTS THAT WOULD HAVE BEEN
REPORTED HAD SUCH EVENTS ACTUALLY OCCURRED ON THE DATES SPECIFIED, AND SHOULD
NOT BE VIEWED AS A PROJECTION OR FORECAST OF THE COMPANY'S PERFORMANCE FOR ANY
FUTURE PERIOD. INCLUSION OF PRO FORMA FINANCIAL DATA SHOULD NOT BE REGARDED AS
A REPRESENTATION BY THE COMPANY, AND THERE CAN BE NO ASSURANCE THAT THE
RESULTS REFLECTED IN THE PRO FORMA FINANCIAL DATA WILL BE REALIZED. THE
COMPANY DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE PRO FORMA FINANCIAL
DATA TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF FUTURE EVENTS, EVEN IF THE ASSUMPTIONS OR ESTIMATES UNDERLYING
THE PRO FORMA FINANCIAL DATA ARE SHOWN TO BE IN ERROR. PROSPECTIVE INVESTORS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE PRO FORMA FINANCIAL DATA.
31
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
COMPANY OTHER 1996 OTHER 1997
AND ACQUIRED ACQUIRED TOTAL PRO FORMA
PREDECESSORS(A) BUSINESSES(B) BUSINESSES(C) STC HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ------------- ------------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $59,169 $2,623 $3,838 $15,282 $80,912 $ -- $80,912
Operating expenses:
Telecommunication
costs................. 25,616 1,214 1,982 8,265 37,077 (3,557)(d) 33,520
Facility commissions... 15,417 737 1,097 3,246 20,497 20,497
Field operations and
maintenance........... 2,035 86 115 1,056 3,292 3,292
Selling, general, and
administrative........ 4,293 184 269 1,374 6,120 (453)(e) 5,667
Depreciation........... 1,649 -- -- 868 2,517 (624)(f) 1,893
Amortization of
intangibles........... 2,487 -- -- -- 2,487 9,299 (g) 11,786
Non-recurring
expenses.............. 684 -- -- -- 684 (434)(h) 250
------- ------ ------ ------- ------- -------- -------
Total operating
expenses.............. 52,181 2,221 3,463 14,809 72,674 4,231 76,905
------- ------ ------ ------- ------- -------- -------
Operating income
(loss)................. 6,988 402 375 473 8,238 (4,231) 4,007
Other (income) expense:
Interest expense, net.. 2,081 -- -- 447 2,528 9,230 (i) 11,758
Other, net............. 7 -- -- (66) (59) (19)(j) (78)
------- ------ ------ ------- ------- -------- -------
Total other (income)
expense............... 2,088 -- -- 381 2,469 9,211 11,680
------- ------ ------ ------- ------- -------- -------
Income (loss) before
income taxes........... 4,900 402 375 92 5,769 (13,442) (7,673)
Income tax expense
(benefit).............. 1,894 156 128 22 2,200 (3,496)(k) (1,296)
------- ------ ------ ------- ------- -------- -------
Income (loss) from
continuing operations.. $ 3,006 $ 246 $ 247 $ 70 $ 3,569 $ (9,946) $(6,377)
======= ====== ====== ======= ======= ======== =======
EBITDA(1)............... $11,801 $ 402 $ 375 $ 1,407 $13,985 $ 4,029 $18,014
======= ====== ====== ======= ======= ======== =======
</TABLE>
32
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE TOTAL PRO FORMA
COMPANY TATAKA STC HISTORICAL ADJUSTMENTS PRO FORMA
------- ------ ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues...... $15,056 $528 $5,660 $21,244 $ -- $21,244
Operating expenses:
Telecommunication
costs................. 6,195 291 2,950 9,436 (783)(d) 8,653
Facility commissions... 4,005 87 1,111 5,203 5,203
Field operations and
maintenance........... 588 16 419 1,023 1,023
Selling, general, and
administrative........ 1,096 37 464 1,597 (37)(e) 1,560
Depreciation........... 299 -- 265 564 (83)(f) 481
Amortization of
intangibles........... 2,220 -- -- 2,220 562 (g) 2,782
------- ---- ------ ------- ----- -------
Total operating
expenses.............. 14,403 431 5,209 20,043 (341) 19,702
------- ---- ------ ------- ----- -------
Operating income
(loss)................. 653 97 451 1,201 341 1,542
Other (income) expense:
Interest expense, net.. 1,877 -- 129 2,006 935 (i) 2,941
Other, net............. 16 -- (30) (14) (9)(j) (23)
------- ---- ------ ------- ----- -------
Total other (income)
expense............... 1,893 -- 99 1,992 926 2,918
------- ---- ------ ------- ----- -------
Income (loss) before in-
come taxes............. (1,240) 97 352 (791) (585) (1,376)
Income tax expense (ben-
efit).................. 68 31 6 105 (105)(k) --
------- ---- ------ ------- ----- -------
Income (loss) from con-
tinuing operations..... $(1,308) $ 66 $ 346 $ (896) $(480) $(1,376)
======= ==== ====== ======= ===== =======
EBITDA(1)............... $ 3,156 $ 97 $ 746 $ 3,999 $ 829 $ 4,828
======= ==== ====== ======= ===== =======
</TABLE>
33
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Represents the combined historical operating results of the Company for
the one-month period from December 1, 1996 (date of acquisition) to
December 31, 1996 and of the Company's predecessors, AmeriTel and Talton
Telecommunications (the "Predecessors"), for the eleven-month pre-
acquisition periods ended November 30, 1996.
(b) Represents the combined historical operating results of inmate facility
contracts and related telecommunications assets acquired during 1996 by
AmeriTel from Peoples Telephone, Inc., in three separate transactions, and
from Intellipay Systems, Inc., Value-Added Communications, Inc., and
Steelweb, Inc. (the "Other 1996 Acquired Businesses").
(c) Represents the combined historical operating results of inmate facility
contracts and related telecommunications assets acquired during 1997 by
the Company from Tataka and inmate facility contracts and related
telecommunications assets acquired effective January 1, 1997 by STC from
NAI (the "Other 1997 Acquired Businesses").
(d) Telecommunication costs have been reduced to reflect long distance cost
savings associated with the negotiation of a new long distance contract
with LDDS/Worldcom and billing and collection cost savings associated with
the negotiation of new direct billing agreements with GTE, US West,
Southwestern Bell, Sprint, and other LECs. The Company was able to
negotiate these new agreements as a result of the higher
telecommunications traffic of the combined AmeriTel and Talton
Telecommunications operations.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Billing and collections savings......... $(2,954) $(765)
Long distance savings................... (603) (18)
------- -----
Pro forma adjustment.................. $(3,557) $(783)
======= =====
</TABLE>
(e) Selling, general, and administrative costs of the Other 1996 Acquired
Businesses and Other 1997 Acquired Businesses have been eliminated because
such costs were absorbed by the Company's existing overhead structure.
(f) Depreciation expense has been reduced to reflect differences between pro
forma depreciation expense based on the fair values of acquired telephone
system equipment over a useful life of 7.5 years and historical
depreciation expense over useful lives primarily ranging from 5 to 7.5
years.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Pro forma depreciation expense.......... $ 1,893 $ 481
Historical depreciation expense......... (2,517) (564)
------- -----
Pro forma adjustment.................. $ (624) $ (83)
======= =====
</TABLE>
(g) Amortization expense has been increased to reflect the difference between
historical amortization expense and amortization of the purchase price
amounts allocated to the fair values of (i) acquired inmate facility
contracts over the life of the related contract (generally 3 to 5 years);
(ii) goodwill (over 20 years); and (iii) other identifiable intangibles,
such as organization costs and non-competition agreements, over the life
of the related intangible (generally 2.5 to 5 years).
34
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Pro forma amortization expense:
Acquired contracts.................... $ 9,520 $ 2,217
Goodwill.............................. 2,174 542
Other intangible assets............... 92 23
Historical amortization expense:
Acquired contracts.................... (1,776) --
Goodwill.............................. (476) --
Other intangible assets............... (235) (2,220)
------- -------
Pro forma adjustment................ $ 9,299 $ 562
======= =======
</TABLE>
(h) Non-recurring expenses have been reduced to eliminate special management
bonuses paid to certain key managers of AmeriTel, which were contingent
upon the consummation of the Company's acquisition of AmeriTel.
(i) Interest expense has been increased to reflect interest expense on the
Senior Notes and amortization of deferred financing costs related to the
Senior Notes, and to eliminate historical interest expense and deferred
financing costs associated with indebtedness repaid with a portion of the
net proceeds from the Offering.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Pro forma interest expense on the
Senior Notes at an interest rate of
11.0%................................ $12,650 $ 3,163
Pro forma amortization of new deferred
financing costs...................... 600 150
Pro forma interest expense on other
long-term debt....................... 18 5
Pro forma interest income on excess
cash proceeds of the Offering at an
assumed rate of 5.5%................. (1,510) (377)
Combined historical interest expense,
including amortization of deferred
financing costs...................... (2,528) (2,006)
------- -------
Pro forma adjustment................ $ 9,230 $ 935
======= =======
</TABLE>
(j) Minority interest representing STC's interest in the earnings of its
subsidiary has been eliminated because this subsidiary is now wholly owned
by the Company following the STC Acquisition.
(k) Income taxes have been adjusted to reflect pro forma income taxes at the
Company's estimated effective tax rate of 38.5%, after adjustment for
deferred income tax valuation allowance and the estimated non-deductible
permanent difference relating to goodwill of approximately $1.5 million
annually.
(l) EBITDA represents income before interest expense, income taxes,
depreciation, amortization, and non-recurring expenses. Although EBITDA is
not a measure of performance calculated in accordance with generally
accepted accounting principles, the Company has included information
concerning EBITDA in this Prospectus because it is used by certain
investors as a measure of a company's ability to service its debt
obligations. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income or cash flow
as an indicator of the Company's operating performance.
35
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Pro forma EBITDA reflects the following adjustments:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Historical EBITDA..................... $13,985 $3,999
Pro forma adjustments:
Billing and collection savings...... 2,954 765
Long distance savings............... 603 18
Elimination of selling, general, and
administrative costs of acquired
businesses......................... 453 37
Elimination of minority interest.... 19 9
------- ------
Pro forma EBITDA...................... $18,014 $4,828
======= ======
</TABLE>
The following adjustments to pro forma EBITDA reflect various tariff
increases and decreases implemented during 1996 and reduction in bad-debt
expense based on management's business and operating strategy. These
adjustments are based on estimates and assumptions made and believed to be
reasonable by the Company, but that are inherently uncertain and subject to
significant business, economic, and competitive contingencies, many of which
are beyond the control of the Company, and are based on assumptions with
respect to future business decisions that are subject to change. See "Special
Note Regarding Forward-Looking Statements." The following calculations should
not be viewed as indicative of actual or future results and were not prepared
with a view towards compliance with published guidelines of the Commission or
the AICPA with respect to prospective financial information and have not been
examined or compiled by any certified public accountant.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Pro forma EBITDA....................... $18,014 $4,828
Effect of net tariff rate increase(a).. 1,342 --
Effect of full implementation of the
Company's billing and bad-debt
management system(b).................. 851 401
------- ------
Adjusted EBITDA........................ $20,207 $5,229
======= ======
</TABLE>
--------
(a) Reflects net effect of increases in revenues and expenses
associated with various tariff rate increases and decreases that
were implemented during 1996 as if such changes were implemented on
January 1, 1996.
(b) Reflects net effect of the implementation of the internally
developed billing and bad-debt management system that is estimated
to result in (i) decreased revenues due to call blocking and
decreased facility commissions, billing, and collection costs and
long distance charges correlated to the decreased revenue; (ii)
reduced bad-debt expense; (iii) increased validation costs; and
(iv) increased selling, general, and administrative costs.
36
<PAGE>
PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY STC ADJUSTMENTS PRO FORMA
----------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... $ 424 $ 54 $ 27,449 (a) $ 27,927
Accounts receivable............... 9,325 724 2,097 (a) 12,146
Refundable income taxes........... 652 -- 652
Inventories....................... 958 -- 958
Prepaid expenses.................. 511 43 554
Deferred income tax asset......... 645 -- 645
-------- ------ -------- --------
Total current assets............ 12,515 821 29,546 42,882
Property and equipment.............. 8,099 4,466 922 (c) 13,487
Intangible and other assets......... 59,718 577 6,000 (a) 72,669
6,330 (c)
3,600 (c)
(3,556)(d)
-------- ------ -------- --------
Total assets.................... $ 80,332 $5,864 $ 42,842 $129,038
======== ====== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................. $ 2,134 $1,046 -- $ 3,180
Accrued expenses.................. 6,130 916 7,046
Income taxes payable.............. 403 -- 403
Current portion of long-term
debt............................. 4,613 2,315 (4,613)(a) --
(2,315)(b)
-------- ------ -------- --------
Current liabilities............. 13,280 4,277 (6,928) 10,629
Long-term debt...................... 60,432 702 115,300 (a) 115,500
(61,287)(a)
(702)(b)
1,055 (d)
Deferred income taxes............... 1,566 113 (113)(d) 645
(921)(d)
Minority interest................... -- 185 (185)(b) --
Stockholders' Equity:
Preferred stock................... 0 0 0
Common stock...................... 0 2 (2)(b) 0
Additional paid-in capital........ 21,611 -- 900 (a) 22,511
Retained earnings (deficit)....... (16,557) 585 (585)(b) (20,247)
(3,690)(d)
-------- ------ -------- --------
Total stockholders' equity...... 5,054 587 (3,377) 2,264
-------- ------ -------- --------
Total liabilities and
stockholders' equity........... $ 80,332 $5,864 $ 42,842 $129,038
======== ====== ======== ========
</TABLE>
37
<PAGE>
NOTES TO PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(a) Represents the sources of funds from the issuance of the Old Notes and
Tataka seller notes, and the related use of the proceeds, as follows:
<TABLE>
<S> <C>
Sources of Funds:
Proceeds from the issuance of the Old Notes...................... $115,000
Issuance of 900 shares of Class A Common Stock to STC............ 900
Issuance of Tataka seller notes.................................. 300
--------
Total sources.................................................. $116,200
========
Uses of Funds:
Payment of fees and expenses of the Offering..................... 6,000
Excess cash proceeds of the Offering............................. 27,449
Purchase price to acquire STC.................................... 13,829
Purchase price to acquire Tataka................................. 925
Repayment of existing debt:
Term loan........................................................ 45,000
Revolving loan................................................... 7,400
Senior Subordinated Notes........................................ 8,500
Subordinated Talton Note......................................... 5,000
STC advance payments............................................. 2,097
--------
Total debt repayment........................................... 67,997
--------
Total.......................................................... $116,200
========
</TABLE>
(b) Represents the elimination of assets, liabilities, and stockholders'
equity of STC that were not purchased or assumed in the STC Acquisition.
(c) Represents the allocation of the excess of the aggregate purchase prices
of STC and Tataka over the historical carrying value of the net assets
acquired to the fair values of net assets acquired, as follows:
<TABLE>
<CAPTION>
STC TATAKA TOTAL
------- ------ -------
<S> <C> <C> <C>
Aggregate purchase prices......................... $13,829 $925 $14,754
Less historical carrying value of net assets
acquired......................................... (3,902) -- (3,902)
------- ---- -------
Excess purchase prices............................ $ 9,927 $925 $10,852
======= ==== =======
Allocation of excess purchase prices:
Excess fair value of property and equipment... $ 813 $109 $ 922
Excess fair value of inmate facility
contracts.................................... 5,797 533 6,330
Goodwill...................................... 3,317 283 3,600
------- ---- -------
Total....................................... $ 9,927 $925 $10,852
======= ==== =======
</TABLE>
(d) Represents the write-off of $3,556 in unamortized deferred financing costs
associated with the repayment of outstanding indebtedness under the
Existing Credit Facility and $1,055 of unamortized discount on the Senior
Subordinated Notes related to the value of the warrants issued in
conjunction with the Senior Subordinated Notes, which will be accounted
for as an extraordinary loss on the early extinguishment of debt, net of
deferred income tax benefit of $921.
38
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Effective on December 1, 1996, the Company became the holding company for
the operations of AmeriTel and Talton Telecommunications. The Company
accounted for these acquisitions using the purchase method of accounting.
Accordingly, the Company's consolidated financial statements include the
operations of AmeriTel and Talton Telecommunications only for periods after
December 1, 1996.
The following selected consolidated financial data of the Company for the
one month ended December 31, 1996 and the selected combined financial data of
the Company's predecessors for the years ended December 31, 1994 and 1995, and
for the eleven months ended November 30, 1996, have been derived from the
Company's and its predecessors' audited financial statements. The selected
combined financial data of the predecessors for the years ended December 31,
1992 and 1993, and for the three months ended March 31, 1996, and the selected
consolidated, financial data of the Company for the three months ended March
31, 1997 are unaudited and, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) that are necessary
to present fairly the combined or consolidated financial statements for such
periods. The selected combined and consolidated financial data do not purport
to indicate results of operations as of any future date or for any future
period.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto included elsewhere in this
Prospectus.
39
<PAGE>
<TABLE>
<CAPTION>
COMBINED THE COMBINED THE
COMBINED PREDECESSORS PREDECESSORS COMPANY PREDECESSORS COMPANY
--------------------------------- ------------- ----------- ------------- ------------
ELEVEN MONTHS ONE MONTH THREE MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED
--------------------------------- NOVEMBER 30, DECEMBER 31 MARCH 31, MARCH 31,
1992 1993 1994 1995 1996 1996 1996 1997
------ ------- ------- ------- ------------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $7,137 $13,593 $23,892 $40,326 $53,663 $ 5,506 $13,154 $15,056
Operating expenses:
Telecommunication
costs................. 4,414 7,025 11,761 18,673 23,317 2,299 5,988 6,195
Facility commissions... 1,177 2,225 3,901 9,595 13,962 1,455 3,345 4,005
Field operations and
maintenance........... 310 538 1,044 1,467 1,816 219 430 588
Selling, general, and
administration........ 884 1,566 2,571 4,089 3,921 372 994 1,096
Depreciation........... 496 780 965 1,359 1,538 111 380 299
Amortization of
intangibles........... 3 684 1,392 1,605 1,746 741 443 2,220
Nonrecurring expenses.. -- -- -- -- 684 -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 7,284 12,818 21,634 36,788 46,984 5,197 11,580 14,403
------ ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (147) 775 2,258 3,583 6,679 309 1,574 653
Other (income) expense:
Interest expense, net.. 131 331 745 1,360 1,469 612 397 1,877
Other, net............. (2) (153) (134) (52) 27 (20) 21 16
------ ------- ------- ------- ------- ------- ------- -------
Total other (income)
expense............... 129 178 611 1,308 1,496 592 418 1,893
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (276) 597 1,647 2,230 5,183 (283) 1,156 (1,240)
Income tax expense
(benefit).............. 1 -- (11) 891 1,917 (23) 479 68
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (277) 597 1,658 1,339 3,266 (260) 677 (1,308)
Extraordinary loss...... -- -- -- -- 52 -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (277) $ 597 $ 1,658 $ 1,339 $ 3,214 $ (260) $ 677 $(1,308)
====== ======= ======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 354 $ 2,392 $ 4,749 $ 6,554 $10,620 $ 1,181 $ 2,376 $ 3,156
Capital
expenditures(2)........ 1,774 1,978 3,223 4,669 2,804 269 1,057 429
Ratio of earnings to
fixed charges(3)....... -- 2.8 3.0 2.5 4.2 -- 3.7 --
Deficiency of earnings
to fixed charges....... $ 276 -- -- -- -- $ 283 -- $ 1,240
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents............ $ 370 $ 283 $ 419 $ 1,293 $ 531 $ 294 $ 260 $ 424
Total assets............ 4,100 8,528 17,639 26,592 34,708 80,134 30,104 80,333
Total debt (including
current maturities..... 1,938 4,854 10,750 15,074 14,845 63,315 17,274 65,045
Total stockholders'
equity (deficit)....... (40) 556 2,027 4,850 9,361 6,481 5,497 5,054
</TABLE>
- -------
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation, amortization, and non-recurring expenses.
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principles, the Company has included
information concerning EBITDA in this Prospectus because it is commonly
used by certain investors and analysts as a measure of a company's ability
to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, operating income,
net income, or cash flow as an indicator of the Company's operating
performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
40
<PAGE>
SELECTED HISTORICAL PREDECESSOR FINANCIAL DATA
The following selected historical predecessor financial data of AmeriTel and
Talton Telecommunications for the years ended December 31, 1994 and 1995, and
for the eleven months ended November 30, 1996 (the period prior to the
effective dates of their respective acquisitions by the Company) have been
derived from AmeriTel's and Talton Telecommunications' audited financial
statements. The selected historical predecessor financial data of Talton
Telecommunications for the years ended December 31, 1992 and 1993, and for
both AmeriTel and Talton Telecommunications for the three months ended March
31, 1996, are unaudited and, in the opinion of management, reflect all
adjustments (consisting only of normal recurring accruals) that are necessary
to present fairly their respective financial statements for such periods.
The selected historical predecessor financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
41
<PAGE>
AMERITEL PAY PHONES, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------------- NOVEMBER 30, MARCH, 31
1992 1993 1994 1995 1996 1996
------ ------ ------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $1,191 $3,858 $11,699 $20,371 $29,306 $ 6,927
Operating expenses:
Telecommunication
costs................. 701 1,826 5,347 9,747 13,729 3,267
Facility commissions... 170 623 1,861 3,497 6,087 1,380
Field operations and
maintenance........... 83 192 508 864 1,166 286
Selling, general and
administration........ 162 376 928 1,759 2,281 547
Depreciation........... 156 213 194 384 536 133
Amortization of
intangibles........... 2 81 595 1,224 1,624 410
Nonrecurring expenses.. -- -- -- -- 684 --
------ ------ ------- ------- ------- -------
Total operating
expenses.............. 1,274 3,311 9,433 17,475 26,107 6,023
------ ------ ------- ------- ------- -------
Operating income
(loss)................. (83) 547 2,266 2,896 3,199 904
Other (income) expense:
Interest expense, net.. 90 188 564 1,028 1,355 339
Other, net............. -- (123) -- 66 39 27
------ ------ ------- ------- ------- -------
Total other (income)
expense............... 90 65 564 1,094 1,394 366
------ ------ ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (173) 482 1,702 1,802 1,805 538
Income tax expense
(benefit).............. -- -- -- 734 693 215
------ ------ ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (173) 482 1,702 1,068 1,112 323
Extraordinary loss...... -- -- -- -- 52 --
------ ------ ------- ------- ------- -------
Net income (loss)....... $ (173) 482 $ 1,702 $ 1,068 $ 1,060 $ 323
====== ====== ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 75 $ 964 $ 3,055 $ 4,438 $ 6,004 $ 1,420
Capital
expenditures(2)........ 725 175 1,779 2,051 1,516 563
Ratio of earnings to
fixed charges(3)....... -- 3.5 3.9 2.7 2.3 2.5
Deficiency of earnings
to fixed charges....... 173 -- -- -- -- --
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents............ $ 234 $ 189 $ 229 $ 891 $ 81 $ 256
Total assets............ 1,780 2,800 12,449 18,586 26,885 21,423
Long-term debt
(including current
maturities)............ 955 1,735 8,181 11,690 14,845 14,248
Total stockholders'
equity (deficit)....... (12) 470 1,985 4,537 6,894 4,830
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means as income before
interest, income taxes, depreciation, amortization, and non-recurring
expenses. Although EBITDA is not a measure of performance calculated in
accordance with generally accepted accounting principles, the Company has
included information concerning EBITDA in this Prospectus because it is
commonly used by certain investors and analysts as a measure of a
company's ability to service its debt obligations. EBITDA should not be
used as an alternative to, or be considered more meaningful than,
operating income, net income, or cash flow as an indicator of the
Company's operating performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
42
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
---------------------------------------- NOVEMBER 30, MARCH, 31
1992 1993 1994 1995 1996 1996
----------- ----------- ------- ------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues......... $5,946 $9,735 $12,193 $19,955 $24,357 $6,227
Operating expenses:
Telecommunication costs... 3,713 5,199 6,414 8,926 9,588 2,721
Facility commissions...... 1,007 1,602 2,040 6,098 7,875 1,965
Field operations and
maintenance.............. 227 346 536 603 650 144
Selling, general and
administration........... 722 1,190 1,643 2,330 1,640 447
Depreciation.............. 340 567 771 975 1,002 247
Amortization of
intangibles.............. 1 603 797 381 122 33
------ ------ ------- ------- ------- ------
Total operating
expenses................. 6,010 9,507 12,201 19,313 20,877 5,557
------ ------ ------- ------- ------- ------
Operating income (loss).... (64) 228 (8) 642 3,480 670
Other (income) expense:
Interest expense, net..... 41 143 181 332 114 58
Other, net................ (2) (30) (134) (118) (12) (6)
------ ------ ------- ------- ------- ------
Total other (income)
expense.................. 39 113 47 214 102 52
------ ------ ------- ------- ------- ------
Income (loss) before income
taxes..................... (103) 115 (55) 428 3,378 618
Income tax expense
(benefit)................. 1 -- (11) 157 1,224 264
------ ------ ------- ------- ------- ------
Net income (loss).......... $ (104) $ 115 $ (44) $ 271 $ 2,154 $ 354
====== ====== ======= ======= ======= ======
OTHER DATA:
EBITDA(1).................. $ 279 $1,428 $ 1,694 $ 2,116 $ 4,616 $ 956
Capital expenditures(2).... 1,049 1,803 1,444 2,618 1,288 494
Ratio of earnings to fixed
charges(3)................... -- 1.8 -- 2.1 17.4 8.8
Deficiency of earnings to
fixed charges............. $ 103 -- $ 55 -- -- --
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents.. $ 136 $ 94 $ 190 $ 402 $ 450 $ 4
Total assets............... 2,320 5,728 5,190 8,006 7,823 8,681
Long-term debt (including
current maturities).......... 983 3,118 2,569 3,384 -- 3,026
Total stockholders' equity
(deficit).................... (28) 86 42 313 2,467 667
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means income before interest,
income taxes, depreciation, amortization, and non-recurring expenses.
Although EBITDA is not a measure of performance calculated in accordance
with generally accepted accounting principles, the Company has included
information concerning EBITDA in this Prospectus because it is commonly
used by certain investors and analysts as a measure of a company's ability
to service its debt obligations. EBITDA should not be used as an
alternative to, or be considered more meaningful than, operating income,
net income, or cash flow as an indicator of the Company's operating
performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenues from its operation of
inmate telecommunication systems located in correctional facilities in 33
states and the provision of related services. The Company enters into multi-
year agreements with the correctional facilities, pursuant to which the
Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights,
the Company pays a commission to the correctional facility based upon inmate
telephone use. The Company installs and generally retains ownership of the
telephones and the associated equipment and provides additional services to
the correctional facility that are tailored to the specialized needs of the
corrections industry and to the requirements of the individual correctional
facility, such as call activity reporting and call blocking. The Company also
generates revenues from public pay telephones that are ancillary to its inmate
telephone business. See "Business--Other Operations."
The Company accumulates call activity data from its various installations
and bills its revenues related to this call activity through major LECs or
through third-party billing services for smaller volume LECs. In addition,
during the same period, the Company accrues the related telecommunications
costs for validating, transmitting, billing and collection, and line and long-
distance charges, along with commissions payable to the facilities. Allowances
for bad debts are based on historical experience.
The Company's principal operating expenses consist of (i) telecommunication
costs; (ii) commissions paid to correctional facilities, which are typically
expressed as a percentage of either gross or net revenues and are fixed for
the term of the agreements with the facilities; (iii) field operations and
maintenance costs, which consist primarily of field service on the Company's
installed base of inmate telephones; and (iv) selling, general, and
administrative costs. The Company pays monthly line and usage charges to RBOCs
and other LECs for interconnection to the local network for local calls, which
are computed on a flat monthly charge plus, for certain LECs, on a per message
or per minute usage rate based on the time and duration of the call. The
Company also pays fees to RBOCs and other LECs and long distance carriers
based on usage for long distance calls. See "Business--Regulation."
The Company became the holding company for the operations of AmeriTel and
Talton Telecommunications effective December l, 1996. Because these
acquisitions have been accounted for using the purchase method of accounting,
the Company's results of operations only reflect the operations of AmeriTel
and Talton Telecommunications subsequent to the effective date of their
acquisition. Management believes that the growth of the Company and its
predecessors through acquisitions makes meaningful period-to-period
comparisons of historical results of operations difficult. Consequently,
management believes that an investor is presented with more meaningful
information through discussion of the Company and its predecessors on a
combined basis for the periods discussed below.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the combined
historical results of operations of the Company, AmeriTel, and Talton
Telecommunications, without any adjustments to historical results to reflect
changes in depreciation and amortization resulting from purchase accounting
revaluations and acquisitions subsequent to the dates presented, including the
acquisition of Tataka and the STC Acquisition.
44
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
-------------- -------------- ------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $23,892 100.0% $40,326 100.0% $59,169 100.0% $ 13,154 100.0% $ 15,056 100.0%
Operating expenses:
Telecommunication
costs................. 11,761 49.2 18,673 46.3 25,616 43.3 5,988 45.5 6,195 41.1
Facility commissions... 3,901 16.3 9,595 23.8 15,417 26.1 3,345 25.4 4,005 26.6
Field operations and
maintenance........... 1,044 4.4 1,467 3.6 2,035 3.4 430 3.3 588 3.9
Selling, general, and
administration........ 2,571 10.8 4,089 10.1 4,293 7.3 994 7.6 1,096 7.3
Depreciation........... 965 4.0 1,359 3.4 1,649 2.8 380 2.9 299 2.0
Amortization of
intangibles........... 1,392 5.8 1,605 4.0 2,487 4.2 443 3.4 2,220 14.7
Non-recurring
expenses.............. -- -- -- -- 684 1.2 -- -- -- --
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Total operating
expenses.............. 21,634 90.5 36,788 91.2 52,181 88.3 11,580 88.1 14,403 95.6
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Operating income........ 2,258 9.5 3,538 8.8 6,988 11.7 1,574 11.9 653 4.4
Other (income) expense:
Interest expense, net.. 745 3.1 1,360 3.4 2,081 3.5 397 3.0 1,877 12.5
Other, net............. (134) (0.6) (52) (0.1) 7 0.0 21 0.2 16 0.1
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Total other (income)
expense............... 611 2.5 1,308 3.3 2,088 3.5 418 3.2 1,893 12.6
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 7.0 2,230 5.5 4,900 8.2 1,156 8.7 (1,240) (8.2)
Income tax expense
(benefit).............. (11) 0.0 891 2.2 1,894 3.2 479 3.6 68 0.5
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Income (loss) before
extraordinary loss..... 1,658 7.0 1,339 3.3 3,006 5.0 677 5.1 (1,308) (8.7)
Extraordinary loss...... -- -- -- -- 52 0.1 -- -- -- --
------- ----- ------- ----- ------- ----- -------- ------ -------- ------
Net income (loss)....... $ 1,658 7.0% $ 1,339 3.3% $ 2,954 4.9% $ 677 5.1% ($1,308) (8.7)%
======= ===== ======= ===== ======= ===== ======== ====== ======== ======
EBITDA.................. $ 4,749 19.9% $ 6,554 16.3% $11,801 19.9% $ 2,376 18.1% $ 3,156 21.0%
======= ===== ======= ===== ======= ===== ======== ====== ======== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Operating Revenues. The Company's operating revenues increased by $1.9
million, or 14.5%, from $13.2 million for the three months ended March 31,
1996 to $15.1 million for the three months ended March 31, 1997. The increase
in operating revenues was primarily due to the Company's acquisition of
contracts covering 140 inmate facilities during 1996 (the results of which
were reflected for the full first quarter of 1997), and the Company's addition
of new contracts covering 22 inmate facilities, net of contract terminations,
during 1996 (the results of which were reflected for the full first quarter of
1997). The increase in operating revenues also reflects, to a lesser extent,
local tariff rate increases implemented after the first quarter of 1996.
Operating Expenses. Total operating expenses increased $2.8 million, or
24.4%, from $11.6 million for the three months ended March 31, 1996 to $14.4
million for the three months ended March 31, 1997. Operating expenses as a
percentage of operating revenues increased from 88.1% for the three months
ended March 31, 1996 to 95.6% for the three months ended March 31, 1997.
Excluding depreciation and amortization, operating expenses as a percentage of
operating revenues decreased from 81.8% for the three months ended March 31,
1996 to 78.9% for the three months ended March 31, 1997. The dollar increase
in operating expenses was primarily due to the increased costs associated with
servicing newly acquired inmate facility contracts. The decrease in operating
expenses (excluding depreciation and amortization expenses) as a percentage of
operating revenues is primarily due to a decrease in telecommunication costs
and economies of scale, as described below.
Telecommunication costs increased by $207,000, from $6.0 million for the
three months ended March 31, 1996 to $6.2 million for the three months ended
March 31, 1997. Telecommunication costs represented 45.5% of operating
revenues for the three months ended March 31, 1996 and 41.1% of operating
revenues for the three months ended March 31, 1997, a decrease of 4.4%. The
decrease as a percentage of operating revenues is primarily due to reduced
bad-debt expense and lowered billing costs resulting from the implementation
of direct billing agreements by the Company.
45
<PAGE>
Facility commissions increased by $660,000, from $3.3 million for the three
months ended March 31, 1996 to $4.0 million for the three months ended March
31, 1997. Facility commissions represented 25.4% of operating revenues for the
three months ended March 31, 1996 and 26.6% of operating revenues for the
three months ended March 31, 1997, an increase of 1.2%. The increase as a
percentage of operating revenues is primarily due to higher commissions being
paid on inmate facility contracts acquired in 1996 as compared to the
Company's existing base of inmate facility contracts and, to a lesser extent,
due to the periodic increase in commissions paid to some accounts as contracts
were renewed.
Field operation and maintenance costs increased by $158,000, from $430,000
for the three months ended March 31, 1996 to $588,000 for the three months
ended March 31, 1997. Field operation and maintenance costs represented 3.3%
of operating revenues for the three months ended March 31, 1996 and 3.9% of
operating revenues for the three months ended March 31, 1997, an increase of
0.6%. The increase is primarily due to costs associated with the integration
of the acquisitions of AmeriTel and Talton Telecommunications.
Selling, general, and administrative expenses ("SG&A") increased by
$102,000, from $1.0 million for the three months ended March 31, 1996 to $1.1
million for the three months ended March 31, 1997. SG&A represented 7.6% of
operating revenues for the three months ended March 31, 1996 and 7.3% of
operating revenues for the three months ended March 31, 1997, a decrease of
0.3%. The dollar increase is primarily due to additional expenses associated
with higher call volumes, while the percentage decrease can be attributed to
the economies of scale.
Depreciation and amortization costs increased by $1.7 million, from $823,000
for the three months ended March 31, 1996 to $2.5 million for the three months
ended March 31, 1997. Depreciation and amortization costs represented 6.3% of
operating revenues for the three months ended March 31, 1996 and 16.7% of
operating revenues for the three months ended March 31, 1997, an increase of
10.4%. The dollar and percentage increases are primarily due to additional
amortization expense associated with acquisitions by the Company of inmate
facility contracts and from the increased value of intangible assets related
to the acquisitions of AmeriTel and Talton Telecommunications in December
1996.
Operating Income. The Company's operating income decreased by $921,000, from
$1.6 million for the three months ended March 31, 1996 to $653,000 for the
three months ended March 31, 1997 as a result of the factors described above.
The Company's operating income margin decreased from 11.9% for the three
months ended March 31, 1996 to 4.4% for the three months ended March 31, 1997
primarily due to the increased amortization expense from the Company's
acquisitions of AmeriTel and Talton Telecommunications.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $1.5 million, from $418,000 for the three
months ended March 31, 1996 to $1.9 million for the three months ended March
31, 1997. The increase was primarily due to increased interest expense
associated with the indebtedness incurred by the Company in connection with
its acquisitions of AmeriTel and Talton Telecommunications in December 1996
and indebtedness incurred in connection with acquisitions of inmate facility
contracts and other assets in 1996.
Net Income (Loss). The Company's net income decreased by $2.0 million, from
$677,000 for the three months ended March 31, 1996 to a loss of $1.3 million
for the three months ended March 31, 1997, as a result of the factors
described above.
EBITDA. EBITDA increased by $780,000, from $2.4 million for the three months
ended March 31, 1996 to $3.2 million for the three months ended March 31,
1997. EBITDA as a percentage of operating revenues increased from 18.1% for
the three months ended March 31, 1996 to 21.0% for the three months ended
March 31, 1997, primarily due to increased revenues and lower operating costs
as a percentage of operating revenues, as discussed above.
46
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenues. The Company's operating revenues increased by $18.9
million, or 46.7%, from $40.3 million for the year ended December 31, 1995 to
$59.2 million for the year ended December 31, 1996. The increase in operating
revenues was primarily due to (i) the addition of operating revenues from the
Company's acquisitions of contracts covering 76 inmate facilities during 1995
(the results of which were reflected for the full year in 1996) and contracts
covering 140 inmate facilities during 1996, (ii) operating revenues from the
Company's contract with the state of Alabama, a portion of which become
operational during the last half of 1995, and (iii) increases in operating
revenues from the Company's addition of new contracts covering 130 inmate
facilities, net of contract terminations, during 1995 (the results of which
were reflected for the full year in 1996) and, to a lesser extent from the
addition of new contracts during 1996.
Operating Expenses. Total operating expenses increased $15.4 million, from
$36.8 million in 1995 to $52.2 million in 1996. Operating expenses as a
percentage of operating revenues decreased 2.9% from 91.2% for the year ended
December 31, 1995 to 88.3% for the year ended December 31, 1996. The decrease
in operating expenses as a percentage of revenues is primarily due to a
decrease in telecommunication costs resulting from lower long distance rates
from more favorable long distance service contracts and decreases in local
exchange costs, SG&A expenses, and field operations and maintenance expenses
primarily as a result of the fixed portion of these expenses being spread over
a higher revenue base.
Telecommunication costs increased by $6.9 million, from $18.7 million in
1995 to $25.6 million in 1996. Telecommunication costs represented 46.3% of
operating revenues in 1995 and 43.3% of operating revenues in 1996, a decrease
of 3.0%. The dollar increase is primarily due to increased costs associated
with higher call volumes, while the percentage decrease is primarily due to
lower long distance rates from more favorable long distance service contracts
and decreases in local exchange costs.
Facility commissions increased by $5.8 million, from $9.6 million in 1995 to
$15.4 million in 1996. Facility commissions represented 23.8% of operating
revenues in 1995 and 26.1% of operating revenues in 1996, an increase of 2.3%.
The increase is primarily due to higher commission rates on the Company's
contract with the state of Alabama and on acquired inmate facility contracts.
Field operation and maintenance costs increased by $568,000, from $1.5
million in 1995 to $2.0 million in 1996. Field operation and maintenance costs
represented 3.6% of operating revenues in 1995 and 3.4% of operating revenues
in 1996, a decrease of 0.2%. The dollar increase is primarily due to increased
costs associated with serving a larger account base, while the percentage
decrease is primarily due to the effect of spreading fixed costs over a larger
revenue base.
SG&A increased by $204,000, from $4.1 million in 1995 to $4.3 million in
1996. SG&A represented 10.1% of operating revenues in 1995 and 7.3% of
operating revenues in 1996, a decrease of 2.8%. The decrease in SG&A as a
percentage of operating revenues is primarily due to the effect of spreading
fixed costs over a larger revenue base.
Depreciation and amortization costs increased by $1.1 million, from $3.0
million in 1995 to $4.1 million in 1996. Depreciation and amortization costs
represented 7.4% of operating revenues in 1995 and 7.0% of operating revenues
in 1996, a decrease of 0.4%. The dollar increase is primarily due to $600,000
in additional depreciation and amortization expense resulting from the
Company's acquisitions of AmeriTel and Talton Telecommunications in December
1996.
The Company incurred a non-recurring expense of $684,000 in 1996 related to
$434,000 in bonuses paid by AmeriTel prior to its acquisition by the Company
and $250,000 paid by AmeriTel to settle a lawsuit. Such expense represented
1.2% of operating revenues in 1996.
Operating Income. The Company's operating income increased by $3.5 million,
from $3.5 million in 1995 to $7.0 million in 1996, as a result of the
significant increase in operating revenues offset in part by the increase
47
<PAGE>
in operating costs discussed above. The Company's operating income margin
increased from 8.8% in 1995 to 11.7% in 1996 due to the factors described
above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $780,000 from $1.3 million in 1995 to $2.1
million in 1996. The increase was primarily due to increased interest expense
associated with indebtedness incurred by the Company in connection with the
acquisitions of AmeriTel and Talton Telecommunications.
Net Income (Loss). The Company's net income increased by $1.7 million, from
$1.3 million in 1995 to $3.0 million in 1996 as a result of the factors
described above.
EBITDA. EBITDA increased by $5.2 million from $6.6 million in 1995 to $11.8
million in 1996. EBITDA as a percentage of operating revenues increased from
16.3% in 1995 to 19.9% in 1996 due to the factors described above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Operating Revenues. The Company's operating revenues increased by $16.4
million, or 68.8%, from $23.9 million for the year ended December 31, 1994 to
$40.3 million for the year ended December 31, 1995. The increase in operating
revenues was primarily due to (i) the addition of operating revenues from the
Company's acquisitions of contracts covering 284 inmate facilities in 1994
(the results of which were reflected for the full year in 1995), and contracts
covering 76 inmate facilities in 1995, (ii) operating revenues from the
Company's contract with the state of Alabama, a portion of which became
operational during the last half of 1995, and (iii) increases in operating
revenues from the Company's addition of new contracts covering 69 inmate
facilities, net of contract terminations, during 1994 (the results of which
were reflected for the full year in 1995) and, to a lesser extent, from the
addition of new contracts during 1995.
Operating Expenses. Total operating expenses increased $15.2 million, from
$21.6 million in 1994 to $36.8 million in 1995. Operating expenses as a
percentage of operating revenues increased 0.7%, from 90.5% in 1994 to 91.2%
in 1995. The increase in operating expenses was primarily due to increased
costs associated with servicing acquired inmate facility contracts. The
increase in operating expenses as a percentage of revenues is attributable
primarily to increased facility commissions, which was primarily due to the
higher commission rates on the Company's contract with the state of Alabama,
which became operational during the last half of 1995. The increase in 1995
operating expenses as a percentage of revenues was also due to an increasing
reserve for bad debts associated with higher uncollectible accounts in certain
territories into which the Company expanded, primarily Iowa, Wisconsin, and
Minnesota.
Telecommunication costs increased by $6.9 million, from $11.8 million in
1994 to $18.7 million in 1995. Telecommunication costs represented 49.2% of
operating revenues in 1994 and 46.3% of operating revenues in 1995, a decrease
of 2.9%. The dollar increase is primarily due to higher expenses associated
with increased call volume, while the percentage decrease is primarily due to
lower billing costs as the Company implemented its direct billing agreements
for a portion of its call volume and to lower bad debt.
Facility commissions increased by $5.7 million, from $3.9 million in 1994 to
$9.6 million in 1995. Facility commissions represented 16.3% of operating
revenues in 1994 and 23.8% of operating revenues in 1995, an increase of 7.5%.
The increases are primarily due to the higher commission rates on the
Company's contract with the State of Alabama, which became operational during
the second half of 1995.
Field operation and maintenance costs increased by $423,000, from $1.0
million in 1994 to $1.5 million in 1995. Field operation and maintenance costs
represented 4.4% of operating revenues in 1994 and 3.6% of operating revenues
in 1995, a decrease of 0.8%. The decrease as a percentage of operating
revenues is primarily due to economies of scale associated with servicing a
larger account base.
48
<PAGE>
SG&A increased by $1.5 million, from $2.6 million in 1994 to $4.1 million in
1995. SG&A represented 10.8% of operating revenues in 1994 and 10.1% of
operating revenues in 1995, a decrease of 0.7%. The dollar increase is
primarily due to increased costs required to service acquired inmate facility
contracts, while the decrease as a percentage of operating revenues is due
primarily to economies of scale associated with such acquisitions.
Depreciation and amortization costs increased by $607,000, from $2.4 million
in 1994 to $3.0 million in 1995. Depreciation and amortization costs
represented 9.8% of operating revenues in 1994 and 7.4% of operating revenues
in 1995, a decrease of 2.4%. The dollar increase is primarily due to increased
depreciation and amortization relating to acquired and new inmate facility
contracts, while the percentage decrease is primarily due to proportionately
less depreciation and amortization applied to a higher revenue base.
Operating Income. The Company's operating income increased by $1.2 million,
from $2.3 million in 1994 to $3.5 million in 1995, as a result of higher
revenues, net of the increases in operating costs discussed above. The
Company's operating income margin decreased from 9.5% in 1994 to 8.8% in 1995
primarily due to higher operating costs.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $697,000, from $611,000 in 1994 to $1.3 million
in 1995. The increase was primarily due to additional borrowings to fund
acquisitions of inmate facility contracts.
Net Income. The Company's net income decreased by $319,000, from $1.7
million in 1994 to $1.3 million in 1995 as a result of the factors described
above.
EBITDA. EBITDA increased by $1.9 million, from $4.7 million in 1994 to $6.6
million in 1995. EBITDA as a percentage of operating revenues decreased from
19.9% in 1994 to 16.3% in 1995 primarily due to the increases in facility
commissions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($1.1 million) for
the three months ended March 31, 1997, as compared to $1.5 million for the
three months ended March 31, 1996. Net cash used in operating activities was
$5.9 million and $4.1 million for the years ended December 31, 1996 and 1995,
respectively. Net cash used in operating activities consisted primarily of
increases in accounts receivable associated with the addition of new inmate
facility contracts.
Cash used in investing activities was $429,000 for the three months ended
March 31, 1997, as compared to $4.4 million for the three months ended March
31, 1996. Cash used in investing activities was $54.8 million in 1996,
consisting primarily of cash outflows for acquisitions. Cash used in investing
activities was $8.0 million in 1995, consisting primarily of acquisitions of
inmate facility contracts.
Cash provided by financing activities was $1.7 million for the three months
ended March 31, 1997, as compared to $1.8 million for the three months ended
March 31, 1996. Cash provided by financing activities was $48.4 million and
$4.8 million in 1996 and 1995, respectively, and consisted primarily of
proceeds from borrowings under credit facilities and the issuance of equity by
the Company's predecessors to finance revenue growth and acquisitions.
Financing activity in 1996 included the issuance of equity by the Company in
connection with the acquisitions of AmeriTel and Talton Telecommunications in
December 1996. See "Certain Relationships and Related Transactions; Historic
Relationships and Related Transactions."
The Company expects that its principal sources of liquidity will be cash
flow from operations, borrowings under the Senior Credit Facility, and
proceeds from the Offering. The Company anticipates that its principal uses of
liquidity will be to provide working capital, finance future acquisitions, and
meet debt service requirements.
49
<PAGE>
As of March 3l, 1997, the Company had approximately $65.0 million of long-
term indebtedness outstanding, including (i) $52.4 million outstanding under a
credit facility (the "Existing Credit Facility") entered into with the
Canadian Imperial Bank of Commerce ("CIBC") at a blended interest rate of
9.7%; (ii) $7.4 million of Senior Subordinated Notes, net of discount related
to the value of the warrants issued in conjunction with the Senior
Subordinated Notes; and (iii) the $5.0 million Subordinated Talton Note. The
Company repaid all of such outstanding indebtedness with a portion of the net
proceeds of the Offering. See "Certain Relationships and Related Transactions;
Current Relationships and Related Transactions" and "Description of Other
Indebtedness--Subordinated Indebtedness."
The Company and its Lenders (as defined) have entered into an amendment and
restatement of the Existing Credit Facility, pursuant to which the existing
term facility was repaid using a portion of the net proceeds of the Offering
and the Senior Credit Facility was established in the maximum principal amount
of $35.0 million. Amounts borrowed under the Senior Credit Facility will bear
interest, at the option of the Company, at either (i) the Base Rate (i.e., the
higher of CIBC's reference rate and the overnight federal funds rate plus
0.5%) plus a margin that is expected to vary from 0.25% to 2.75%, depending on
the Company's Total Debt to EBITDA Ratio (as defined in the Senior Credit
Facility); or (ii) the IBOR Rate (as defined in the Senior Credit Facility)
plus a margin that is expected to vary from 1.5% to 4.0%, depending on the
Company's Total Debt to EBITDA Ratio. The Senior Credit Facility requires
quarterly interest-only payments on Base Rate Loans, and periodic interest-
only payments based on the applicable interest period on IBOR Rate loans, but
at least quarterly, until maturity. The Senior Credit Facility will mature on
December 31, 2000, at which time the outstanding principal and all accrued and
unpaid interest will be due. See "Description of Other Indebtedness--Senior
Credit Facility."
The Company is also in discussions with its Lenders to obtain a senior
secured facility to be used for permitted acquisitions. The Company believes
that covenants substantially similar to those contained in the Senior Credit
Facility will be applicable to the acquisition facility. Borrowings under the
acquisition facility will be cross-collateralized and cross-defaulted with the
Senior Credit Facility. The acquisition facility would likely be subject to
mandatory prepayments over its term. Although the Company is currently in
preliminary discussions regarding such facility, the Company does not
anticipate entering into such an arrangement prior to, and acquiring this
facility is not a condition to, the consummation of the Exchange Offer. There
can be no assurance, however, that the Company will be successful in obtaining
such an acquisition facility.
Concurrently with the consummation of the Offering, the Company expensed
approximately $4.4 million to write off previously incurred deferred financing
costs related to the Existing Credit Facility, the Senior Subordinated Notes,
and the Subordinated Talton Note, which were repaid with the net proceeds of
the Offering. These expenses will be accounted for as an extraordinary loss on
the early extinguishment of debt.
Management expects that cash flow from operations along with additional
borrowings under existing and future credit facilities will be sufficient to
meet the Company's requirements for the remainder of 1997. The Company spent
$429,000 for the three months ended March 31, 1997 and expects to spend
approximately $4.1 million in capital expenditures in the remainder of 1997
for new installations and equipment purchases for its billing and inquiry
center, including an amount estimated for capital expenditures for STC. In
July of 1997, the Company acquired substantially all of the assets of CCC for
a purchase price of $10.5 million, subject to adjustment. The Company financed
the acquisition through proceeds from the Offering. In addition, the Company
intends to pursue additional acquisitions to expand its base of installed
inmate telephones and consider acquisition opportunities from time to time.
There can be no assurance, however, that the Company will have sufficient
available capital resources to realize its acquisition strategy. Such future
acquisitions, depending on their size and the form of consideration, may
require the Company to seek additional debt or equity financing. See "Risk
Factors--Risks Associated with Acquisition Strategy."
INCOME TAXES
Since the Company's acquisitions of AmeriTel and Talton Telecommunications
were stock purchases, the Company was required to retain the tax bases of
AmeriTel and Talton Telecommunications in the assets
50
<PAGE>
acquired. As a result, the Company will not be entitled to a tax deduction for
the amortization of goodwill or the depreciation and amortization of certain
other tangible and intangible assets related to these acquisitions. The
Company has provided deferred income tax liabilities for differences in the
financial accounting and tax bases of its tangible and identifiable intangible
assets. However, in accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," future
amortization of non-deductible goodwill will be treated as a permanent
difference in the Company's financial statements.
ACCOUNTING PRONOUNCEMENTS
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Impairment is evaluated by comparing
future cash flows (undiscounted and without interest charges) expected to
result from use of the asset and its eventual disposition to the carrying
amount of the asset. The adoption of this pronouncement had no material impact
on the Company's financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock-based
compensation is not mandatory, SFAS No. 123 requires companies that choose not
to adopt the new fair value accounting to disclose pro forma net income and
earnings per share under the new method. During 1996, the Company's
predecessor, AmeriTel, implemented the disclosure requirements of this
pronouncement. During 1996, neither the Company nor Talton Telecommunications
was a party to any stock-based compensation plans requiring the implementation
of SFAS No. 123.
51
<PAGE>
BUSINESS
GENERAL
The Company is the largest independent provider of inmate telecommunications
services to correctional facilities operated by city, county, and state
authorities and other types of confinement facilities such as juvenile
detention centers, private jails, and halfway houses. As of March 31, 1997,
the Company owned and operated inmate telephones located in 1,157 correctional
facilities in 33 states. Management believes that the Company provides inmate
telecommunications services to over 75% of the county correctional facilities
in the states of Alabama, Iowa, Kansas, Missouri, Nebraska, and Utah and to
over 50% of the county correctional facilities in the states of Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota. For the year ended
December 31, 1996 and the three months ended March 31, 1997, the Company
generated pro forma revenues of $80.9 million and $21.2 million, respectively,
and pro forma Adjusted EBITDA of $20.2 million and $5.2 million, respectively.
The Company's inmate telecommunications business consists of owning,
operating, servicing, and maintaining a system of telephones located in
correctional facilities and providing related services. The Company enters
into multi-year agreements with the correctional facilities pursuant to which
the Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights,
the Company pays a commission to the correctional facility based upon inmate
telephone use. The Company installs and generally retains ownership of the
telephones and related equipment. In addition, the Company provides services
that are tailored to the specialized needs of the corrections industry and to
the requirements of the individual correctional facility, such as a
specialized law enforcement management system, call activity reporting, and
call blocking. The Company also generates revenues from public pay telephones
that are ancillary to its inmate telecommunications business.
The Company was formed in November 1996 to consummate the acquisitions of
AmeriTel and Talton Telecommunications, thereby combining the unique strengths
of two leading independent providers of inmate telecommunications services.
The Company was formed by EUF Talton, an affiliate of EUFCC, a private
investment banking and consulting firm, the principals of which are
experienced in acquiring and integrating the operations of companies in
consolidating industries. The Company has recently been awarded the contract
with the Department of Corrections of the State of North Carolina to provide
inmate telephone services. The agreement covers 96 correctional facilities
with a current inmate population of approximately 32,000. The Company will
also provide coin telephone service for 1,600 telephones throughout North
Carolina in connection with this contract. With the acquisition of AmeriTel,
the Company acquired a management team with extensive experience in
identifying, consummating, and integrating acquisitions in the inmate
telecommunications industry. With Talton Telecommunications, the Company
acquired a billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a competitive
advantage in the industry. With the acquisition of STC, the Company augmented
its information technology and services offered with, among other assets, a
specialized law enforcement management information system. The Company
believes that this system will be instrumental in retaining STC's customers
and will assist the Company in retaining existing and obtaining new customers.
RECENT DEVELOPMENTS
In August of 1997, the Company acquired CCC. With this acquisition, the
Company acquired CCC's proprietary call processor technology, which management
believes will reduce the Company's installation and operating costs. CCC
generated revenues of approximately $9.6 million in 1996.
52
<PAGE>
The Company has pursued a strategy of increasing its installed base of
inmate telephones through selective acquisitions of other inmate
telecommunications operators and has successfully completed 26 acquisitions in
the industry since 1993. The following table sets forth the acquisition
history of the Company:
<TABLE>
<CAPTION>
TOTAL NUMBER OF PRIMARY
DATE SELLER FACILITIES SERVED STATES SERVED
---- ------ ----------------- -------------
<C> <C> <C> <S>
January 1993 Pay-Comm Systems Corp. 7 Iowa
January 1993 to February 1994 Pay-Tel of America, Inc. 94 Colorado, Iowa, Kansas,
(4 transactions) Missouri,
Oklahoma, South Dakota,
Wisconsin
February 1993 Best Serve, Inc. 60 Iowa, Kansas, Missouri,
Nebraska,
South Dakota
July 1993 Coin Telephone, Inc. 37 North Carolina, South
Carolina
April 1994 Ad/Vantage Communications 12 Missouri, Iowa, South
Consultants, Inc. Dakota
April 1994 World Communications 1 Missouri
June 1994 to June 1996 Peoples Telephone Company, Inc. 224 Arkansas, Colorado
(6 transactions) Idaho, Iowa, Kansas,
Minnesota, Missouri,
Nebraska, New Mexico,
North Dakota, Oklahoma,
South Dakota, Utah,
Washington, Wisconsin
September 1994 Phone Management Properties 8 Minnesota
October 1994 Midwest Communications, Inc. 9 Minnesota, North Dakota
October 1994 Star Payphones, Inc. 10 Minnesota
March 1995 Inmate Tel. 26 Louisiana, Mississippi,
Texas
June 1995 Publicom, Inc. 26 Indiana, Michigan, Ohio
January 1996 Intellipay Systems, Inc. 37 Indiana, Michigan, Ohio,
West Virginia
May 1996 Value-Added Communications, Inc. 3 Florida
June 1996 Executone (Steelweb, Inc.) 57 California, Colorado,
Kansas, Maryland,
Oklahoma, South
Carolina, Tennessee,
Texas, Washington
February 1997 North American Intellicom 5 Oklahoma, Texas
May 1997 Tri-T, Inc. (Tataka) 20 Utah
July 1997 Correctional Communications 26 California
Corporation
---
Total 662
===
</TABLE>
INDUSTRY OVERVIEW
Corrections Industry
The corrections industry has experienced dramatic growth over the last
decade as a result of societal and political trends. Recent anti-crime
legislation, including mandatory sentencing guidelines, limitations on parole,
and spending authorizations for crime prevention and construction of
additional correctional facilities have contributed to this industry growth.
The U.S. has one of the highest incarceration rates of any country in the
world. The U.S. Department of Justice estimates that as of June 30, 1996 there
were approximately 1.6 million inmates housed in U.S. correctional facilities,
or approximately one inmate for every 163 U.S. residents. Of this total,
approximately two-thirds were housed in federal and state prisons and
approximately one-third were housed in city and county correctional
facilities.
According to U.S. Department of Justice statistics, the inmate population in
federal and state prisons, which generally house inmates for longer terms than
city and county facilities, increased from approximately 743,000 at December
31, 1990 to approximately 1.1 million at June 30, 1996, representing an
average annual growth rate of approximately 7.6%. The inmate population in
city and county facilities, which generally house inmates for terms of one
year or less, increased from approximately 405,000 at June 30, 1990 to
approximately 518,000 at June 30, 1996, representing an average annual growth
rate of approximately 4.2%. At June 30, 1996, approximately 92.0% of city and
county jail capacity in the U.S. was occupied.
53
<PAGE>
Over the past several years, the private corrections industry has also
experienced dramatic growth. Increasing costs and rising inmate populations
have led a number of jurisdictions to privatize all or a portion of their
corrections operations in an attempt to control or lower expenditures. From
December 31, 1989 to December 31, 1996, the rated capacity of privately
managed adult correctional facilities in the U.S. increased from 10,973 beds
to 77,584 beds, representing an annual growth rate of approximately 32.2%.
Although 25 states have expressed statutory authority for privatized
corrections at the state level, only approximately 2.6% of the nation's inmate
population was housed in privately managed facilities as of December 31, 1996.
Inmate Telecommunications Industry
The inmate telecommunications industry is characterized by the specialized
telecommunications systems and related services required to address the unique
needs of the corrections industry. Security and public safety concerns
associated with inmate telephone use require that correctional facilities have
the ability to control inmate access to telephones and to certain telephone
numbers and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for inmate
telephone usage have also led to the development of systems and procedures
unique to this industry.
Inmate telephones in the U.S. are operated by a large and diverse group of
service providers, including RBOCs, other LECs, IXCs, such as AT&T, MCI,
Sprint, and LDDS/Worldcom, and independent public pay telephone and inmate
telephone companies. Within the inmate telecommunications industry, companies
compete for the right to serve as the exclusive provider of inmate calling
services within a particular correctional facility. Contracts may be awarded
on a facility-by-facility basis, such as for most city or county correctional
systems, which generally include small and medium-sized facilities (less than
250 beds), or system-wide, such as for most state prison systems. Generally,
contracts for federal facilities and state systems are awarded pursuant to a
competitive bidding process, while contracts for city and county facilities
are often negotiated with a single party. Contracts generally have multi-year
terms and typically contain renewal options. As part of the service contract,
the service provider generally installs, operates, and maintains all inmate
telecommunications equipment. In exchange for the exclusive contract rights,
the service provider pays a commission to the operator of the correctional
facility based upon inmate telephone use.
Inmates are generally allowed to make only collect calls from correctional
facilities. Because collect calls have, on average, the second highest revenue
per call (after operator-assisted, person-to-person calls), revenues per
inmate telephone have historically been higher than for public pay telephones.
In addition, maintenance and related labor costs for inmate telephones are
generally lower than for public pay telephones due to the use of automated
operator services and the absence of expenses associated with coin collection
and repairs of coin mechanisms. However, the inmate telecommunications
industry has also historically experienced higher levels of uncollectible
accounts and fraud than the public pay telephone market.
BUSINESS STRATEGY
The Company was formed to capitalize on consolidation opportunities that the
Company believes exist within the highly fragmented inmate telecommunications
industry. The Company's primary business objectives are to be a cost-
efficient, high-quality provider of telecommunications services to
correctional facilities in the U.S. and to continue to expand its installed
base of inmate telephones. The Company has developed and is implementing the
following strategies to meet these objectives:
. Target the corrections industry with specialized products and
services. The Company has developed specialized telecommunications
systems and services to focus on the unique needs of the corrections
industry. In addition to telecommunications services, the Company offers
its LEMs system, which includes jail management, victim notification, and
prisoner profile software packages.
The Company markets its telecommunications system and services through a
sales force consisting largely of former law enforcement officials and
others with experience in the corrections and telecommunications
industries. The Company also maintains a staff of trained field service
technicians
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and independent telecommunications service contractors, which enables the
Company to respond quickly (typically within 24 hours) to service
interruptions. In each of the last three years, the Company has retained
in excess of 95% of its beginning of the year customer base through
contract extensions or renewals.
. Reduce operating costs and bad-debt expense. The Company has developed a
billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a
competitive advantage in the inmate telecommunications industry.
Management believes that, through the use of the Company's system, which
was developed by Talton Telecommunications, the Company has achieved
levels of billing and collection costs and bad-debt expense that are
generally lower than those experienced by other competitors in the inmate
telecommunications industry. Management is currently implementing this
system throughout the Company's existing operations and intends to
implement this system in future acquired operations.
The Company also utilizes direct billing agreements with LECs to bill and
collect a majority of its operating revenues. Under the direct billing
agreements, the LEC includes charges for the Company's services on the
local telephone bill sent to the recipient of inmate collect calls.
Management believes that direct billing arrangements with LECs are
advantageous because they eliminate the costs associated with third party
billing arrangements that are utilized by a majority of independent
inmate telecommunications companies, expedite the billing and collection
process, increase collectibility, and reduce account charge-offs. As of
November 30, 1996, the Company had negotiated direct billing agreements
with BellSouth and GTE South, which enabled the Company to direct bill
approximately 46% of its pro forma operating revenues. The increased
telecommunications traffic that resulted from the combination of AmeriTel
and Talton Telecommunications enabled the Company to enter into new
direct billing arrangements, which, as of June 1997, enabled the Company
to direct bill in excess of 85% of its operating revenues.
. Expand through internal growth. The Company actively seeks to increase
cash flow by installing additional telephones with current customers that
are expanding and by securing new contracts. From January 1997 through
May 1997, the Company signed 39 new contracts for facilities that
management expects will generate monthly revenues of approximately
$490,000, including contracts for the state of Alaska and state of North
Dakota prison systems and a new 1,500-bed CCA facility in Ohio. Through
its sales force, the Company emphasizes the knowledge, experience, and
reputation of the Company in the inmate telecommunications industry, its
high level of service, and the additional specialized products and
services offered by the Company to its correctional facility customers.
Historically, the Company has focused on providing telecommunication
services to small and medium-sized correctional facilities (typically
city or county facilities with fewer than 250 beds). From June 30, 1990
to June 30, 1996, the inmate population in city and county jails
increased at an average annual rate of approximately 4.2%, to
approximately 518,000 of the 1.6 million individuals incarcerated in the
U.S. The Company also intends to selectively pursue additional state and
federal contracts that become available for bid.
Management also believes that the growth of the private corrections
industry provides the Company opportunities for further expansion. The
private corrections industry has experienced dramatic growth over the
last several years, with the rated capacity of privately managed adult
correctional facilities in the U.S. increasing from 10,973 beds at
December 31, 1989 to 77,584 beds at December 31, 1996, representing an
annual growth rate of approximately 32.2%. As the largest provider of
inmate telecommunications services to CCA, the largest private prison
management company in the U.S., the Company is positioned to continue to
benefit from the growth in the private corrections industry.
. Pursue selective consolidating acquisitions. Management believes that the
inmate telecommunications industry is highly fragmented, which affords
significant opportunities for consolidation. Independent inmate telephone
companies are generally small, local, or regional operators that may lack
the financial resources and infrastructure necessary to achieve the
efficiencies and economies of scale necessary to develop new systems and
services to compete effectively for new customers and, as such, present
attractive acquisition opportunities for the Company. In addition,
management believes that the Telecom Act, which requires RBOCs to
decouple their pay phone operations from their local telephone
businesses,
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will contribute to the consolidation opportunities existing in the market.
As a result of the decoupling mandated under the Telecom Act, RBOCs are no
longer entitled to earn a minimum rate of return on their pay phone
business, including their inmate pay phone business. In addition, RBOCs
will be required to charge their own pay phone business the same rates for
local exchange service that RBOCs charge to third party pay phone
operators for the same service. For these reasons, and because of the
incremental costs to the RBOCs to operate their pay phone business as a
separate business, management believes that RBOCs may reevaluate their pay
phone operations, which could increase acquisition opportunities for the
Company.
Management believes that the Company's experience in acquiring
independent inmate telecommunication companies will be instrumental in
identifying acquisition candidates, negotiating favorable terms, and
integrating the acquired operations into the Company. Since January 1993,
the Company has successfully completed 26 acquisitions ranging from the
purchase of relatively small local inmate telecommunication service
providers to the acquisition of larger groups of inmate facility
telecommunications contracts and related assets, including those of
Peoples Telephone Company, Inc. for a seven state region in the
midwestern U.S. In May 1997, the Company acquired the inmate
telecommunications operations of Tataka, the leading independent inmate
telecommunications service provider in the state of Utah. In addition, in
August 1997 the Company acquired substantially all of the assets of CCC.
. Increase geographic concentration/clustering. The Company seeks to
increase market penetration in the states in which it operates. High
market penetration contributes to operating efficiencies through
economies of scale and enables the Company to provide better customer
service and more meaningful call activity reports to its correctional
facility customers. The Company currently serves all of the state
operated correctional facilities and 63 of 72 county correctional
facilities in Alabama, 83 of 95 county correctional facilities in Iowa,
82 of 94 county correctional facilities in Kansas, 104 of 108 county
correctional facilities in Missouri, 52 of 67 county correctional
facilities in Nebraska, 21 of 26 county correctional facilities in Utah,
and over half of the county correctional facilities in Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota.
. Capitalize upon economies of scale. Management believes that the
combination of AmeriTel and Talton Telecommunications, in addition to the
completion of the STC Acquisition, has improved operating efficiencies,
and that additional improvements in efficiency will result from future
acquisitions. As a result of the increased telecommunications traffic and
greater market leverage obtained by the Company in connection with its
acquisitions of AmeriTel and Talton Telecommunications, the Company
negotiated more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. To
the extent that the Company is successful in further increasing its
telecommunications traffic through new installations or acquisitions, the
Company expects to be able to negotiate even more favorable terms from
its long distance providers. Management also believes that the continuing
deregulation of local exchange services will enable the Company to
negotiate more favorable rates from incumbent LECs and competitive local
exchange carriers. In addition, management believes that the Company's
existing infrastructure allows the Company to operate new and acquired
inmate telephones in its existing markets without significant incremental
field service, collection, and other general and administrative costs.
Management believes that the expansion of the Company's installed base of
inmate telephones will also allow the Company to enter into additional
direct billing agreements, thereby decreasing billing and collection
costs and bad-debt expense, and increasing the effectiveness of the
Company's call validation process.
OPERATIONS
Contracts
The Company has contracts to provide inmate telecommunications services on
an exclusive basis to correctional facilities ranging in size from small
municipal jails to large, state-operated facilities, as well as other types of
confinement facilities, including juvenile detention centers, private jails,
and halfway houses. The
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Company's contracts have multi-year terms, and typically contain renewal
options. Typically, the Company negotiates extensions of its contracts before
the end of their stated terms, in each of the last three years, the Company
has retained more than 95% of its beginning of the year customer base through
contract extensions or renewals. Although the Company has experienced what
management believes to be a high retention rate on contracts that come up for
renewal, there can be no assurance that the Company will be successful in
renewing existing inmate telephone contracts in the future.
Marketing
The Company seeks new contracts by participating in competitive bidding
processes and by negotiating directly with the individuals or entities
responsible for operating correctional facilities. The Company markets its
inmate telecommunications services through a sales staff largely made up of
former law enforcement officials and others with experience in the corrections
and telecommunications industries who understand the specialized needs of
correctional facilities. The Company's marketing strategy emphasizes the
knowledge, experience, and reputation of the Company in the inmate
telecommunications industry, its high level of service, and the additional
specialized products and services offered by the Company. The Company relies
on the experience and background of its sales staff to effectively communicate
the capabilities of the Company to both existing and potential customers. In
addition to conducting in-person sales calls on the operators of correctional
facilities, the Company participates in trade shows and is active in local law
enforcement associations.
The Company has historically focused its marketing efforts on city and
county correctional facilities. City and county facilities house inmates for
shorter durations than federal and state prisons and generally have higher
inmate call volumes. In addition, because bidding for contracts to serve city
and county correctional facilities is generally less competitive than that for
state and federal facilities, the Company pays relatively lower commission
rates for these facilities. However, because of their smaller size and limited
resources, these facilities typically require a higher level of service than
federal and state facilities.
Products and Services
Management believes that the specialized products and services offered by
the Company differentiate the Company from its competitors. These services
include the use of the Company's LEMS system, which includes jail management,
victim notification, and prisoner profile software packages. LEMS is a
computer-based system that allows prison authorities to better manage facility
operations and track operating information, including, among other data,
inmate profiles, payroll, and inventory. LEMS is offered to correctional
facilities at no up-front cost in exchange for lower commission rates and
longer contract terms. LEMS is a key selling point for the Company to
potential customers and will also be marketed to its existing customers. The
Company also offers additional services tailored to the corrections industry
such as Guardcheck, a system that verifies the completion of guard rounds,
"man down" notification, an emergency notification system that indicates when
a guard needs assistance, and jail training services. The Company's jail
training services include Company-sponsored training seminars for jail
personnel on a variety of topics including safety and fraud detection. In
addition, the Company's call activity reporting capabilities and its ability
to control inmate access to specific telephone numbers through call blocking
are valuable services to correctional facilities. These specialized products
and services afford the Company a competitive advantage because it is less
likely that a correctional facility will be able to replace all of the
services provided by the Company from a single alternative source, or from
several alternative sources, on an economical basis.
Systems and Equipment
The Company currently utilizes automated operator calling systems that
consist of purchased and internally developed software applications installed
on specialized equipment. The Company's specialized systems limit inmates to
collect calls, validate and verify the payment history of each number dialed
for billing purposes, and confirm that the destination number has not been
blocked. If the number is valid and has not been blocked, the system
automatically requests the inmate's name, records the inmate's response, and
waits for the called party to
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answer. When the call is answered the system informs the called party that
there is a collect call, plays back the name of the inmate in the inmate's
voice, and instructs the called party to accept or reject the call. The system
only completes calls that have been accepted by the called party.
The system automatically records the details of each call (i.e., the number
called and the length of the call) and transmits the data to the Company's
centralized billing center for bill processing and input into the Company's
call activity database. See "Billing and Collection." The Company's database
of telephone numbers and call activity allows the Company to provide extensive
call activity reports to the correctional facilities and to law enforcement
authorities, in addition to identifying numbers appropriate for blocking, thus
helping to reduce the number of uncollectible calls. These include reports of
frequently called numbers, calls of longer than normal duration, and calls by
more than one inmate to the same number, which can assist law enforcement
authorities in connection with ongoing investigations. Management believes
this database offers competitive advantages, particularly within states in
which the Company has achieved substantial market penetration.
Maintenance and Service
The Company provides and installs the telephone system in each correctional
facility at no cost to the operator of the facility and generally performs all
maintenance activities. The Company maintains a geographically dispersed staff
of trained field service technicians and independent contractors, which allows
the Company to respond quickly (typically within 24 hours) to service
interruptions. In addition, the Company has the ability to make some repairs
remotely through electronic communication with the installed equipment without
the need of an on-site service call. Management believes that system
reliability and service quality are particularly important in the inmate
telecommunications industry because of the potential for disruptions among
inmates if telephone service remains unavailable for extended periods.
Billing and Collection
The Company uses direct and third party billing agreements to bill and
collect phone charges. Under direct billing agreements, the LEC includes
collect call charges for the Company's services on the local telephone bill
sent to the recipient of the inmate collect call. The Company generally
receives payment for such calls thirty days after the end of the month in
which the call is submitted to the LEC for billing. The payment received by
the Company is net of a service fee and net of write-offs of uncollectible
accounts for which the Company previously received payment, or net of a
reserve for bad debt expense.
Unlike many smaller independent service providers with lower
telecommunications traffic, the Company has been able to enter into direct
billing agreements in most of its markets because of the Company's high market
penetration. As of November 30, 1996, the Company had negotiated direct
billing agreements with BellSouth and GTE South, which enabled the Company to
direct bill approximately 46% of its pro forma operating revenues. The
increased telecommunications traffic that resulted from the combination of
AmeriTel and Talton Telecommunications enabled the Company to enter into new
direct billing arrangements, which, as of June 1997, enable the Company to
direct bill over 85% of its operating revenues. Management believes that
direct billing agreements with LECs decrease bad-debt expense and billing
expenses by eliminating an additional third-party billing entity, while
expediting and increasing collectibility. In addition, direct billing
agreements help the Company resolve disputes with billed parties by
facilitating direct communication between the Company and the called party,
thereby reducing the number of charge-offs.
In the absence of a direct billing arrangement, the Company bills and
collects its fees through a third party billing and collection clearinghouse
that has a billing and collection agreement with the LEC. When the Company
employs a third party billing and collection clearinghouse, the account
proceeds are forwarded by the various LECs to the clearinghouse, which then
forwards the proceeds to the Company, less a processing fee. With both direct
and third party billing and collection agreements, the Company reconciles its
call records with collections and write-offs on a regular basis. The entire
billing and collection cycle (including reconciliation)
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generally takes between four and eight months after the call record is
submitted to the LEC or to a third party billing and collection clearinghouse
by the Company.
The Company's specialized billing and bad-debt management system integrates
its direct billing arrangements with LECs with its call blocking, validation,
and customer inquiry procedures. Through the use of this system, which was
developed by Talton Telecommunications, the Company has experienced levels of
bad-debt expense that are generally lower than those experienced in the inmate
telecommunications industry. Management is currently implementing this system
throughout the Company's existing operations and intends to implement this
system in future acquired operations.
Long Distance and Local Exchange Costs
Effective January 1997, as a result of the increased telecommunications
traffic and greater market leverage obtained by the Company in connection with
its acquisitions of AmeriTel and Talton Telecommunications, the Company was
able to negotiate more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. The
Company expects to continue to benefit from this reduced long distance cost
structure and further reduce costs as the Company consummates additional
acquisitions and increases its long distance traffic. The Company also
maintains relationships with other long-distance carriers, including AT&T and
MCI.
The Company obtains local exchange services from LECs. The cost of local
exchange services is tariffed in certain jurisdictions. As the deregulation of
the telecommunications industry, including local exchange service, continues
the Company is exploring alternative sources for its local exchange service
requirements. Management believes that the deregulation of local exchange
service could result in additional cost savings to the Company.
OTHER OPERATIONS
The Company owns, operates, services, and maintains a system of
microprocessor controlled public pay telephones that are ancillary to its
inmate telecommunications business. The Company occasionally installs public
pay telephones as an accommodation to, or pursuant to a contract requirement
imposed by, its correctional facility customers. As of March 31, 1997, the
Company had 1,599 public pay telephones installed in 23 states. The Company
obtains contracts with location owners to operate public pay telephones at
locations such as shopping centers, convenience stores, service stations,
grocery stores, restaurants, and truck stops. Such contracts usually provide
for the payment of a commission by the Company to the location owner based on
revenues generated by the telephones.
COMPETITION
In the inmate telecommunications business, the Company competes with
numerous independent providers of inmate telephone systems, LECs, and IXCs
such as AT&T and MCI. Many of the Company's competitors are larger and better
capitalized with significantly greater financial resources than the Company.
The Company believes that the principal competitive factors in the inmate
telecommunications industry are (i) system features and functionality; (ii)
system reliability and service; (iii) the ability to customize inmate call
processing systems to the specific needs of the particular correctional
facility; (iv) relationships with correctional facilities; and (v) rates of
commissions paid to the correctional facilities. The Company competes for
business on local, county, and state levels, and in privately managed
correctional facilities, and intends to compete for business at the federal
level on a selective basis.
Historically, federal and state correctional facilities, which are generally
bid on a system-wide basis, have been served by RBOCs, large LECs, and major
long distance companies, which are able to leverage their existing systems and
infrastructure to serve these large, high-volume customers without significant
additional capital expenditures. These same service providers, however, have
generally not focused on the smaller city and county correctional systems,
service contracts for which may be awarded on a facility-by-facility basis.
Because of the
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variance in the level of service required by these relatively small
facilities, service providers must maintain a more extensive service
infrastructure in order to compete within this segment of the corrections
industry. Due to greater costs associated with serving smaller facilities and
their lower volume of telecommunications traffic, management believes that
large service providers have historically found the smaller facilities less
attractive to serve. As a result, a significant portion of city and county
correctional facilities are served by independent inmate telephone and public
pay telephone companies. Management believes that the market for city and
county correctional facilities is fragmented and is occupied by a number of
competing service providers.
REGULATION
The inmate telephone industry is regulated at the federal level by the FCC
and at the state level by the public utility commissions of the various
states. In addition, from time to time, legislation may be enacted by Congress
or the various state legislatures that affects the telecommunications industry
generally and the inmate telephone industry specifically. Court decisions
interpreting applicable laws and regulations may also have a significant
effect on the inmate telephone industry. Changes in existing laws and
regulations, as well as the adoption of new laws and regulations applicable to
the activities of the Company or other telecommunications business, could have
a material adverse effect on the Company.
Federal Regulation
Prior to 1996, the federal government's role in the regulation of the inmate
telephone industry was limited. The enactment of the Telecom Act, however,
marked a significant change in the scope of federal regulation of inmate
telephone service. Section 276 of the Telecom Act directed the FCC to
implement rules to overhaul the regulation of the provision of pay telephone
service, which Congress defined to include the provision of inmate telephone
service in correctional institutions.
Before adoption of the Telecom Act, LECs generally included inmate telephone
operations as part of their regulated local exchange telephone company
operations. This allowed the LECs to pool revenue and expenses from their
monopoly local exchange operations with revenue and expenses from their inmate
telephone operations. This mingling of operations made possible the
subsidization of the LECs' inmate operations through other regulated revenues.
The LECs were also able to shift certain costs from their inmate operations to
their local exchange monopoly accounts. In particular, the LECs were able to
pool the bad debt from their inmate operations with their other bad debt.
Because inmate telephone providers act as their own carrier, they bear the
risk of fraudulent calling and uncollectible calls and other bad debt. Bad
debt is substantially higher in the inmate telephone industry than in other
segments of the telecommunications industry. The LECs' practice of pooling bad
debt shifts the high costs of bad debt from inmate telephone operations to the
expense accounts of other LEC operations, presenting a vehicle for the cross-
subsidization of the LECs' inmate operations, which, in turn, has allowed the
LECs to offer commissions to correctional facilities that are significantly
higher than those that independent inmate telephone providers can offer.
Section 276 directed the FCC to adopt regulations to end the LECs'
subsidization of their inmate telephone operations from regulated revenues.
Congress also directed the FCC to ensure that the LECs could not discriminate
in favor of their own operations to the competitive detriment of independent
inmate telephone providers. Finally, Congress required the FCC to ensure that
all inmate telephone providers were fairly compensated for "each and every"
call made from their telephones.
To carry out its Congressional mandate, the FCC adopted regulations
requiring all LECs to transfer their inmate telephone operations from their
regulated accounts to the LECs' unregulated accounts no later than April 15,
1997. While the FCC's rules implementing Section 276 are designed to eliminate
cross-subsidization and cost-shifting, there are significant questions
regarding their ultimate effect. For example, it is unclear whether the FCC's
rules will fully prevent the shifting of bad debt from inmate operations to
the LECs' regulated accounts. Since the bad debt arises from the charges for
collect calls, which have traditionally been regulated
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carrier activities, the FCC has not yet fully resolved exactly how the bad
debt from inmate operations will be allocated between regulated and
unregulated accounts.
The FCC also addressed the one-time transfer of existing inmate telephone
operation assets from the LECs' regulated accounts to the unregulated accounts
established for inmate telephone operations. The FCC ordered the transfer of
those assets at their net book value rather than at their fair market value.
That order is currently being appealed by the inmate telecommunications
industry. However, a recent adverse decision by the U.S. Court of Appeals for
the D.C. Circuit may foreclose the inmate telecommunications industry's
ability to prosecute its appeal. The inmate telecommunications industry had
argued to the FCC that the transfer should be accomplished at the assets' fair
market value, including the value of the contracts between the LECs' inmate
operations and correctional facilities. The net book value of those assets is
much lower than their fair market value. As a result of the below market
valuation of the assets, the LECs' inmate telephone operations are able to
post nominally higher returns on their assets than they would otherwise be
able to and hence relieve operating pressures for returns on assets. This also
could result in a competitive advantage for the LECs with respect to access to
capital markets vis-a-vis the Company and other independent inmate telephone
providers.
To eliminate discrimination, the FCC required, among other things, that the
LECs' inmate telephone operations take any tariffed services from its
regulated operations at the tariffed rate for the service, rather than the
actual cost of the service. Before the Telecom Act, the LECs' inmate
operations were able to take these services at some variant of their
underlying costs without regard to the tariffed rate being charged to
independent providers. Under the Telecom Act, the LECs' inmate operations must
take tariffed services on an arm's length basis, at tariffed rates that are
subject to regulatory approval. Further, the rates for the tariffed services
offered to both the LECs' inmate telephone operations and independent inmate
telephone providers must be developed on a consistent basis. The test that the
FCC has mandated for the pricing of services to both independent inmate
telephone providers and the LECs' own inmate operations will require a
reexamination of existing rates and may lead to a rate reduction for services
in some instances, while it is also possible that the rate reexamination may
result in some rate increases. In either event, the requirement for a
consistent methodology for developing rates should substantially reduce LEC
opportunities for unfavorable rate discrimination against independent inmate
telephone providers like the Company.
The FCC did allow the LECs to offer certain non-tariffed services, for
example, repair and installation services, to the LECs' inmate operations on a
cost-sharing basis, which could result in some cost advantage to the LECs'
inmate operations. The LECs are free to price these services at full market
rates to independent inmate telephone providers. Independent inmate telephone
providers are not, however, dependent on the LEC for these services, as they
are with telephone lines; independent inmate telephone providers can provide
services like repair and installation with their own staff or contractors.
To ensure "fair compensation" for inmate telephone providers, the FCC held
that it was not required to prescribe compensation for collect calls because
inmate providers act as their own carriers and collect the revenue from those
calls directly from end users. The inmate telephone industry had argued to the
FCC, however, that because of state-mandated ceilings on the rates for
intrastate collect calls, inmate telephone providers could not recover
adequate revenue for those calls, and accordingly, had sought an "inmate
system compensation charge" in addition to the charges collected for carrying
the call. See "--State Regulation."
Because of continuing restrictions stemming from the 1984 divestiture of the
RBOCs by AT&T, the RBOCs are not able to carry long distance traffic. Prior to
the Telecom Act, the RBOCs were also precluded from choosing a long distance
carrier for calls originating from facilities where the RBOCs provided the
inmate telephone service and receiving commission revenue from that carrier.
Instead, carriers were selected by, and paid commissions directly to, the
individual correctional facilities being served by RBOCs.
Pursuant to the Telecom Act, the FCC decided that the RBOCs would be allowed
to choose their own carrier for their traffic from a given correctional
facility. As a result, the RBOCs may gain the ability to negotiate higher
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commission rates to be paid to them from their contracted carrier by
aggregating traffic from several facilities into a single contract with the
carrier.
Many aspects of the FCC's rules implementing Section 276 are currently the
subject of requests for clarification or reconsideration by the FCC or in
collateral proceedings. In addition, several elements of the new rules are
subject to pending court challenges. The most significant is the FCC's
decision not to prescribe compensation for inmate collect calls. If the FCC is
reversed on that issue, the Company could potentially benefit from the ability
to collect additional revenue. It is not possible to predict the likelihood of
the success of the appeal, and the degree to which the Company could benefit,
if at all, would depend on the exact compensation scheme ultimately prescribed
by the FCC for inmate collect calls.
Because of the pending requests for clarification, reconsiderations,
collateral proceedings, and court challenges, and because the FCC is still in
the process of implementing its new rules, the ultimate effects of the rule
changes mandated by the Telecom Act are uncertain. In particular, whether the
FCC's rules designed to eliminate subsidization and discrimination by the LECs
prove to be effective will significantly affect the level of competition faced
by the Company in the inmate telecommunications market. Similarly, because the
rules have only recently been adopted, it is too early to assess the LECs'
competitive responses to them.
Apart from the FCC proceedings to implement the provisions of the Telecom
Act, there are other matters pending before the FCC that could potentially
affect the Company and its operations. In 1992, the FCC proposed a new plan
for operator assisted interstate calls, including collect calls. Collect calls
are the predominant method of calling from inmate telephones. Currently, the
inmate telephone provider generally acts as the carrier for these calls and
receives the revenues generated by the calls. Under the proposed new plan,
known as "Billed Party Preference" ("BPP"), those calls would be sent instead
to the pre-subscribed carrier of the called-party, thereby bypassing the
opportunity for the inmate telephone provider to carry, and receive revenues
from, the calls. Since the time that the FCC initially proposed BPP,
opposition has surfaced from virtually every industry segment, including large
and small LECs, IXCs, and independent providers of both pay telephone and
inmate telephoned services. The FCC has recognized that the substantial costs
of implementing BPP should lead to an examination of alternatives.
In response to the FCC's BPP proposal and its subsequent call for
alternatives, an inmate telephone providers industry group, along with other
telecommunications companies and trade associations, has proposed an
alternative plan that would set caps on the rates for interstate inmate
collect calls by tying those rates to the rates charged by the largest IXCs.
The FCC is also considering requiring carriers to disclose their rates to
called parties before completing inmate collect calls. These alternative
approaches are designed to address the FCC's concerns with regard to a small
minority of inmate telephone service providers that may be charging excessive
rates, while allowing the inmate telephone industry to receive a fair rate of
return. As with the underlying BPP proposal, the rate ceiling alternative and
the disclosure option are pending before the FCC, and the outcome or mix of
remedies remains uncertain. Although a rate ceiling or disclosure regime could
be substantially less burdensome to the Company than BPP, the ultimate effect
on the Company's operations would depend on the levels at which the ceilings
were set or the nature of the disclosure.
If the BPP system were to be adopted, the Company could experience a
reduction in the revenues it now receives on inmate collect calls and,
accordingly, might be unable to continue to pay its present levels of
commissions to correctional facilities for accounts. Since the FCC has stated
that inmate service providers are to recover the "fair compensation" required
under the Telecom Act from revenues they earn on those calls, and BPP would
deprive them of that revenue, adoption of BPP would require the FCC to revisit
its decision not to prescribe such compensation. The outcome of such
proceedings is extremely uncertain.
State Regulation
The most significant state involvement in the regulation of inmate telephone
service is the limit on the maximum rates that can be charged for intrastate
collect calls set by most states, referred to as "rate ceilings."
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<PAGE>
Since collect calls are generally the only kind of calls that can be made by
inmates in correctional facilities, the state-imposed rate ceilings on those
calls can have a significant effect on the Company's business.
In many states, the rate ceilings on inmate collect calls within the
originating LEC's service area are tied to the rates charged by the LEC and
subject to state regulatory approval. Thus, where the LEC chooses not to raise
its rates, independent inmate telephone providers are precluded from raising
theirs. Prior to the passage of the Telecom Act, the LECs had less incentive
to raise their rates than independent inmate telephone providers because the
LECs were able to subsidize their inmate telephone operations and discriminate
in their favor, as described above. See "--Federal Regulation." It is possible
that as a result of the FCC's new rules designed to eliminate such subsidies,
some LECs may choose to file with their state commissions to raise their rates
for inmate collect calls. If this occurs, the Company and other independent
inmate telephone providers could also raise their rates. It is difficult to
predict the extent to which the LECs will raise their rates.
For calls going outside the originating LEC's service area, there may be
state rate ceilings tied to the rates of the largest IXCs. In some cases,
these rate ceilings can also make sufficient cost recovery difficult. In
general, the cost recovery problems that arise from rate ceilings tied to IXC
rates are not as severe as the difficulties created by rate ceilings tied to
LEC rates.
In its rulemaking implementing the Telecom Act, the FCC declined to address
these state rate ceilings. The FCC ruled that inmate telephone providers must
first seek relief from the state rate ceilings at the state level. The outcome
of any such proceedings at the state level, if undertaken, is uncertain.
Further, it is uncertain whether the FCC would intervene or if so, how, in the
event a state failed to provide relief.
In addition to imposing rate caps, the states regulate other aspects of the
inmate calling industry. While the degree of regulatory oversight varies
significantly from state to state, state regulations generally establish
minimum technical and operating standards to ensure that public interest
considerations are met. Among other things, most states have established rules
that govern registration requirements, notice to end users of the identity of
the service provider in the form of postings or verbal announcements, and
requirements for rate quotes upon request. In some jurisdictions, in order for
the Company to operate its inmate telephones and public pay telephones, it is
necessary to become certificated and to file tariffs with the appropriate
state regulatory authority.
In connection with the Exchange Offer, the Company may be required to obtain
consents or approvals of the state regulatory authorities in certain states in
which the Company conducts a limited portion of its business. The Company does
not believe that the failure to obtain such consents or approvals,
individually or in the aggregate, would have a material adverse effect on the
Company or its operations.
TRADENAMES
The Company has two registered trademarks, Security Telecom Corporation(R)
and STC(R) and has developed or acquired a number of additional unregistered
tradenames that it uses in its business. Although the use of these trademarks
and tradenames has created goodwill in certain markets, management does not
believe that the loss of these trademarks and tradenames would have a material
adverse effect on the Company's operations.
FACILITIES
The Company's principal executive offices are located in, and a portion of
its operations are conducted from, leased premises located at 1209 W. North
Carrier Parkway, Suite 300, Grand Prairie, Texas 75050. The Company also has
three additional facilities from which it conducts its operations located in
Selma, Alabama, Dublin, California and Lee's Summit, Missouri, all of which
are leased.
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<PAGE>
ENVIRONMENTAL
The Company is subject to certain federal, state, and local environmental
regulations. Management does not expect environmental compliance to have a
material impact on the Company's capital expenditures, earnings, or
competitive position in the foreseeable future.
EMPLOYEES
As of March 31, 1997, the Company had approximately 128 employees of which
approximately 28 were executive and administrative personnel, and
approximately 100 were sales, marketing, technical, and other operations
personnel.
LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the
resolution of any threatened or pending legal proceedings will have a material
adverse affect on the Company.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages (as of July 31, 1997) and
positions of each of the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Julius E. Talton (1),
(3).................... 68 Chairman of the Board
John A. Crooks, Jr...... 50 President and Chief Operating Officer
John R. Summers......... 41 Vice President, Chief Financial Officer, Secretary, and Treasurer
Julius E. Talton, Jr.... 36 Vice President
James E. Lumpkin........ 53 Vice President
Todd W. Follmer (1)..... 38 Vice President, Assistant Secretary, Assistant Treasurer, and Director
Gregg L. Engles......... 39 Director
Richard H. Hochman (1),
(3).................... 51 Director
Jay R. Levine (2)....... 40 Director
Nina E. McLemore (2).... 52 Director
Bruce I. Raben (l),
(3).................... 43 Director
David A. Sachs (2)...... 38 Director
Roger K. Sallee (3)..... 49 Director
Joseph P. Urso.......... 43 Director
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit and Finance Committee
(3) Member of the Compensation Committee
Julius E. Talton. Mr. Talton became Chairman of the Board in December 1996.
From December 1996 until June 1997, Mr. Talton served as President of the
Company. Mr. Talton founded Talton Telecommunications and served as its
Chairman of the Board, President, and Chief Executive Officer from 1973 until
December 1996. Mr. Talton served as President of Talton Outdoor Advertising
from 1976 until November 1996. Mr. Talton is a Director of the People's Bank
and Trust Company in Alabama.
John A. Crooks, Jr. Mr. Crooks became President and Chief Operating Officer
of the Company in June 1997. From 1990 until June 1997, Mr. Crooks served in
various capacities with MCI Telecommunications Corporation, most recently as
director of Enterprise Marketing for MCI's Business Services Division.
John R. Summers. Mr. Summers became Vice President, Chief Financial Officer,
Secretary, and Treasurer of the Company in December 1996. From April 1993
until December 1996, Mr. Summers served as Vice President--Operations and
Finance of AmeriTel. Mr. Summers was a self-employed consultant with Summers
and Associates, a management and financial consulting firm, from January 1992
until April 1993.
Julius E. Talton, Jr. Mr. Talton, Jr. became Vice President of the Company
in December 1996. Mr. Talton, Jr. served in various capacities with Talton
Telecommunications from 1986 until December 1996, most recently as Vice
President of Sales.
James E. Lumpkin. Mr. Lumpkin became Vice President of the Company in
December 1996. Mr. Lumpkin served in various capacities with Talton
Telecommunications from its founding in 1973 until December 1996, most
recently as Vice President, Technical Operations.
Todd W. Follmer. Mr. Follmer became Vice President, Assistant Secretary, and
Assistant Treasurer and was elected to the Company's Board of Directors in
December 1996. Mr. Follmer has been a principal of EUFCC since January 1996.
From January 1993 until December 1995, Mr. Follmer served as President of Gulf
Capital
65
<PAGE>
Partners Inc., a merchant banking firm. From May 1988 until December 1992, Mr.
Follmer served in various capacities with Donaldson, Lufkin & Jenrette
Securities Corporation, an investment banking firm.
Gregg L. Engles. Mr. Engles was elected to the Company's Board of Directors
in December 1996. Mr. Engles has served as Chairman and has been a principal
of EUFCC since January 1996. Mr. Engles has served as Chairman of the Board
and Chief Executive Officer of Suiza Foods Corporation since October 1994. Mr.
Engles has also served in various senior management positions with certain
subsidiaries of Suiza Foods since 1988. In addition, Mr. Engles has served as
President of Kaminski Engles Capital Corporation ("KECC") since May 1988 and
as President of Engles Management Corporation ("EMC") since February 1993.
KECC and EMC are investment banking and consulting firms. Mr. Engles was also
President of Engles Capital Corporation, an investment banking and consulting
firm, from May 1989 to October 1992. Mr. Engles is a director of Columbus
Realty Trust.
Richard H. Hochman. Mr. Hochman was elected to the Company's Board of
Directors in December 1996. Mr. Hochman has served as the Chairman of Regent
Capital Management Corp., a private investment firm, since January 1995. From
1990 to December 1994, Mr. Hochman was a Managing Director of PaineWebber,
Inc., an investment banking firm. Mr. Hochman is a director of Cablevision
Systems Corporation.
Jay R. Levine. Mr. Levine was elected to the Company's Board of Directors in
December 1996. Since April 1997, Mr. Levine has served as a Managing Director
of CIBC Wood Gundy Securities Corp., an investment banking firm. From
September 1996 to April 1997, Mr. Levine served as President of PPMJ, Inc., an
investment banking and consulting firm. From January 1994 to June 1996, Mr.
Levine served as President of Springfield Services, Inc. ("Springfield"), a
private investment company. From August 1990 to January 1994, Mr. Levine
served as Vice President of Morningside/North America Limited, a private
investment company affiliated with Springfield.
Nina E. McLemore. Ms. McLemore was elected to the Company's Board of
Directors in December 1996. Ms. McLemore has been the President of Regent
Capital Management Corp. since January 1995. From 1990 until 1993, Ms.
McLemore served in various capacities with Liz Claiborne Accessories.
Bruce I. Raben. Mr. Raben was elected to the Company's Board of Directors in
December 1996. Since February 1996, Mr. Raben has served as a Managing
Director of CIBC Wood Gundy Securities Corp., an investment banking firm. From
March 1990 to February 1996, Mr. Raben served as a Managing Director of
Jefferies & Co., an investment banking firm. Mr. Raben is a director of GT
Parent Holdings, L.D.C., Terex Corporation, Optical Security, Inc., and Equity
Marketing, Inc.
David A. Sachs. Mr. Sachs was elected to the Company's Board of Directors in
December 1996. Since July 1994, Mr. Sachs has been a principal of Onyx
Partners, Inc., a merchant banking firm. From October 1990 until June 1994,
Mr. Sachs was employed at TMT-FW, Inc., an affiliate of Taylor & Co., a
private investment management firm. Mr. Sachs is a director of Terex
Corporation.
Roger K. Sallee. Mr. Sallee was elected to the Company's Board of Directors
in December 1996. Mr. Sallee founded AmeriTel and served as its President and
Chief Executive Officer from July 1991 until December 1996.
Joseph P. Urso. Mr. Urso was elected to the Company's Board of Directors in
December 1996. Mr. Urso has served as President and has been a principal of
EUFCC since January 1996. Since March 1996, Mr. Urso has served as Chairman of
Interstate Engineering, a manufacturing firm located in California. Mr. Urso
was a shareholder of Stutzman & Bromberg, P.C. from January 1992 until June
1995.
The Company's Certificate of Incorporation divides the Board of Directors
into two classes, the "Class A/B Directors" and the "Class B Directors," with
each class serving a one-year term. The size of the Board of Directors depends
on the aggregate percentage ownership of all outstanding Common Stock held by
Gregg L.
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<PAGE>
Engles, Joseph P. Urso, Todd W. Follmer, and their respective affiliates (the
"EUF Holders") and Onyx Talton Partners, L.P. and Sachs Investment Partners
and their respective affiliates (the "Onyx Holders").
The size of the Company's Board of Directors is currently eleven (11)
members, with the holders of Class A Common Stock and Class B Common Stock
entitled to elect six Class A/B Directors and the holders of Class B Common
Stock entitled exclusively to elect five Class B Directors. The Class A/B
Directors are Richard H. Hochman, Jay R. Levine, Nina E. McLemore, Bruce I.
Raben, and Julius E. Talton. There is one vacant Class A/B Director position
on the Board of Directors. The Class B Directors are Gregg L. Engles, Todd W.
Follmer, David A. Sachs, Roger K. Sallee, and Joseph P. Urso.
Each Class A/B Director is entitled, at all times, to one vote on any matter
voted on by the Board of Directors. The number of votes that each Class B
Director is entitled to on any matter voted on by the Board of Directors
depends on the aggregate percentage ownership of all outstanding Common Stock
held by the EUF Holders and the Onyx Holders. Each Class B Director is
currently entitled to a 0.6 director vote on any matter voted on by the Board
of Directors, resulting in the Class B Directors having an aggregate of three
(3) director votes as a class. As the EUF Holders' and the Onyx Holders'
ownership of the outstanding common stock decreases, the number of Class B
Directors that the EUF Holders have the right to designate, the aggregate
number of votes held by the remaining Class B Directors, and the size of the
Company's Board of Directors decrease (and the number of Class A/B Directors
increases), all as set forth in the Company's Certificate of Incorporation and
the Shareholders Agreement (as defined). Under the terms of the Certificate of
Incorporation and the Shareholders Agreement, the total number of votes on the
Board of Directors will remain at nine. See "Certain Relationships and Related
Transactions--Historic Relationships and Related Transactions--Acquisitions--
Shareholders Agreement" and "Description of Capital Stock."
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth annual cash compensation paid or accrued by
the Company, AmeriTel, or Talton Telecommunications to the Company's Chief
Executive Officer and its other Executive Officers receiving total salary and
bonus in excess of $100,000 for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER ANNUAL SHARES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS (#) ($)
- --------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Julius E. Talton,
Chairman of the Board
and President.......... 1996 149,975 -- -- -- --
John R. Summers,
Vice President, Chief
Financial Officer,
Secretary, and
Treasurer.............. 1996 94,565 211,506(2) -- -- --
Julius E. Talton, Jr.,
Vice President......... 1996 101,926 -- -- -- --
James E. Lumpkin,
Vice President......... 1996 99,376 -- -- -- --
Terry C. Matlack,
Vice President(3)...... 1996 106,000 244,500(4) -- -- --
</TABLE>
- --------
(1) In each case, the aggregate value of perquisites and other personal
benefit does not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus report for the named executive officer.
(2) Includes special bonuses of $195,506 paid in connection with the Company's
acquisition of AmeriTel in December 1996.
(3) Mr. Matlack resigned as Vice President of the Company effective May 30,
1997.
(4) Consists of a special bonus paid in connection with the Company's
acquisition of AmeriTel in December 1996.
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<PAGE>
Employment Agreements and Other Arrangements
In connection with the Company's acquisitions of AmeriTel and Talton
Telecommunications in December 1996, the Company entered into consulting or
employment agreements with each of Julius E. Talton, Julius E. Talton, Jr.,
Roger K. Sallee, James E. Lumpkin, Terry C. Matlack, and John R. Summers, each
of whom was a former stockholder of AmeriTel or Talton Telecommunications.
The consulting agreement of Julius E. Talton provides that Mr. Talton will
serve as a director of the Company and will perform such duties related to the
business conducted by the Company as the Board of Directors may designate from
time to time. The consulting agreement has an initial term of two years, with
successive one-year renewal periods thereafter unless earlier terminated by
the Company or Mr. Talton. In addition to an aggregate of $10,000 payable in
equal monthly installments to Mr. Talton over the first twelve months of the
agreement, Mr. Talton will receive payments of $86,000 and $96,000 for the
first and second years of the initial term, respectively, and $120,000 for
each year thereafter that the agreement remains in effect. Mr. Talton's
consulting agreement contains a non-competition provision that applies during
the term of the agreement and for a period of two years after the expiration
or earlier termination of the agreement.
Julius E. Talton, Jr.'s employment agreement provides that Mr. Talton, Jr.
will serve as an executive of the Company, performing such duties and holding
such positions as the Board of Directors or senior management of the Company
may direct. The employment agreement has an initial term of one year, with
successive one-year periods thereafter unless earlier terminated by the
Company or Mr. Talton, Jr. In addition to an aggregate of $25,000 payable in
equal monthly installments to Mr. Talton, Jr. over the first twelve months of
the agreement, Mr. Talton will receive an annual base salary of $100,000, a
guaranteed bonus of $25,000 which was paid, in accordance with the agreement,
upon closing of the Offering, and an incentive cash bonus of up to 37.5% of
base salary if certain performance goals established by the Board of Directors
are achieved. Mr. Talton Jr.'s employment agreement contains a non-competition
provision that applies during the term of the agreement and for a period of
two years after the expiration or earlier termination of the agreement. Mr.
Talton, Jr. is also expected to receive an option to purchase up to 247.5
shares of Class A Common Stock at an exercise price of $2,000 per share.
The consulting agreement of James E. Lumpkin provides that Mr. Lumpkin will
serve, if requested, as a director of the Company and will perform such duties
related to the business conducted by the Company as the chief executive
officer or the Board of Directors may designate from time to time. The
consulting agreement has an initial term of two years, with successive one-
year renewal periods thereafter unless earlier terminated by the Company or
Mr. Lumpkin. In addition to an aggregate of $10,000 payable in equal monthly
installments to Mr. Lumpkin over the first twelve months of the agreement, Mr.
Lumpkin will receive $62,000 and $72,000 for the first and second years of the
initial term, respectively. Mr. Lumpkin's consulting agreement contains a non-
competition provision that applies during the term of the agreement and for a
period of two years after the expiration or earlier termination of the
agreement.
The consulting agreement of Roger K. Sallee provides that Mr. Sallee will
serve as a director of the Company and will perform such duties related to the
business conducted by the Company as the chief executive officer or the Board
of Directors may designate from time to time. The consulting agreement has an
initial term of one year, with successive one-year renewal periods thereafter
unless earlier terminated by the Company or Mr. Sallee. In addition to a lump
sum payment of $5,000 paid on the effective date of the agreement, Mr. Sallee
will receive an annual consulting fee of $30,000 for each year that the
agreement remains in effect. Mr. Sallee's consulting agreement contains non-
competition provisions covering the Company's existing markets and expansion
markets that apply during the term of the agreement and for a period of three
years and two years, respectively, after the expiration or earlier termination
of the agreement.
The employment agreement of John R. Summers provides that Mr. Summers will
serve as an executive of the Company, performing such duties and holding such
positions as the Board of Directors or senior management of the Company may
direct. The employment agreement has an initial term of one year, with
successive one-year
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<PAGE>
renewal periods thereafter unless earlier terminated by the Company or Mr.
Summers. In addition to a lump sum
payment of $30,000 paid on the effective date of the agreement, Mr. Summers
received or will receive an annual base salary of $100,000, a cash bonus of
$20,000, which was paid, in accordance with the agreement, upon closing of the
Offering, and an incentive cash bonus of up to 30.0% of base salary if certain
performance goals established by the Board of Directors are achieved. In
addition, the agreement provides that if the Company terminates Mr. Summers
without cause, the Company is required, upon request from Mr. Summers, to
redeem shares of Class A Common Stock purchased by Mr. Summers in connection
with the Company's acquisition of AmeriTel for $100,000, which redemption
price is equal to the original purchase price for such shares. Mr. Summers'
employment agreement contains a non-competition provision that applies during
the term of the agreement and for a period of three years after the expiration
or earlier termination of the agreement. Mr. Summers is also expected to
receive an option to purchase up to 247.5 shares of Class A Common Stock at an
exercise price of $2,000 per share.
John A. Crooks joined the Company as President and Chief Operating Officer
in June 1997. The Company entered into a written employment agreement with Mr.
Crooks has an initial term expiring on December 31, 1998, with successive one-
year renewals thereafter unless earlier terminated by the Company or Mr.
Crooks. Mr. Crooks receives an annual base salary of $170,000 and a guaranteed
bonus of $50,000 payable on or before December 31, 1997. In addition, Mr.
Crooks received the right to purchase 165 shares of the Company's Class A
Common Stock at a price of $2,000 per share, and is eligible to receive
options to acquire an additional 330 shares of Class A Common Stock at a price
of $2,000 per share. The employment agreement provides for a severance payment
equal to one year's base salary if Mr. Crook's employment is terminated by the
Company without cause. The employment agreement also contains a non-
competition provision that covers the Company's existing markets and expansion
markets that apply during the term of the agreement and for a period of three
years and two years, respectively, after the expiration or earlier termination
of the agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides, consistent with the
provisions of the Delaware General Corporation Law, that no director of the
Company will be personally liable to the Company or any of its stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director. This does not apply, however, with respect to any action for
unlawful payments of dividends, stock purchases, or redemptions, nor does it
apply if the director (i) has breached his duty of loyalty to the Company and
its stockholders; (ii) does not act or, in failing to act, has not acted in
good faith; (iii) has acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, has acted in a manner
69
<PAGE>
involving intentional misconduct or a knowing violation of law; or (iv) has
derived an improper personal benefit. The provisions of the Certificate of
Incorporation eliminating liability of directors for monetary damages do not
affect the standard of conduct to which directors must adhere, nor do such
provisions affect the availability of equitable relief. In addition, such
limitations on personal liability do not affect the availability of monetary
damages under claims based on federal law.
The Company's By-laws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
capital stock as of June 30, 1997 by (i) each stockholder known by the Company
to beneficially own more than 5% of any class of the Company's outstanding
capital stock; (ii) each director of the Company; (iii) each executive officer
named in the Summary Compensation Table; and (iv) all executive officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF PERCENT SHARES OF
CLASS A CLASS B OF TOTAL SENIOR
COMMON PERCENT COMMON PERCENT OF VOTING PREFERRED PERCENT
NAME OF BENEFICIAL OWNER STOCK OF CLASS STOCK CLASS POWER(1) STOCK OF CLASS
- ------------------------ --------- -------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Julius E. Talton(2)..... 2,062.5 13.8% -- -- % 12.5% 2,500.0 42.2%
John A. Crooks, Jr. .... -- -- -- -- -- -- --
Julius E. Talton,
Jr.(2)................. 1,237.5 8.3 -- -- 7.5 1,500.0 25.3
James E. Lumpkin(2)..... 825.0 5.5 -- -- 5.0 1,000.0 16.9
John R. Summers......... 100.0 * -- -- * -- --
Todd W. Follmer(3)...... -- -- 100.0 25.0 2.4 -- --
Gregg L. Engles(3)...... 150.0 1.0 100.0 25.0 3.3 -- --
Richard H. Hochman(4)... 2,000.0 13.4 -- -- 12.1 -- --
Jay R. Levine(5)........ -- -- -- -- -- -- --
Nina E. McLemore(6)..... 2,000.0 13.4 -- -- 12.1 -- --
Bruce I. Raben(5)....... -- -- -- -- -- -- --
David A. Sachs(7)....... 250.0 1.7 31.5 7.9 2.3 -- --
Roger K. Sallee......... 53.0 * -- -- -- 61.7 1.0
Joseph P. Urso(3)....... -- -- 100.0 25.0 2.4 -- --
CIBC Wood Gundy
Ventures, Inc.(8)...... 5,935.5 37.1 -- -- 33.8 -- --
Regent Capital Partners,
L.P.(9)................ 2,000.0 13.4 -- -- 12.1 -- --
Onyx Talton Partners,
L.P.(10)............... -- -- 100.0 25.0 2.4 -- --
Richard C. Green, Jr.... 250.0 1.7 -- -- 1.5 310.8 5.2
Robert K. Green......... 250.0 1.7 -- -- 1.5 310.8 5.2
Terry C. Matlack........ 125.0 * -- -- * -- --
William M. Ohland(11)... 900.0 5.7 -- -- 5.2 -- --
All executive officers
and directors as a
group (14 persons)..... 6,678.0 44.8 331.5 82.9 48.5 5,061.7 85.4
</TABLE>
- --------
* Less than 1.0%
(l) In calculating the percent of total voting power, the voting power of
shares of Class A Common Stock (one vote per share) and Class B Common
Stock (four votes per share) is aggregated. This calculation also assumes
that no shares of Senior Preferred Stock are converted into shares of
Class A Common Stock.
(2) The address for each of these stockholders is 720 Alabama Avenue, Selma,
Alabama 36701.
(3) The address for each of these stockholders is 3811 Turtle Creek Blvd.,
Suite 1300, Dallas, Texas 75219.
(4) Includes 2,000 shares of Class A Common Stock held by Regent Capital
Partners. Mr. Hochman, who is the chairman of Regent Capital Management
Corp., an affiliate of Regent Capital Partners, exercises voting and
investment power with respect to such shares. Mr. Hochman's address is
505 Park Avenue, 17th Floor, New York, New York 10022.
(5) Excludes shares of Class A Common Stock and warrants to acquire shares of
Class A Common Stock held by CIBC Ventures. Mr. Levine and Mr. Raben, who
are designees of CIBC Ventures to the Company's Board of Directors and
who are managing directors of CIBC Wood Gundy Securities Corp., an
affiliate of CIBC Ventures and CIBC, disclaim beneficial ownership of
such shares.
(6) Includes 2,000 shares of Class A Common Stock held by Regent Capital
Partners. Ms. McLemore, who is the president of Regent Capital Management
Corp., an affiliate of Regent Capital Partners, exercises voting and
investment power with respect to such shares. Ms. McLemore's address is
505 Park Avenue, 17th Floor, New York, New York 10022.
(7) Consists of 250 shares of Class A Common Stock held by Sachs Investment
Partners and 31.5 shares of Class B Common Stock held by Onyx Talton
Partners, L.P. Mr. Sachs is a general partner of Sachs Investment
Partners and a principal shareholder of Onyx Talton Partners, Inc., the
general partner of Onyx Talton Class B Common Stock held by Onyx Talton
Partners, L.P. Mr. Sachs is a general partner of Sachs
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<PAGE>
Partners, L.P., and exercises voting and investment power with respect to
such shares. Mr. Sachs disclaims beneficial ownership of an additional
68.5 shares of Class B Common Stock held by Onyx Talton Partners, L.P. Mr.
Sachs' address is 9595 Wilshire Blvd., Suite 700, Beverly Hills,
California 90212.
(8) Includes 1,085.5 shares of Class A Common Stock subject to a warrant that
is exercisable within 60 days. CIBC Ventures' address is 425 Lexington
Avenue, Third Floor, New York, New York 10017.
(9) Includes 500 shares of Class A Common Stock held by Regent Capital Equity
Partners, L.P., an affiliate of Regent Capital Partners. Regent Capital
Partners' address is 505 Park Avenue, 17th Floor, New York, New York
10022.
(10) Onyx Talton Partners, L.P.'s address is 9595 Wilshire Blvd., Suite 700,
Beverly Hills, California 90212.
(11) Consists of shares issued to STC as part of the purchase price in the STC
Acquisition. Mr. Ohland owns all of the outstanding capital stock of STC.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CURRENT RELATIONSHIPS AND RELATED TRANSACTIONS
Repayment of Indebtedness
CIBC, an affiliate of CIBC Ventures, a principal stockholder of the Company,
and of CIBC Merchant Fund, a former holder of a portion of the Company's
Senior Subordinated Notes described below, is agent and a lender under the
Existing Credit Facility, and held $28.6 million and $4.7 million of the
principal amount outstanding under the term and revolving loan portions,
respectively, of the Existing Credit Facility at March 31, 1997. Upon
completion of the Offering, the Company repaid the entire principal amounts
outstanding under the term loan and revolving loan portions of the Existing
Credit Facility, together with accrued and unpaid interest. In addition to
this repayment, CIBC received a customary fee for banking services rendered to
the Company in its capacity as agent under the Existing Credit Facility in
connection with the Senior Credit Facility that closed following the Offering.
At March 31, 1997, CIBC Merchant Fund and Regent Capital Partners, a principal
stockholder of the Company, held $7.5 million and $1.0 million, respectively,
of the Company's outstanding Senior Subordinated Notes. Upon completion of the
Offering, the Company repaid the entire amount of the Senior Subordinated
Notes, together with accrued and unpaid interest. In addition, CIBC Wood Gundy
Securities Corp. and Onyx Partners, Inc. ("Onyx Partners") from time to time
provide financial and investment banking services to the Company for customary
fees.
At March 31, 1997, Messrs. Talton, Talton, Jr., and Lumpkin held $2.5
million, $1.5 million, and $1.0 million, respectively, of the Talton
Subordinated Note. Upon completion of the Offering, the Company repaid the
entire amount of the Talton Subordinated Note, together with accrued and
unpaid interest.
Consulting and Strategic Services Agreement
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company entered into a Consulting and Strategic
Services Agreement with EUF Talton, a limited partnership controlled by
Messrs. Engles, Urso, and Follmer, pursuant to which the Company will pay to
EUF Talton an annual consulting fee of $300,000 for an initial term of three
years ending December 27, 1999. Pursuant to this agreement, EUF Talton will
provide management consulting services relating to strategic and financial
matters, including acquisitions, business strategies, and financial planning.
The Company also paid to EUF Talton a $200,000 refinancing fee upon the
repayment of the Senior Subordinated Notes and the Subordinated Talton Note
upon the closing of the Offering. The Company paid an acquisition fee of
$357,000 to EUF Talton upon the closing of the STC Acquisition. In addition,
the Company has agreed to pay to EUF Talton an acquisition fee of 1% of the
gross acquisition price of any acquisitions of assets or stock by the Company
up to an aggregate maximum of $1.25 million.
Lease Agreement
In December 1996, Talton Telecommunications entered in a lease agreement
(the "Talton Lease") with Mr. Talton for office space located in Selma,
Alabama. The lease has a five-year term commencing January 1, 1997, with an
option to renew for an additional five-year term. Under the Talton Lease,
Talton Telecommunications will pay fixed annual rent of approximately
$109,000, $112,000, $90,000, $93,000, and $96,000, respectively, for the five
years of the initial term.
Financial Advisor
The Company and the Subsidiary Guarantors agreed to indemnify Onyx Partners
against certain liabilities in connection with the Offering, including
liabilities under the Securities Act.
The Offering
CIBC acted as Initial Purchaser in connection with the Offering, which was
completed on June 27, 1997. In such capacity, CIBC received an aggregate
discount of $3,852,500. In addition, the Company and the Subsidiary
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Guarantors agreed to indemnify the Initial Purchaser against certain
liabilities, including liabilities under the Securities Act, in connection
with the Offering.
HISTORIC RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisitions
In December 1996, the Company acquired the outstanding capital stock of
AmeriTel for a purchase price of approximately $23.4 million. Terry C.
Matlack, a former executive officer of the Company, John R. Summers, an
executive officer of the Company, and Roger K. Sallee, a director of the
Company, were stockholders of AmeriTel and received an aggregate of
approximately $361,000, $354,000, and $1.4 million, respectively, of the
purchase price, and 125, 100, and 53 shares, respectively, of Class A Common
Stock in exchange for shares of AmeriTel capital stock held by each of them.
In addition, Mr. Sallee received 61.699 shares of Senior Preferred Stock.
Concurrently with its acquisition of AmeriTel, the Company acquired the
outstanding capital stock of Talton Telecommunications for an aggregate
purchase price of approximately $39.4 million, which included the issuance of
the $5.0 million Subordinated Talton Note. Julius E. Talton, the Chairman of
the Board of the Company, Julius E. Talton, Jr., and James E. Lumpkin, each of
whom is an executive officer of the Company, and Mr. Talton's daughter, were
stockholders of Talton Telecommunications and received an aggregate of
approximately $11.2 million (including $2.5 million of the Subordinated Talton
Note), $9.1 million (including $1.5 million of the Subordinated Talton Note),
$6.0 million (including $1.0 million of the Subordinated Talton Note), and
$4.0 million, respectively, of the purchase price. Messrs. Talton, Talton Jr.,
and Lumpkin also received 2,062.5 shares of Class A Common Stock and 2,500
shares of Senior Preferred Stock, 1,237.5 shares of Class A Common Stock and
1,500 shares of Senior Preferred Stock, and 825 shares of Class A Common Stock
and 1,000 shares of Senior Preferred Stock, respectively in exchange for
shares of Talton Telecommunications capital stock held by each of them.
The cash portions of the respective purchase prices for AmeriTel and Talton
Telecommunications were financed with the proceeds of the following: (i) the
issuance by the Company of an aggregate of 9,775 shares of Class A Common
Stock to the stockholders of the Company, including CIBC Ventures, an
affiliate of Regent Capital Partners, and Mr. Engles, a director of the
Company, for aggregate consideration of approximately $9.8 million; (ii) the
issuance by the Company of an aggregate of 400 shares of Class B Common Stock
and warrants to acquire an aggregate of 4,309.4488 shares of Class A Common
Stock to Onyx Talton Partners, L.P. ("Onyx Talton Partners") and to Messrs.
Follmer, Engles, and Urso, each of whom is an executive officer and/or
director of the Company, for aggregate consideration of $400,000; (iii) the
issuance of an aggregate of $8.5 million in Senior Subordinated Notes to CIBC
Merchant Fund and to Regent Capital Partners and related warrants for the
purchase of Class A Common Stock to CIBC Ventures and to Regent Equity
Partners, L.P.; (iv) the issuance of the $5.0 million Subordinated Talton Note
(including related warrants) to Messrs. Talton, Talton, Jr., and Lumpkin; and
(v) an aggregate of $50.7 million of the proceeds from the term and revolving
loan facilities under the Existing Credit Facility. All stockholders of the
Company, including the executive officers and directors of the Company who
hold shares of capital stock of the Company, pledged the shares of capital
stock of the Company held by each of them to CIBC to secure the Company's
obligations under the Existing Credit Facility.
The holders of Class A Common Stock received registration rights with
respect to such shares pursuant to the terms of that certain registration
rights agreement (the "Equity Registration Rights Agreement"). In addition,
the Company and its stockholders entered into a Shareholders Agreement (the
"Shareholders Agreement"). The following summary of the warrants referred to
above, the Equity Registration Rights Agreement, and the Shareholders
Agreement are qualified in their entirety to the actual documents, which are
included in the Registration Statement.
CIBC Merchant Fund and Onyx Partners, Inc., the general partner of Onyx
Talton Partners, were reimbursed for expenses and received transaction fees
totaling approximately $852,000 and $635,000, respectively, and EUF Talton
received approximately $183,000 as reimbursement for its expenses, in December
1996 in connection
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with the acquisitions of AmeriTel and Talton Telecommunications and the
consummation of the related financing. CIBC, which is the agent and a lender
under the Existing Credit Facility, received a fee of approximately $1.8
million in December 1996 for banking services rendered to the Company in
connection with the closing of the Existing Credit Facility.
Warrants
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company issued to CIBC Ventures a warrant to acquire
up to 1,085.5263 shares of Class A Common Stock (subject to certain
adjustments) with an exercise price of $0.01 per share. This warrant is
exercisable at any time, and unless exercised, will automatically expire on
December 26, 2006. The Company also issued to CIBC Ventures and Regent Equity
Partners warrants to acquire an aggregate of up to 1,199.9227 shares of Class
A Common Stock (subject to certain adjustments), with an exercise price of
$1,000 per share. These warrants expired by their terms upon closing of the
Offering. A portion of the net proceeds from the Offering were used to repay
the Senior Subordinated Notes, and upon such payment, such warrants
terminated.
The Company issued to Julius E. Talton, Julius E. Talton, Jr., and James E.
Lumpkin warrants to acquire up to 719.9536 shares of Class A Common Stock
(subject to certain adjustments) with an exercise price of $1,000 per share.
These warrants may only be exercised if the Subordinated Talton Note issued by
the Company to Messrs. Talton, Talton, Jr., and Lumpkin is not repaid on or
before September 30, 1997. A portion of the net proceeds from the Offering
were used to repay the Subordinated Talton Note, and upon such payments such
warrants terminated.
The Company issued to each of Messrs. Follmer, Urso, and Engles (i) a
warrant to acquire up to 448.6842 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $1,000; (ii) a
warrant to acquire up to 336.5132 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $2,000; and (iii) a
warrant to acquire up to 328.0769 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $3,000. The Company
also issued to Onyx Talton Partners: (i) a warrant to acquire up to 390.7895
shares of Class A Common Stock (subject to certain adjustments) with an
exercise price per share of $1,000; (ii) a warrant to acquire up to 293.0920
shares of Class A Common Stock (subject to certain adjustments) with an
exercise price per share of $2,000; and (iii) a warrant to acquire up to
285.7444 shares of Class A Common Stock (subject to certain adjustments) with
an exercise price per share of $3,000. Each of these warrants is exercisable
upon the earlier to occur of the following dates: (i) December 27, 1999; (ii)
the date when a change in control notice (as defined in the warrant) is given;
(iii) the date the Consulting and Strategic Services Agreement with EUF Talton
is terminated; or (iv) the date upon which a registered public offering of
equity interests in the Company is made (but in no event earlier than June 27,
1998, if such offering occurs prior to such date). Unless exercised, each of
these warrants will automatically expire on December 26, 2006.
Equity Registration Rights Agreement
The Equity Registration Rights Agreement applies to all currently
outstanding shares of Class A Common Stock, including shares issuable upon
exercise of the currently outstanding warrants or the conversion of the
currently outstanding Class B Common Stock or the Senior Preferred Stock
("Registrable Securities"), and grants to all holders of Registrable
Securities ("Holders") certain registration rights with respect to such
Registrable Securities.
Subject to certain special rights (the "CIBC Demand Rights") granted to CIBC
Ventures and its affiliates (the "CIBC Entities"), at any time after the
earlier to occur of (i) six months after the initial registered public
offering by the Company under the Securities Act of the Class A Common Stock
(the "Initial Public Offering"); or (ii) November 30, 1998, Initiating Holders
(defined below) are entitled to require the Company to effect up to
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three registrations under the Securities Act of all or a part of the
Registrable Securities (each a "Demand Registration"), subject to certain
limitations. Initiating Holders are defined as (i) Holders of at least 25% (or
35% in certain circumstances) of the Registrable Securities; or (ii) a
combination of Holders of Registrable Securities and Holders of warrants
having an exercise price less than or equal to the per share reported price
for the Class A Common Stock (the "Qualified Warrants") that in the aggregate
hold at least 25% (or 35% in certain circumstances) of all Registrable
Securities and Qualified Warrants. Subject to the CIBC Demand Rights, Holders
of Registrable Securities also have the right to include such Registrable
Securities in any registration statement under the Securities Act filed by the
Company for its own account (other than a registration statement for
securities to be offered in a Rule 145 transaction under the Securities Act or
to employees of the Company pursuant to any employee benefit plan). So long as
the CIBC Entities hold Registrable Securities equaling at least 50% of their
holdings of Common Stock on December 27, 1996, the CIBC Entities have the
following CIBC Demand Rights: (i) one of the Demand Registrations is
exclusively reserved for the use and exercise by the CIBC Entities; (ii) the
CIBC Entities have the right at any time to require the Company to use its
best efforts to effect an Initial Public Offering; and (iii) the CIBC Entities
have in certain circumstances, a first priority to cause a portion of their
Registrable Securities to be registered prior to the registration of the
Registrable Securities of the other Holders.
The Company is also obligated to file and maintain a shelf registration
statement on Form S-3 pursuant to Rule 415 of the Securities Act for all
Registrable Securities as expeditiously as possible after it is eligible to do
so.
Shareholders Agreement
Both the Shareholders Agreement and the Certificate of Incorporation of the
Company initially establish an eleven member board of directors, consisting of
six Class A/B Directors with one vote per director and five Class B Directors
having three total votes (i.e., 0.6 vote per director). The Shareholders
Agreement provides that, subject to the adjustments described below, (i) the
CIBC Entities have the right to designate two Class A/B Directors; (ii) Regent
Capital Partners and its affiliates (the "Regent Entities") have the right to
designate two Class A/B Directors; (iii) Julius E. Talton, Julius E. Talton,
Jr., James E. Lumpkin, and their affiliates (the "Talton Holders") have the
right to designate one Class A/B Director; (iv) all other stockholders, except
the EUF Holders, the Talton Holders, the CIBC Entities, the AmeriTel Holders
(as defined in the Shareholders Agreement), and the Onyx Holders, have the
right to designate one Class A/B Director; and (v) the EUF Holders have the
right to designate five Class B Directors. The CIBC Entities and the Regent
Entities lose the right to designate one Class A/B Director if their
respective ownership of outstanding Common Stock falls below 7.5% (but remains
at or above 5%). The CIBC Entities, the Regent Entities, and the Talton
Holders each loses its right to designate any Class A/B Directors if their
respective ownership of outstanding Common Stock falls below 5%. If the EUF
Holders and the Onyx Holders collectively own less than 10% (but at least
7.5%) of the outstanding Common Stock, the EUF Holders lose the right to
designate two Class B Directors, the three Class B Directors that they remain
entitled to designate will have a total of two votes, and all the holders of
the outstanding Common Stock collectively acquire the right to designate one
additional Class A/B Director with one full vote so as to maintain the total
number of votes on the Board of Directors at nine (and the membership on the
Board of Directors will be reduced to ten). If the EUF Holders and the Onyx
Holders collectively own less than 7.5% (but at least 5%) of the outstanding
Common Stock, the EUF Holders lose the right to designate an additional two
Class B Directors, the Class B Director that they remain entitled to designate
will have one full vote, and all the holders of the outstanding Common Stock
collectively acquire the right to designate one additional Class A/B Director
with one full vote so as to maintain the total number of votes on the Board of
Directors at nine (and the membership on the Board of Directors will be
reduced to nine). If the EUF Holders and the Onyx Holders collectively own
less than 5% of the outstanding Common Stock, the EUF Holders lose the right
to designate any directors, and all the holders of the outstanding Common
Stock collectively acquire the right to designate one additional Class A/B
Director with one full vote so as to maintain the total number of votes on the
Board of Directors at nine (and the membership on the Board of Directors will
remain at nine). In determining the percentage ownership of the EUF Holders
and the Onyx Holders, the Class B Common Stock
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held by them is deemed to have been converted into shares of Class A Common
Stock, and if one of the director designees of the EUF Holders is not a
principal of the Onyx Holders, then the Common Stock owned by the Onyx Holders
is not considered in calculating the ownership percentages. Director
designation rights are generally not assignable. However, in certain
circumstances, the CIBC Entities may assign its designation rights in
connection with a transfer of its Common Stock.
Pursuant to the Shareholders Agreement, the Company has a right of first
refusal with respect to most transfers of Common Stock and rights, warrants,
options, convertible securities, or debt convertible into Common Stock (the
"Common Stock Equivalents"). To the extent the Company does not fully exercise
such right of first refusal, the stockholders generally have the right to
purchase the offered Common Stock or Common Stock Equivalents on a pro rata
basis. Transfers to affiliates, testamentary transfers, and intestate
succession are generally excluded from the Company's first refusal rights and
any stockholder acquisition rights. In addition, the Shareholders Agreement
establishes certain "tag-along" rights whereby if any holder of 10% or more of
the fully diluted Common Stock or any EUF Holder proposes to sell any of its
Common Stock, then the other stockholders have the right to require the
proposed buyer to purchase from each of them a proportionate number of shares
of Common Stock.
The Shareholders Agreement also provides for certain "drag along rights"
whereby any stockholder or group of stockholders owning Common Stock
representing 60% or more of the total amount of the outstanding Common Stock
and warrants having a value in excess of their exercise price proposes to
transfer all their Common Stock to any third party, such stockholders have the
right to require all other holders to sell all of their Common Stock and
Common Stock Equivalents to such third party. The Shareholders Agreement
further provides that if a third party offers to acquire 75% or more of all
outstanding Common Stock and all warrants having a value in excess of their
exercise price, and a holder or a group of holders owning 75% or more of the
outstanding Common Stock plus such warrants proposes to accept such offer,
then such holders desiring to accept such offer have the right to require all
other holders of Common Stock and such warrants to sell to the third party
their outstanding Common Stock and such warrants pro rata in accordance with
such offer.
The Shareholders Agreement terminates upon (i) the effective date of an
Initial Public Offering by the Company resulting in at least $20.0 million in
gross proceeds; (ii) the merger, consolidation, or reorganization of the
Company, or the sale of all or substantially all of the assets of the Company,
if, immediately following such transaction, the stockholders of the Company
immediately prior to such transaction own less than a majority of the combined
voting power to elect directors and the combined equity ownership interest in
the surviving entity, or such surviving entity has publicly traded common
stock not held by the parties to the Shareholders Agreement with a market
value in excess of $30.0 million; or (iii) the written consent of the CIBC
Entities, the Talton Holders, the Regent Entities, and the EUF Holders (but
only so long as each such party is entitled to designate at least one member
of the Board of Directors) and a majority in interest of the other
stockholders; or (iv) with respect to any party, when such party no longer
owns any capital stock of the Company.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000 shares of
common stock, par value $0.01 per share (the "Common Stock"), and 50,000
shares of preferred stock, par value $0.01 per share (the "Preferred Stock").
The Common Stock is divided into two classes. One class consists of 49,600
shares and is designated "Class A Common Stock" and the other class consists
of 400 shares and is designated "Class B Common Stock." The Preferred Stock is
also divided into two classes. One class consists of 6,000 shares and is
designated "Senior Preferred Stock" and the other class consists of 44,000
shares and is designated "Junior Preferred Stock."
As of July 31, 1997, (i) 14,900 shares of Class A Common Stock were issued
and outstanding, (ii) 400 shares of Class B Common Stock were issued and
outstanding, (iii) 5,925 shares of Senior Preferred Stock were issued and
outstanding, (iv) 7,314.8514 shares of Class A Common Stock were reserved for
issuance pursuant to outstanding warrant agreements, and (v) 503.9213 shares
of Class A Common Stock were reserved for issuance in the event the holders of
the Senior Preferred Stock exercise their conversion rights. See "Certain
Relationships and Related Transactions--Historic Relationships and Related
Transactions--Acquisitions--Warrants." All outstanding shares of Common Stock
and Preferred Stock are duly authorized, validly issued, fully paid, and
nonassessable. There is currently no public trading market for the capital
stock of the Company.
COMMON STOCK
The holders of Class A Common Stock are entitled to one vote for each share
of Class A Common Stock, and the holders of Class B Common Stock are entitled
to four votes for each share of Class B Common Stock on all matters voted on
by the stockholders of the Company. The holders of both classes of Common
Stock are entitled to receive, pari passu, such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the preferential dividend rights of the Senior
Preferred Stock and any preferential dividend rights that may be designated by
the Board of Directors with respect to the Junior Preferred Stock. See "--
Preferred Stock." In the event of the liquidation, dissolution, or winding up
of the Company, subject to the preferential liquidation rights of the Senior
Preferred Stock, and any preferential liquidation rights that may be
designated by the Board of Directors with respect to the Junior Preferred
Stock, the holders of Class A Common Stock are entitled to receive, prior to
and in preference of any distribution to the holders of Class B Common Stock,
the amount of $1,000 per share (as adjusted for any stock dividends,
combinations, or splits), from all assets of the Company available for
distribution, and after payment in full thereof, all remaining assets of the
Company available for distribution are distributed ratably among the holders
of both classes of Common Stock.
In the event any additional shares of Class A Common Stock are issued, all
shares of Class B Common Stock may be converted, at the election of the
holders of a majority of the outstanding Class B Common Stock, into four
shares of Class A Common Stock for each share of Class B Common Stock. In
addition, upon the consummation of a "Major Event," each share of Class B
Common Stock will be automatically converted into four shares of Class A
Common Stock. The Certificate of Incorporation defines a Major Event as (i) a
sale of all or substantially all of the Company's assets or (ii) a registered
public offering of equity interests in the Company made pursuant to a
registration statement on Form S-1 or a successor form that yields gross
proceeds of at least $20.0 million to the Company. The Certificate of
Incorporation also provides for adjustments to be made in the number of shares
of Class A Common Stock into which Class B Common Stock may be convened in
order reflect any stock dividends, splits, reclassification, combinations, or
other changes affecting the number of outstanding shares of Class A Common
Stock. Upon the conversion of Class B Common Stock into Class A Common Stock,
the Class A Common Stock's $1,000 per share liquidation preference will be
eliminated.
PREFERRED STOCK
Senior Preferred Stock
The holders of the Senior Preferred Stock are entitled to receive dividends
at a rate of $80.00 per share (as adjusted for any stock dividends,
combinations, or splits) per annum, payable quarterly out of funds legally
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available therefor. Dividends are payable only when, as, and if declared by
the Board of Directors and are cumulative, but do not bear or accrue any
interest. No dividends (other than those payable in Common Stock) may be paid
on any Common Stock unless full cumulative dividends for all Senior Preferred
Stock have been paid or declared and set aside by the Company. In the event of
the liquidation, dissolution, or winding up of the Company, the holders of the
Senior Preferred Stock are entitled to receive a liquidation preference of
$1,000 per share (as adjusted for any stock dividends, combinations or
splits), plus all accrued or declared but unpaid dividends.
Each share of Senior Preferred Stock is convertible into 0.08505 shares of
Class A Common Stock (as adjusted for any stock dividends, splits,
reclassifications, combinations, or other changes affecting the Class A Common
Stock) at any time at the option of the holder thereof.
Upon the occurrence of a Major Event or the exercise of the drag along
rights under the Shareholders Agreement, the Company is required to redeem all
Senior Preferred Stock unless the holders thereof elect to convert their
shares into Class A Common Stock. The redemption price for the Senior
Preferred Stock is $1,000 per share (as adjusted for any stock dividends,
combinations, or splits), plus all accrued or declared but unpaid dividends.
The Senior Preferred Stock is non-voting. There are no redemption or sinking
fund provisions applicable to the Senior Preferred Stock.
Junior Preferred Stock
The Certificate of Incorporation provides that the Board of Directors,
acting unanimously, has the authority to issue up to 44,000 shares of Junior
Preferred Stock in one or more series and to establish the number of shares
constituting any such series, the voting powers, designation, preferences, and
relative participation, option, or other special rights and qualifications,
limitations, or restrictions thereof, including the dividend rights and
dividend rate, redemption price, conversion rights, and liquidation
preferences of the shares constituting any series. Upon the unanimous consent
of the Board of Directors, the Company may issue to each holder of Class A
Common Stock one share of Junior Preferred Stock having a liquidation
preference of $1,000 per share in exchange for one share of Class A Common
Stock held by such stockholder, and each such stockholder has agreed under the
Shareholders Agreement to such exchange, provided that (i) issues of Junior
Preferred Stock are made to all stockholders of Class A Common Stock on a pro
rata basis and are subject to the rights of the parties under the Equity
Registration Rights Agreement, and (ii) no more than ninety percent (90%) of
the Class A Common Stock may be exchanged for Junior Preferred Stock. As of
the date of this Prospectus, the Company has not issued any Junior Preferred
Stock and has no present intention to do so, either pursuant to the terms of
the Shareholders Agreement or otherwise.
DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR CREDIT FACILITY
Following the Offering, the Company amended and restated its Existing Credit
Facility with CIBC and First Source Financial LLP (collectively, the
"Lenders"). This amendment and restatement (i) repaid the existing term
facility from the net proceeds of the Offering and (ii) established a senior
secured revolving credit facility in the principal amount of $35.0 million.
The following summary is a description of the terms of the Senior Credit
Facility, as amended.
The Company may use borrowings under the Senior Credit Facility for working
capital, capital expenditures, and general corporate purpose, and to fund
certain permitted acquisitions, as set forth in the Senior Credit Facility. In
addition to a $175,000 fee that was paid at the closing of the Senior Credit
Facility, the Company will pay an annual administrative fee and an annual
commitment fee of 0.5% of the unused portion of the facility.
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Amounts borrowed under the Senior Credit Facility bear interest, at the
option of the Company, at either (i) the Base Rate (i.e. the higher of CIBC's
reference rate and the overnight federal funds rate plus 0.5%) plus a margin
that varies from 0.25% to 2.75%, depending on the Company's Total Debt to
EBITDA Ratio (as defined in the Senior Credit Facility), or (ii) the IBOR Rate
(as defined in the Senior Credit Facility) plus a margin that varies from 1.5%
to 4.0%, depending on the Company's Total Debt to EBITDA Ratio. The Senior
Credit Facility requires quarterly interest-only payments on Base Rate Loans,
and periodic interest-only payment based on the applicable interest period on
IBOR Rate loans, but at least quarterly, until maturity. The Senior Credit
Facility matures on December 31, 2000, at which time the outstanding principal
and all accrued and unpaid interest will be due.
The Senior Credit Facility requires mandatory prepayments from the proceeds
of certain asset sales by the Company and from the proceeds of permitted debt
and equity offerings. In addition, the Company is permitted to make certain
voluntary, prepayments, without penalty, and to reduce the size of the
commitment, subject to certain limitations.
Obligations under the Senior Credit Facility are guaranteed by all of the
Company's subsidiaries, and are secured by a perfected first priority security
interest in substantially all of the existing and after-acquired tangible and
intangible assets of the Company (including the capital stock of the Company
and its subsidiaries) and its subsidiaries.
The Senior Credit Facility contains a number of restrictive covenants,
including, among other things: (i) prohibitions on the incurrence of liens,
the incurrence of additional indebtedness, the payment of dividends, the
repurchase of equity, the redemption of other indebtedness, the consummation
of certain mergers and other fundamental changes (including change in control
of the Company), and the consummation of certain purchases and sales of assets
or stock; (ii) limitations on capital expenditures, leases, transactions with
affiliates, and management and advisory fees; and (iii) negative pledges.
The Senior Credit Facility requires the Company to comply with certain
financial covenants (each as defined in the Senior Credit Facility), including
without limitation: (i) the ratio of total debt to EBITDA; (ii) the ratio of
senior debt to EBITDA; (iii) the ratio of EBITDA to cash interest expense; and
(iv) the ratio of EBITDA to fixed charges. The Senior Credit Facility also
contains customary representations, warranties, affirmative and negative
covenants, and events of default for a facility of this type.
The Company is also in discussions with its Lenders to obtain a separate
senior secured facility to be used for permitted acquisitions. The Company
believes that covenants substantially similar to those contained in the Senior
Credit Facility will be applicable to the acquisition facility. Borrowings
under the acquisition facility will be cross-collateralized and cross-
defaulted with the Senior Credit Facility. The acquisition facility would
likely be subject to mandatory prepayments over its term. There can be no
assurance that the Company will be successful in obtaining such an acquisition
facility.
SUBORDINATED INDEBTEDNESS
In connection with the Offering, the Company repaid its obligations under
the Senior Subordinated Notes in the aggregate principal amount of $8.5
million and its $5.0 million Subordinated Talton Note. See "Certain
Relationships and Related Transactions; Current Relationships and Related
Transactions."
DESCRIPTION OF SENIOR NOTES
GENERAL
The New Notes, like the Old Notes, will be issued pursuant to the Indenture,
dated as of June 27, 1997 (the "Indenture") between the Company and U.S. Trust
Company of Texas, N.A., as trustee (the "Trustee"). The terms of the Senior
Notes include those stated in the Indenture and those made part of the
Indenture by reference
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to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The terms of
the New Notes are identical to the Old Notes in all material respects
(including interest rate and maturity), except that (i) the New Notes will not
be subject to the restrictions on transfer (other than with respect to holders
that are broker-dealers, persons who participated in the distribution of the
Old Notes, or affiliates of the Company), (ii) the Registration Rights
Agreement covenants regarding registration will have been deemed satisfied,
and (iii) there will be no right on the part of holders of the New Notes to
receive increased interest payments if registration is not effected under the
Securities Act. The Senior Notes are subject to all such terms, and Holders of
Senior Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture is subject to, and qualified in its entirety by reference to, the
provisions of Indenture, including the definitions therein of certain terms
used below. A copy of the form of Indenture is available as set forth under
"--Available Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." As used
in this Description of Senior Notes, the "Company" refers only to Talton
Holdings, Inc. and not to any of its Subsidiaries.
The Senior Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all other current and future
senior Indebtedness of the Company, including borrowings under the Senior
Credit Facilities, and senior to all subordinated Indebtedness of the Company.
The Senior Notes will be guaranteed on a senior unsecured basis by all of the
Company's current and future Restricted Subsidiaries. See "--Subsidiary
Guarantees." The Senior Notes will be effectively subordinated, however, to
all secured obligations of the Company and the Subsidiary Guarantors to the
extent of the assets securing such obligations, including borrowings under the
Senior Credit Facilities. The Indenture permits the incurrence of additional
Indebtedness, including additional secured Indebtedness, under certain
circumstances.
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
As of the date of this Prospectus, $115,000,000 principal amount of the Old
Notes was outstanding.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $115.0 million
and will mature on June 30, 2007. Interest on the Senior Notes accrues at the
rate of 11% per annum and is payable semi-annually in arrears on January 1 and
July 1, commencing on January 1, 1998, to Holders of record on the immediately
preceding December 15 and June 15. Interest on the Senior Notes accrues from
the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest is computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal of,
premium, if any, and interest on the Senior Notes is payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the Holders of the Senior Notes at their respective addresses
set forth in the register of Holders of the Senior Notes; provided that all
payments of principal, premium, and interest with respect to the Senior Notes
the Holders of which have given wire transfer instructions to the Company must
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company,
the Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Senior Notes are and will be issued in
denominations of $1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes is jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Subsidiary
Guarantors. The Subsidiary Guarantee of each Subsidiary Guarantor is a general
unsecured obligation of such Subsidiary Guarantor, ranking pari passu in right
of payment with all other senior Indebtedness of such Subsidiary Guarantor and
senior in right of payment to all subordinated
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Indebtedness of such Subsidiary Guarantor. The obligations of each Subsidiary
Guarantor under its Subsidiary Guarantee is limited so as not to constitute a
fraudulent conveyance under applicable law. See, however, "Risk Factors--
Fraudulent Conveyance Risks."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another Person, whether or not affiliated with such Subsidiary
Guarantor, unless (i) subject to the provisions of the following paragraph,
the Person formed by or surviving any such consolidation or merger (if other
than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor, pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Senior Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; (iii) the Company would be permitted by
virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described below under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation, or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in
the event of a sale or other disposition, by way of such a merger,
consolidation, or otherwise, of all of the capital stock of such Subsidiary
Guarantor) or the corporation acquiring the property (in the event of a sale
or other disposition of all of the assets of such Subsidiary Guarantor) will
be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the Indenture. See "--Certain
Covenants--Limitation on Asset Sales."
OPTIONAL REDEMPTION
The Senior Notes are not redeemable at the Company's option prior to June
30, 2002. Thereafter, the Senior Notes are subject to redemption at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest thereon, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on June 30 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.......................................................... 105.500
2003.......................................................... 103.667
2004.......................................................... 101.833
2005 and thereafter........................................... 100.000
</TABLE>
Notwithstanding the foregoing, at any time or from time to time on or prior
to June 30, 2000, the Company may redeem up to 30% of aggregate principal
amount of the Senior Notes originally issued under the Indenture on the
Issuance Date at a redemption price of 111% of the principal amount thereof,
in each case plus accrued and unpaid interest thereon, if any, to the
redemption date, with the net cash proceeds of one or more Equity Offerings;
provided that at least $80.0 million aggregate principal amount of the Senior
Notes originally issued remains outstanding immediately after the occurrence
of each such redemption; and provided, further, that any such redemption
occurs within 90 days of the date of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of the Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed, or, if the Senior
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee deems fair and appropriate (and in such manner as complies with
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applicable legal requirements); provided that no Senior Notes of $1,000 or
less will be redeemed in part. Notices of redemption will be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of the Senior Notes to be redeemed at its registered address.
Notices of redemption may not be conditional. If any Senior Note is to be
redeemed in part only, the notice of redemption that relates to such Senior
Note will state the portion of the principal amount thereof to be redeemed. A
new Senior Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Senior Note. Senior Notes called for redemption become due and
payable on the date fixed for redemption. On and after the redemption date,
unless the Company defaults in payment of the redemption price, interest
ceases to accrue on the Senior Notes or portions thereof called for
redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Change of Control Offer" and "--Certain
Covenants--Limitation on Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Senior
Notes.
CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each Holder of the Senior Notes
will have the right to require the Company to repurchase all or any part equal
to $1,000 or an integral multiple thereof of such Holder's Senior Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase (the "Change
of Control Payment"). Within 30 days following any Change of Control, the
Company will mail a notice to each Holder stating that (i) the Change of
Control Offer is being made pursuant to this covenant and all the Senior Notes
tendered will be accepted for payment; (ii) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date");
(iii) any Senior Note not tendered will continue to accrue interest; (iv)
unless the Company defaults in the payment of the Change of Control Payment,
all Senior Notes accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control Payment Date; (v)
Holders electing to have any Senior Notes purchased pursuant to a Change of
Control Offer will be required to surrender the Senior Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Senior
Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change
of Control Payment Date; (vi) any Holder will be entitled to withdraw its
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission, or letter setting forth the name of
the Holder, the principal amount of the Senior Notes delivered for purchase,
and a statement that such Holder is withdrawing such Holder's election to have
such Senior Notes purchased; and (vii) Holders whose Senior Notes are being
purchased only in part will be issued new Senior Notes equal in principal
amount to the unpurchased portion of the Senior Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Senior Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Senior Notes or portions thereof so tendered, and (iii) deliver or cause to be
delivered to the Trustee the Senior Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Senior
Notes or portions thereof being purchased by the Company. The Paying Agent
will promptly mail to each Holder of Senior Notes so tendered the Change of
Control Payment for such Senior Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Senior Note equal in principal amount to any unpurchased portion
of the Senior Notes surrendered, if any; provided that each such new Senior
Note will be in
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a principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Senior Notes to require that
the Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization, or similar transaction. In addition, the Company could enter
into certain transactions, including acquisitions, refinancings, or other
recapitalizations, that could affect the Company's capital structure or the
value of the Senior Notes, but that would not constitute a Change of Control.
The Company's other senior indebtedness contains prohibitions of certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of the Senior Notes of their right to require the Company to
repurchase the Senior Notes could cause a default under such other senior
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. The Company's ability to
repurchase the Senior Notes following a Change of Control may also be limited
by the Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Senior Notes validly tendered and not withdrawn
under such Change of Control Offer.
CERTAIN COVENANTS
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
or any of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company); (ii) purchase, redeem, or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company; (iii) make any payment on or with respect to, or purchase, redeem,
defease, or otherwise acquire or retire for value any Subordinated
Indebtedness, except a payment of principal or interest at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness under the provisions of
the first paragraph of the covenant described below under the caption "--
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock";
and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), and (v) (but only to the extent of the dividends
paid to the Company or its Wholly Owned Restricted Subsidiaries pursuant to
such clause (v)) of the next succeeding paragraph), is less than the sum of
(i) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture
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to the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus (ii) 100% of the aggregate net cash
proceeds received by the Company from the issue or sale since the date of
the Indenture of Equity Interests of the Company (other than Disqualified
Stock) or Disqualified Stock or debt securities of the Company that have
been converted into such Equity Interests (other than Equity Interests (or
Disqualified Stock or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or debt securities that have
been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash, the lesser of (A) the
cash return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) so long as no Default or Event of Default has occurred and is
continuing, the redemption, repurchase, defeasance, retirement, or
other acquisition of any Subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
defeasance, retirement, or other acquisition will be excluded from
clause (c)(ii) of the preceding paragraph;
(iii) so long as no Default or Event of Default has occurred and is
continuing, the redemption, repurchase, defeasance, retirement, or
other acquisition of any Subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) so long as no Default or Event of Default has occurred and is
continuing, the retirement of any shares of Disqualified Stock by
conversion into, or by exchange for, shares of Disqualified Stock, or
out of the net cash proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of other shares of
Disqualified Stock; provided that (a) such Disqualified Stock is not
subject to mandatory redemption earlier than the maturity of the Senior
Notes; (b) such Disqualified Stock is in an aggregate liquidation
preference that is equal to or less than the sum of (x) the aggregate
liquidation preference of the Disqualified Stock being retired, (y) the
amount of accrued and unpaid dividends, if any, and premiums owed, if
any, on the Disqualified Stock being retired, and (z) the amount of
customary fees, expenses, and costs related to the incurrence of such
Disqualified Stock; and (c) such Disqualified Stock is incurred by the
same Person that initially incurred the Disqualified Stock being
retired, except that the Company may incur Disqualified Stock to refund
or refinance Disqualified Stock of any Wholly Owned Subsidiary of the
Company;
(v) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its Equity Interests on a pro rata basis;
(vi) the payment of cash dividends on the Existing Preferred Stock
when such dividends are required to be paid in accordance with the
Certificate of Designation with respect to the Existing Preferred
Stock;
(vii) so long as no Default or Event of Default has occurred and is
continuing, the repurchase, redemption, or other acquisition or
retirement for value of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management pursuant
to any management equity subscription agreement or stock option
agreement in effect as of the date of the Indenture; provided that the
aggregate price paid for all such repurchased, redeemed, acquired, or
retired Equity Interests will not exceed $300,000 in any twelve-month
period:
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(viii) so long as no Default or Event of Default has occurred and is
continuing, repurchases of Equity Interests deemed to occur upon the
exercise of stock options or warrants upon surrender of Equity
Interests to pay the exercise price of such stock options or warrants;
and
(ix) so long as no Default or Event of Default has occurred and is
continuing, other Restricted Payments in an aggregate amount not to
exceed $1.0 million since the date of the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default;
provided that in no event will the business currently operated by AmeriTel or
Talton Telecommunications be transferred to or held by any Subsidiary other
than a Wholly Owned Restricted Subsidiary. For purposes of making such
determination, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of (x) the
net book value of such Investments at the time of such designation, (y) the
fair market value of such Investments at the time of such designation, and (z)
the original fair market value of such Investments at the time they were made.
Such designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment will be determined by the
Board of Directors, whose resolution with respect thereto will be set forth in
an Officer's Certificate delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal, or
investment banking firm of national standing if such fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, the
Company will deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed and
that no Default or Event of Default will result from making the Restricted
Payment, together with a copy of any fairness opinion or appraisal required by
the Indenture.
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee, or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock if (A)
the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Stock is issued would have been at least (x)
1.75 to 1.0 if the Indebtedness is incurred prior to December 31, 1998, (y)
2.0 to 1.0 if the Indebtedness is incurred prior to December 31, 1999, or (z)
2.5 to 1.0 if the Indebtedness is incurred on or after December 31, 1999,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred or
the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period, and (B) no Default or Event of Default occurs and
is continuing at the time or as a consequence of the incurrence of such
Indebtedness or the issuance of such Disqualified Stock.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
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(i) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness under the Senior Credit Facilities and the issuance and
creation of letters of credit and banker's acceptances thereunder (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) not to exceed an amount equal to $80.0 million outstanding at
any one time, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such
Indebtedness pursuant to the covenant described below under the caption "--
Limitation on Asset Sales":
(ii) the incurrence by the Company and its Subsidiaries of the Existing
Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Notes issued on the Issuance Date and the incurrence by the
Subsidiary Guarantors of the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance, or replace Indebtedness that was
permitted by the Indenture to be incurred;
(v) the incurrence by the Company or any of its Wholly Owned Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, however, that
(i) if the Company or a Subsidiary Guarantor is the obligor on such
Indebtedness, such Indebtedness is unsecured and expressly subordinated to
the prior payment in full in cash of all Obligations with respect to the
Senior Notes and the Subsidiary Guarantees, respectively, and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a Wholly
Owned Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause (v);
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations in the ordinary course of business of the Company or
any of its Restricted Subsidiaries; provided that the notional principal
amount of such Hedging Obligation does not exceed the principal amount of
Indebtedness to which such Hedging Obligation relates;
(vii) the guarantee by the Company or any of the Subsidiary Guarantors of
Indebtedness of the Company or any of its Restricted Subsidiaries that was
permitted to be incurred by another provision of this covenant;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt; provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be
deemed to constitute an incurrence of Indebtedness (and Liens, if any,
securing such Indebtedness) by a Restricted Subsidiary of the Company; or
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance, or replace any
other Indebtedness incurred pursuant to this clause (ix), not to exceed
$5.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness described in clauses (i) through (ix) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness will
be treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Accrual of interest, the accretion of
accreted value, and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
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Limitation on Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (evidenced
by a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Senior
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities,
notes, or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company
or such Restricted Subsidiary into cash (to the extent of the cash received),
will be deemed to be cash for purposes of this clause (ii).
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Restricted Subsidiary may apply such Net Proceeds, at
its option, (a) to repay Indebtedness outstanding under the Senior Credit
Facilities (and to correspondingly reduce commitments with respect thereto),
or (b) to the acquisition of a controlling interest in another business, the
making of a capital expenditure, or the acquisition of other long-term assets,
in each case, in the same or a similar line of business as the Company was
engaged in on the date of the Indenture. Pending the final application of any
such Net Proceeds, the Company or such Restricted Subsidiary may temporarily
reduce outstanding revolving credit borrowings, including borrowings under the
Senior Credit Facilities or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales
that are not applied or invested as provided in the first sentence of this
paragraph will be deemed to constitute "Excess Proceeds."
Not later than 30 days after any date (an "Asset Sale Offer Trigger Date")
that the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will mail to each holder of the Senior Notes at such holder's
registered address a notice stating (i) that an Asset Sale Offer Trigger Date
has occurred and that the Company is offering to purchase the maximum
principal amount of the Senior Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase (the "Asset
Sale Offer Purchase Date"), which will be a business day, specified in such
notice, that is not earlier than 30 days or later than 60 days from the date
such notice is mailed; (ii) the amount of accrued and unpaid interest as of
the Asset Sale Offer Purchase Date; (iii) that any Senior Note not tendered
will continue to accrue interest; (iv) that, unless the Company defaults in
the payment of the purchase price for the Senior Notes payable pursuant to the
Asset Sale Offer, any Senior Notes accepted for payment pursuant to the Asset
Sale Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date; (v) the procedures, consistent with the Indenture, to be followed by a
holder of the Senior Notes in order to accept an Asset Sale Offer or to
withdraw such acceptance; and (vi) such other information as may be required
by the Indenture and applicable laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of the Senior Notes or portions thereof
tendered pursuant to the Asset Sale Offer that can be purchased out of Excess
Proceeds from such Asset Sale; (ii) deposit with the Paying Agent the
aggregate purchase price of all the Senior Notes or portions thereof accepted
for payment and any accrued and unpaid interest on such Senior Notes as of the
Asset Sale Offer Purchase Date; and (iii) deliver or cause to be delivered to
the Trustee all the Senior Notes tendered pursuant to the Asset Sale Offer. If
less than all the Senior Notes tendered pursuant to the Asset Sale Offer are
accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Senior Notes to be purchased by the Company will
be in compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed or, if the Senior Notes
are not so listed, on a pro rata basis, by lot or by such method as the
Trustee deems fair and appropriate; provided that the Senior Notes accepted
for payment in part will only be purchased in integral multiples of $1,000.
The
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paying agent will promptly mail to each holder of the Senior Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Senior Notes plus any accrued and unpaid interest thereon, and the Trustee
will promptly authenticate and mail to such holder of the Senior Notes
accepted for payment in part a new Senior Note equal in principal amount to
any unpurchased portion of the Senior Notes, and any Senior Note not accepted
for payment in whole or in part will be promptly returned to the holder of
such Senior Note. On and after an Asset Sale Offer Purchase Date, interest
will cease to accrue on the Senior Notes or portions thereof accepted for
payment, unless the Company defaults in the payment of the purchase price
therefor. The Company will announce the results of the Asset Sale Offer to
holders of the Senior Notes on or as soon as practicable after the Asset Sale
Offer Purchase Date. To the extent that the aggregate amount of the Senior
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of the Senior Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee will select the Senior Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Asset Sale
Offer.
Limitation on Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, or otherwise cause or suffer to
exist or become effective any Liens of any kind (other than Permitted Liens)
upon any property or assets of the Company or any such Restricted Subsidiary
or any shares of stock or debt of any such Restricted Subsidiary unless (i) if
such Lien secures Indebtedness that is pari passu with the Senior Notes, then
the Senior Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligation is no longer secured
by a Lien or (ii) if such Lien secures Subordinated Indebtedness, any such
Lien will be subordinated to a Lien granted to the holders of the Senior Notes
in the same collateral as that securing such Lien to the same extent as such
Subordinated Indebtedness is subordinated to the Senior Notes.
Limitation on Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey, or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Company is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance,
or other disposition has been made is a corporation organized or existing
under the laws of the United States, any state thereof, or the District of
Columbia; (ii) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such sale,
assignment, transfer, lease, conveyance, or other disposition has been made
assumes all the obligations of the Company under the Senior Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee and the obligations under the Indenture will
remain in full force and effect; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance, or other disposition has been made will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock."
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In connection with any consolidation, merger, or transfer of assets
contemplated by this provision, the Company will deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger, or transfer and the supplemental indenture in
respect thereto comply with this provision and that all conditions precedent
relating to such transaction or transactions have been complied with.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer,
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, understanding, loan, advance, or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$500,000, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $5.0 million, an opinion as to
the fairness to the Holders of such Affiliate Transaction from a financial
point of view issued by an accounting, appraisal, or investment banking firm
of national standing; provided that the following shall not be deemed to be
Affiliate Transactions: (1) transactions pursuant to the Senior Credit
Facilities; (2) customary investment banking or financial advisory services
rendered by CIBC Wood Gundy Securities Corp. or Onyx Partners, Inc. or any of
their respective affiliates; (3) transactions under the Talton Lease (as such
agreement may be amended or replaced, so long as any amounts paid under such
amended or replacement agreement do not exceed the amounts payable under such
agreement as in effect on the Issuance Date); (4) payments made by the Company
or any of its Restricted Subsidiaries pursuant to the terms of the Consulting
and Strategic Services Agreement (as such agreement may be amended or
replaced, so long as any amounts paid under such amended or replacement
agreement do not exceed the amounts payable under such agreement as in effect
on the Issuance Date); (5) transactions pursuant to the Shareholders Agreement
and the Equity Registration Rights Agreement, each as in effect on the
Issuance Date; (6) any employment agreement entered into by the Company or any
of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary; (7) transactions between or among the Company and/or its
Restricted Subsidiaries; and (8) Restricted Payments and Permitted Investments
that are permitted by the provisions of the Indenture described above under
the caption "--Limitation on Restricted Payments."
Limitation on Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company or such Restricted Subsidiary may enter into a sale
and leaseback transaction if (i) the Company or such Restricted Subsidiary
could have (a) incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Limitation on Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described under the caption
"--Limitation on Liens," (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors and set forth in an
Officers' Certificates delivered to the Trustee) of the property that is the
subject of such sale and lease back transaction, and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
or such Restricted Subsidiary applies the proceeds of such transaction in
compliance with, the covenant described under the caption "--Limitation on
Asset Sales."
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries acquire or create another Restricted Subsidiary or designate an
Unrestricted Subsidiary to be a Restricted Subsidiary after the date of the
Indenture, then such newly acquired or created or designated Restricted
Subsidiary will execute a Subsidiary Guarantee and deliver an opinion of
counsel, in accordance with the terms of the Indenture.
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries on
its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries; (ii) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries; (iii) make loans or advances to
the Company or any of its Restricted Subsidiaries; (iv) guarantee any
Indebtedness of the Company or any other Restricted Subsidiary of the Company;
or (v) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of
the Indenture, (b) the Senior Credit Facility, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements, or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement, or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Existing
Credit Facility, (c) any acquisition facility under the Senior Credit
Facilities and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements, or refinancings thereof,
provided that any such encumbrances or restrictions in such acquisition
facility or any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements, or refinancings thereof are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in the Existing Credit Facility, (d) the Indenture, the Senior
Notes, and the Subsidiary Guarantees, (e) applicable law, (f) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (g) customary non-
assignment provisions in leases and other agreements entered into in the
ordinary course of business and consistent with past practices, (h) purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (v) above on the
property so acquired, or (i) Permitted Refinancing Indebtedness, provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Limitation on Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease,
pledge, hypothecate, or otherwise dispose of any Capital Stock of any
Restricted Subsidiary of the Company to any Person (other than the Company or
a wholly Owned Restricted Subsidiary of the Company), other than Capital Stock
of a Restricted Subsidiary of the Company that holds property or assets
acquired by the Company and its Restricted Subsidiaries after the Issuance
Date, and (ii) will not permit any Restricted Subsidiary of the Company to
issue any of its Equity Interests to any Person other than to the Company or a
wholly Owned Restricted Subsidiary of the Company. The foregoing restrictions
will not apply to (a) an Asset Sale made in compliance with the covenant
described under the caption "--Limitation on Asset Sales" or (b) a pledge or
hypothecation or other Lien on Capital Stock of a Restricted Subsidiary
otherwise permitted by the covenant described under the caption "--Limitation
on Liens."
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Reports
The Indenture provides that, whether or not the Company is then subject to
Section 13(a) or 15(d) of the Exchange Act, so long as any Senior Notes are
outstanding, the Company will furnish to the Trustee and all Holders of the
Senior Notes (i) all annual reports, quarterly reports and other periodic
reports which the Company would have been required to file with the Securities
and Exchange Commission (the "Commission") pursuant to Section 13(a) or 15(d)
of the Exchange Act if the Company were so subject. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission, on or
prior to the respective dates by which the Company would have been required to
file such documents if subject to Section 13(a) or 15(d) of the Exchange Act,
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Subsidiary Guarantors
have agreed that, for so long as any Senior Notes remain outstanding, they
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on the Senior
Notes;
(ii) default in payment when due of the principal of or premium, if any,
on the Senior Notes;
(iii) failure by the Company or any Subsidiary to comply with the
provisions described under the caption "Change of Control Offer," "--
Certain Covenants--Limitation on Asset Sales," "--Certain Covenants--
Limitation on Restricted Payments" or "Certain Covenants--Limitation on
Incurrence of Indebtedness";
(iv) failure by the Company or any Subsidiary for 60 days after receipt
of written notice given by the Trustee or the holders of at least 25% in
principal amount of the Senior Notes then outstanding to comply with any of
its other agreements in the Indenture or the Senior Notes;
(v) default under any mortgage, indenture, or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more, and such default has not been
cured, waived, or postponed pursuant to an agreement with the holders of
such Indebtedness within 30 days after written notice as provided in the
Indenture, or such acceleration is not rescinded or annulled within 10 days
after written notice as provided in the Indenture;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged, or stayed for a period of 60 days after their entry;
(vii) any holder (or person acting on its behalf) of at least $5.0
million in aggregate principal amount of Indebtedness of the Company or any
of its Restricted Subsidiaries, subsequent to the occurrence of a default
with respect to such Indebtedness and in accordance with the terms of the
document or agreement governing such Indebtedness, commences judicial
proceedings to foreclose upon assets of the Company or any of its
Restricted Subsidiaries having an aggregate fair market value in excess of
$5.0 million or exercises any rights under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure;
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(viii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary; and
(ix) except as permitted by the Indenture, any Subsidiary Guarantee is
held in any judicial proceeding to be unenforceable or invalid or ceases
for any reason to be in full force and effect or any Subsidiary Guarantor,
or any Person acting on behalf of any Subsidiary Guarantor, denies or
disaffirms its obligations under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company or any
Restricted Subsidiary, all outstanding Senior Notes will become due and
payable without further action or notice. Holders of the Senior Notes may not
enforce the Indenture or the Senior Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of
the then outstanding Senior Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Senior Notes
notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
will also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Senior Notes. If an Event of Default occurs
prior to June 30, 2002 by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to June 30, 2002, then the
premium specified in the Indenture will also become immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may, on behalf of the Holders of all
of the Senior Notes, waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior Notes.
No Holder of any Senior Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy under the Indenture, unless
such holder has previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Senior Notes has made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as a
trustee, and unless the Trustee has not received from the holders of a
majority in aggregate principal amount of the outstanding Senior Notes, a
direction inconsistent with such request and has failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted on such Senior Note on or after the respective due dates expressed
in such Senior Note.
The Company is required to deliver to the Trustee on or before 100 days
after the end of the Company's fiscal year and on or before 50 days after the
end of the first three fiscal quarters in each year an Officers' Certificate
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, or stockholder of the Company,
as such, will have any liability for any obligations of the Company under the
Senior Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of the Senior
Notes, by accepting a Senior Note, waives and releases all such liability. The
waiver and release are part of the consideration for issuance of
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the Senior Notes. Such waiver may not be effective to waive liabilities under
the federal securities laws and it is the view of the Commission that such a
waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Senior Notes
to receive payments in respect of the principal of, premium, if any, and
interest on such Senior Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Senior
Notes concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost, or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties, and immunities of the Trustee, and
the Company's obligations in connection therewith, and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations will not constitute a Default or Event of Default with respect to
the Senior Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation, and
insolvency events) described under the caption "--Events of Default" will no
longer constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on,
the outstanding Senior Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Senior Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that the Holders of the outstanding Senior Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company must deliver to the Trustee an opinion of counsel in
the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Senior Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Senior Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying, or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Senior Note selected for redemption. Also, the Company is not
required to transfer or exchange any Senior Note for a period of 15 days
before a selection of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of such
Senior Note for all purposes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all the Senior Notes issued thereunder, when either (a) all such Senior
Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Senior Notes which have been replaced or paid and the Senior Notes
for whose payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for cancellation; or
(b) (i) all such Senior Notes not theretofore delivered to the Trustee for
cancellation have become due and payable within one year and the Company or a
Subsidiary Guarantor, if any, has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount of money
sufficient to pay and discharge the entire Indebtedness on such Senior Notes
not theretofore delivered to the Trustee for cancellation for principal,
premium, if any, and accrued interest to the date of maturity or redemption;
(ii) no Default or Event of Default with respect to the Indenture or the
Senior Notes has occurred and is continuing on the date of such deposit or
will occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company or a Subsidiary Guarantor, is a party or by which the
Company or a Subsidiary Guarantor is bound; (iii) the Company or a Subsidiary
Guarantor, has paid or caused to be paid all sums payable by it under such
Indenture; and (iv) the Company has delivered irrevocable instructions to the
Trustee under such Indenture to apply the deposited money toward the payment
of such Senior Notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an Officers' Certificate and an opinion
of counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
AMENDMENT, SUPPLEMENT, AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Senior Notes, and the Registration Rights Agreement may be amended or
supplemented with the consent of the Holders of at least a majority in
principal amount of the Senior Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Senior Notes), and any existing default or
compliance with any provision of the Indenture or the Senior Notes may be
waived with the consent of the Holders of a majority in principal amount of
the then outstanding Senior Notes (including consents obtained in connection
with a tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an
amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any Senior Note or alter the provisions with respect to the
redemption of the Senior Notes (other than provisions relating to the
covenants described above under the captions "--Change of Control Offer" and
"--Certain Covenants--Limitation on Asset Sales"); (iii) reduce the rate of or
change the time for payment of interest on any Senior Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Senior Notes (except a rescission of acceleration of the
Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration); (v) make any Senior Note payable in money other than
that stated in the Senior Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or
interest on the Senior Notes;
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(vii) waive a redemption payment with respect to any Senior Note (other than a
payment required by one of the covenants described above under the caption "--
Change of Control Offer" or "--Certain Covenants--Limitation on Asset Sales");
(viii) affect the ranking of the Senior Notes in a manner adverse to the
Holders of the Senior Notes; or (ix) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company and the Trustee may amend or supplement the Indenture, the
Senior Notes, and the Registration Rights Agreement to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Senior Notes in
addition to or in place of certificated Senior Notes, to provide for the
assumption of the Company's obligations to Holders of Senior Notes in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Senior Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Notes will have the right to direct the time, method, and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (that is not cured), the Trustee is required, in the exercise of its
power, to use the degree of care of a prudent person in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of the Senior Notes, unless such Holder has offered to the Trustee
security and indemnity satisfactory to it against any loss, liability, or
expense.
GOVERNING LAW
The Indenture, the Senior Notes, and the Subsidiary Guarantees are subject
to certain exceptions, governed by and construed in accordance with, the
internal laws of the State of New York, without regard to choice of law rules.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Talton Holdings,
Inc., 1209 W. North Carrier Parkway, Suite 300, Grand Prairie, Texas, 75050
Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used in this Prospectus for which no definition is
provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or equipment in the ordinary course
of business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "change
of Control Offer" and/or the provisions described above under the caption "--
Certain Covenants--Limitation on Merger, Consolidation or Sale of Assets" and
not by the provisions described under the caption "--Certain Covenants--
Limitation on Asset Sales"), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $100,000
or (b) for net proceeds in excess of $100,000 and (ii) the issue or sale by
the Company or any of its Restricted Subsidiaries of Equity Interests of any
of the Company's Restricted Subsidiaries, whether in a single transaction or a
series of related transactions. Notwithstanding the foregoing: (i) any
simultaneous exchanges of telephones and related contracts and equipment of
the Company or any Restricted Subsidiaries for telephones and related
contracts and equipment of another Person with equivalent fair market value
(provided that the fair market value of telephones and related contracts and
equipment so exchanged in any fiscal year shall not exceed 10% of the total
assets of the Company on a consolidated basis); (ii) a transfer of assets by
the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary; (iii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary;
and (iv) a Restricted Payment that is permitted by the covenant described
above under the caption "--Certain Covenants--Limitation on Restricted
Payments", in each case, will not be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means: (i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock; (iii) in the case of a partnership or a limited liability
company, partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means: (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than 365
days from the date of acquisition; (iii) certificates of deposit and
eurodollar time deposits with maturities of 365 days or less from the date of
acquisition, bankers' acceptances with maturities not exceeding 365 days and
overnight bank deposits, in each case with any commercial banking institution
that is a lender under the Senior Credit Facilities or a member of the Federal
Reserve System having capital and surplus in excess of $500 million; (iv)
repurchase obligations with a term of not more than 365 days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications
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specified in clause (iii) above; (v) commercial paper rated at least P-1 by
Moody's Investors Service, Inc. or at least A-1 by Standard & Poor's
Corporation and in each case maturing within nine months after the date of
acquisition; and (vi) money market funds which invest substantially all of
their assets in instruments of the types described in clauses (i) through (v)
above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties (as defined below); (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company; (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition) directly or indirectly, of more than 50% of the Voting Stock of the
Company (measured by voting power rather than number of shares); or (iv) the
first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors. For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of the Company will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of
such entity that has been so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period (to the
extent that such provision for taxes was included in computing such
Consolidated Net Income), plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit
or bankers' acceptance financings, and net payments (if any) pursuant to
Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expenses to the extent
that it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period (to the
extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income), minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in
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accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a Wholly
Owned Restricted Subsidiary thereof that is a Subsidiary Guarantor, (ii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that
the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders; (iii)
the Net Income of any Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, and
(iv) the cumulative effect of a change in accounting principles shall be
excluded.
"Consulting and Strategic Services Agreement" means that certain Consulting
and Strategic Services Agreement between the Company and EUF Talton, L.P.,
dated as of December 27, 1996.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors for a period of two consecutive years or on the date of the
Indenture if less than two years have elapsed since the date of Indenture) or
(ii) was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof in whole or in part, on or prior to the
date that is 91 days after the date on which the Senior Notes mature, provided
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the
option of the holder thereof prior to such final maturity date will be deemed
to be Disqualified Stock; provided, however, that preferred stock of the
Company that is issued with the benefit of provisions requiring a change of
control offer to be made for such Capital Stock in the event of a Change of
Control of the Company, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control Offer,"
will not be deemed to be Disqualified Stock solely by virtue of such
provisions.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any (i) issuance of common stock or preferred stock
by the Company (excluding Disqualified Stock) that is registered pursuant to
the Securities Act, other than issuances registered on Form S-8 and issuances
registered on Form S-4, and (ii) any private issuance of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than
issuances of common stock pursuant to employee benefit plans of the Company or
otherwise as compensation to employees of the Company, in each case generating
aggregate gross proceeds to the Company of at least $25.0 million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Existing Credit Facility) [in
existence on the date of the Indenture], until such amounts are repaid.
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"Existing Preferred Stock" means the Company's Senior Preferred Stock issued
and outstanding [as of the Issuance Date.]
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the Company
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event
for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption. Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the
four-quarter reference period and Consolidated Cash Flow for such reference
period shall be calculated without giving effect to clause (iii) of the
proviso set forth in the definition of Consolidated Net Income, (ii) the
Consolidated Cash Flow attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, and (iii) the Fixed Charges attributable
to discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense (including
capitalized interest) of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization
of debt issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations) and (ii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Subsidiary Guarantee or Lien is
called upon) and (iii) the product of (A) all dividend payments, whether or
not in cash, on any series of preferred stock of such Person, other than
dividend payments on Equity Interests payable solely in Equity Interests
(other than Disqualified Stock), times (B) a fraction, the numerator of which
is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of America
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past
due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Limitation on Restricted Payments." Investments
will exclude extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices.
"Issuance Date" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) and (ii)
any extraordinary gain or loss, together with any related provision for taxes
on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other
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disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than indebtedness under the Senior
Credit Facilities or Acquisition Facility) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including and undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means (a) with respect to the Senior Notes, any
Indebtedness which ranks pari passu in right of payment to the Senior Notes
and (b) with respect to any Subsidiary Guarantee, any Indebtedness which ranks
pari passu in right of payment to such Subsidiary Guarantee.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is a Subsidiary
Guarantor and that is engaged in the same or a similar line of business as the
Company and its Restricted Subsidiaries were engaged in on the date of the
Indenture; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company and a Subsidiary Guarantor that is engaged in the same or a similar
line of business as the Company and its Restricted Subsidiaries were engaged
in on the date of the Indenture or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company that is a Subsidiary Guarantor and that is engaged
in the same or a similar line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of the Indenture; (d) any Investment
made as a result of the receipt of non-cash consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "--Certain Covenants--Limitation on Asset Sales"; (e) any
Investment in the same or substantially similar line of business as the
Company or any of its Restricted Subsidiaries acquired solely in exchange for
Equity Interests (other than Disqualified Stock) of the Company; (f) Hedging
Obligations permitted to be incurred under the covenant described above under
the caption "--Certain Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock"; and (g) other Investments in any Person having
an aggregate fair market value (measured on the date each such Investment was
made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (g) that are
at the time outstanding, not to exceed $2.0 million.
"Permitted Liens" means (i) Liens securing Senior Indebtedness of the
Company and any Subsidiary Guarantor that was permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company or any Wholly
Owned Restricted Subsidiary of the Company; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the
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Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (vi) purchase money
security interests on any property acquired by the Company or any Subsidiary
in the ordinary course of business, securing Indebtedness incurred or assumed
for the purpose of financing all or any part of the cost of acquiring such
property; provided that (a) any such Lien attached to such property
concurrently with or within 90 days after the acquisition thereof, (b) such
Lien attaches solely to the property so acquired in such transaction, (c) the
principal amount of the Indebtedness secured thereby does not exceed 100% of
the cost of such property and (d) the Indebtedness secured by such purchase
money security interests is otherwise permitted by the covenant entitled "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock"; (vii) Liens existing on the date of the Indenture; (viii) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (ix) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries; and
(x) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $2.0 million at any one time outstanding and that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business) and (b) do
not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of, such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date no earlier than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Senior
Notes on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, except that the Company may incur Permitted
Refinancing Indebtedness to extend, refinance, renew, replace, defease or
refund, Indebtedness of any Wholly Owned Restricted Subsidiary of the Company.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"preferred stock" means any Equity Interest with, preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Principals" means (i) Gregg L. Engles, (ii) Joseph P. Urso, (iii) Todd W.
Follmer, (iv) David A. Sachs, (v) CIBC Wood Gundy Ventures, Inc., (vi) Onyx
Talton Partners, L.P., (vii) Regent Capital Equity Partners, L.P., (viii)
Julius E. Talton, or (ix) Julius E. Talton, Jr.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal, (B) or trust,
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corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A), or (C) the estate of such
Principal until such estate is distributed pursuant to such Principal's will
or applicable state law.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means, collectively, (i) that certain Senior
Credit Facility to be entered into on the terms described herein, and (ii) a
senior credit facility to be entered into subsequent to the [Issuance Date]
for permitted acquisitions by the Company or its Restricted Subsidiaries on
the terms described herein, in each case by and among the Company and the
lenders from time to time parties thereto and Canadian Imperial Bank of
Commerce, as agent for such lenders, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, replaced
or refinanced from time to time.
"Senior Indebtedness" means all Indebtedness of the Company or any
Subsidiary Guarantors that is not, by its terms, subordinated in right of
payment to the Senior Notes.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Indebtedness" means (a) with respect to the Senior Notes, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Senior Notes and (b) with respect to any Subsidiary Guarantee,
any Indebtedness of the applicable Subsidiary Guarantor which by its terms is
subordinated in right of payment to such Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Subsidiary Guarantors" means each of (i) AmeriTel Pay Phones, Inc., Talton
Telecommunications Corporation, Talton Telecommunications of Carolina, Inc.,
and Talton STC, Inc., and (ii) any other subsidiary that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Talton Lease" means the lease dated as of December 27, 1996 between Julius
E. Talton and Talton Telecommunications Corporation.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than AmeriTel or
Talton Telecommunications or any successor to any of them) that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which
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neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness and Liens of such Subsidiary shall be deemed to
be incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness or any such Lien is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain Covenants--
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock" or
the covenant described under the caption "--Certain Covenants--Limitation on
Liens," respectively, the Company shall be in default of such covenant). The
Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness and Liens by a Restricted
Subsidiary of the Company of any outstanding Indebtedness and Liens of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"--Certain Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, (ii) such
Liens are permitted under the covenant described under the caption "--Certain
Covenants--Limitation on Liens," and (iii) no Default or Event of Default
would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth that will elapse
between such date and the making of such payment by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes will initially be
issued in the form of one or more registered notes in global form (the "New
Global Note," and together with the global notes representing the Old Notes,
the "Global Note"). The New Global Note will be deposited on the Exchange Date
with, or on behalf of, the Depositary and registered in the name of the Global
Note Holder. See "Exchange Offer."
DTC has advised the Company that DTC is a limited-purpose trust company that
was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in
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accounts of its Participants. The Participants include securities brokers and
dealers (including the Initial Purchaser), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests and transfer of ownership interests of
each actual purchaser of each security held by or on behalf of DTC are
recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes). Holders
are advised that the laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to such extent. Because DTC can act only on
behalf of Participants, which in turn act on behalf of Indirect Participants
and certain banks, the ability of a person having beneficial interests in a
Global Note to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
Payments in respect of the principal of and premium, and interest on a
Global Note registered in the name of DTC or its nominee will be payable by
the Trustee to DTC in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Senior Notes, including the Global Notes,
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Senior Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants
and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Senior Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED SENIOR NOTES
A Global Note is exchangeable for definitive Senior Notes in registered
certificated form if (i) DTC (a) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (b) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Senior Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the
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Senior Notes. In addition, beneficial interests in a Global Note may be
exchanged for certificated Senior Notes upon request but only upon at least 20
days prior written notice given to the Trustee by or on behalf of DTC in
accordance with its customary procedures. In all cases, certificated Senior
Notes delivered in exchange for any Global Note or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the applicable restrictive legend
referred to in "Notice to Investors," unless the Company determines otherwise
in compliance with applicable law.
EXCHANGE OF CERTIFICATED SENIOR NOTES FOR BOOK ENTRY NOTES
Senior Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Senior Notes [as described under "Notice to
Investors."]
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Senior Notes, and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Senior Notes
represented by the Global Note (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Senior Notes in
definitive certificated form, the Company will make all payments of principal,
premium, if any, and interest, by wire transfer of immediately available funds
to the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-houses or next-day funds. The Company expects
that secondary trading in the certificated notes will also be settled in
immediately available funds.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of the Old Notes for the New Notes,
but does not purport to be a complete analysis of all potential tax effects.
The discussion is based upon the United States Internal Revenue Code of 1986,
as amended, (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and pronouncements and judicial decisions now in effect, all
of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the New Notes. The following
discussion assumes that holders hold the Old Notes and the New Notes as
capital assets within the meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the exchange of the Old Notes for the New Notes or that any
such position would not be sustained.
The tax treatment of a holder may vary depending on his or its particular
situation or status. This summary does not address the tax consequences to
taxpayers who are subject to special rules such as insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign entities
and individuals, persons holding Old Notes or New Notes as a part of a hedging
or conversion transaction or a straddle and holders whose
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"functional currency" is not the U.S. dollar, or aspects of federal income
taxation that may be relevant to a prospective investor based upon such
investor's particular tax situation. In addition, the description does not
consider the effect of any applicable foreign, state, local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE
The exchange of the New Notes for Old Notes should not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss should be recognized by holders upon receipt of the New Notes. For
purposes of determining gain or loss upon the subsequent exchange of New
Notes, a holder's basis in the New Notes will be the same as a holder's basis
in the Old Notes exchanged therefor. Holders should be considered to have held
the New Notes from the time of their original acquisition of the Old Notes. As
used herein, the term "Senior Note" refers to both an Old Note and a New Note
received in exchange therefor.
INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on a New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is, as a general rule, required to
include interest in ordinary income as such interest accrues. A cash basis
holder must include interest in income when cash payments are received by (or
made available to) such holder.
MARKET DISCOUNT
If a holder acquired an Old Note at a market discount (i.e., at a price less
than the stated redemption price at maturity of the Old Note), the Old Note is
subject to the market discount rules of the Code unless the market discount is
de minimis. Market discount is de minimis if it is less than one quarter of
one percent of the principal amount of the Old Note multiplied by the number
of complete years to maturity after the holder acquired the Old Note. If the
holder exchanges an Old Note that has more than de minimis market discount for
a New Note, the New Note also will be subject to the market discount rules of
the Code. New Notes purchased by a subsequent purchaser also will be subject
to the market discount rules if the New Notes are purchased with more than a
de minimis amount of market discount. Notes that have more than de minimis
market discount are herein referred to as "Market Discount Notes."
Any gain recognized on the maturity or disposition of a Market Discount Note
will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on the Market Discount Note. Alternatively,
a holder may elect to include market discount in income currently over the
life of the Market Discount Note. Such an election shall apply to all debt
instruments with market discount acquired by the holder on or after the first
day of the first taxable year to which the election applies. This election may
not be revoked without the consent of the IRS.
Market discount will accrue on a straight-line basis unless the holder
elects to accrue market discount on a constant yield to maturity basis. Such
an election shall apply only to the Market Discount Note with respect to which
it is made and may not be revoked without the consent of the IRS. A holder who
does not elect to include market discount in income currently generally will
be required to defer deductions for interest on borrowings allocable to a
Market Discount Note in an amount not exceeding the accrued market discount on
the Market Discount Note until the maturity or disposition of the Market
Discount Note.
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AMORTIZABLE BOND PREMIUM
A holder that purchased an Old Note for an amount in excess of its principal
amount may elect to treat such excess as "amortizable bond premium," in which
case the amount required to be included in the holder's income each year with
respect to interest on the Old Note will be reduced by the amount of
amortizable bond premium allocable (based on the yield to maturity of the Old
Note) to such year. If a holder made an election to amortize bond premium with
respect to an Old Note and exchanges the Old Note for a New Note pursuant to
the Exchange Offer, the election will apply to the New Note. A holder who
exchanges an Old Note for which an election has not been made for a New Note,
and a subsequent purchaser of a New Note, may also elect to amortize bond
premium if the holder acquired the Note for an amount in excess of its
principal amount. Any election to amortize bond premium shall apply to all
bonds (other than bonds the interest on which is excludable from gross income)
held by the holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the holder, and is irrevocable
without the consent of the IRS.
DISPOSITION OF THE NOTES
Subject to the market discount rules discussed above, a holder of Senior
Notes will recognize gain or loss upon the sale, redemption, retirement or
other disposition of such securities equal to the difference between (i) the
amount of cash and the fair market value of the property received (except to
the extent attributable to the payment of accrued interest) and (ii) the
holder's adjusted tax basis in the securities. Gain or loss recognized will be
capital gain or loss provided the Notes are held as capital assets by the
holder, and will be subject to income tax at rates that may be lower than the
rate at which ordinary income is taxed, depending on the length of time that
the holder has held such securities (or is treated as having held such
securities).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Holders of the Senior Notes may be subject to backup withholding at a rate
of 31% with respect to interest paid on the Senior Notes unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with the requirements of the backup
withholding rules.
The Company will report to the holders of the Senior Notes and the IRS the
amount of any "reportable payment" for each calendar year and amount of tax
withheld, if any, with respect to payments on the Senior Notes.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER
SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT
OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE SENIOR NOTES (INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS).
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period of 365
days after the Expiration Date or until all participating broker-dealers have
so resold.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time
109
<PAGE>
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices prevailing at the time of resale,
at prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concession
from any such broker-dealer and/or the purchasers of any New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker-dealer that participates
in a distribution of New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any resale of New Notes and
any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Hughes & Luce, L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of Talton Holdings, Inc. as of
December 3l, 1996 and for the one- month period from December 1, 1996 (date of
acquisition) to December 31, 1996; the financial statements of AmeriTel Pay
Phones Inc. as of November 30, 1996 and for the eleven months ended November
30, 1996; and the consolidated financial statements of Talton
Telecommunications Corporation as of November 30, 1996 and for the eleven
months ended November 30, 1996 appearing in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of AmeriTel Pay Phones, Inc. as of December 31,
1995 and for each of the two years in the period ended December 31, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent auditors, as stated in their reports herein and are included in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Talton Telecommunications Corporation as of
December 31, 1995 and for each of the two years in the period ended December
31, 1995 appearing in this Prospectus have been audited by Borland, Benefield,
Crawford & Webster, P.C., independent auditors, as stated in their report
appearing herein and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Security Telecom Corporation as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus have been audited by Davis, Clark and
Company, P.C., independent auditors, as stated in their report appearing
herein and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
110
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under "Prospectus Summary"; "Risk Factors"; "Pro Forma
Combined Financial Data"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; "Business" and elsewhere in this
Offering Memorandum constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, levels of activity,
performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the ability of the Company to implement its business and
acquisition strategy, including the ability to integrate recently acquired
businesses into the Company; the ability of the Company to meet its debt
service obligations and to obtain additional financing for general corporate
and other purposes; changes in the telecommunications industry; competition;
availability of key personnel; and changes in, or the failure to comply with
government regulations. See "Risk Factors." As a result of the foregoing and
other factors, no assurance can be given as to future results, levels of
activity and achievements and neither the Company nor any other person assumes
responsibility for the accuracy and completeness of these statements.
111
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TALTON HOLDINGS, INC.
Report of Independent Auditors--Deloitte & Touche LLP.................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
AMERITEL PAY PHONES, INC.
Report of Independent Auditors--Deloitte & Touche LLP.................... F-17
Report of Independent Auditors--Arthur Andersen LLP...................... F-18
Balance Sheets........................................................... F-19
Statements of Income..................................................... F-20
Statements of Stockholders' Equity....................................... F-21
Statements of Cash Flows................................................. F-22
Notes to Financial Statements............................................ F-23
TALTON TELECOMMUNICATIONS CORPORATION
Report of Independent Auditors--Deloitte & Touche LLP.................... F-33
Report of Independent Auditors--Borland, Benefield, Crawford & Webster,
P.C..................................................................... F-34
Consolidated Balance Sheets.............................................. F-35
Consolidated Statements of Operations.................................... F-36
Consolidated Statements of Stockholders' Equity.......................... F-37
Consolidated Statements of Cash Flows.................................... F-38
Notes to Consolidated Financial Statements............................... F-39
SECURITY TELECOM CORPORATION
Report of Independent Auditors--Davis, Clark and Company, P.C............ F-46
Consolidated Balance Sheets.............................................. F-47
Consolidated Statements of Income........................................ F-48
Consolidated Statements of Stockholders' Equity.......................... F-49
Consolidated Statements of Cash Flows.................................... F-50
Notes to Consolidated Financial Statements............................... F-51
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Talton Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Talton
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the one-month period from December 1, 1996 (date of
acquisition) to December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Talton Holdings,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the one-month period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 4, 1997
(August 11, 1997 as to Note 13)
F-2
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 294,494 $ 423,975
Accounts receivable.............................. 7,346,270 9,324,053
Refundable income taxes.......................... 601,842 652,009
Inventories...................................... 941,819 958,140
Prepaid expenses................................. 259,984 511,664
Deferred income tax asset........................ 673,259 645,259
------------ ------------
Total current assets........................... 10,117,668 12,515,100
PROPERTY AND EQUIPMENT............................. 7,969,134 8,099,250
INTANGIBLE AND OTHER ASSETS........................ 62,046,732 59,718,197
------------ ------------
TOTAL.......................................... $ 80,133,534 $ 80,332,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 1,369,697 $ 2,133,729
Accrued expenses................................. 6,021,241 6,130,576
Income taxes payable............................. 978,000 403,234
Current portion of long-term debt................ 3,150,000 4,612,500
------------ ------------
Total current liabilities...................... 11,518,938 13,280,039
LONG-TERM DEBT..................................... 60,164,500 60,432,000
DEFERRED INCOME TAXES.............................. 1,968,767 1,565,767
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 6,000 shares
authorized, 5,925 shares issued and outstanding
(cumulative liquidation value of $5,925,000).... 59 59
Common stock, $.01 par value; 50,000 shares
authorized, 15,300 shares issued and
outstanding..................................... 153 153
Additional paid-in capital....................... 21,610,972 21,610,972
Retained earnings (deficit)...................... (15,129,855) (16,556,443)
------------ ------------
Total stockholders' equity..................... 6,481,329 5,054,741
------------ ------------
TOTAL.......................................... $ 80,133,534 $ 80,332,547
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH
ONE MONTH PERIOD
PERIOD ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUE.................................... $5,506,110 $15,055,620
OPERATING EXPENSES:
Telecommunication costs............................ 2,298,712 6,195,214
Facility commissions............................... 1,455,375 4,004,916
Field operations and maintenance................... 218,895 587,928
Selling, general and administrative................ 372,341 1,095,613
Depreciation....................................... 110,803 299,348
Amortization of intangibles........................ 741,032 2,219,754
---------- -----------
Total operating expense.......................... 5,197,158 14,402,773
---------- -----------
OPERATING INCOME..................................... 308,952 652,847
OTHER (INCOME) EXPENSE:
Interest expense, net.............................. 612,071 1,877,035
Other, net......................................... (20,490) 16,067
---------- -----------
Total other (income) expense..................... 591,581 1,893,102
---------- -----------
LOSS BEFORE INCOME TAX............................... (282,629) (1,240,255)
INCOME TAX EXPENSE (BENEFIT)......................... (22,502) 67,833
---------- -----------
NET LOSS............................................. $ (260,127) $(1,308,088)
========== ===========
NET LOSS PER SHARE................................... $ (14.38) $ (72.31)
========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING.................. 18,089 18,089
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
----------------- ------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- ------- ------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF PREFERRED
STOCK.................. 5,925 $ 59 -- $-- $ 5,924,941 $ -- $ 5,925,000
ISSUANCE OF COMMON
STOCK.................. 15,300 153 15,686,031 15,686,184
PORTION OF ACQUISITION
CASH PAYMENTS TO
CONTINUING
STOCKHOLDERS, TREATED
AS A DIVIDEND.......... (14,869,728) (14,869,728)
NET LOSS................ (260,127) (260,127)
-------- ------ ------ ---- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 5,925 $ 59 15,300 $153 $21,610,972 $(15,129,855) $ 6,481,329
PREFERRED DIVIDENDS
(UNAUDITED)............ (118,500) (118,500)
NET LOSS (UNAUDITED).... (1,308,088) (1,308,088)
-------- ------ ------ ---- ----------- ------------ ------------
BALANCE, MARCH 31, 1997
(UNAUDITED)............ 5,925 $ 59 15,300 $153 $21,610,972 $(16,556,443) $ 5,054,741
======== ====== ====== ==== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (260,127) $(1,308,092)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation...................................... 110,803 299,348
Amortization of intangible assets, including
deferred financing costs and bond discount....... 803,023 2,435,754
Deferred income taxes............................. 160,512 (375,000)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable.............................. 44,823 (1,953,883)
Inventories...................................... 12,013 (16,321)
Prepaid expenses and other assets................ (166,096) (352,800)
Accounts payable................................. (1,010,795) 764,032
Accrued expenses................................. (718,313) (9,162)
Income taxes..................................... (394,963) (624,933)
------------ -----------
Net cash used in operating activities........... (1,419,120) (1,141,057)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (268,801) (429,462)
Cash outflows for acquisitions..................... (46,983,442)
------------ -----------
Net cash used in investing activities........... (47,252,243) (429,462)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt................. 59,200,000 1,700,000
Repayment of debt.................................. (15,912,706)
Payments of deferred financing costs............... (3,804,121)
Proceeds from the issuance of common and preferred
stock, net of expenses............................ 9,482,684
------------ -----------
Net cash provided by financing activities....... 48,965,857 1,700,000
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS............... 294,494 129,481
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 294,494
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 294,494 $ 423,975
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................. $ 640,035 $ 384,382
============ ===========
Cash paid for income taxes......................... $ 211,950 $ 1,060,500
============ ===========
NONCASH TRANSACTION:
Issuance of subordinate notes, preferred stock and
common stock in the acquisition................... $ 16,043,000 $
============ ===========
Reduction of stockholders' equity to reflect
continuing shareholder interests.................. $(14,869,728) $
============ ===========
Dividends payable.................................. $ $ (118,500)
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Talton Holdings, Inc. (the "Company") was incorporated on November
20, 1996, and, effective December 1, 1996, acquired all of the outstanding
equity interests of Talton Telecommunications Corporation and AmeriTel Pay
Phones, Inc., as discussed in Note 2. Effective with the acquisitions, the
Company became a holding company to these two operating companies, which own,
operate and maintain telephone systems under contracts with correctional
facilities in 33 states, with the majority of their installations in the
Central and Southeastern United States.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services for smaller volume
LECs, all of which are granted credit in the normal course of business with
terms of between 30 and 60 days. The Company performs ongoing credit
evaluations of its customers and maintains allowances for unbillable and
uncollectible losses based on historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
and reserves for unbillable and uncollectible chargebacks, that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Talton Telecommunications Corporation and AmeriTel Pay Phones,
Inc. All significant intercompany balances and transactions are eliminated in
consolidation.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and investments with a remaining
maturity at date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of advance payments received, and an
allowance for unbillable and uncollectible calls, based on historical
experience, for estimated chargebacks to be made by the LECs. Under account
advance agreements with various third-party billing services, advance payments
equal to a percentage of the outstanding billed receivables are remitted to
the Company when calls are submitted to the third-party billing service, and
the Company grants a lien to the third-party billing service on the related
accounts receivable for the advance. The remainder of the billed receivable is
paid to the Company, net of the advance amount, after the third-party billing
service has collected the amounts receivable from the respective LECs.
Interest is charged on the advance payment at varying rates.
INVENTORIES--Inventories are stated at the lower of cost, as determined
primarily using the weighted average cost method, or market. Inventory is
primarily composed of equipment for installation on new contracts and supplies
and parts for the telephone systems serviced by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment.
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- -------------
<S> <C>
Leasehold improvements...................................... Term of lease
Telephone system equipment.................................. 7.5 years
Vehicles.................................................... 3 years
Office equipment............................................ 3 to 7 years
</TABLE>
F-7
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts, and the net difference less any amount realized
from the disposition is reflected in earnings.
INTANGIBLE AND OTHER ASSETS--Intangible and other assets primarily include
amounts allocated to acquired facility contracts, noncompete agreements,
goodwill and other intangible assets, which are stated at cost, along with the
long-term portion of customer advances. Amortization of intangible assets is
provided on a straight-line basis over the estimated useful lives of the
related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
Deferred loan costs........................................ Loan term
Other intangibles.......................................... 2 to 5 years
Goodwill................................................... 20 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with signing bonuses paid to the facilities under new
facility installations and other incremental direct costs paid to obtain the
facility contracts.
Other intangibles include organizational costs and licensing fees to obtain
state licenses to conduct business.
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flow, undiscounted and without interest charges, to the
carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--The Company accounts for income taxes using the liability
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are provided for temporary differences
between the financial statement and tax bases of the assets and liabilities
using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long-distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," includes
primarily cash and cash equivalents, accounts receivable, accounts payable and
long-term debt. The Company believes that the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and long-term debt are
a reasonable estimate of their fair
F-8
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value because of the short-term maturities of such instruments or, in the case
of long-term debt under the Senior Credit Agreement, because of the floating
interest rates on such long-term debt. In the case of the Company's senior
subordinated and subordinated notes, which bear fixed interest rates, subject
to scheduled increases, the Company believes that the interest rates on these
notes approximate fair value since they were established in December 1996.
LOSS PER SHARE--The Company computes earnings per share based on the
weighted average number of common shares outstanding during the year,
including common equivalent shares, when dilutive.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of
March 31, 1997 and the statements of operations and cash flows for the three
months ended March 31, 1996 and 1997, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations and cash flows of the Company as of March
31, 1997 and for the three months ended March 31, 1996 and 1997, have been
made. The financial position and results of operations for the interim period
are not necessarily indicative of the results to be expected for the full
years.
2. ACQUISITIONS
Effective December 1, 1996, the Company acquired all of the outstanding
equity interests of Talton Telecommunications Corporation and AmeriTel Pay
Phones, Inc. The aggregate net purchase price was approximately $47.9 million,
which was funded with the net proceeds from the issuance of common and
preferred stock and the proceeds from the issuance of long-term debt.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates and, accordingly, only the
results of operations of the acquired companies subsequent to their respective
acquisition dates are included in the consolidated financial statements of the
Company. At the acquisition date, the purchase price was allocated to assets
acquired, including identifiable intangibles, and liabilities assumed based on
their fair market values. The excess of the total purchase prices over the
fair value of the net assets acquired represents goodwill. In connection with
the acquisitions, assets were acquired and liabilities were assumed as
follows:
<TABLE>
<S> <C>
Purchase prices:
Net cash paid............................................. $ 46,983,442
Subordinated notes, preferred stock and common stock
issued to sellers, net of expenses....................... 15,768,624
Portion of purchase price for continuing stockholders,
treated as a dividend.................................... (14,869,728)
------------
Total net purchase prices................................ 47,882,338
Fair values of net assets acquired:
Fair values of assets acquired............................ 35,987,320
Liabilities assumed....................................... (27,864,398)
------------
Total net assets acquired................................ 8,122,922
------------
Goodwill................................................... $ 39,759,416
============
</TABLE>
Since certain of the stockholders of the Company held ownership interests in
the acquired companies, their continuing ownership interest in the Company has
been accounted for at their prior historical basis, which has resulted in a
reduction in stockholders' equity of approximately $14.9 million and a
corresponding reduction in the fair values assigned to tangible and
identifiable intangible assets, in accordance with the provisions of Emerging
Issue Task Force discussion No. 88-16, "Basis in Leveraged Buyout
Transactions."
F-9
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable, net of advance payments
received of $1,188,671 at December 31, 1996........ $ 7,975,016 $9,618,576
Advance commissions receivable...................... 349,094 318,116
Amounts receivable from stockholders................ 135,627 222,148
Employees and other................................. 11,556 23,900
----------- ----------
8,471,293 10,182,740
Less allowance for unbillable and uncollectible
chargebacks........................................ (1,125,023) (858,687)
----------- ----------
$ 7,346,270 $9,324,053
=========== ==========
</TABLE>
At December 31, 1996 and March 31, 1997, the Company had advanced commissions
to certain facilities of $835,641 and $720,504 (unaudited) which are
recoverable from such facilities as a reduction of earned commissions at
specified monthly amounts. Amounts included in accounts receivable represent
the estimated recoverable amounts during the next fiscal year with the
remaining balance recorded in other assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements................................ $ 432,036 $ 432,036
Telephone system equipment............................ 7,259,333 7,277,179
Vehicles.............................................. 123,977 132,876
Office equipment...................................... 264,591 666,210
---------- ----------
8,079,937 8,508,301
Less accumulated depreciation......................... (110,803) (409,051)
---------- ----------
$7,969,134 $8,099,250
========== ==========
</TABLE>
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts..................... $18,440,124 $18,507,038
Noncompete agreements............................ 303,611 303,611
Deferred loan costs.............................. 3,804,121 3,804,121
Goodwill......................................... 39,759,416 39,759,416
Other intangibles................................ 55,936 150,401
----------- -----------
62,363,208 62,524,587
Less accumulated amortization..................... (803,023) (3,208,778)
----------- -----------
Total intangible assets............................ 61,560,185 59,315,809
Other assets--noncurrent portion of commission
advances to facilities............................ 486,547 402,388
----------- -----------
$62,046,732 $59,718,197
=========== ===========
</TABLE>
F-10
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Facility commissions.............................. $2,034,070 $1,808,668
Billing and collection fees....................... 455,517 513,762
Uncollectible call chargebacks.................... 840,000 840,000
Long-distance charges............................. 1,428,148 764,197
Accrued acquisition costs......................... 1,068,124 503,352
Accrued interest.................................. 9,946 1,300,587
Other............................................. 185,436 400,010
---------- ----------
$6,021,241 $6,130,576
========== ==========
</TABLE>
The accrual for uncollectible call chargebacks represents a reserve for
amounts collected from the various LECs or third-party billing services which
are expected to be charged back to the Company in future periods.
7. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Senior Credit Agreement:
Revolving loan facility....................... $ 5,700,000 $ 7,400,000
Term loan facility............................ 45,000,000 45,000,000
Senior subordinated notes....................... 8,500,000 8,500,000
Subordinated notes.............................. 5,000,000 5,000,000
Other........................................... 200,000 200,000
----------- -----------
64,400,000 66,100,000
Less unamortized discount....................... (1,085,500) (1,055,500)
Less current portion of long-term debt.......... (3,150,000) (4,612,500)
----------- -----------
$60,164,500 $60,432,000
=========== ===========
</TABLE>
SENIOR CREDIT AGREEMENT--In December 1996, the Company entered into a Senior
Credit Agreement with a group of lenders, which included a revolving loan
facility and a term loan facility. Under the revolving loan facility, the
Company has availability of up to $10 million, subject to certain
restrictions. The revolving loan facility matures on December 27, 1998, and
requires quarterly interest payments beginning March 31, 1997.
The term loan facility is a $45 million facility, which requires quarterly
interest payments beginning on March 31, 1997, and quarterly principal
installments, beginning on September 30, 1997, of $1,575,000 through December
1997, decreasing to $1,462,500 on March 31, 1998, and increasing to $2,137,500
on March 31, 1999, $2,868,750 on March 31, 2000, and $3,993,750 on March 31,
2001, with the remaining unpaid balance due on December 27, 2001. These
scheduled payments under the term loan facility are subject to mandatory
prepayments beginning March 31, 1998, based on excess cash flows as defined in
the Senior Credit Agreement.
Amounts outstanding under both the revolving loan facility and the term loan
facility bear interest based on one of the following rates at the Company's
option: (i) a variable rate equal to the higher of the administrative agent's
established commercial lending rate or the federal funds rate plus 0.5% or
(ii) a variable rate based on the LIBO (London Interbank Offering) rate. The
Company pays a commitment fee to the lenders at the rate of 0.5% per annum on
the average daily unused portion of the commitment amounts for both the
revolving loan and term loan facilities.
F-11
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Both the revolving and term loan facilities are collateralized by
substantially all the assets of the Company.
SENIOR SUBORDINATED NOTES--In connection with the acquisitions, the Company
issued $8.5 million of senior subordinated notes which mature on December 27,
2002, and accrue interest, payable quarterly, at an initial rate of 12% per
annum for the period from the date of issuance until March 27, 1997.
Thereafter, the interest rate increases 0.5% on a quarterly basis up to a
maximum rate of 19%. The interest rates on these notes are payable in
additional notes for interest paid in excess of 16%. In connection with the
issuance of the senior subordinated notes, stock purchase warrants to acquire
1,085 shares of the Company's Class A common stock at an exercise price of
$.01 per share were issued to certain note holders. As a result, the senior
subordinated notes were discounted from their face value by $1,085,500, which
represented the estimated value of the proceeds assigned to the warrants as
discussed in Note 9. This discount is being amortized as additional interest
expense over the term of the notes, resulting in an effective interest rate on
the senior subordinated notes of 13.76% as of December 31, 1996.
SUBORDINATED NOTES--In connection with the acquisitions, the Company issued
subordinated notes to three stockholders of the Company, which mature on
December 27, 2002, and accrue interest, payable quarterly, at an initial rate
of 12.5% per annum, for the period from the date of issuance through September
30, 1997. Thereafter, the interest rate increases 0.5% on a quarterly basis up
to a maximum rate of 19%.
COVENANTS AND OTHER--The Senior Credit Agreement contains financial and
operating covenants requiring, among other items, the maintenance of certain
financial ratios, as defined, including total debt to free cash flow, senior
debt to free cash flow and various other ratios of free cash flow to specified
minimums. In the event the Company fails to comply with the covenants and
other restrictions, as specified below, it could be in default under the
Senior Credit Agreement and substantially all of the Company's long-term
maturities could be accelerated.
In addition, the Senior Credit Agreement contains various covenants which,
among other things, limit the Company's ability to incur additional
indebtedness, restrict the Company's ability to invest in and divest of
assets, and restrict the Company's ability to pay dividends, redeem or
purchase its common stock or redeem or prepay principal and interest on its
subordinated debt.
At December 31, 1996, the scheduled maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
1997........................................................... $ 3,150,000
1998........................................................... 11,550,000
1999........................................................... 8,750,000
2000........................................................... 11,475,000
2001........................................................... 15,975,000
Thereafter..................................................... 13,500,000
-----------
$64,400,000
===========
</TABLE>
8. INCOME TAXES
A summary of the income tax benefit for the one-month period ended December
31, 1996, is as follows:
<TABLE>
<S> <C>
Refundable income taxes:
Federal........................................................ $(73,837)
State.......................................................... (10,260)
Deferred income taxes............................................ 61,595
--------
$(22,502)
========
</TABLE>
F-12
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has provided for income taxes during the three months ended
March 31, 1997 using expected 1997 effective tax rates for each of its taxing
jurisdictions which have been allocated between current income taxes payable
and deferred income taxes based on anticipated 1997 temporary differences.
The income tax benefit differs from statutory rates primarily because of
permanent differences related to nondeductible goodwill amortization. The
following is a reconciliation of the income tax benefit reported in the
statement of operations:
<TABLE>
<S> <C>
Tax benefit at statutory rates.................................. $(96,094)
Effect of state income taxes.................................... (13,284)
Effect of nondeductible goodwill amortization................... 86,876
--------
$(22,502)
========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<S> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible chargebacks..... $ 440,547
Reserves................................................... 232,712
-----------
673,259
Deferred income tax liabilities:
Depreciation and amortization.............................. (1,944,922)
Other...................................................... (23,845)
-----------
(1,968,767)
-----------
Net deferred income tax liability............................ $(1,295,508)
===========
</TABLE>
This net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<S> <C>
Current asset................................................. $ 673,259
Noncurrent liability.......................................... (1,968,767)
-----------
$(1,295,508)
===========
</TABLE>
9. STOCKHOLDERS' EQUITY
COMMON STOCK--The authorized common stock of the Company includes 49,600
shares of Class A common stock and 400 shares of Class B common stock. Holders
of the shares of Class A and Class B common stock have identical rights and
privileges except that holders of Class B common stock are entitled to four
votes per share as compared to one vote per share for holders of Class A
common stock.
Issued and outstanding shares of common stock include 14,900 shares of Class
A common stock and 400 shares of Class B common stock. The Class B common
stock is convertible into four shares of Class A common stock upon the
occurrence of a major event, as defined.
PREFERRED STOCK--In connection with the acquisitions as discussed in Note 2,
the Company issued 5,925 shares of senior preferred stock to former
stockholders of the acquired companies. The preferred stockholders have no
voting rights and are entitled to receive cumulative dividends at the rate of
$80 per share per annum, payable quarterly, when declared by the Board of
Directors. In the event of any liquidation, dissolution or winding up of the
Company (voluntary or involuntary), the holders of the preferred stock shall
be entitled to receive a preference over common shareholders in any
distribution of assets of the Company, equal to $1,000 per share plus
cumulative unpaid dividends. Upon the occurrence of a major event, which
includes (i) a sale of all or substantially all the assets of the Company or
(ii) a registered public offering of equity interests with gross
F-13
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
proceeds of at least $20 million under the Securities Act of 1933, as amended,
the Company is required to redeem the outstanding shares of preferred stock at
a price equal to $1,000 per share plus cumulative unpaid dividends. Each
holder of preferred stock is entitled to convert each preferred share into
0.08505 shares of Class A common stock, at the option of the holder, at any
time after the date of issuance and on or prior to the occurrence of a major
event, as defined.
In addition to the senior preferred stock discussed above, the Company is
authorized to issue up to 44,000 shares of junior preferred stock, of which no
shares have been issued as of December 31, 1996.
WARRANTS--At the acquisition date, the Company entered into a warrant
agreement with certain of its senior subordinated note holders, which granted
the note holders the right to purchase 1,085 shares of Class A common stock at
an exercise price of $.01 per share, which was below the market value of the
underlying shares at that date. Accordingly, approximately $1,085,500 of the
proceeds of the senior subordinated note borrowings have been allocated to
these warrants and are recorded as additional paid-in capital.
At the acquisition date, the Company also entered into various warrant
agreements with its other subordinated lenders along with its Class B common
shareholders which granted such holders the right to purchase 6,230 shares of
Class A common stock of the Company upon terms established by the Board of
Directors. These warrants are exercisable in whole or part, at various dates
through December 27, 2006, at warrant prices ranging from $1,000 to $3,000 per
share.
As of December 31, 1996, no warrant holders have exercised their warrants to
acquire additional shares of Class A common stock.
10. RELATED-PARTY TRANSACTIONS
A stockholder of the Company has personally guaranteed three of the
Company's operating leases, which have expiration dates ranging from March
1997 to September 1998. In addition, one of the Company's subsidiaries leased
office space from this stockholder under a month-to-month lease with monthly
rentals of $3,000. This lease expired on December 31, 1996. Subsequently, the
Company entered into a new lease agreement with the stockholder, which
requires monthly payments in 1997 of $9,083, and thereafter at agreed-upon
monthly rates through December 31, 2001, at which time the Company has an
option to extend the lease for an additional five years.
The Company entered into a management services and consulting agreement with
a company affiliated with certain stockholders, along with separate consulting
agreements with four stockholders who were formerly employees of the acquired
companies. These agreements require the payment of aggregate minimum annual
consulting fees over the next three years in the following amounts:
<TABLE>
<S> <C>
1997.............................................................. $478,000
1998.............................................................. $468,000
1999.............................................................. $300,000
</TABLE>
These agreements also provide for the reimbursement of direct expenses along
with future payments for transaction consulting services. One of the
agreements entitles an affiliate of certain stockholders to a 1% fee based on
the gross acquisition price for any asset or stock acquisitions by the
Company. This agreement, which expires in December 1999, limits the cumulative
acquisition fees paid to this consultant to an amount not to exceed $1,250,000
over the life of the agreement.
F-14
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The management services and consulting agreement has a three-year term and
is cancelable at either party's discretion, with all consulting fees under the
remaining term of the agreement to be paid upon the date of termination. The
remaining consulting agreements are cancelable only at the option of the
consultants and expire over one- and two-year terms.
In connection with these agreements, the Company paid $150,000 during the
three months ended March 31, 1997, of which $75,000 was recorded as a prepaid
expense at March 31, 1997.
In conjunction with the formation of the Company and the consummation and
financing of the acquisitions, the Company paid transaction fees and expenses
of $1,670,000 to three companies affiliated with certain stockholders which
have been capitalized in the acquisitions.
11. BENEFIT PLAN
The Company's subsidiaries sponsor 401(k) savings plans for the benefit of
eligible full-time employees, which are qualified benefit plans in accordance
with the Employee Retirement Income Security Act (ERISA). Employees
participating in the plan can generally make contributions to the plan of up
to 15% of their compensation. The plans provide for discretionary matching
contributions by the Company of up to 50% of an eligible employee's
contribution. Total plan expense was $3,517 for the one month ended December
31, 1996. There was no plan expense during the unaudited three months ended
March 31, 1997.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases office furniture, office space and
vehicles under various operating lease agreements. Rent expense under these
operating lease agreements was $19,900 and $65,880, respectively, during the
one-month period ended December 31, 1996 and the unaudited three-month period
ended March 31, 1997. Minimum future rental payments under noncancelable
operating leases for each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
December 31:
1997........................................................... $238,809
1998........................................................... 208,337
1999........................................................... 129,986
2000........................................................... 93,602
2001........................................................... 95,668
--------
Total minimum future rental payments............................. $766,402
========
</TABLE>
OTHER--In connection with the acquisitions, the Company entered into
consulting agreements with certain shareholders, which are discussed in Note
10.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of business operations. In the opinion of management,
the amount of liability, if any, with respect to these actions would not
materially affect the financial position of the Company or its results of
operation.
13. SUBSEQUENT EVENTS
On June 27, 1997 the Company issued $115 million of 11% Senior Notes due
2007 in a private placement under Section 144A of the Securities Act of 1933.
A portion of the proceeds of the issuance was used to repay all of the debt
outstanding under the Senior Credit Agreement, the Senior Subordinated Notes
and the
F-15
<PAGE>
Subordinated Notes and to fund the purchase of Security Telecom Corporation.
As a result of the repayment of the outstanding debt, the Company incurred an
extraordinary loss of $4.4 million resulting from the write-off of the
unamortized deferred loan costs and the unamortized discount on the Senior
Subordinated Notes. In addition, on July 30, 1997 the Company's Senior Credit
Agreement was amended to provide the Company a $35 million revolving loan
commitment with interest rates similar to the prior revolving loan commitment
and a maturity date of December 31, 2000.
As discussed above, on June 27, 1997 the Company acquired substantially all
of the net assets of Security Telecom Corporation for cash of $11.2 million
and issuance of 900 shares of the Company's Common Stock. In addition, on July
31, 1997 the Company acquired substantially all of the net assets of
Correctional Communications Corporation for a cash purchase price of $10.5
million. Of this amount, $5.5 million is held in escrow serving as security
for certain representations and warranties made by the sellers. The
acquisition agreement also provides for a contingent payment of up to $1.5
million if certain financial performance benchmarks are achieved in the future
and grants the sellers the right to acquire up to 267 shares of the Company's
common stock at a price of at least $3,000 per share.
* * * * * *
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of AmeriTel Pay Phones, Inc.:
We have audited the accompanying balance sheet of AmeriTel Pay Phones, Inc.
(the "Company"), as of November 30, 1996, and the related statements of
income, stockholders' equity and cash flows for the eleven months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AmeriTel Pay Phones, Inc., as of November
30, 1996, and the results of its income and its cash flows for the eleven
months then ended, in conformity with generally accepted accounting
principles.
Deloitte & Touche llp
Dallas, Texas
April 4, 1997
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of AmeriTel Pay Phones, Inc.:
We have audited the accompanying balance sheet of AmeriTel Pay Phones, Inc.
(the "Company"), as of December 31, 1995, and the related statements of
income, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1995, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Kansas City, Missouri
March 22, 1996
F-18
<PAGE>
AMERITEL PAY PHONES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 891,026 $ 80,664
Accounts receivable................................ 1,754,777 5,546,304
Stock subscriptions receivable..................... 1,061,384
Refundable income taxes............................ 242,277 342,986
Inventories........................................ 1,056,724 785,438
Prepaid expenses................................... 79,526 34,646
Deferred tax asset................................. 253,893 396,752
------------ ------------
Total current assets............................. 4,278,223 8,248,174
PROPERTY AND EQUIPMENT............................... 3,671,940 4,521,521
INTANGIBLE AND OTHER ASSETS.......................... 10,635,478 14,114,958
------------ ------------
TOTAL............................................ $ 18,585,641 $ 26,884,653
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 337,485 $ 1,429,916
Accrued expenses................................... 1,702,786 3,289,957
Current maturities of long-term debt............... 220,592 1,824,907
------------ ------------
Total current liabilities........................ 2,260,863 6,544,780
LONG-TERM DEBT....................................... 11,469,408 13,019,811
DEFERRED INCOME TAXES................................ 318,354 425,689
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
authorized; 244,800 shares issued and outstanding
(liquidation value of $1,534,157 at November 30,
1996)............................................. 2,448 2,448
Common stock, $.01 par value, 10,000,000 shares
authorized; 3,233,854 and 3,519,315 shares issued
and outstanding as of December 31, 1995, and
November 30, 1996, respectively................... 32,338 35,193
Additional paid-in capital......................... 2,292,548 3,704,863
Retained earnings.................................. 2,209,682 3,151,869
------------ ------------
Total stockholders' equity....................... 4,537,016 6,894,373
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 18,585,641 $ 26,884,653
============ ============
</TABLE>
See notes to financial statements.
F-19
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------- NOVEMBER 30, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 11,698,641 $ 20,371,388 $29,305,641 $6,926,662
OPERATING EXPENSES:
Telecommunication
costs................ 5,346,949 9,747,326 13,728,316 3,266,511
Facility commissions.. 1,861,154 3,497,488 6,086,469 1,379,540
Field operations and
maintenance.......... 507,460 863,901 1,166,063 286,000
Selling, general and
administrative....... 927,441 1,758,744 2,281,177 547,460
Depreciation.......... 194,413 384,277 536,264 133,419
Amortization of
intangibles.......... 595,268 1,224,071 1,624,017 409,514
Nonrecurring
expenses............. 684,320
------------ ------------ ----------- ----------
Total operating
expenses........... 9,432,685 17,475,807 26,106,626 6,022,444
------------ ------------ ----------- ----------
OPERATING INCOME........ 2,265,956 2,895,581 3,199,015 904,218
OTHER (INCOME) EXPENSE:
Interest income....... (8,637) (32,165) (20,816)
Interest expense...... 572,618 1,059,860 1,375,701 339,299
Other, net............ 66,139 38,881 27,362
------------ ------------ ----------- ----------
Total other (income)
expense............ 563,981 1,093,834 1,393,766 366,661
------------ ------------ ----------- ----------
INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY
LOSS................... 1,701,975 1,801,747 1,805,249 537,557
INCOME TAXES............ 734,363 693,001 215,022
------------ ------------ ----------- ----------
INCOME BEFORE
EXTRAORDINARY LOSS..... 1,701,975 1,067,384 1,112,248 322,535
EXTRAORDINARY LOSS FROM
EARLY EXTINGUISHMENT OF
DEBT................... 52,353
------------ ------------ ----------- ----------
NET INCOME.............. $ 1,701,975 $ 1,067,384 $ 1,059,895 $ 322,535
============ ============ =========== ==========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED --------------------- PAID-IN RETAINED
STOCK SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... $ -- 3,750 $ 3,750 $ 196,250 $ 269,865 $ 469,865
Issuance of common
stock................. 5,625 5,625 541,875 547,500
Net income for 1994.... 1,701,975 1,701,975
Distributions to
shareholders ($78 per
share)................ (734,575) (734,575)
------ --------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31,
1994................... -- 9,375 9,375 738,125 1,237,265 1,984,765
Stock split............ 3,054,377 3,054,377 (3,054,377) --
Change in par value.... (3,033,115) 3,033,115 --
Issuance of common
stock................. 173,370 1,734 130,891 132,625
Purchase and retirement
of treasury stock..... (3,268) (33) (14,967) (15,000)
Issuance of preferred
stock................. 2,400 1,414,842 1,417,242
Preferred stock
dividends ($.21 per
share)................ 48 29,952 (80,000) (50,000)
Net income for 1995.... 1,067,384 1,067,384
------ --------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31,
1995................... 2,448 3,233,854 32,338 2,292,548 2,209,682 4,537,016
Issuance of common
stock................. 285,461 2,855 1,412,315 1,415,170
Preferred stock
dividends ($0.48 per
share)................ (117,708) (117,708)
Net income for the
eleven months ended
November 30, 1996..... 1,059,895 1,059,895
------ --------- ---------- ---------- ---------- ----------
BALANCE, NOVEMBER 30,
1996................... $2,448 3,519,315 $ 35,193 $3,704,863 $3,151,869 $6,894,373
====== ========= ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------ NOVEMBER 30, MARCH 31,
1994 1995 1996 1996
------------ ------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 1,701,975 $ 1,067,384 $ 1,059,895 $ 322,535
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Extraordinary loss.... 52,353
Depreciation and
amortization......... 789,681 1,608,348 2,160,281 542,933
Deferred income
taxes................ 64,461 (35,524)
Changes in operating
assets and
liabilities:
Accounts receivable.. (605,975) (992,079) (3,803,925) (491,685)
Inventory............ (604,411) (299,555) 271,286 177,505
Prepaid expenses..... (30,619) (44,017) 44,880 (55,495)
Accounts payable..... (189,185) (135,633) 1,092,431 249,988
Accrued expenses..... 366,783 1,288,008 1,460,005 94,836
Income taxes......... (242,277) 266,149 242,277
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 1,428,249 2,314,640 2,567,831 1,082,894
------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (1,779,468) (2,051,111) (1,516,236) (562,511)
Cash outflows for
acquisition of
facility contracts... (6,770,292) (3,613,662) (4,698,468) (3,205,401)
Payments under
noncompete
agreements........... (55,000) (120,000)
------------ ------------ ----------- -----------
Net cash used in
investing
activities......... (8,604,760) (5,664,773) (6,214,704) (3,887,912)
------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-
term debt
borrowings........... 12,305,000 11,890,000 5,600,000 2,700,000
Proceeds from
(payments on) advance
from related
parties.............. 480,742 (571,653)
Proceeds from issuance
of common stock...... 547,500 19,501
Proceeds from issuance
of preferred stock... 1,417,242
Purchase of treasury
stock................ (15,000)
Payments of long-term
debt................. (5,859,932) (8,200,510) (2,645,282) (500,000)
Dividends paid on
common and preferred
stock................ (256,735) (507,840) (137,708) (30,000)
------------ ------------ ----------- -----------
Net cash provided by
financing
activities......... 7,216,575 4,012,239 2,836,511 2,170,000
------------ ------------ ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 40,064 662,106 (810,362) (635,018)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 188,856 228,920 891,026 891,026
------------ ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 228,920 $ 891,026 $ 80,664 $ 256,008
============ ============ =========== ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for
interest............. $ 516,732 $ 930,906 $ 1,489,076 $ 339,299
============ ============ =========== ===========
Cash paid for income
tax.................. $ -- $ 912,479 $ 462,380 $ 10,800
============ ============ =========== ===========
Noncash transactions:
Issuance of common
stock upon exercise
of stock options in
exchange for stock
subscriptions
receivable, along
with the related tax
benefit.............. $ -- $ -- $ 1,395,669 $ --
============ ============ =========== ===========
Amounts payable for
acquisitions......... $ 354,839 $ -- $ 310,000 $ --
============ ============ =========== ===========
Issuance of common
stock upon conversion
of notes payable..... $ -- $ 123,500 $ -- $ --
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--AmeriTel Pay Phones, Inc. (the "Company"), which was incorporated
on June 6, 1991, owns, operates and maintains telephone systems under
contracts with correctional facilities in 30 states, with the majority of its
installations in Missouri, Kansas, Iowa, Indiana, Minnesota and Nebraska.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services, all of which are
granted credit in the normal course of business with terms of between 30 and
60 days. The Company performs ongoing credit evaluations of its customers and
maintains allowances for unbillable and uncollectible losses based on
historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
for unbillable and uncollectible chargebacks, that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of advance payments received, and an
allowance for unbillable and uncollectible calls based on historical
experience for estimated chargebacks to be made by the LECs. Under account
advance agreements with various third-party billing services, advance payments
equal to a percentage of the outstanding billed receivables are remitted to
the Company when calls are submitted to the third-party billing service and
the Company grants a lien to the third-party billing service on the related
accounts receivable for the advance. The remainder of the billed receivable is
paid to the Company, net of the advance amount, after the third-party billing
service has collected the amounts receivable from the respective LECs.
Interest is charged on the advance payment at varying rates.
INVENTORIES--Inventories are stated at the lower of cost, as determined
using the weighted average cost method, or market. Inventory is primarily
composed of equipment available for installation on new contracts and supplies
and parts for the telephone systems serviced by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- ---------------
<S> <C>
Leasehold improvements.................................... Term of lease
Telephone system equipment................................ 7.5 to 10 years
Vehicles.................................................. 5 years
Office equipment.......................................... 3 to 7 years
</TABLE>
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net difference less any amount
realized from the disposition is reflected in earnings.
F-23
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE AND OTHER ASSETS--Intangible and other assets primarily include
amounts allocated to acquired facility contracts, noncompete agreements,
goodwill and other intangible assets, which are stated at cost, along with the
long-term portion of customer advances. Amortization of intangible assets is
provided on a straight-line basis over the estimated useful lives of the
related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ 7.5 years
Noncompete agreements...................................... Agreement term
Deferred loan costs........................................ Loan term
Other intangibles.......................................... 5 to 20 years
Goodwill................................................... 15 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with signing bonuses paid to the facilities under new
facility installations and other incremental direct costs paid to obtain the
facility contracts.
Other intangibles include organizational costs and licensing fees to obtain
state licenses to conduct business.
The Company began in 1996 to periodically assess the net realizable value of
its intangible assets, as well as all other assets, by comparing the expected
future net operating cash flow, undiscounted and without interest charges, to
the carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--Prior to 1995, the Company had elected to be treated as an S
corporation under certain provisions of the Internal Revenue Code.
Accordingly, the 1994 statement of income includes no provision for federal or
state income taxes since the taxable income of the Company is included in the
shareholders' individual income tax returns. Effective January 1, 1995, the
Company terminated its S corporation status.
The Company accounts for income taxes using the liability method in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are provided for temporary differences between the
financial statement and tax bases of the assets and liabilities using current
tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," include cash and
cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company believes that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are a reasonable
estimate of their fair value because of the short-
F-24
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
term maturities of such instruments or, in the case of the revolving credit
facility borrowings, because of the floating interest rates on such
borrowings. In the case of the subordinated promissory notes to related
parties, which bear a fixed interest rate, the Company believes that the
current interest rates on these notes approximate the rates which could be
currently negotiated with such related parties.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's statements of income
and cash flows for the three months ended March 31, 1996, have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal, recurring adjustments) necessary to present fairly
the results of operations and cash flows of the Company for the three months
ended March 31, 1996, have been made. The results of operations for the
interim period are not necessarily indicative of the results to be expected
for the full year.
2. ACQUISITIONS
During the years ended December 31, 1994 and 1995, and the eleven months
ended November 30, 1996, the Company acquired facility contracts and the
related facility equipment from various other independent inmate phone
operators for purchase prices aggregating $7.2 million, $3.6 million and $5.0
million, respectively.
These acquisitions were each accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only the
results of the operations of these facilities subsequent to their respective
acquisition dates are included in the financial statements of the Company. At
the acquisition dates, the purchase prices were allocated to the assets
acquired, including telephone system equipment, facility contracts and other
identifiable intangibles based on their fair market values. The excess of the
total purchase prices over the fair values of the assets acquired represented
goodwill. In connection with the acquisitions, assets were acquired and
liabilities were assumed as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, ELEVEN MONTHS
--------------------- ENDED
1994 1995 NOVEMBER 30, 1996
---------- ---------- -----------------
<S> <C> <C> <C>
Purchase prices:
Net cash paid.................. $6,825,292 $3,613,662 $4,698,468
Amounts payable to sellers..... 354,839 310,000
---------- ---------- ----------
Total purchase prices............ 7,180,131 3,613,662 5,008,468
Estimated fair values of tangible
and identifiable intangible
assets acquired................. 3,204,881 3,215,111 4,121,809
---------- ---------- ----------
Goodwill......................... $3,975,250 $ 398,551 $ 886,659
========== ========== ==========
</TABLE>
The following table presents unaudited pro forma results of operations of
the Company for the year ended December 31, 1995, and the eleven months ended
November 30, 1996, as if the 1995 and 1996 acquisitions had occurred at the
beginning of 1995.
<TABLE>
<CAPTION>
(UNAUDITED)
1995 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $32,770,086 $31,929,045
=========== ===========
Income before extraordinary loss.................. $ 1,430,165 $ 1,308,344
=========== ===========
Net income........................................ $ 1,430,165 $ 1,255,991
=========== ===========
</TABLE>
F-25
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations of the Company would have been had
the acquisitions occurred at the beginning of the year, nor do they purport to
be indicative of the future results of operations of the Company.
In connection with four of the acquisitions in 1994 and two of the
acquisitions in 1996, the Company recorded amounts payable to the sellers of
$354,839 and $310,000, respectively, the payment of which was contingent upon
the fulfillment of certain stipulations which the Company believed were
probable of being met. In the event that the stipulations were not met and the
full balance was not paid by the Company, intangible assets previously
recorded on these acquisitions would be reduced. During 1995, certain of the
stipulations related to the 1994 acquisitions were not met and $171,500 of the
amounts payable to sellers recorded in 1994 was not paid, which was accounted
for as an adjustment to the purchase prices in 1995, thus reducing the amount
of goodwill originally recorded on these acquisitions.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Trade accounts receivable..................... $ 4,255,170 $ 6,895,904
Advance commissions receivable................ 111,211 353,378
Receivable related to an acquisition.......... 163,867
Employees and other........................... 22,621 50,670
----------- -----------
4,552,869 7,299,952
Less advances on receivables.................. (2,136,156) (719,093)
Less allowance for unbillable and uncollecti-
ble chargebacks.............................. (661,936) (1,034,555)
----------- -----------
$ 1,754,777 $ 5,546,304
=========== ===========
</TABLE>
At December 31, 1995, and November 30, 1996, the Company had advanced
commissions to certain facilities of $306,243 and $843,378, respectively,
which are recoverable from such facilities as a reduction of earned
commissions at specified monthly amounts. Amounts included in accounts
receivable represent the estimated recoverable amounts during the next fiscal
year with the remaining balance recorded in other assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements......................... $ 66,156 $ 59,145
Telephone system equipment..................... 3,845,877 5,159,020
Vehicles....................................... 157,506 138,914
Office equipment............................... 263,558 334,543
---------- -----------
4,333,097 5,691,622
Less accumulated depreciation and amortiza-
tion.......................................... (661,157) (1,170,101)
---------- -----------
$3,671,940 $ 4,521,521
========== ===========
</TABLE>
Substantially all of the Company's property and equipment is collateral for
the Company's long-term debt.
F-26
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Intangible assets:
Acquired facility contracts................... $ 7,549,937 $11,432,435
Noncompete agreements......................... 455,000 375,000
Goodwill...................................... 4,202,301 5,088,960
Other intangibles............................. 199,819 100,945
----------- -----------
12,407,057 16,997,340
Less accumulated amortization................. (1,966,611) (3,372,382)
----------- -----------
Total intangible assets......................... 10,440,446 13,624,958
Other assets--noncurrent portion of commission
advances to facilities......................... 195,032 490,000
----------- -----------
$10,635,478 $14,114,958
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Billing and collection fees........................ $ 382,965 $ 420,338
Facility commissions............................... 326,613 722,769
Long-distance charges.............................. 740,006 1,399,180
Recurring and special bonuses...................... 521,875
Other.............................................. 253,202 225,795
---------- ----------
$1,702,786 $3,289,957
========== ==========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revolving credit facility advances................ $ 9,500,000 $12,600,000
Subordinated promissory note payable to a related
party, with interest at 10%, due on December 31,
2001............................................. 800,000 800,000
Subordinated promissory notes payable to a related
party, with interest of 10%, payable in quarterly
installments of $106,472 until maturity on March
31, 2000, collateralized by a security interest
in certain facility equipment and contracts...... 1,390,000 1,244,718
Amount payable in connection with a facility con-
tract acquisition, due in February 1999.......... 200,000
----------- -----------
11,690,000 14,844,718
Current maturities of long-term debt.............. (220,592) (1,824,907)
----------- -----------
$11,469,408 $13,019,811
=========== ===========
</TABLE>
F-27
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The revolving credit facility is a $20,000,000 revolving credit facility
with United Missouri Bank, N.A. and NBD Bank, with interest at a floating rate
based on either prime or LIBOR options plus applicable basis points based on
the Company's applicable coverage ratios. The outstanding balance at September
30, 1996, was converted into an installment note at that date, with the
remaining balance of the revolving credit facility available until September
30, 1998. The installment note is payable in quarterly installments of
$378,000 in 1997, increasing on an annual basis thereafter through September
30, 2001. The Company pays a commitment and facility fee of 0.5% on the
average daily unused portion of the revolving credit facility. The revolving
credit facility is collateralized by substantially all assets of the Company.
Scheduled principal maturities on long-term debt for the five years
subsequent to December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 1,824,907
1998........................................................... 2,374,490
1999........................................................... 3,194,374
2000........................................................... 3,122,947
2001........................................................... 4,328,000
-----------
$14,844,718
===========
</TABLE>
In conjunction with the sale of the Company as discussed in Note 14, all of
the outstanding debt was repaid.
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1995, and the
eleven months ended November 30, 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current taxes payable:
Federal............................................... $553,459 $609,228
State................................................. 116,443 119,297
Deferred income taxes................................... 64,461 (35,524)
-------- --------
$734,363 $693,001
======== ========
</TABLE>
There was no provision for income taxes in 1994 because of the Company's
election to be treated as an S corporation during that period.
The Company has provided income tax expense during the three months ended
March 31, 1996 using the effective tax rates for each of its taxing
jurisdictions which have been allocated between current income taxes payable
and deferred income taxes based on 1996 temporary differences.
The provision for income taxes differs from statutory rates primarily as a
result of state income taxes and permanent differences. The following is a
reconciliation of income taxes reported in the statement of operations:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Tax at statutory rates.................................. $612,594 $613,785
Effect of state income taxes............................ 78,919 102,487
Termination of S corporation status..................... 15,141
Other................................................... 27,709 (23,271)
-------- --------
$734,363 $693,001
======== ========
</TABLE>
F-28
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<CAPTION>
ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
Deferred tax asset:
Allowance for unbillable and
uncollectible chargebacks.............. $ 253,893 $ 396,752
Deferred tax liabilities:
Depreciation and amortization........... (313,584) (402,892)
Other................................... (4,770) (22,797)
--------- ---------
(318,354) (425,689)
--------- ---------
Net deferred income tax liability......... $ (64,461) $ (28,937)
========= =========
</TABLE>
This net deferred income tax liability is classified in the balance sheet as
follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
Current asset............................... $ 253,893 $ 396,752
Noncurrent liability........................ (318,354) (425,689)
--------- ---------
$ (64,461) $ (28,937)
========= =========
</TABLE>
9. STOCKHOLDERS' EQUITY
STOCK SPLIT--On April 26, 1995, the Company's Board of Directors approved a
326.8-for-1 split of the Company's common stock, a change in the par value of
the stock from $1 to $.01 and a change in the number of authorized common
shares to 10,000,000 shares of common stock. All share amounts in the
financial statements have been restated for the stock split.
STOCK OPTIONS--On May 1, 1994, the Board of Directors of the Company adopted
a stock option agreement for certain employees and consultants of the Company.
On the same date, the Board of Directors granted options for 233,335 shares of
common stock at $.765 per share, the then-estimated fair market value per
share of common stock of the Company which were exercisable at any time for a
period of up to ten years from the date of grant.
On December 19, 1994, the Board of Directors of the Company adopted the 1995
Stock Option Plan (the "Plan") for the directors, officers and other key
employees of the Company, effective for fiscal year 1995. The maximum number
of shares that could be granted under the Plan was amended from 653,600 shares
to 446,248 shares on April 28, 1995. Under the provisions of the Plan, options
were to be granted at an exercise price per share not less than the fair
market value at the date of grant, as determined by the Compensation Committee
(the "Committee"), and were to be exercisable on the date of grant. The
Committee was also assigned responsibility for determining the term of each
option, which in no event could exceed ten years from the date of grant. A
total of 225,492 options were granted under the Plan during 1995 at a price of
$4.59 per share, the then estimated fair market value per share of common
stock of the Company.
F-29
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, no additional stock options were granted to employees, and
employees exercised all remaining unexercised options prior to the sale of the
Company, as discussed in Note 14. The following is a summary of changes in
stock options during 1995 and 1996:
<TABLE>
<CAPTION>
EXERCISE
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Granted during 1994............................. 233,339 $ .765
--------
Outstanding at December 31, 1994.................. 233,339 .765
Granted during 1995............................. 225,492 4.590
Exercised during 1995........................... (173,370) .765
--------
Outstanding at December 31, 1995.................. 285,461 3.790
Exercised during 1996........................... (285,461) 3.790
--------
Outstanding at November 30, 1996.................. --
========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation has
been recognized since stock options granted under these plans were at exercise
prices which approximated market value at the grant date. Had the Company
implemented SFAS No. 123, the implementation would not have affected the net
income of the Company for the eleven months ending November 30, 1996, because
no options were granted during the period and because options granted prior to
1996 were fully vested. Had the Company implemented SFAS No. 123 in 1995, the
implementation would have increased the Company's compensation expense by
approximately $307,000 and the Company's pro forma net income, considering the
effect of implementing SFAS No. 123, net of tax effects, would have been
approximately $878,384.
In connection with the issuance of shares of the Company's common stock for
exercised options in 1996, the Company recognized, as increases in common
stock and additional paid-in capital, the aggregate exercise prices of
$1,080,885, along with the tax benefits related to such options of $334,285.
At November 30, 1996, the Company had recorded stock subscriptions receivable
of $1,061,384 from certain employees for unpaid exercise proceeds, which were
subsequently collected by the Company in December 1996.
PREFERRED STOCK--On May 1, 1995, the Company authorized the issuance of up
to 500,000 shares of preferred stock at $.01 par value. Subsequently, 244,800
shares were issued during 1995 (of which 4,800 were issued in the form of a
stock dividend), 208,000 of such shares were purchased by Kansas City Equity
Partners, L.P. The preferred stock accrues dividends at 8% for the one-year
period ending on the first anniversary of the original issue date, 10% until
the second anniversary date and 12% thereafter. The preferred stock dividend,
at the election of the Company, is payable in cash or additional shares of
preferred stock. The preferred stock is convertible any time into 244,800
shares of common stock on an after-stock-conversion basis. During 1996,
$137,708 of the cash dividends were paid on the preferred stock. During 1995,
$30,000 of dividends were paid on the preferred stock in the form of a stock
dividend, resulting in the issuance of an additional 4,800 preferred shares;
and $50,000 of cash dividends were paid on the preferred stock.
In conjunction with the sale of the Company, as discussed in Note 14, all
outstanding shares of preferred stock were redeemed.
10. RELATED PARTY TRANSACTIONS
In addition to the related party notes payable discussed in Note 7 and the
stock subscription receivables related to exercised stock options discussed in
Note 9, during 1995 and the eleven months ended November 30,
F-30
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996, the Company paid an affiliate of its majority stockholders a consulting
fee of $57,005 and $37,500, respectively, and, in 1996, incurred certain legal
costs on behalf of its stockholders which are recorded as accounts receivable
from such stockholders.
In 1994 and 1995, the Company shared a common office facility with Green
Street Capital, Inc. ("Green Street"), which is owned by the two principal
shareholders of the Company. Rental payments received from Green Street in
1994 and 1995 were $12,000 and $7,750, respectively. There were no similar
arrangements in 1996.
In addition to the above shared facilities, the Company entered into several
other related party transactions with Green Street. A management fee of
$185,689 in 1994 and $40,000 through June 1995 was paid to Green Street for
reimbursement of services provided to the Company and is included in selling,
general and administrative expenses in the accompanying statements of income.
Subsequent to the termination of the management fee, certain salaries and
expenses of Green Street employees were billed and paid monthly by the Company
for services rendered. During 1994, an advance of $571,653 was received by the
Company, representing Company expenses paid by Green Street during the year.
The advance carried interest at 9.5% and was repaid by the Company in 1995.
Other related party transactions included the Company's purchase of
telephone contracts and equipment from Pay-Tel of America, Inc., an affiliate
of certain stockholders, for $3,978,216 and $770,000 in 1994 and 1995,
respectively; and during 1995, the Company paid Phone Bell Systems, Inc., an
affiliate of certain stockholders, $18,825 for billing services and purchased
the stock of this entity for $10,000.
11. BENEFIT PLAN
The Company sponsors a 401(k) savings plan for the benefit of eligible full-
time employees which is a qualified benefit plan in accordance with the
Employee Retirement Income Security Act ("ERISA"). The employees participating
in the plan can generally make contributions to the plan of up to 15% of their
compensation. The plan provides for discretionary matching contributions by
the Company of up to 50% of an eligible employee's contribution. No
significant contributions to this plan were made by the Company during 1994,
1995 and 1996.
12. OTHER COSTS
NONRECURRING COSTS--During 1996, the Company incurred costs of $250,000
related to the settlement of a lawsuit related to a prior acquisition, along
with special bonuses of $434,320 paid to key management at the date of the
sale of the Company, as discussed in Note 14. These special bonuses were
payable to key management upon the closing of the sale of the Company pursuant
to a transaction bonus agreement with such employees, due and payable only
upon the closing of the sale, a portion of which was attributable to the
buyout of existing employment contracts with such employees.
EXTRAORDINARY LOSS--In connection with the sale of the Company, all
outstanding long-term debt was repaid, resulting in the expensing of existing
unamortized debt issue costs of $52,353 (net of income tax benefit of
$32,573). This loss has been classified as an extraordinary loss in accordance
with the provisions of SFAS No. 4, "Reporting Gains and Losses From the Early
Extinguishment of Debt."
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE--The Company leases office space under an operating lease
agreement which expires on July 31, 1999. Rent expense under this and prior
operating lease agreements was $18,800, $102,484, $61,050, and $33,031 during
the fiscal years 1994, 1995, 1996, and the unaudited three months ended March
31, 1996,
F-31
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
respectively. The total remaining future minimum lease payments for the
Company under the operating lease agreement is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 66,600
1998.............................................................. 66,600
1999.............................................................. 38,850
--------
$172,050
========
</TABLE>
CONTINGENCIES--The Company is subject to various legal proceedings and
claims which arise in the ordinary course of business operations. In the
opinion of management, the amount of liability, if any, with respect to these
actions would not materially affect the financial position of the Company or
its results of operations.
14. SUBSEQUENT SALE OF COMPANY
On December 27, 1996, Talton Holdings, Inc. acquired all of the outstanding
common stock of the Company in a purchase business combination effective
December 1, 1996. In conjunction with this transaction, all of the outstanding
debt of the Company was repaid and all of the outstanding preferred stock was
redeemed.
* * * * * *
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Talton Telecommunications
Corporation:
We have audited the accompanying consolidated balance sheet of Talton
Telecommunications Corporation and subsidiary (the "Company") as November 30,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the eleven months then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Talton
Telecommunications Corporation and subsidiary as of November 30, 1996, and the
results of their income and their cash flows for the eleven months then ended,
in conformity with generally accepted accounting principles.
Deloitte & Touche llp
Dallas, Texas
April 4, 1997
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Talton Telecommunications
Corporation:
We have audited the accompanying consolidated balance sheet of Talton
Telecommunications Corporation and subsidiary (the "Company") as of December
31, 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1995, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Borland, Benefield, Crawford & Webster, P.C.
Birmingham, Alabama
March 4, 1996
F-34
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30, MARCH 31,
1995 1996 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 401,737 $ 449,904 $ 4,449
Accounts receivable.................... 2,054,141 2,388,958 3,385,155
Refundable income taxes................ 489,652 249,000
Inventories............................ 310,628 168,395 66,498
Prepaid expenses....................... 55,788 12,935
Deferred income tax asset.............. 220,653 54,400 219,876
---------- ---------- ----------
Total current assets................. 3,476,811 3,117,445 3,937,913
PROPERTY AND EQUIPMENT................... 3,833,426 4,119,147 4,080,635
INTANGIBLE AND OTHER ASSETS.............. 695,861 586,656 662,127
---------- ---------- ----------
TOTAL................................ $8,006,098 $7,823,248 $8,680,675
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................ $ 936,569 $ 950,576 $1,888,409
Accrued expenses........................ 3,148,445 3,205,027 2,852,026
Income taxes payable.................... 892,000
Current portion of debt................. 1,848,716
---------- ---------- ----------
Total current liabilities............ 5,933,730 5,047,603 4,740,435
LONG-TERM DEBT........................... 1,535,078 3,026,217
DEFERRED INCOME TAXES.................... 223,869 308,605 246,740
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 5,000
shares authorized, issued and
outstanding........................... 5,000 5,000 5,000
Retained earnings...................... 308,421 2,462,040 662,283
---------- ---------- ----------
Total stockholders' equity........... 313,421 2,467,040 667,283
---------- ---------- ----------
TOTAL................................ $8,006,098 $7,823,248 $8,680,675
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-35
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, ELEVEN MONTHS THREE MONTHS
-------------------------- ENDED ENDED
1994 1995 NOVEMBER 30, 1996 MARCH 31, 1996
------------ ------------ ----------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 12,192,640 $ 19,955,019 $24,357,473 $6,227,076
OPERATING EXPENSES:
Telecommunication
costs................ 6,413,500 8,926,090 9,588,482 2,720,550
Facility commissions.. 2,040,281 6,097,790 7,875,455 1,965,294
Field operations and
maintenance.......... 535,971 602,429 649,739 143,531
Selling, general and
administrative....... 1,642,976 2,329,970 1,639,827 447,428
Depreciation.......... 771,419 975,350 1,001,982 246,964
Amortization of
intangibles.......... 796,548 380,895 122,180 33,733
------------ ------------ ----------- ----------
Total operating
expense............ 12,200,695 19,312,524 20,877,665 5,557,500
------------ ------------ ----------- ----------
OPERATING INCOME
(LOSS)................. (8,055) 642,495 3,479,808 669,576
OTHER (INCOME) EXPENSE:
Interest income....... (111) (9,625) (55,268) (7,639)
Interest expense...... 181,521 341,461 169,789 65,402
Other, net............ (134,548) (118,095) (12,321) (6,352)
------------ ------------ ----------- ----------
Total other (income)
expense............ 46,862 213,741 102,200 51,411
------------ ------------ ----------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (54,917) 428,754 3,377,608 618,165
INCOME TAXES (BENEFIT).. (10,716) 157,339 1,223,989 264,300
------------ ------------ ----------- ----------
NET INCOME (LOSS)....... $ (44,201) $ 271,415 $ 2,153,619 $ 353,865
============ ============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 (As restated--
Note 2)................................. 5,000 $5,000 $ 81,207 $ 86,207
Net loss for 1994 (as restated)........ (44,201) (44,201)
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1994 (As restated--
Note 2)................................. 5,000 5,000 37,006 42,006
Net income for 1995 (as restated)...... 271,415 271,415
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1995 (As restated--
Note 2)................................. 5,000 5,000 308,421 313,421
Net income for the eleven months ended
November 30, 1996..................... 2,153,619 2,153,619
----- ------ ---------- ----------
BALANCE, NOVEMBER 30, 1996............... 5,000 $5,000 $2,462,040 $2,467,040
===== ====== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEARS ENDED DECEMBER 31, ENDED THREE MONTHS
-------------------------- NOVEMBER 30, ENDED
1994 1995 1996 MARCH 31, 1996
------------ ------------ ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (44,201) $ 271,415 $ 2,153,619 $ 353,865
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,567,967 1,356,245 1,124,162 280,698
Deferred income
taxes................ (101,180) 354,884 250,989 23,648
Changes in operating
assets and
liabilities:
Accounts receivable... 608,077 (1,077,696) (180,563) (1,331,014)
Inventories........... (62,254) (174,715) 142,233 244,130
Prepaid expenses...... (7,217) 7,536 (55,788) (12,935)
Accounts payable...... 9,663 302,838 14,007 1,791,840
Accrued expenses...... 157,638 1,236,118 (97,672) (1,136,422)
Income taxes payable.. (111,272) (523,114) 1,381,652 240,652
------------ ------------ ----------- ----------
Net cash provided by
operating
activities......... 2,017,221 1,753,511 4,732,639 454,462
------------ ------------ ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (1,443,911) (2,617,816) (1,287,703) (494,173)
Payments (refunds) for
intangible and other.. 72,179 260,767 (12,975)
------------ ------------ ----------- ----------
Net cash used in
investing
activities......... (1,371,732) (2,357,049) (1,300,678) (494,173)
------------ ------------ ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt..... 400,000 2,000,225
Payments of long-term
debt.................. (949,488) (1,185,168) (3,383,794) (357,577)
------------ ------------ ----------- ----------
Net cash provided by
(used in) financing
activities......... (549,488) 815,057 (3,383,794) (357,577)
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ 96,001 211,519 48,167 (397,288)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 94,217 190,218 401,737 401,737
------------ ------------ ----------- ----------
CASH AND CASH
EQUIVALENTS,
END OF PERIOD.......... $ 190,218 $ 401,737 $ 449,904 $ 4,449
============ ============ =========== ==========
SUPPLEMENTAL
INFORMATION:
Interest paid.......... $ 181,521 $ 338,672 $ 172,578 $ 65,402
============ ============ =========== ==========
Income taxes paid
(refunded)............ $ 201,736 $ 89,500 $ (408,652) $ --
============ ============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Talton Telecommunications Corporation (the "Company"), which was
incorporated in 1973, owns, operates and maintains telephone systems under
contracts with correctional facilities in Alabama, Mississippi, North Carolina
and South Carolina. The Company also operates and maintains public pay
telephone systems at various third-party property locations.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services for smaller volume
LECs, all of which are granted credit in the normal course of business with
terms of between 30 and 60 days. The Company performs ongoing credit
evaluations of its customers and maintains allowances for unbillable and
uncollectible losses based on historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
and reserves for unbillable and uncollectible chargebacks, that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Talton
Telecommunications of Carolina, Inc. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of an allowance for unbillable and
uncollectible calls, based on historical experience, for estimated chargebacks
to be made by the LECs.
INVENTORIES--Inventories are stated at the lower of cost, as determined
using the first-in, first-out ("FIFO") method of valuation or market.
Inventory is primarily composed of equipment available for installation on new
contracts and supplies and parts for the telephone systems serviced by the
Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Leasehold improvements..................................... 15 to 39 years
Telephone system equipment................................. 5 to 6 years
Vehicles................................................... 5 years
Office equipment........................................... 5 to 7 years
</TABLE>
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net difference less any amount
realized from the disposition is reflected in earnings.
F-39
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE AND OTHER ASSETS--Intangible and other assets include amounts
allocated to acquired facility contracts, noncompete agreements, goodwill and
other intangible assets, which are stated at cost. Amortization of intangible
assets is provided on a straight-line basis over the estimated useful lives of
the related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
---------------- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
Goodwill................................................... 15 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with other incremental direct costs paid to obtain
the facility contracts.
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flows, undiscounted and without interest charges, to the
carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--The Company accounts for income taxes using the liability
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are provided for temporary differences
between the financial statement and tax bases of the assets and liabilities
using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," include cash and
cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company believes that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are a reasonable
estimate of their fair value because of the short-term maturities of such
instruments or, in the case of long-term debt, because of the floating
interest rates on such long-term debt.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's statements of income
and cash flows for the three months ended March 31, 1996, have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal, recurring adjustments) necessary to present fairly
the results of operations and cash flows of the Company for the three months
ended March 31, 1996, have been
F-40
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
made. The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
2. PRIOR-PERIOD ADJUSTMENTS
The Company has restated its previously issued consolidated financial
statements for the years ended December 31, 1994 and 1995, to correct for
certain errors principally related to the timing of when certain recurring
costs are recognized in the consolidated financial statements. These
corrections relate primarily to the capitalization of certain direct costs of
facility contract installations previously expensed, the recording of
allowances and reserves for unbillable and uncollectible chargebacks, the
recording of excise taxes and the recording of deferred income taxes, and
reduced previously reported retained earnings as of January 1, 1994, by
$396,209. The following table summarizes the impact of these corrections on
previously reported results of operations and retained earnings during 1994
and 1995:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
------------ ------------
<S> <C> <C>
Income (loss) before income taxes:
As previously reported....................... $ (190,808) $ (24,716)
As restated.................................. (54,917) 428,754
Net income (loss):
As previously reported....................... (328,286) 154,670
As restated.................................. (44,201) 271,415
Retained earnings:
As previously reported....................... 149,130 303,800
As restated.................................. 37,006 308,421
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Trade accounts receivable...................... $2,159,660 $2,390,864
Amounts due from shareholders.................. -- 154,894
Other.......................................... 54,481 3,200
---------- ----------
2,214,141 2,548,958
Less allowance for unbillable and uncollectible
chargebacks................................... (160,000) (160,000)
---------- ----------
$2,054,141 $2,388,958
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements........................ $ 430,346 $ 449,116
Telephone system equipment.................... 6,301,141 7,425,582
Vehicles...................................... 227,370 246,611
Office equipment.............................. 194,942 319,167
----------- -----------
7,153,799 8,440,476
Less accumulated depreciation and
amortization................................. (3,320,373) (4,321,329)
----------- -----------
$ 3,833,426 $ 4,119,147
=========== ===========
</TABLE>
F-41
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Acquired facility contracts.................... $ 1,562,906 $ 1,562,906
Noncompete agreement........................... 250,000 250,000
Goodwill....................................... 455,704 455,704
Other.......................................... 53,400 66,375
----------- -----------
2,322,010 2,334,985
Less accumulated amortization.................. (1,626,149) (1,748,329)
----------- -----------
$ 695,861 $ 586,656
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Facility commissions............................. $1,293,030 $1,317,000
Uncollectible call chargebacks................... 840,000 840,000
Sales and excise taxes........................... 530,161 702,838
Payroll and benefits............................. 161,000 145,295
Other............................................ 324,254 199,894
---------- ----------
$3,148,445 $3,205,027
========== ==========
</TABLE>
The accrual for uncollectible call chargebacks represents a reserve for
amounts collected from the various LECs or third-party billing services which
are expected to be charged back to the Company in future periods.
7. LONG-TERM DEBT
The following table summarizes the Company's long-term debt at December 31,
1995. Since all of the outstanding debt was repaid by the Company during 1996,
there are no outstanding balances at November 30, 1996:
<TABLE>
<S> <C>
Notes payable, with interest of 8.5%, payable in monthly
installments of $110,000 until maturity in June 1997,
collateralized by equipment and personally guaranteed by the
majority stockholder........................................ $ 1,980,545
Note payable, with interest of 9.75%, payable in monthly
installments of $50,000 until maturity in December 1997,
collateralized by accounts receivable and certain equipment
and personally guaranteed by the majority stockholder....... 1,112,226
Note payable, with interest of 8.5%, payable in monthly
installments of $12,660 until maturity in January 1998,
collateralized by equipment and personally guaranteed by the
majority stockholder........................................ 291,023
-----------
3,383,794
Current maturities of long-term debt......................... (1,848,716)
-----------
$ 1,535,078
===========
</TABLE>
F-42
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a $750,000 line of credit arrangement with The Peoples Bank
and Trust Company. The line had no outstanding balance at either December 31,
1995, or November 30, 1996. The line of credit bears interest at the prime
rate, and is personally guaranteed by the majority stockholder.
8. INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1994 and 1995, and the eleven months ended November 30, 1996, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Current taxes payable (refundable):
Federal................................ $ 82,306 $(181,387) $ 901,000
State.................................. 8,158 (16,158) 72,000
Deferred income taxes.................... (101,180) 354,884 250,989
--------- --------- ----------
$ (10,716) $ 157,339 $1,223,989
========= ========= ==========
</TABLE>
The Company has provided income tax expense during the three months ended
March 31, 1996 using the effective tax rates for each of its taxing
jurisdictions which have been allocated between current income taxes payable
and deferred income taxes based on 1996 anticipated temporary differences.
The provision for income taxes (benefit) differs from statutory rates
primarily as a result of state income taxes and permanent differences. The
following is a reconciliation of income taxes reported in the statement of
operations:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, NOVEMBER 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory rates............. $(18,672) $145,776 $1,148,387
Effect of state income taxes....... (1,593) 12,434 97,951
Tax penalties and other............ 9,549 (871) (22,349)
-------- -------- ----------
$(10,716) $157,339 $1,223,989
======== ======== ==========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible
revenues.................................... $ 54,400 $ 54,400
Reserves..................................... 146,201 --
Other........................................ 20,052 --
--------- ---------
220,653 54,400
Deferred income tax liabilities:
Depreciation and amortization................ (222,821) (307,557)
Other........................................ (1,048) (1,048)
--------- ---------
(223,869) (308,605)
--------- ---------
Net deferred income tax liability.............. $ (3,216) $(254,205)
========= =========
</TABLE>
F-43
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
This net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Current asset.................................... $ 220,653 $ 54,400
Noncurrent liability............................. (223,869) (308,605)
--------- ---------
$ (3,216) $(254,205)
========= =========
</TABLE>
9. BENEFIT PLAN
The Company sponsors a 401(k) savings plan for the benefit of eligible full-
time employees which is a qualified benefit plan in accordance with the
Employee Retirement Income Security Act ("ERISA"). The employees participating
in the plan can generally make contributions to the plan of between 5% and 10%
of their compensation. The plan provides for discretionary matching
contributions by the Company of up to 50% of an eligible employee's
contribution. Total plan expense was $19,029, $29,489 and $32,820 for the
years ended December 31, 1994 and 1995, and for the eleven months ended
November 30, 1996. There was no plan expense during the unaudited three months
ended March 31, 1996.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment used in its operations
under operating lease agreements. Such leases, which are primarily for office
furniture, office space and vehicles, have lease terms ranging from one to
four years.
Future minimum lease payments for years ending December 31 under
noncancelable operating leases are summarized below:
<TABLE>
<S> <C>
1996 (one month)................................................. $ 10,848
1997............................................................. 63,209
1998............................................................. 30,187
1999............................................................. 960
2000............................................................. 720
--------
Total minimum future rental payments............................. $105,924
========
</TABLE>
Rent expense in connection with these leases totaled $152,815, $159,951 and
$107,158 for the years ended December 31, 1994 and 1995, and for the period
ended November 30, 1996, respectively, and $42,041 for the unaudited three
months ended March 31, 1996.
11. RELATED PARTY TRANSACTIONS
The Company's majority stockholder and president has personally guaranteed
three of the Company's operating leases, which have expiration dates ranging
from March 1997 to September 1998. Total payments under the guaranteed leases
for the year ended December 31, 1995, and for the eleven months ended November
30, 1996, totaled $75,282 and $79,239, respectively.
The Company's offices are located in an office building leased from the
Company's president and majority stockholder under a month-to-month lease,
with monthly rentals of $3,000.
During 1996, the Company's stockholders incurred $154,894 of legal expenses
which were paid by the Company and are recorded as amounts due from
stockholders in accounts receivable at November 30, 1996, pending
reimbursement from such stockholders.
F-44
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
12. SUBSEQUENT SALE OF COMPANY
On December 27, 1996, Talton Holdings, Inc. acquired all of the outstanding
common stock of the Company in a purchase business combination effective
December 1, 1996.
* * * * * *
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Security Telecom Corporation
We have audited the accompanying consolidated balance sheets of Security
Telecom Corporation and subsidiary (the "Company") as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Telecom Corporation and subsidiary as of December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Davis, Clark and Company, P.C.
Dallas, Texas
May 23, 1997
F-46
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 11,601 $ 15,391 $ 53,598
Accounts receivable........................ 257,847 788,070 724,457
Prepaid expenses........................... 27,191 69,817 43,035
---------- ---------- ----------
Total current assets..................... 296,639 873,278 821,090
PROPERTY AND EQUIPMENT....................... 3,275,040 4,213,412 4,465,775
OTHER ASSETS................................. 79,192 44,473 576,766
---------- ---------- ----------
TOTAL.................................... $3,650,871 $5,131,163 $5,863,631
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $1,139,488 $1,633,773 $1,045,552
Accrued expenses........................... 383,387 523,517 916,106
Current portion of long-term debt.......... 963,069 1,692,647 2,315,304
---------- ---------- ----------
Total current liabilities................ 2,485,944 3,849,937 4,276,962
LONG-TERM DEBT............................... 567,538 758,513 702,001
DEFERRED INCOME TAXES........................ 87,125 106,915 113,396
MINORITY INTEREST............................ 156,546 175,352 184,789
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares
authorized, 105 and 70 shares,
respectively, issued and outstanding...... 2,857 1,905 1,905
Retained earnings.......................... 350,861 238,541 584,578
---------- ---------- ----------
Total stockholders' equity............... 353,718 240,446 586,483
---------- ---------- ----------
TOTAL.................................... $3,650,871 $5,131,163 $5,863,631
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------ ------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....... $8,091,728 $11,892,919 $15,281,621 $4,184,949 $5,660,354
OPERATING EXPENSES:
Telecommunication
costs................ 4,176,907 6,134,823 8,265,116 2,798,135 2,950,189
Facility commissions.. 1,814,997 2,590,813 3,246,247 703,541 1,110,496
Field operations and
maintenance.......... 483,012 632,178 1,055,506 223,486 419,358
Selling, general and
administrative....... 866,762 1,201,567 1,373,701 315,394 463,641
Depreciation and
amortization......... 255,324 442,952 868,265 171,977 265,329
---------- ----------- ----------- ---------- ----------
Total operating
expense............ 7,597,002 11,002,333 14,808,835 4,212,533 5,209,013
---------- ----------- ----------- ---------- ----------
OPERATING INCOME........ 494,726 890,586 472,786 (27,584) 451,341
OTHER (INCOME) EXPENSE:
Interest income....... (29,040) (24,204) (13,643) (1,397) (2,841)
Interest expense...... 252,904 314,110 460,880 90,836 131,888
Minority interest..... 117,478 19,724 18,806 4,909 9,437
Other, net............ (21,667) 20,544 (84,970) (13,197) (39,661)
---------- ----------- ----------- ---------- ----------
Total other (income)
expense............ 319,675 330,174 381,073 81,151 98,823
---------- ----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES........... 175,051 560,412 91,713 (108,735) 352,518
INCOME TAXES............ 66,730 13,548 21,609 3,371 6,481
---------- ----------- ----------- ---------- ----------
NET INCOME (LOSS)....... $ 108,321 $ 546,864 $ 70,104 $ (112,106) $ 346,037
========== =========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.................. 105 $2,857 $(304,324) $(301,467)
Net income.............................. 108,321 108,321
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1994................ 105 2,857 (196,003) (193,146)
Net income.............................. 546,864 546,864
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1995................ 105 2,857 350,861 353,718
Net income.............................. 70,104 70,104
Purchase and retirement of treasury
stock.................................. (35) (952) (117,359) (118,311)
Dividends............................... (65,065) (65,065)
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1996................ 70 1,905 238,541 240,446
Net income for the three months ended
March 31, 1997 (Unaudited)............. 346,037 346,037
--- ------ --------- ---------
BALANCE, MARCH 31, 1997 (Unaudited)....... 70 $1,905 $ 584,578 $ 586,483
=== ====== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income..... $ 108,321 $ 546,864 $ 70,104 $(112,076) $ 346,037
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 255,324 442,952 868,265 171,977 265,329
Minority interest.... 117,478 19,724 18,806 4,909 9,437
Deferred income
taxes............... 78,472 13,548 19,790 90,496 6,481
Changes in operating
assets and
liabilities:
Accounts receivable.. (283,405) (319,099) (1,096,079) (435,562) (307,681)
Prepaid expenses..... (27,191) (42,626) (19,823) 26,782
Accounts payable..... 275,536 419,939 494,285 (191,565) (588,221)
Accrued expenses..... 97,332 137,486 140,130 291,740 392,589
Other assets......... (18,251) 4,160 34,719 20,254 (32,634)
----------- ----------- ----------- --------- ---------
Net cash provided by
(used in) operating
activities......... 630,807 1,238,383 507,394 (179,650) 118,119
----------- ----------- ----------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (1,522,914) (1,085,286) (1,687,649) (263,166) (117,184)
Increase in
investments.......... (21,154)
----------- ----------- ----------- --------- ---------
Net cash used in
investing
activities......... (1,544,068) (1,085,286) (1,687,649) (263,166) (117,184)
----------- ----------- ----------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Dividends paid........ (43,376)
Net proceeds from
advances on accounts
receivable........... 201,789 294,273 565,856 38,053 (128,365)
Proceeds from issuance
of long-term debt.... 1,065,723 158,763 1,006,955 1,248,592 430,000
Payments of long-term
debt................. (317,823) (634,769) (345,390) (855,430) (264,363)
----------- ----------- ----------- --------- ---------
Net cash provided by
(used in) financing
activities......... 949,689 (181,733) 1,184,045 431,215 37,272
----------- ----------- ----------- --------- ---------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 36,428 (28,636) 3,790 (11,601) 38,207
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 3,809 40,237 11,601 11,601 15,391
----------- ----------- ----------- --------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 40,237 $ 11,601 $ 15,391 $ -- $ 53,598
=========== =========== =========== ========= =========
SUPPLEMENTAL
INFORMATION:
Interest paid......... $ 214,090 $ 295,204 $ 429,365 $ -- $ --
=========== =========== =========== ========= =========
SUPPLEMENTAL DISCLOSURE
OF NONCASH
TRANSACTIONS:
Purchase of fixed
assets through the
issuance of long-term
debt................. $ 194,999 $ 385,829 $ 118,988 $ 140,596 $ 400,508
=========== =========== =========== ========= =========
Purchase of treasury
stock through the
issuance of long-term
debt................. $ -- $ -- $ 118,311 $ -- $ --
=========== =========== =========== ========= =========
Dividends paid through
the issuance of long-
term debt............ $ -- $ -- $ 21,689 $ -- $ --
=========== =========== =========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Security Telecom Corporation (the "Company" or "STC"), which was
incorporated on November 1, 1990, owns, operates and maintains telephone
systems under contracts with correctional facilities.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through third-party billing
services to local exchange carriers ("LECs"), all of which are granted credit
in the normal course of business with terms of between 30 and 60 days. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for unbillable and uncollectible losses based on historical
experience.
In fulfilling its responsibility for the preparation of the Company's
financial statements and disclosures, Company management selects generally
accepted accounting principles and adopts methods for their application. The
application of accounting principles requires the estimating, matching and
timing of revenue and costs in the determination of income or loss. It is also
necessary for management to determine, measure and allocate Company resources
and obligations within the financial process according to those principles.
PRINCIPLES OF CONSOLIDATION--The financial statements include accounts of
the Company and its 25% owned subsidiary, Law Enforcement Technologies, Inc.
("LETI"). The Company consolidates LETI because of its ability to control the
operations of LETI pursuant to an exclusive marketing agreement with LETI
whereby STC is the primary customer of LETI. All material intercompany
transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represents amounts billed for
calls placed through the Company's telephone systems to the third-party
billing services, net of advance payments received, and an allowance for
unbillable and uncollectible calls based on historical experience for
estimated chargebacks to be made by the LECs. Under account advance agreements
with third-party billing services, advance payments equal to a percentage of
the outstanding billed receivables are remitted to the Company when calls are
submitted to the third-party billing service and the Company grants a lien to
the third-party billing service on the related accounts receivable for the
advance. The remainder of the billed receivable is paid to the Company, net of
the advance amount, after the third-party billing service has collected the
receivables from the respective LECs. Interest is charged on the advance
payment at varying rates.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated lives of the related assets, or in the case of capital lease assets,
over the life of the leases. The following is a summary of useful lives for
major categories of property and equipment.
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- -------------
<S> <C>
Leasehold improvements....................................... 2 to 10 years
Telephone system equipment................................... 5 to 10 years
Office equipment............................................. 5 to 7 years
</TABLE>
F-51
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net differences less any amount
realized from the disposition is reflected in earnings.
The Company capitalizes internally developed software by its LETI subsidiary
based on the guidelines of Statement of Financial Accounting Standards
("SFAS") No. 86. Accordingly, development cost incurred after technological
feasibility has been established for a product and before substantial sales
occur are capitalized. Costs capitalized in 1994, 1995 and 1996 were $30,870,
$103,863 and $119,826, respectively, and cost capitalized during the three
month period ended March 31, 1996 and 1997 were $29,957 and $29,750,
respectively. These costs are being amortized over 60 months. Amortization
expense was $3,087, $16,560 and $38,930 in 1994, 1995 and 1996, respectively.
Amortization expense for the three month period ended March 31, 1996 and 1997
were $6,737 and $12,728, respectively.
INCOME TAXES--The Company has elected to be treated as an S corporation
under certain provisions of the Internal Revenue Code and the Company's
subsidiary, LETI, is a C corporation. Accordingly, the statements of income
included a provision for federal income taxes only on the operations of LETI
since the taxable income of the Company is included in the shareholders'
individual income tax returns.
The Company's LETI subsidiary accounts for income taxes using the liability
method in accordance with the provisions of SFAS No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
provided for temporary differences between the financial statement and tax
bases of the assets and liabilities using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowance for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with corrections facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," includes cash
and cash equivalents, accounts receivable, accounts payable and long-term
debt. The Company believes that the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt are a
reasonable estimate of their fair value because of the short-term maturities
of such instruments or, in the case of long-term debt due after one year,
because the Company believes that the current interest rates on these notes
approximates the rates which could be currently negotiated with such lenders.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of
March 31, 1997 and the statements of income and cash flows for the three
months ended March 31, 1996 and 1997 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include only
normal, recurring adjustments) necessary to present fairly the financial
position and results of operations and cash flows of the Company as of March
31, 1997 and for the three months ended March 31, 1996 and March 31, 1997,
have been made. The financial position and the results of operations for the
interim period are not necessarily indicative of the results to be expected
for the full years.
F-52
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RELATED PARTIES
The Company purchases software and enters into other related transactions
with the Company's subsidiary, LETI, which are eliminated in consolidation.
The Company has also entered into financing arrangements with its shareholders
which are discussed in Note 6. At December 31, 1995 and 1996, and March 31,
1996 and 1997, the outstanding balances of these related party notes payable
were $534,848, $655,451, $170,427 and $146,950, respectively. Interest paid or
accrued to these related parties pursuant to these financing arrangements was
$46,704 in 1994, $43,007 in 1995, $55,576 in 1996, $5,144 in the three months
ended March 31, 1996 and $7,790 in the three month period ended March 31,
1997.
In addition, as discussed in Note 6, since December 31, 1996, the Company
has borrowed an additional $500,000 from related parties and in May 1997, one
of the Company's affiliates acquired the remaining outstanding common stock of
LETI.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable.............. $ 1,530,663 $ 2,686,172 $ 2,964,569
Employee receivables................... 21,153 42,274 44,396
----------- ----------- -----------
1,551,816 2,728,446 3,008,965
Less advances on receivables........... (1,159,969) (1,725,825) (2,097,119)
Less allowance for unbillable and
uncollectible chargebacks............. (134,000) (214,551) (187,389)
----------- ----------- -----------
$ 257,847 $ 788,070 $ 724,457
=========== =========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<CAPTION>
DECEMBER 31,
------------------------
MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements................. $ 2,000 $ 2,900 $ 20,347
Telephone systems equipment............ 3,789,729 5,429,727 6,202,542
Furniture and fixtures................. 292,005 449,175 139,977
----------- ----------- -----------
4,083,734 5,881,802 6,362,866
Less accumulated depreciation and
amortization.......................... (808,694) (1,668,390) (1,897,091)
----------- ----------- -----------
$ 3,275,040 $ 4,213,412 $ 4,465,775
=========== =========== ===========
5. ACCRUED EXPENSE
Accrued expenses consist of the following:
<CAPTION>
DECEMBER 31,
------------------------
MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Billing and collection fees............ $ 89,410 $ 66,240 $ 80,314
Facility commissions................... 227,730 323,889 432,849
Other.................................. 66,247 133,388 402,842
----------- ----------- -----------
$ 383,387 $523,517 $ 916,106
=========== =========== ===========
</TABLE>
F-53
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
The Company's long-term debt is composed of the following as of December 31,
1996:
<TABLE>
<S> <C>
Notes payable to Comerica Bank--Texas with interest at 9.25%,
payable in monthly principal installments of $11,925, plus
interest, through their maturity at varying dates throughout
1997......................................................... $ 382,428
Notes payable to Lyon Credit with interest at between 10.09%
and 10.78%, payable in monthly installments of $34,458,
through their maturity on April 1, 1999...................... 826,377
Note payable to LDDS with interest at 9.5%, payable in monthly
installments of $21,538 through its maturity on December 8,
1997......................................................... 245,630
Notes payable to Northern Trust Bank with interest at between
10.25% and 10.76%, payable in monthly installments of
$11,429, through their maturity at varying dates from May 21,
1997 through December 10, 1999............................... 177,341
Notes payable to shareholders:
Notes payable with interest at 5%, due at maturity on
November 28, 1997 and subordinated to borrowings from
Comerica Bank--Texas....................................... 515,451
Note payable with interest at 7.5%, payable in monthly
principal installments of $3,602, plus interest, through
December 6, 1999........................................... 140,000
Capital lease obligations and other........................... 163,933
Less current portion of long-term debt........................ (1,692,647)
-----------
$ 758,513
===========
</TABLE>
Substantially all of the Company's accounts receivable and equipment are
collateral for the above notes payable or the advances on accounts receivable
from third party billing services. In addition, the notes payable agreements
with Lyon Credit are subject to prepayment penalties of: 3% for prepayments
during the first twelve months of the loan; 2% for prepayments during the
second twelve months of the loan; and 1% for prepayments during the third
twelve months of the loan.
Future maturities of long-term debt, including capital lease obligations,
for the years ending December 31, are as follows:
<TABLE>
<S> <C>
1997............................................................ $1,692,647
1998............................................................ 513,547
1999............................................................ 244,966
----------
Total......................................................... $2,451,160
==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain telephone systems equipment under capital
lease agreements with lease terms of two to six years and leases certain
operating facilities under operating lease agreements with lease terms of one
to seven years. Total rent expense under operating lease agreements for 1994,
1995 and 1996 was $33,520, $64,240 and $50,797, respectively, and rent expense
under operating lease agreements for the unaudited three month period ended
March 31, 1996 and 1997 was $20,308 and $14,811, respectively.
F-54
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital and operating leases with terms
greater than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year Ending December 31,
1997................................................... $ 79,878 $ 46,225
1998................................................... 50,629 50,455
1999................................................... 37,309 56,377
2000................................................... 30,303
-------- --------
Total minimum future rental payments................... 167,816 $183,360
========
Less amounts representing imputed interest............. (29,687)
--------
Total capital lease obligations........................ 138,129
Less current portion................................... (60,106)
--------
Long-term portion...................................... $ 78,023
========
</TABLE>
CONTINGENCIES--The Company is a party to various claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
management, the amount of liability, if any, with respect to these actions,
would not have a material effect on the financial position of the Company or
its results of operations.
9. STOCKHOLDERS' EQUITY
The Company has outstanding options and warrants which allow certain
individuals the right to acquire up to a 14% ownership interest in the Company
for nominal exercise prices including an option to acquire up to a 10%
ownership interest issued in 1989 to a consultant in consideration for certain
facility contract proposals and a warrant issued in 1996 to a stockholder to
acquire up to a 4% ownership interest in connection with this stockholder's
sale of common stock to the Company discussed below.
During 1996, the Company acquired 35 shares of common stock from a
stockholder for $118,311, which was retired by the Company resulting in a
reduction of common stock of $952 and retained earnings of $117,359.
10. INCOME TAXES
As discussed in Note 1, STC is organized as an S corporation and does not
pay tax at the corporate level, however, the Company's subsidiary, LETI, is
subject to income taxes at the corporate level. There are no material
permanent differences for LETI, and principal temporary differences between
book income and taxable income include capital leases which are reported on
the cash basis for tax purposes and capitalized software costs which are
expensed for tax purposes as research and development costs. The composition
of deferred income tax liabilities as of December 31, 1995 and 1996, are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Capital leases.............................................. $ 68,617 $ 50,616
Capitalized software........................................ 39,129 66,634
Other....................................................... (20,621) (10,335)
-------- --------
Total..................................................... $ 87,125 $106,915
======== ========
</TABLE>
F-55
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
Since December 31, 1996, the Company purchased five inmate facility
contracts from a competitor for $686,504 and purchased approximately $215,000
of telephone equipment for installation at new inmate facilities. These
capital expenditures along with funds for working capital purposes were funded
with a note payable issued to the seller of the inmate facility contracts of
$430,000, and notes payable to a bank and certain related parties of $100,508
and $500,000, respectively. In addition, $300,000 was borrowed from an
unrelated individual and was repaid.
In May 1997, an affiliate of the majority stockholder, OBA, Inc., acquired
the remaining 75% of the outstanding common stock of LETI, not held by the
Company.
On May 7, 1997, the Company signed an agreement with Talton Holdings, Inc.
to sell substantially all the assets of the Company for cash and assumption of
all liabilities except for notes payable, advances on receivables and
substantially all operating leases.
* * * * * *
F-56
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHROIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE OR EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OF-
FER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................................. 3
Prospectus Summary..................................................................... 4
Risk Factors........................................................................... 16
The Exchange Offer..................................................................... 22
Use of Proceeds........................................................................ 29
Capitalization......................................................................... 30
Pro Forma Financial Data............................................................... 31
Selected Financial Data................................................................ 39
Selected Historical Predecessor Financial Data......................................... 41
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 44
Business............................................................................... 52
Management............................................................................. 65
Principal Stockholders................................................................. 71
Certain Relationships and Related Transactions......................................... 73
Description of Capital Stock........................................................... 78
Description of Other Indebtedness...................................................... 79
Description of the Notes............................................................... 80
Certain Federal Income Tax Considerations.............................................. 107
Plan of Distribution................................................................... 109
Legal Matters.......................................................................... 110
Experts................................................................................ 110
Special Note Regarding Forward-Looking Information..................................... 111
Index to Financial Statements.......................................................... F-1
Independent Auditors' Report........................................................... F-2
</TABLE>
---------------
UNTIL NOVEMBER , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI-
TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING NEW
NOTES RECEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR THEIR OWN ACCOUNT. SEE
"PLAN OF DISTRIBUTION."
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$115,000,000
TALTON HOLDINGS, INC.
11% SERIES B SENIOR NOTES DUE 2007
---------------
PROSPECTUS
---------------
AUGUST , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides, consistent with the
provisions of the Delaware General Corporation Law, that no director of the
Company will be personally liable to the Company or any of its stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director. This does not apply, however, with respect to any action for
unlawful payments of dividends, stock purchases or redemptions, nor does it
apply if the director (i) has breached his duty of loyalty to the Company and
its stockholders; (ii) does not act or, in failing to act, has not acted in
good faith; (iii) has acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, has acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) has
derived an improper personal benefit. The provisions of the Certificate of
Incorporation eliminating liability of directors for monetary damages do not
affect the standard of conduct to which directors must adhere, nor do such
provisions affect the availability of equitable relief. In addition, such
limitations on personal liability do not affect the availability of monetary
damages under claims based on federal law.
The Company's By-laws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1* Certificate of Incorporation of Talton Holdings, Inc.
3.2* Bylaws of Talton Holdings, Inc.
4.1* Indenture, dated as of June 27, 1997, between the Company and
U.S. Trust Company of Texas, N.A.
4.2* Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3* Form of Subsidiary Guaranty (contained in Indenture filed as
Exhibit 4.1).
4.4** Registration Rights Agreement, dated as of June 27, 1997,
between the Company and the Initial Purchaser
5.1* Opinion of Hughes & Luce, L.L.P.
10.1** Purchase Agreement dated as of June 27, 1997, between the
Company and CIBC Wood Gundy Securities Corp. (the "Initial
Purchaser")
10.2** Amended and Restated Credit Agreement, dated as of July 30,
1997, among the Company, Canadian Imperial Bank of Commerce,
CIBC Inc., and First Source Financial LLP.
10.3** Asset Purchase Agreement, dated as of May 9, 1997 among the
Company, Security Telecom Corporation, and William H. Ohland.
10.4** First Amendment to Asset Purchase Agreement dated as of June
21, 1997, among the Company Security Telecom Corporation, and
William H. Ohland.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
23.1* Consent of Hughes & Luce, L.L.P. (contained in its opinion filed as Exhibit 5.1 hereto).
23.2** Consent of Deloitte & Touche LLP.
23.3** Consent of Arthur Andersen LLP.
23.4** Consent of Borland, Benefield, Crawford & Webster, P.C.
23.5** Consent of Davis, Clark and Company, P.C.
24.1* Power of Attorney (appearing on Signature Page).
25.1* Form T-1 Statement of Eligibility of Trustee.
27.1* Financial Data Schedule.
99.1** Form of Letter of Transmittal and Notice of Guaranteed Delivery.
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
The following are included in Part II of this Registration Statement:
Schedule I--Condensed Financial Information of the Registrant
Schedule II--Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes to respond to requests for information that
is incorporated by reference into the Prospectus pursuant to Item 4, 10(b),
11, or 13 of the Form S-4, within one business day of receipt of such request,
and to send the incorporated documents by first-class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration
II-2
<PAGE>
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed part of the
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at such
time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) ((S)230.424(b) of this
chapter), if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (3)(i) and (3)(ii) above do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed with or furnished to the Commission
by the registrants pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(6) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS,
ON THE 14TH DAY OF AUGUST, 1997.
Talton Holdings, Inc.
/s/ John A. Crooks, Jr.
By: _________________________________
JOHN A. CROOKS, JR. PRESIDENT AND
CHIEF OPERATING OFFICER
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears
below constitutes and appoints John A. Crooks, Jr., Todd W. Follmer, and John
R. Summers, and each of them, such person's true and lawful attorneys-in-fact
and agents, with full power of substitution and revocation, for such person
and in such person's name, place and stead, in any and all amendments
(including post-effective amendments to this Registration Statement) and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute of substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Gregg L. Engles Director of Talton August 14,
- ------------------------------------- Holdings, Inc. 1997
GREGG L. ENGLES
/s/ Richard H. Hochman Director of Talton August 14,
- ------------------------------------- Holdings, Inc. 1997
RICHARD H. HOCHMAN
/s/ Jay R. Levine Director of Talton August 14,
- ------------------------------------- Holdings, Inc. 1997
JAY R. LEVINE
/s/ Roger K. Sallee Director of Talton August 14,
- ------------------------------------- Holdings, Inc. 1997
ROGER K. SALLEE
/s/ David A. Sachs Director of Talton August 14,
- ------------------------------------- Holdings, Inc. 1997
DAVID A. SACHS
/s/ Todd W. Follmer Vice President, August 14,
- ------------------------------------- Assistant Secretary, 1997
TODD W. FOLLMER Assistant Treasurer,
and Director of Talton
Holdings, Inc.
/s/ John R. Summers Vice President, Chief August 14,
- ------------------------------------- Financial Officer, 1997
JOHN R. SUMMERS Secretary, and
Treasurer of the
Company
/s/ John A. Crooks, Jr. President and Chief August 14,
- ------------------------------------- Operating Officer of 1997
JOHN A. CROOKS, JR. the Company
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS,
ON THE 14TH DAY OF AUGUST, 1997.
Ameritel Pay Phones, Inc.
/s/ John R. Summers
By: _________________________________
JOHN R. SUMMERS VICE-PRESIDENT
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears
below constitutes and appoints John A. Crooks, Jr., Todd W. Follmer, and John
R. Summers, and each of them, such person's true and lawful attorneys-in-fact
and agents, with full power of substitution and revocation, for such person
and in such person's name, place, and stead, in any and all amendments
(including post-effective amendments to this Registration Statement) and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute of substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Richard H. Hochman Director of AmeriTel August 14, 1997
- ------------------------------------- Pay Phones, Inc.
RICHARD H. HOCHMAN
/s/ Nina E. McLemore Director of AmeriTel August 14, 1997
- ------------------------------------- Pay Phones, Inc.
NINA E. MCLEMORE
/s/ Julius E. Talton, Sr. Director of AmeriTel August 14, 1997
- ------------------------------------- Pay Phones, Inc.
JULIUS E. TALTON, SR.
/s/ David A. Sachs Director of AmeriTel August 14, 1997
- ------------------------------------- Pay Phones, Inc.
DAVID A. SACHS
/s/ Todd W. Follmer Vice President and August 14, 1997
- ------------------------------------- Director of
TODD W. FOLLMER AmeriTel Pay
Phones, Inc.
/s/ John R. Summers Vice President and August 14, 1997
- ------------------------------------- Chief Financial
JOHN R. SUMMERS Officer of AmeriTel
Pay Phones, Inc.
(principal
executive officer,
principal financial
officer, and
principal
accounting officer)
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS,
ON THE 14TH DAY OF AUGUST, 1997.
Talton Telecommunications of
Carolina, Inc.
/s/ Julius E. Talton, Sr.
By: _________________________________
JULIUS E. TALTON, SR. CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears below
constitutes and appoints John A. Crooks, Jr., Todd W. Follmer, and John R.
Summers, and each of them, such person's true and lawful attorneys-in-fact and
agents, with full power of substitution and revocation, for such person and in
such person's name, place, and stead, in any and all amendments (including
post-effective amendments to this Registration Statement) and to file the same
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute of substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Richard H. Hochman Director of August 14, 1997
- ------------------------------------- TaltonTelecommunications
RICHARD H. HOCHMAN of Carolina, Inc.
/s/ Nina E. McLemore Director of Talton August 14, 1997
- ------------------------------------- Telecommunications
NINA E. MCLEMORE of Carolina, Inc.
/s/ David A. Sachs Director of Talton August 14, 1997
- ------------------------------------- Telecommunications
DAVID A. SACHS of Carolina, Inc.
/s/ Todd W. Follmer Vice President and August 14, 1997
- ------------------------------------- Director of Talton
TODD W. FOLLMER Telecommunications
of Carolina, Inc.
/s/ Julius E. Talton, Sr. Chairman, Chief August 14, 1997
- ------------------------------------- Executive Officer
JULIUS E. TALTON, SR. and Director of
Talton Telecommunications
of Carolina, Inc.
(principal
executive officer)
/s/ Tom Glover Secretary of Talton August 14, 1997
- ------------------------------------- Telecommunications
TOM GLOVER of Carolina, Inc.
(principal
financial officer
and principal
accounting
officer).
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS
ON THE 14TH DAY OF AUGUST, 1997.
Talton Telecommunications Corporation
/s/ Julius E. Talton, Sr.
By: __________________________________
JULIUS E. TALTON, SR. CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears below
constitutes and appoints John A. Crooks, Jr., Todd W. Follmer, and John R.
Summers, and each of them, such person's true and lawful attorneys-in-fact and
agents, with full power of substitution and revocation, for such person and in
such person's name, place and stead, in any and all amendments (including post-
effective amendments to this Registration Statement) and to file the same with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-on-fact and agents or any of them, or their
or his substitute of substitutes, may lawfully do or cause to be done by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Richard H. Hochman Director of Talton August 14, 1997
- ------------------------------------ Telecommunications
RICHARD H. HOCHMAN Corporation
/s/ Nina E. McLemore Director of Talton August 14, 1997
- ------------------------------------ Telecommunications
NINA E. MCLEMORE Corporation
/s/ David A. Sachs Director of Talton August 14, 1997
- ------------------------------------ Telecommunications
DAVID A. SACHS
/s/ Todd W. Follmer Vice President and August 14, 1997
- ------------------------------------ Director of Talton
TODD W. FOLLMER Telecommunications
Corporation
/s/ Julius E. Talton, Sr. Chairman, Chief August 14, 1997
- ------------------------------------ Executive Officer
JULIUS E. TALTON, SR. and Director of
Talton
Telecommunications
Corporation
(principal
executive officer)
/s/ Tom Glover Secretary of Talton August 14, 1997
- ------------------------------------ Telecommunications
TOM GLOVER Corporation
(principal
financial officer,
principal
accounting
officer)
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS,
ON THE 14TH DAY OF AUGUST, 1997.
Talton STC, Inc.
/s/ Todd W. Follmer
By: _________________________________
TODD W. FOLLMER PRESIDENT
POWER OF ATTORNEY
Know All Men By These Presents that each person whose signature appears
below constitutes and appoints John A. Crooks, Jr., Todd W. Follmer and John
R. Summers, and each of them, such person's true and lawful attorneys-in-fact
and agents, with full power of substitution and revocation, for such person
and in such person's name, place and stead, in any and all amendments
(including post-effective amendments to this Registration Statement) and to
file the same with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as such person might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute of substitutes, may lawfully
do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Todd W. Follmer President and August 14, 1997
- ------------------------------------- Director ofTalton
TODD W. FOLLMER STC, Inc.
(principal
executive officer)
/s/ John R. Summers Vice President of August 14, 1997
- ------------------------------------- Talton STC, Inc.
JOHN R. SUMMERS (principal
financial officer
and principal
accounting officer)
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.1* Certificate of Incorporation of Talton Holdings, Inc.
3.2* Bylaws of Talton Holdings, Inc.
4.1* Indenture, dated as of June 27, 1997, between the Company and U.S.
Trust Company of Texas, N.A.
4.2* Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3* Form of Subsidiary Guaranty (contained in Indenture filed as
Exhibit 4.1).
4.4** Registration Rights Agreement dated as of June 27, 1997, between
the Company, the Subsidiary Guarantors and the Initial Purchaser.
5.1* Opinion of Hughes & Luce, L.L.P.
10.1** Purchase Agreement Dated as of June 27, 1997, between the Company
and CIBC Wood Gundy Securities Corp. (the "Initial Purchaser").
10.2** Amended and Restated Credit Agreement, dated as of July 30, 1997,
among the Company, Canadian Imperial Bank of Commerce, CIBC Inc.,
and First Source Financial LLP.
10.3** Asset Purchase Agreement, dated as of May 9, 1997, among the
Company, Security Telecom Corporation, and William H. Ohland.
10.4** First Amendment to Asset Purchase Agreement, dated as of June 21,
1997, among the Company, Security Telecom Corporation, and William
H. Ohland.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
23.1* Consent of Hughes & Luce, L.L.P. (contained in its opinion filed
as Exhibit 5.1 hereto).
23.2** Consent of Deloitte & Touche LLP.
23.3** Consent of Arthur Andersen LLP.
23.4** Consent of Borland, Benefield, Crawford & Webster, P.C.
23.5** Consent of Davis, Clark and Company, P.C.
24.1* Power of Attorney (appearing on Signature Page).
25.1* Form T-1 Statement of Eligibility of Trustee.
27.1* Financial Data Schedule.
99.1** Form of Letter of Transmittal and Notice of Guaranteed Delivery.
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
<PAGE>
EXHIBIT 4.4
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of June 27, 1997
by and among
Talton Holdings, Inc.
AmeriTel Pay Phones, Inc.
Talton Telecommunications Corporation
Talton Telecommunications of Carolina, Inc.
Talton STC, Inc.
and
CIBC Wood Gundy Securities Corp.
================================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
---------
into as of June 27, 1997 by and among Talton Holdings, Inc., a Delaware
corporation (the "Company"), AmeriTel Pay Phones, Inc., a Missouri corporation
-------
("AmeriTel"), Talton Telecommunications Corporation, an Alabama corporation
--------
("Talton Telecommunications"), Talton Telecommunications of Carolina, Inc., an
- ---------------------------
Alabama corporation ("Talton of Carolina"), Talton STC, Inc. ("Talton STC", and
------------------ ----------
along with AmeriTel, Talton Telecommunications and Talton of Carolina, the
"Subsidiary Guarantors"), and CIBC Wood Gundy Securities Corp. (the "Initial
- ---------------------- -------
Purchaser"), which has agreed to purchase the Company's 11% Senior Notes due
- ---------
2007, Series A (the "Series A Notes") pursuant to the Purchase Agreement, dated
--------------
as of June 24, 1997, by and among the Company, the Subsidiary Guarantors and the
Initial Purchaser (the "Purchase Agreement").
------------------
This Agreement is made pursuant to the Purchase Agreement. In order to
induce the Initial Purchaser to purchase the Series A Notes, the Company has
agreed to provide the registration rights set forth in this Agreement. The
execution and delivery of this Agreement is a condition to the obligations of
the Initial Purchaser set forth in Section 2 of the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
-----------
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Additional Interest: As defined in Section 5.
-------------------
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
-------------
Business Day: Any day except a Saturday, Sunday or other day on which
------------
banking institutions in New York, New York are generally required or authorized
to be closed.
Closing Date: The date of this Agreement.
------------
Commission: The Securities and Exchange Commission.
----------
Consummate: A Registered Exchange Offer shall be deemed "Consummated" for
----------
purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Securities Act of the Exchange Offer Registration
Statement relating to the Series B Notes to be issued in the Exchange Offer,
(ii) the maintenance of such Registration Statement continuously effective and
the keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b) hereof, and (iii) the delivery by the
Company to the Registrar under the Indenture of Series B Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Notes
that were tendered by Holders thereof pursuant to the Exchange Offer.
Effectiveness Target Date: As defined in Section 5.
-------------------------
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
------------
rules and regulations promulgated thereunder.
<PAGE>
Exchange Offer: The registration by the Company under the Securities Act
--------------
of the Series B Notes pursuant to a Registration Statement pursuant to which the
Company offers the Holders of all outstanding Transfer Restricted Securities the
opportunity to exchange all such outstanding Transfer Restricted Securities held
by such Holders for Series B Notes in an aggregate principal amount equal to the
aggregate principal amount of the Transfer Restricted Securities tendered in
such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement relating
-------------------------------------
to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchaser proposes
--------------
to sell the Series A Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Securities Act, and to certain
institutional "accredited investors," as such term is defined in Rule 501(a)(1),
(2), (3) and (7) of Regulation D under the Securities Act.
Holder: As defined in Section 2(b) hereof.
------
Indemnified Holder: As defined in Section 8(a) hereof.
------------------
Indenture: The Indenture, dated as of June 27, 1997, among the Company,
---------
the Subsidiary Guarantors and U.S. Trust Company of Texas, N.A., as trustee,
pursuant to which the Notes are to be issued, as such Indenture is amended or
supplemented from time to time in accordance with the terms thereof.
Initial Purchaser: As defined in the preamble hereto.
-----------------
Interest Payment Date: As defined in the Indenture and the Notes.
---------------------
NASD: National Association of Securities Dealers, Inc.
----
Notes: The Series A Notes and the Series B Notes.
-----
Person: An individual, corporation, partnership, limited liability
------
company, joint venture, association, trust or other organization, whether or not
a legal entity, or a government or agency or political subdivision thereof.
Prospectus: The prospectus included in a Registration Statement, as
----------
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference into such Prospectus.
Record Holder: Each Person who is a Holder of Series A Notes on the record
-------------
date with respect to the applicable Interest Payment Date (as defined in the
Indenture).
Registration Default: As defined in Section 5 hereof.
--------------------
Registration Statement: Any registration statement of the Company relating
----------------------
to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the
registration for resale of Transfer Restricted Securities pursuant to the Shelf
Registration Statement, which is filed pursuant to the provisions of this
Agreement, in each case, including the Prospectus included therein, all
amendments and supplements thereto (including post-effective amendments) and all
exhibits and material incorporated by reference therein.
2
<PAGE>
Securities Act: The Securities Act of 1933, as amended, and the rules and
--------------
regulations promulgated thereunder.
Series A Notes: As defined in the preamble hereto.
--------------
Series B Notes: The Company's 11% Senior Notes due 2007, Series B to be
--------------
issued pursuant to the Indenture in the Exchange Offer.
Shelf Filing Deadline: As defined in Section 4 hereof.
---------------------
Shelf Registration: A registration effected by the filing of a Shelf
------------------
Registration Statement pursuant to Section 4 hereof.
Shelf Registration Statement: As defined in Section 4 hereof.
----------------------------
Subsidiary Guarantors: As defined in the preamble hereto.
---------------------
TIA: The Trust Indenture Act of 1939, as amended (15 U.S.C. Section 77aaa-
---
77bbbb) as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Note, until the earliest to occur of
------------------------------
(a) the date on which such Note is exchanged in the Exchange Offer and entitled
to be resold to the public by the Holder thereof without complying with the
prospectus delivery requirements of the Securities Act, (b) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with a Shelf Registration Statement, (c) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Securities Act
or by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the Prospectus
contained therein) or (d) the date on which such Note ceases to be outstanding
for purposes of the Indenture.
Trustee: The trustee under the Indenture.
-------
Underwritten Registration or Underwritten Offering: A registration in
------------------------- ---------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
------------------------------------
(a) Transfer Restricted Securities. The securities entitled to the
------------------------------
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is deemed to be a
-----------------------------------------
holder of Transfer Restricted Securities (each, a "Holder") whenever such Person
------
owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
-------------------------
(a) Unless the Exchange Offer shall not be permissible under applicable law
or Commission policy (after the procedures set forth in Section 6(a) below have
been complied with), the Company and the Subsidiary Guarantors shall (i) cause
to be filed with the Commission as soon as practicable after the Closing Date,
but in no event later than 60 days after the Closing Date, a Registration
Statement under the Securities
3
<PAGE>
Act relating to the Series B Notes and the Exchange Offer, (ii) use their best
efforts to cause such Registration Statement to become effective at the earliest
possible time, but in no event later than 120 days after the Closing Date, (iii)
in connection with the foregoing, (A) file all pre-effective amendments to such
Registration Statement as may be necessary in order to cause such Registration
Statement to become effective, (B) if applicable, file a post-effective
amendment to such Registration Statement pursuant to Rule 430A under the
Securities Act, and (C) cause all necessary filings in connection with the
registration and qualification of the Series B Notes to be made under the Blue
Sky laws of such jurisdictions as are necessary to permit Consummation of the
Exchange Offer (provided, however, that the Company shall not be required in
connection therewith to register or qualify as a foreign corporation where it is
not now qualified or to take any action that would subject it to service of
process in suits or taxation, other than as to matters and transactions relating
to the Exempt Resales, in any jurisdiction where it is not now so subject), and
(iv) upon the effectiveness of such Registration Statement, commence and
Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate
form permitting registration of the Series B Notes to be offered in exchange for
the Transfer Restricted Securities and to permit resales of Notes held by
Broker-Dealers as contemplated by Section 3(c) below. If, after such Exchange
Offer Registration Statement initially is declared effective by the Commission,
the Exchange Offer or the issuance of Series B Notes thereunder or the sale of
Notes held by Broker Dealers pursuant thereto as contemplated by Section 3(c)
below is interfered with by any stop order, injunction or other order or
requirement of the Commission or any other governmental agency or court, such
Exchange Offer Registration Statement shall be deemed not to have become
effective for purposes of this Agreement during the period that such stop order,
injunction or other similar order or requirement shall remain in effect.
(b) The Company shall cause the Exchange Offer Registration Statement to be
effective continuously and shall keep the Exchange Offer open for a period of
not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 20 Business Days. The Company shall cause
the Exchange Offer to comply with all applicable federal and state securities
laws. No securities other than the Notes (and the Subsidiary Guarantees
thereof) shall be included in the Exchange Offer Registration Statement. The
Company shall use its best efforts to cause the Exchange Offer to be Consummated
on the earliest practicable date after the Exchange Offer Registration Statement
has become effective, but in no event later than 150 days after the Closing
Date.
(c) The Company shall indicate in a "Plan of Distribution" section
contained in the Prospectus contained in the Exchange Offer Registration
Statement that any Broker-Dealer who holds Series A Notes that are Transfer
Restricted Securities and that were acquired for its own account as a result of
market-making activities or other trading activities (other than Transfer
Restricted Securities acquired directly from the Company) (a "Participating
-------------
Broker Dealer"), may exchange such Series A Notes pursuant to the Exchange
- -------------
Offer; however, any such Participating Broker-Dealer may be deemed to be an
"underwriter" within the meaning of the Securities Act and must, therefore,
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of the Series B Notes received by such Participating
Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may
(to the extent then consistent with Commission policy) be satisfied by the
delivery by such Broker-Dealer of the Prospectus contained in the Exchange Offer
Registration Statement. Such "Plan of Distribution" section shall also contain
all other information with respect to such resales by Participating Broker-
Dealers that the Commission may require in order to permit such resales pursuant
thereto, but such "Plan of Distribution" shall not name any such Participating
Broker-Dealer or disclose the amount of Notes held by any such Participating
Broker-Dealer except to the extent required by the Commission as a result of a
change in policy after the date of this Agreement.
4
<PAGE>
The Company and the Subsidiary Guarantors shall use their best efforts to
keep the Exchange Offer Registration Statement continuously effective,
supplemented and amended as required by the provisions of Section 6(c) below to
the extent necessary to ensure that it is available for resales of Notes
acquired by Broker Dealers for their own accounts as a result of market-making
activities or other trading activities and to ensure that it conforms with the
requirements of this Agreement, the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period
ending on the earlier to occur of: (i) 180 days from the date on which the
Exchange Offer is consummated, and (ii) the date each Participating Broker-
Dealer has notified the Company in writing that such Participating Broker-Dealer
has resold all Series B Notes acquired by it in the Exchange Offer.
The Company shall provide sufficient copies of the latest version of such
Prospectus to Participating Broker-Dealers promptly upon request at any time
during such 180-day (or shorter) period in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
------------------
(a) Shelf Registration. If (i) the Company is not required to file an
------------------
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 6(a)(i) below have been
complied with), (ii) for any other reason the Exchange Offer is not Consummated
within 150 days after the Closing Date, or (iii) any Holder of Transfer
Restricted Securities shall notify the Company within 30 days of the
Consummation of the Exchange Offer (A) that such Holder is prohibited by
applicable law or Commission policy from participating in the Exchange Offer, or
(B) that such Holder may not resell the Series B Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and that the
Prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such Holder, or (C) that such
Holder is a Broker-Dealer and holds Series A Notes acquired directly from the
Company or one of its affiliates, then the Company and the Subsidiary Guarantors
shall:
(x) cause to be filed a shelf registration statement
pursuant to Rule 415 under the Securities Act, which may be
an amendment to the Exchange Offer Registration Statement
(in either event, the "Shelf Registration Statement") on or
prior to the earliest to occur of: (1) in the case of a
Shelf Registration Statement being filed pursuant to clause
----------------------------
(i) above, the later of (A) 45 days after the date on which
the Company determines that it is not required to file the
Exchange Offer Registration Statement and (B) the 60th day
after the Closing Date, and (2) in the case of a
Registration Statement being filed pursuant to clause (ii)
above, as soon as reasonably practicable, and in the case of
a Registration Statement being filed pursuant to clause
(iii) above, the 45th day after the date on which the
Company receives notice from a Holder of Transfer Restricted
Securities as contemplated by clause (iii) above (such
earliest date being the "Shelf Filing Deadline"), which
---------------------
Shelf Registration Statement shall provide for resales of
all Transfer Restricted Securities the Holders of which
shall have provided the information required pursuant to
Section 4(b) hereof; and
(y) use their best efforts to cause such Shelf
Registration Statement to be declared effective by the
Commission on or before the 60th day after the Shelf Filing
Deadline but in no event later than 150 days after the
Closing Date. If, after the Company has filed an Exchange
Offer Registration Statement which satisfies the
requirements of Section 3(a) above, the Company is required
to file and make effective a Shelf Registration Statement
solely because the Exchange Offer shall not be permitted
under applicable federal law, then the filing of the
Exchange Offer Registration Statement shall be deemed to
satisfy
5
<PAGE>
the requirements of clause (x) above. Such an event shall
have no effect on the requirements of this clause (y), or on
the Effectiveness Target Date as defined in Section 5 below.
The Company and the Subsidiary Guarantors shall use their best efforts to
keep such Shelf Registration Statement continuously effective, supplemented and
amended as required by the provisions of Sections 6(b) and (c) hereof to the
extent necessary to ensure that it is available for resales of Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a), and to ensure that it conforms with the requirements of this
Agreement, the Securities Act and the policies, rules and regulations of the
Commission as announced from time to time, until the earlier of two years after
the Closing Date or such shorter period ending when all Notes covered by the
Shelf Registration Statement have been sold in the manner set forth and as
contemplated in the Shelf Registration Statement or when the Notes held by all
Holders become eligible for resale pursuant to Rule 144 under the Securities Act
without volume restrictions, if any.
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
- ----------------------------
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 Business Days after receipt of a request
therefor, such information specified in item 507 of Regulation S-K under the
Securities Act as the Company may reasonably request for use in connection with
any Shelf Registration Statement or Prospectus or preliminary Prospectus
included therein. No Holder of Transfer Restricted Securities shall be entitled
to Additional Interest pursuant to Section 5 hereof unless and until such Holder
shall have provided all such reasonably requested information. Each Holder as
to which any Shelf Registration Statement is being effected agrees to furnish
promptly to the Company all information required to be disclosed therein in
order to make the information previously furnished to the Company by such Holder
not materially misleading.
SECTION 5. ADDITIONAL INTEREST
-------------------
If (i) any Registration Statement required by this Agreement is not filed
with the Commission on or prior to the date specified for such filing in this
Agreement, (ii) any of such Registration Statements has not been declared
effective by the Commission on or prior to the date specified for such
effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the
-------------------------
Exchange Offer has not been Consummated within 150 days after the Closing Date
with respect to the Exchange Offer Registration Statement or (iv) any
Registration Statement required by this Agreement is filed and declared
effective but shall thereafter cease to be effective prior to the end of the
required period or fail to be usable for its intended purpose without being
succeeded immediately by a post-effective amendment to such Registration
Statement that cures such failure and that is itself immediately declared
effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company and the Subsidiary Guarantors hereby
--------------------
jointly and severally agree to pay additional interest ("Additional Interest")
-------------------
to each Holder of Transfer Restricted Securities with respect to the first 90-
day period immediately following the occurrence of such Registration Default, in
an amount equal to 0.25%. The amount of the Additional Interest payable to each
Holder shall increase by an additional 0.25% with respect to each subsequent 90-
day period until all Registration Defaults have been cured, up to a maximum
amount of Additional Interest of 2.0%. All accrued Additional Interest shall be
paid to Record Holders by the Company by wire transfer of immediately available
funds or by federal funds check on each Interest Payment Date, as provided in
the Indenture. Following the cure of all Registration Defaults relating to any
particular Transfer Restricted Securities, the accrual of Additional Interest
with respect to such Transfer Restricted Securities will cease. Without
limitation of the foregoing, the Additional Interest payable with respect to
Transfer Restricted Securities as a result of a Registration Default shall cease
to accrue (1) upon filing of the Exchange Offer Registration Statement (and/or,
if applicable, the Shelf Registration Statement) in the case of (i) above, (2)
upon the effectiveness of the Exchange Offer Registration Statement (or, if
applicable, the Shelf Registration
6
<PAGE>
Statement) in the case of (ii) above, (3) upon Consummation of the Exchange
Offer in the case of (iii) above, or (4) upon the filing of a post-effective
amendment to the Registration Statement that causes the Exchange Offer
Registration Statement (or, if applicable, the Shelf Registration Statement) to
again be declared effective in the case of (iv) above, as the case may be.
All obligations of the Company and the Subsidiary Guarantors set forth in
the preceding paragraph that are outstanding with respect to any Transfer
Restricted Security at the time such security ceases to be a Transfer Restricted
Security shall survive until such time as all such obligations with respect to
such Security shall have been satisfied in full.
(b) The Company shall promptly notify the Trustee of the occurrence of each
and every Registration Default. The parties hereto agree that the Additional
Interest provided for in this Section 5 constitute a reasonable estimate of the
damages that may be incurred by Holders by reason of any Registration Default.
SECTION 6. REGISTRATION PROCEDURES
-----------------------
(a) Exchange Offer Registration Statement. In connection with the Exchange
-------------------------------------
Offer, the Company and the Subsidiary Guarantors shall comply with the
provisions of Section 6(c) below, shall use their best efforts to effect such
exchange to permit the sale of Transfer Restricted Securities being sold in
accordance with the intended method or methods of distribution thereof, and
shall comply with all of the following provisions:
(i) If in the reasonable opinion of counsel to the Company there is a
question as to whether the Exchange Offer is permitted by applicable law,
the Company and the Subsidiary Guarantors hereby agree to seek a no-action
letter or other favorable decision from the Commission allowing the Company
and the Subsidiary Guarantors to Consummate an Exchange Offer for such
Series A Notes. The Company and the Subsidiary Guarantors each hereby
agree to pursue the issuance of such a decision to the Commission staff
level but shall not be required to take commercially unreasonable action to
effect a change of Commission policy. In connection with the foregoing,
the Company and the Subsidiary Guarantors hereby agree to (A) participate
in telephonic conferences with the Commission, (B) deliver to the
Commission staff an analysis prepared by counsel to the Company setting
forth the legal bases, if any, upon which such counsel has concluded that
such an Exchange Offer should be permitted and (C) diligently pursue a
resolution (which need not be favorable) by the Commission staff of such
submission.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation thereof, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of
the Company, (B) it is not engaged in, and does not intend to engage in,
and has no arrangement or understanding with any person to participate in,
a distribution of the Series B Notes to be issued in the Exchange Offer and
(C) it is acquiring the Series B Notes in its ordinary course of business.
In addition, all such Holders of Transfer Restricted Securities shall
otherwise cooperate in the Company's preparations for the Exchange Offer.
Each Holder hereby acknowledges and agrees that any Broker-Dealer and any
such Holder using the Exchange Offer to participate in a distribution of
the securities to be acquired in the Exchange Offer (1) could not under
Commission policy as in effect on the date of this Agreement rely on the
position
7
<PAGE>
of the Commission enunciated in Morgan Stanley and Co., Inc. (available
---------------------------
June 5, 1991) and Exxon Capital Holdings Corporation (available May 13,
----------------------------------
1988), as interpreted in the Commission's letter to Shearman & Sterling
dated July 2, 1993, and similar no-action letters (including any no-action
letter obtained pursuant to clause (i) above), and (2) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction and that such a secondary
resale transaction should be covered by an effective registration statement
containing the selling security holder information required by Item 507 or
508, as applicable, of Regulation S-K if the resales are of Series B Notes
obtained by such Holder in exchange for Series A Notes acquired by such
Holder directly from the Company.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company and the Subsidiary Guarantors shall provide a
supplemental letter to the Commission (A) stating that the Company and the
Subsidiary Guarantors are registering the Exchange Offer in reliance on the
position of the Commission enunciated in Exxon Capital Holdings Corporation
----------------------------------
(available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5,
----------------------------
1991) and, if applicable, any no-action letter obtained pursuant to clause
(i) above, (B) including a representation that neither the Company nor any
of the Subsidiary Guarantors has entered into any arrangement or
understanding with any Person to distribute the Series B Notes to be
received in the Exchange Offer and that, to the best of the Company's
information and belief, each Holder participating in the Exchange Offer is
acquiring the Series B Notes in its ordinary course of business and has no
arrangement or understanding with any Person to participate in the
distribution of the Series B Notes received in the Exchange Offer, and (C)
including any other understanding or representation required by the
Commission as set forth in any no-action letter obtained pursuant to clause
(i) above.
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, the Company and the Subsidiary Guarantors shall comply
with all the provisions of Section 6(c) below and shall use their best efforts
to effect such registration to permit the sale of the Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof, and pursuant thereto the Company will as expeditiously as
possible prepare and file with the Commission a Registration Statement relating
to the registration on any appropriate form under the Securities Act, which form
shall be available for the sale of the Transfer Restricted Securities in
accordance with the intended method or methods of distribution thereof, within
the time periods and otherwise in accordance with the provisions hereof.
(c) General Provisions. In connection with any Registration Statement and
------------------
any related Prospectus required by this Agreement to permit the sale or resale
of Transfer Restricted Securities (including, without limitation, any
Registration Statement and the related Prospectus required to permit resales of
Notes by Broker-Dealers), the Company and the Subsidiary Guarantors shall:
(i) use their best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements
(including, if required by the Securities Act or any regulation thereunder,
financial statements of each of the Subsidiary Guarantors) for the period
specified in Section 3 or 4 of this Agreement, as applicable; upon the
occurrence of any event that would cause any such Registration Statement or
the Prospectus contained therein (A) to contain a material misstatement or
omission or (B) not to be effective and usable for resale of Transfer
Restricted Securities during the period required by this Agreement, the
Company and the Subsidiary Guarantors shall file promptly an appropriate
amendment to such Registration Statement, in the case of clause (A),
correcting any such misstatement or omission, and, in the case of either
clause (A) or (B), use their best efforts to cause such amendment to be
declared effective and such Registration
8
<PAGE>
Statement and the related Prospectus to become usable for their intended
purpose(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period set
forth in Section 3 or 4 hereof, as applicable, or such shorter period as
will terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold; cause the Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented
to be filed pursuant to Rule 424 under the Securities Act, and to comply
fully with the applicable provisions of Rules 424 and 430A under the
Securities Act in a timely manner; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such Registration Statement during the applicable period in accordance with
the intended method or methods of distribution by the sellers thereof set
forth in such Registration Statement or supplement to the Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders promptly
and, if requested by such Persons, to confirm such advice in writing, (A)
when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to any Registration Statement
or any post-effective amendment thereto, when the same has become
effective, (B) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or
for additional information relating thereto, (C) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement under the Securities Act or of the suspension by any
state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of
any proceeding for any of the preceding purposes, (D) of the existence of
any fact or the happening of any event that makes any statement of a
material fact made in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any document incorporated by reference
therein untrue, or that requires the making of any additions to or changes
in the Registration Statement or the Prospectus in order to make the
statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities
or Blue Sky laws, the Company and the Subsidiary Guarantors shall use their
best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time;
(iv) furnish to the Initial Purchaser, each selling Holder named in
any Registration Statement or Prospectus and each of the underwriter(s) in
connection with such sale, if any, before filing with the Commission,
copies of any Registration Statement or Prospectus included therein or any
amendments or supplements to any such Registration Statement or Prospectus
(including all documents incorporated by reference after the initial filing
of such Registration Statement), which documents will be subject to the
review of such Holders and underwriter(s) in connection with such sale, if
any, for a period of at least five Business Days, and the Company will not
file any such Registration Statement or Prospectus or any amendment or
supplement to any such Registration Statement or Prospectus (including all
such documents incorporated by reference) to which selling Holders of
Transfer Restricted Securities covered by such Registration Statement or
the underwriter(s) in connection with such sale, if any, shall reasonably
object within five Business Days after the receipt thereof. A selling
Holder or underwriter, if any, shall be deemed to have reasonably objected
to such filing if such Registration Statement, amendment, Prospectus or
supplement, as
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<PAGE>
applicable, as proposed to be filed, contains a material misstatement or
omission or fails to comply with any applicable requirements of the
Securities Act specified in such objection;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the selling Holders and to the
underwriter(s) in connection with such a sale, if any, make the
representatives of the Company and the Subsidiary Guarantors available for
discussion of such document and other customary due diligence matters, and
include such information in such document prior to the filing thereof as
such selling Holders or underwriter(s), if any, reasonably may request;
(vi) make available at reasonable times for inspection by the
selling Holders, any underwriter participating in any disposition pursuant
to such Registration Statement, and any attorney or accountant retained by
such selling Holders or any of such underwriter(s), all financial and other
records, pertinent corporate documents and properties of the Company and
the Subsidiary Guarantors and cause the Company's and the Subsidiary
Guarantors' officers, directors and employees to supply all information
reasonably requested by any such Holder, underwriter, attorney or
accountant in connection with such Registration Statement or any post-
effective amendment thereto subsequent to the filing thereof and prior to
its effectiveness;
(vii) if requested by any selling Holders or the underwriter(s) in
connection with such sale, if any, promptly include in any Registration
Statement or Prospectus, pursuant to a supplement or post-effective
amendment if necessary, such information as such selling Holders and such
underwriter(s), if any, may reasonably request to have included therein,
including, without limitation, information relating to the "Plan of
Distribution" of the Transfer Restricted Securities, information with
respect to the principal amount of Transfer Restricted Securities being
sold to such underwriter(s), the purchase price being paid therefor and any
other terms of the offering of the Transfer Restricted Securities to be
sold in such offering, and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of the matters to be included in such Prospectus
supplement or post-effective amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if
so requested by the Holders of a majority in aggregate principal amount of
Notes covered thereby or the underwriter(s), if any;
(ix) furnish to each selling Holder and each of the underwriter(s)
in connection with such sale, if any, without charge, at least one copy of
the Registration Statement, as first filed with the Commission, and of each
amendment thereto, including all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference);
(x) deliver to each selling Holder and each of the underwriter(s),
if any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons reasonably may request; the Company and the Subsidiary Guarantors
hereby consent to the use of the Prospectus and any amendment or supplement
thereto by each of the selling Holders and each of the underwriter(s), if
any, in connection with the offering and the sale of the Transfer
Restricted Securities covered by the Prospectus or any amendment or
supplement thereto;
(xi) enter into such agreements (including an underwriting
agreement), and make such representations and warranties, and take all such
other actions in connection therewith in order to
10
<PAGE>
expedite or facilitate the disposition of the Transfer Restricted
Securities pursuant to any Registration Statement contemplated by this
Agreement, all to such extent as may be requested by the Initial Purchaser
or by any Holder of Transfer Restricted Securities or underwriter in
connection with any sale or resale pursuant to any Registration Statement
contemplated by this Agreement; and whether or not an underwriting
agreement is entered into and whether or not the registration is an
Underwritten Registration, the Company and the Subsidiary Guarantors shall:
(A) furnish to the Initial Purchaser, each selling Holder and
each underwriter, if any, in such substance and scope as they may
request and as are customarily made by issuers to underwriters in
primary underwritten offerings, upon the date of the Consummation of
the Exchange Offer and, if applicable, the effectiveness of the Shelf
Registration Statement:
(1) a certificate, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, signed by (y) the
President or any Vice President and (z) a principal financial or
accounting officer of each of the Company and the Subsidiary
Guarantors, confirming, as of the date thereof, the matters set
forth in paragraphs (a), (b), (c), and (d) of Section 9 of the
Purchase Agreement and such other matters as such parties may
reasonably request;
(2) an opinion, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, of counsel for the
Company and the Subsidiary Guarantors covering the matters set
forth in [Sections 9(i), (j) and (k)] of the Purchase Agreement
and such other matters as such parties may reasonably request,
and in any event including a statement to the effect that such
counsel has participated in conferences with officers and other
representatives of the Company and the Subsidiary Guarantors, and
representatives of the independent public accountants for the
Company and the Subsidiary Guarantors, in connection with the
preparation of such Registration Statement and the related
Prospectus and have considered the matters required to be stated
therein and the statements contained therein, although such
counsel has not independently verified the accuracy, completeness
or fairness of such statements; and that such counsel advises
that, on the basis of the foregoing (relying as to materiality to
the extent necessary upon facts provided to such counsel by
officers and other representatives of the Company and without
independent check or verification), no facts came to such
counsel's attention that caused such counsel to believe that the
applicable Registration Statement, at the time such Registration
Statement or any post-effective amendment thereto became
effective, and, in the case of the Exchange Offer Registration
Statement, as of the date of Consummation, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus contained in such
Registration Statement as of its date and, in the case of the
opinion dated the date of Consummation of the Exchange Offer, as
of the date of Consummation, contained an untrue statement of a
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<PAGE>
material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Without
limiting the foregoing, such counsel may state further that such
counsel assumes no responsibility for, and has not independently
verified, the accuracy, completeness or fairness of the financial
statements, notes and schedules and other financial data included
in any Registration Statement contemplated by this Agreement or
the related Prospectus; and
(3) a customary comfort letter, dated as of the date of
Consummation of the Exchange Offer or the date of effectiveness
of the Shelf Registration Statement, as the case may be, from the
Company's independent accountants, in the customary form and
covering matters of the type customarily covered in comfort
letters by underwriters in connection with primary underwritten
offerings, and affirming the matters set forth in the comfort
letters delivered pursuant to [Section 9(n)] of the Purchase
Agreement, without exception;
(B) set forth in full or incorporate by reference in the
underwriting agreement, if any, the indemnification provisions and
procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with
clause (A) above and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company
and the Subsidiary Guarantors pursuant to this clause (xi), if any.
If at any time the representations and warranties of the Company
contemplated in clause (A)(1) above cease to be true and correct, the
Company shall so advise the Initial Purchaser and the underwriter(s),
if any, and each selling Holder promptly and, if requested by such
Persons, shall confirm such advice in writing.
(xii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the underwriter(s), if any,
and their respective counsel in connection with the registration and
qualification of the Transfer Restricted Securities under the securities or
Blue Sky laws of such jurisdictions as the selling Holders or
underwriter(s), if any, may request and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of
the Transfer Restricted Securities covered by the applicable Registration
Statement; provided, however, that neither the Company nor any of the
Subsidiary Guarantors shall be required to register or qualify as a foreign
corporation where it is not now so qualified or to take any action that
would subject it to the service of process in suits or to taxation, other
than as to matters and transactions relating to the Registration Statement,
in any jurisdiction where it is not now so subject;
(xiii) issue, upon the request of any Holder of Series A Notes
covered by any Shelf Registration Statement contemplated by this Agreement,
Series B Notes, having an aggregate principal amount equal to the aggregate
principal amount of Series A Notes surrendered to the Company by such
Holder in exchange therefor or being sold by such Holder; such Series B
Notes to be registered in the name of such Holder or in the name of the
purchaser(s) of such Notes, as the
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<PAGE>
case may be; in return, the Series A Notes held by such Holder shall be
surrendered to the Company for cancellation;
(xiv) cooperate with the selling Holders and the underwriter(s), if
any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and to register such Transfer Restricted Securities in
such denominations and such names as the Holders or the underwriter(s), if
any, may request at least two Business Days prior to such sale of Transfer
Restricted Securities;
(xv) use their best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof or the underwriter(s), if
any, to consummate the disposition of such Transfer Restricted Securities;
(xvi) if any fact or event contemplated by Section 6(c)(iii)(D)
above shall exist or have occurred, prepare a supplement or post-effective
amendment to the Registration Statement or related Prospectus or any
document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Prospectus will not contain an untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(xvii) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of the Registration Statement covering
such Transfer Restricted Securities and provide the Trustee under the
Indenture with printed certificates for the Transfer Restricted Securities
which are in a form eligible for deposit with the Depository Trust Company;
(xviii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use their best efforts to cause such Registration Statement to
become effective and approved by such governmental agencies or authorities
as may be necessary to enable the Holders selling Transfer Restricted
Securities to consummate the disposition of such Transfer Restricted
Securities;
(xix) otherwise use their best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to their securityholders, as soon as practicable, a consolidated
earnings statement meeting the requirements of Rule 158 under the
Securities Act (which need not be audited) covering a twelve-month period
(A) commencing at the end of any fiscal quarter in which Transfer
Restricted Securities are sold to underwriters in a firm or best efforts
Underwritten Offering or (B) if not sold to underwriters in such an
offering, commencing with the first month of the Company's first fiscal
quarter commencing after the effective date of the Registration Statement.
(xx) cause the Indenture to be qualified under the TIA not later
than the effective date of the first Registration Statement required by
this Agreement, and, in connection therewith, cooperate with the Trustee
and the Holders of Notes to effect such changes to the Indenture as may be
required for such Indenture to be so qualified in accordance with the terms
of the TIA; and execute and use their best efforts to cause the Trustee to
execute, all documents that may be required
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<PAGE>
to effect such changes and all other forms and documents required to be
filed with the Commission to enable such Indenture to be so qualified in a
timely manner;
(xxi) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 or
Section 15(d) of the Exchange Act; and
(xxii) cause all Transfer Restricted Securities covered by the
Registration Statement to be listed on each securities exchange on which
similar securities issued by the Company are then listed if requested by
the Holders of a majority in aggregate principal amount of Series A Notes
or the managing underwriter(s), if any.
(d) Restrictions on Holders. Each Holder agrees by acquisition of a
-----------------------
Transfer Restricted Security that, upon receipt of any notice from the Company
of the existence of any fact of the kind described in Section 6(c)(iii)(D)
hereof, such Holder will forthwith discontinue disposition of Transfer
Restricted Securities pursuant to the applicable Registration Statement until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 6(c)(xvi) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
------
received copies of any additional or supplemental filings that are incorporated
by reference in the Prospectus. If so directed by the Company, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Transfer Restricted Securities that was current at the time of
receipt of such notice. In the event the Company shall give any such notice,
the time period regarding the effectiveness of such Registration Statement set
forth in Section 3 or 4 hereof, as applicable, shall be extended by the number
of days during the period from and including the date of the giving of such
notice pursuant to Section 6(c)(iii)(D) hereof to and including the date when
each selling Holder covered by such Registration Statement shall have received
the copies of the supplemented or amended Prospectus contemplated by Section
6(c)(xvi) hereof or shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
---------------------
(a) All expenses incident to the Company's or the Subsidiary Guarantors'
performance of or compliance with this Agreement will be borne by the Company or
the Subsidiary Guarantors, regardless of whether a Registration Statement
becomes effective, including without limitation: (i) all registration and filing
fees and expenses (including filings made by the Initial Purchaser or Holder
with the NASD (and, if applicable, the fees and expenses of any "qualified
independent underwriter" and its counsel, as may be required by the rules and
regulations of the NASD)); (ii) all fees and expenses of compliance with federal
securities and state Blue Sky or securities laws; (iii) all expenses of printing
(including printing certificates for the Series B Notes and printing of
Prospectuses), (iv) reasonable messenger, delivery service and telephone
charges; (v) all fees and disbursements of counsel for the Company, the
Subsidiary Guarantors and, in accordance with Section 7(b) below, the Holders of
Transfer Restricted Securities; (vi) all application and filing fees in
connection with listing Notes on a national securities exchange or automated
quotation system pursuant to the requirements hereof; and (vii) all fees and
disbursements of independent certified public accountants of the Company and the
Subsidiary Guarantors (including the expenses of any special audit and comfort
letters required by or incident to such performance).
The Company and the Subsidiary Guarantors will, in any event, bear their
internal expenses (including, without limitation, all salaries and expenses of
their officers and employees performing legal or accounting duties), the
expenses of any annual audit and the fees and expenses of any Person, including
special experts, retained by the Company and the Subsidiary Guarantors.
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<PAGE>
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Initial Purchaser and the Holders of Transfer Restricted Securities being
tendered in the Exchange Offer and/or resold pursuant to the "Plan of
Distribution" contained in the Exchange Offer Registration Statement or
registered pursuant to the Shelf Registration Statement, as applicable, for the
reasonable fees and disbursements of not more than one counsel, who shall be
Latham & Watkins or such other counsel as may be chosen by the Holders of a
majority in principal amount of the Transfer Restricted Securities for whose
benefit such Registration Statement is being prepared.
SECTION 8. INDEMNIFICATION
---------------
(a) The Company and each of the Subsidiary Guarantors (for purposes of this
Section 8 collectively referred to as the "Talton Entities") jointly and
---------------
severally, agree to indemnify and hold harmless each Holder (including, without
limitation, each Holder that is a Broker-Dealer) and each person, if any, who
controls (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) any Holder (a "controlling person") and the respective
------------------
officers, directors, partners, employees, representatives and agents of any
Holder or any controlling person (each of the foregoing may hereinafter be
referred to as an "Indemnified Holder"), to the fullest extent lawful, from and
------------------
against any and all losses, claims, damages, liabilities, judgments, actions and
expenses directly or indirectly caused by, related to, based upon, arising out
of or in connection with: (1) any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement or Prospectus (or any
amendment or supplement thereto); or (2) any omission or alleged omission to
state in any Registration Statement or Prospectus (or any amendment or
supplement thereto) a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and will
reimburse, as incurred, each Indemnified Person for any legal or other expenses
reasonably incurred by such Indemnified Person in connection with investigating,
preparing, pursuing or defending against any claim or action, or any
investigation or proceeding, commenced or threatened, or appearing as a
third-party witness in connection with any such loss, claim, damage, liability,
judgment, action or expense; provided, however, that none of the Talton Entities
will be liable in any such case to an Indemnified Holder to the extent that such
losses, claims, damages, liabilities, judgments, actions or expenses are caused
by an untrue statement or alleged untrue statement or omission or alleged
omission that is made in any Registration Statement or Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
information relating to any of the Holders furnished in writing to the Company
or the Subsidiary Guarantors by or on behalf of any of the Holders expressly for
use therein. The indemnity, contribution and reimbursement obligations of the
Talton Entities set forth in this Section 8 shall be in addition to any
liability or obligation the Talton Entities may otherwise have to any
Indemnified Holder.
(b) Each Holder of Transfer Restricted Securities agrees, severally and not
jointly, to indemnify and hold harmless the Company and the Subsidiary
Guarantors, and their respective directors and officers, and any person
controlling (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) the Company, the Subsidiary Guarantors and the
respective officers, directors, partners, employees, representatives and agents
of each such person, to the same extent as the foregoing indemnity from the
Company and the Subsidiary Guarantors to each of the Indemnified Holders, but
only with respect to claims and actions based on information relating to such
Holder furnished in writing by or on behalf of such Holder to the Company or the
Subsidiary Guarantors expressly for use in any Registration Statement or
Prospectus. In no event shall the liability of any selling Holder hereunder be
greater in amount than the dollar amount of the proceeds received by such Holder
upon its sale of the Registrable Securities giving rise to such indemnification
obligation.
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(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action or proceeding (including any
governmental or regulatory investigation or proceeding), such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
provided, that the omission so to notify the indemnifying party will not relieve
it from any liability that it may have to any indemnified party except to the
extent that such omission materially prejudices the rights or defenses of the
indemnifying party. In case any such action is brought against any indemnified
party, and such indemnified party notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the named
parties in any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties that are different from or additional to
those available to any such indemnifying party, then the indemnifying parties
shall not have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses, other than reasonable and documented
out-of-pocket costs of investigation, subsequently incurred by such indemnified
party in connection with the defense thereof, unless (i) the indemnified party
shall have employed separate counsel in accordance with the proviso to the
immediately preceding sentence (it being understood, however, that in connection
with such action the indemnifying party shall not be liable for the expenses of
more than one separate counsel (in addition to local counsel) in any one action
or separate but substantially similar actions in the same jurisdiction arising
out of the same general allegations or circumstances, designated by the Holders
in the case of paragraph (a) of this Section 8 or the Company in the case of
paragraph (b) of this Section 8, representing the indemnified parties under such
paragraph (a) or paragraph (b), as the case may be, who are parties to such
action or actions); (ii) the indemnifying party has authorized in writing the
employment of counsel for the indemnified party at the expense of the
indemnifying parties; or (iii) the indemnifying party shall have failed to
assume the defense or retain counsel reasonably satisfactory to the indemnified
party. After such notice from the indemnifying parties to such indemnified party
(so long as the indemnified party shall have informed the indemnifying parties
of such action in accordance with this Section 8 on a timely basis prior to the
indemnified party seeking indemnification hereunder), the indemnifying parties
will not be liable under this Section 8 for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party, unless such indemnified party waived its rights under
this Section 8, in which case the indemnified party may effect such a settlement
without such consent. No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of judgment in or otherwise seek to terminate any pending or threatened action,
claim, litigation or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not any indemnified party is a
party thereto), unless such settlement, compromise, consent or termination
includes an unconditional release of each indemnified party from all liability
arising out of such action, claim, litigation or proceeding. If any indemnifying
party reimburses an indemnified party hereunder for any expenses incurred in
connection with an action or proceeding for which indemnification is sought, the
indemnified party hereby agrees to refund such reimbursement of expenses to the
extent that it is determined by a court of competent jurisdiction that the
indemnified party is not entitled to indemnification pursuant to this Section 8
for such expenses.
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<PAGE>
(d) If the indemnification provided for in this Section 8 is unavailable to
an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Holders on the other hand from their sale of
Transfer Restricted Securities or (ii) if such allocation provided by the
preceding clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the
Talton Entities, on the one hand, and of the Indemnified Holder, on the other
hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Subsidiary Guarantors or by the Indemnified Holder and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission and other equitable considerations
appropriate in the circumstances. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 8(c), any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
The Talton Entities and each Holder of Transfer Restricted Securities
agree that it would not be equitable if contribution pursuant to this Section
8(d) were determined by pro rata allocation (even if the Holders were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8, none of the
Holders (and its related Indemnified Holders) shall be required to contribute,
in the aggregate, any amount in excess of the amount by which the total discount
received by such Holder with respect to the Series A Notes exceeds the amount of
any damages which such Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 8(d) are several in
proportion to the respective principal amount of Notes held by each of the
Holders hereunder and not joint.
SECTION 9. RULE 144A
---------
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available upon request of any
Holder of Transfer Restricted Securities, to any Holder or beneficial owner of
Transfer Restricted Securities in connection with any sale thereof and any
prospective purchaser of such Transfer Restricted Securities from such Holder or
beneficial owner, the information required by Rule 144A(d)(4) under the
Securities Act in order to permit resales of such Transfer Restricted Securities
pursuant to Rule 144A.
17
<PAGE>
SECTION 10. UNDERWRITTEN REGISTRATIONS
--------------------------
No Holder may participate in any Underwritten Registration hereunder unless
such Holder (a) agrees to sell such Holder's Transfer Restricted Securities on
the basis provided in any underwriting arrangements approved by the Persons
entitled hereunder to approve such arrangements and (b) completes and executes
all reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents required under the terms of such
underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
-------------------------
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Securities included in
such offering; provided, that such investment bankers and managers must be
reasonably satisfactory to the Company.
SECTION 12. MISCELLANEOUS
-------------
(a) Remedies. Each Holder, in addition to being entitled to exercise all
--------
rights provided herein, in the Indenture, the Purchase Agreement or granted by
law, including recovery of liquidated or other damages, will be entitled to
specific performance of its rights under this Agreement. Notwithstanding the
provisions of Section 5 hereof, the Company and the Subsidiary Guarantors agree
that monetary damages (including any Additional Interest on the Notes
contemplated hereby) would not be adequate compensation for any loss incurred by
reason of a breach by them of the provisions of this Agreement and hereby agree
to waive the defense in any action for specific performance that a remedy at law
would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of the
--------------------------
Subsidiary Guarantors will, on or after the date of this Agreement, enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any
way conflict with and are not inconsistent with the rights granted to the
holders of the Company's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Notes. The Company will not take any action,
-------------------------------
or permit any change to occur, with respect to the Notes that would materially
and adversely affect the ability of the Holders to Consummate any Exchange
Offer.
(d) No Piggyback on Registrations. The Company shall not grant to any of
-----------------------------
its securityholders (other than the holders of the Transfer Restricted
Securities in such capacity) the right to include any of their securities in any
Registration Statement other than Transfer Restricted Securities.
(e) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders whose securities are being tendered pursuant to the Exchange
Offer and that does not affect directly or indirectly the rights of other
Holders whose securities are not being tendered pursuant to such Exchange Offer
may be given by the
18
<PAGE>
Holders of a majority of the outstanding principal amount of Transfer Restricted
Securities being tendered or registered.
(f) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture;
(ii) if to the Initial Purchaser, as provided in the Purchase
Agreement; and
(iii) if to the Company or the Subsidiary Guarantors:
Talton Holdings, Inc.
611 S.W. Third Street
Lee's Summit, Missouri 64063
Telecopier No.: (816) 525-3006
Attention: Chief Financial Officer
With a copy to:
Hughes & Luce, L.L.P.
1717 Main Street, Suite 2800
Dallas, Texas 75201
Telecopier No.: (214) 939-5849
Attention: Glen J. Hettinger, Esq.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five days after
being deposited in the mail, postage prepaid, if mailed; when confirmation is
received, if telexed; when receipt acknowledged, if telecopied; and on the next
Business Day, if timely delivered to a reputable courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(g) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
(h) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(i) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof. All
references made in this Agreement to "Section" and "paragraph" refer to such
Section or paragraph of this Agreement, unless expressly stated otherwise.
19
<PAGE>
(j) Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE
-----------------------------------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. THE COMPANY HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATEMENT COURT SITTING
IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING
IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT,
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS.
(k) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(l) Entire Agreement. This Agreement is intended by the parties as a final
----------------
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
(signature page follows)
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Talton Holdings, Inc.
By:________________________________________
Name:
Title:
AmeriTel Pay Phones, Inc.
By:________________________________________
Name:
Title:
Talton Telecommunications Corporation
By:________________________________________
Name:
Title:
Talton Telecommunications of Carolina, Inc.
By:________________________________________
Name:
Title:
Talton STC, Inc.
By:________________________________________
Name:
Title:
CIBC Wood Gundy Securities Corp.
By:_______________________________
Name:
Title:
S-1
<PAGE>
EXHIBIT 10.1
TALTON HOLDINGS, INC.
$115,000,000
11% SENIOR NOTES DUE 2007, SERIES A
PURCHASE AGREEMENT
------------------
June 24, 1997
CIBC WOOD GUNDY SECURITIES CORP.
425 Lexington Avenue
Third Floor
New York, New York 10017
Ladies and Gentlemen:
Talton Holdings, Inc., a Delaware corporation (the "Company"), and
-------
AmeriTel Pay Phones, Inc., a Missouri corporation ("AmeriTel"), Talton
--------
Telecommunications Corporation, an Alabama corporation ("Talton
------
Telecommunications"), Talton Telecommunications of Carolina, Inc., an Alabama
- ------------------
corporation ("Talton of Carolina"), and Talton STC, Inc., a Delaware corporation
------------------
("Talton STC", and collectively with AmeriTel, Talton Telecommunications and
----------
Talton of Carolina, the "Subsidiary Guarantors"), jointly and severally agree
---------------------
with you as follows:
1. The Notes. The Company proposes to issue and sell to CIBC Wood
---------
Gundy Securities Corp. (the "Initial Purchaser"), an aggregate of $115,000,000
-----------------
principal amount of its 11% Senior Notes due 2007, Series A (the "Series A
--------
Notes"). The Series A Notes are to be issued pursuant to an indenture (the
"Indenture") to be dated as of June 27, 1997 by and among the Company, the
- ----------
Subsidiary Guarantors and U.S. Trust Company of Texas, N.A. (the "Trustee").
-------
Capitalized terms used but not defined herein shall have the meanings given to
such terms in the Indenture.
The Company's obligations under the Series A Notes and the Series B
Notes (as defined below) (the Series A Notes and the Series B Notes being
collectively referred to as the "Notes") will be fully and unconditionally
-----
guaranteed, jointly and severally, on a general unsecured basis initially by the
Subsidiary Guarantors pursuant to and to the extent set forth in the Indenture
(the "Subsidiary Guarantees").
---------------------
The Notes will be offered and sold to you pursuant to an exemption
from the registration requirements under the Securities Act of 1933, as amended
(the "Securities Act"). The Company has prepared a preliminary offering
--------------
memorandum, subject to completion, dated June 4, 1997 (the "Preliminary Offering
--------------------
Memorandum"), and a final offering memorandum, dated June 24, 1997 (the
- ----------
"Offering Memorandum"), relating to the Company, the Subsidiary Guarantors, the
- --------------------
Notes and the Subsidiary Guarantees.
Upon original issuance thereof by the Company, and until such time as
the same is no longer required under the applicable requirements of the
Securities Act, the Notes (and all securities issued in exchange therefor or in
substitution thereof) shall bear the following legend:
<PAGE>
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY
EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY
EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH
SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a)
INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A
FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904
UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) OF THE
SECURITIES ACT), THAT PRIOR TO SUCH TRANSFER, FURNISHED THE TRUSTEE A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE
FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER
IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SENIOR NOTES LESS
THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT
SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (e) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE
COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES
OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND
EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT
OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH
IN (A) ABOVE."
You have advised the Company that you will make offers (the "Exempt
------
Resales") of the Notes purchased by you hereunder on the terms set forth in the
- -------
Offering Memorandum, as amended or supplemented, solely by you to (i) persons
who you reasonably believe to be "qualified institutional buyers," as defined in
Rule 144A under the Securities Act ("QIBs"), and (ii) to a limited number of
----
institutional "accredited investors" referred to in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act (each, an "Institutional Accredited Investor", and
---------------------------------
together with the QIBs, the "Eligible Purchasers.") You will offer the Notes to
-------------------
Eligible Purchasers initially at a price equal to 100% of the principal amount
thereof. Such price may be changed at any time without notice.
Holders (including subsequent transferees) of the Series A Notes will
have the registration rights set forth in the registration rights agreement
relating thereto (the "Registration Rights Agreement"),
-----------------------------
to be dated the Closing Date (as defined below), in substantially the form of
Exhibit A hereto, for so long
2
<PAGE>
as such Series A Notes constitute "Transfer Restricted Securities" (as defined
in the Registration Rights Agreement). Pursuant to, and subject to all the terms
and conditions of, the Registration Rights Agreement, the Company and the
Subsidiary Guarantors will agree to file with the Securities and Exchange
Commission (the "Commission"), under the circumstances set forth therein, (i) a
----------
registration statement under the Securities Act (the "Exchange Offer
--------------
Registration Statement") relating to the 11% Senior Notes due 2007, Series B
- ----------------------
(the "Series B Notes") of the Company to be offered in exchange for the Series A
--------------
Notes (the "Exchange Offer"), and, as and to the extent required by the
--------------
Registration Rights Agreement, (ii) a shelf registration statement pursuant to
Rule 415 under the Securities Act (the "Shelf Registration Statement") relating
----------------------------
to the resale by certain holders of the Series A Notes, and to use their best
efforts to cause such Registration Statements to be declared effective.
The Company is a party to (i) that certain asset purchase agreement
dated as of May 9, 1997 (as amended on June 21, 1997, the "STC Acquisition
---------------
Agreement") with Security Telecom Corporation, a Texas corporation ("STC"), and
- --------- ---
(ii) that certain Stock Purchase Agreement dated as of June 21, 1997, with
O.B.A., Inc. (the "LETI Acquisition Agreement", and collectively with the STC
--------------------------
Acquisition Agreement, the "Acquisition Agreements"). This Purchase Agreement
----------------------
(this "Agreement"), the Notes, the Subsidiary Guarantees, the Indenture, the
---------
Registration Rights Agreement, and the Acquisition Agreements, are hereinafter
sometimes referred to collectively as the "Operative Documents."
-------------------
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties and covenants contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell to the
Initial Purchaser, and the Initial Purchaser agrees to purchase from the
Company, $115,000,000 aggregate principal amount of Series A Notes at the
purchase price equal to 96.65% of the principal amount thereof (the "Purchase
--------
Price").
- -----
3. Delivery and Payment. Delivery to the Initial Purchaser of and
--------------------
payment for the Notes shall be made at 10:00 A.M., New York City time, on June
27, 1997, at the offices of CIBC Wood Gundy Securities Corp., 425 Lexington
Avenue, New York, New York 10017, or such other time or place as the Initial
Purchaser and the Company shall designate (the "Closing Date"). The actual time
------------
of such delivery and purchase of the Notes on the Closing Date is referred to
herein as the "Closing."
-------
One or more of the Series A Notes in definitive form, registered in
the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), or
---
such other names as the Initial Purchaser may request upon at least one business
day's notice to the Company, having an aggregate principal amount designated by
the Initial Purchaser (each, a "Global Note"), and one or more certificated
-----------
Series A Notes in definitive form, registered in such names and denominations as
the Initial Purchaser may so request (each, a "Definitive Note"), shall be
---------------
delivered by the Company to the Initial Purchaser (or as the Initial Purchaser
directs), against payment by the Initial Purchaser of the Purchase Price by wire
transfer of immediately available funds to the order of the Company. The Global
Note(s) and the Definitive Note(s), if any, shall be made available to the
Initial Purchaser for inspection no later than 9:30 a.m. on the business day
immediately preceding the Closing Date.
4. Agreements of the Company and the Subsidiary Guarantors. The
-------------------------------------------------------
Company and the Subsidiary Guarantors agree, jointly and severally, with the
Initial Purchaser as follows:
(a) To advise the Initial Purchaser promptly and, if requested
by the Initial Purchaser, confirm such advice in writing, (i) of the
issuance by any state securities commission of any stop order known to the
Company or any of the Subsidiary Guarantors suspending the qualification or
exemption of the Notes (including the Subsidiary Guarantees thereof) for
offering
3
<PAGE>
or sale in any jurisdiction, or the initiation of any proceeding known to
the Company or any of the Subsidiary Guarantors for such purpose by the
Commission or any state securities commission or other regulatory
authority, and (ii) of the happening of any event known to the Company or
any of the Subsidiary Guarantors that makes any statement of a material
fact made in the Offering Memorandum untrue or that requires the making of
any additions to or changes in the Offering Memorandum (as amended or
supplemented from time to time) in order to make any statements of a
material fact therein, in light of the circumstances under which they were
made, not misleading. The Company and each of the Subsidiary Guarantors
shall use its respective reasonable best efforts to prevent the issuance of
any stop order or order suspending the qualification or exemption of the
Notes and the Subsidiary Guarantees under any state securities or Blue Sky
laws, and if, at any time, any state securities commission or other
regulatory authority shall issue an order suspending the qualification or
exemption of the Notes or the Subsidiary Guarantees under any state
securities or Blue Sky laws, the Company and each of the Subsidiary
Guarantors shall use its reasonable best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time.
(b) For the period after the date hereof and prior to the
completion of all Exempt Resales, to furnish to the Initial Purchaser,
without charge, as many copies of the Offering Memorandum and any
amendments or supplements thereto, as the Initial Purchaser may reasonably
request. The Company and each of the Subsidiary Guarantors consents to the
use of the Offering Memorandum, as amended or supplemented, by the Initial
Purchaser in connection with Exempt Resales until the effectiveness of the
Exchange Offer Registration Statement or the Shelf Registration Statement,
as applicable.
(c) Not to amend or supplement the Preliminary Offering
Memorandum or the Offering Memorandum prior to the Closing Date, unless the
Initial Purchaser shall previously have been advised thereof and shall not
have reasonably objected thereto promptly after notice thereof. The
Company and the Subsidiary Guarantors will promptly prepare, upon the
Initial Purchaser's request, any amendment or supplement to the Offering
Memorandum that may be reasonably necessary or advisable in connection with
Exempt Resales.
(d) If, after the date hereof and prior to consummation of any
Exempt Resales, any event shall occur as a result of which, in the
reasonable judgment of the Company or in the reasonable opinion of the
Initial Purchaser's counsel, it becomes necessary to amend or supplement
the Offering Memorandum in order to make the statements of material fact
therein, in light of the circumstances existing when the Offering
Memorandum is delivered to a prospective purchaser, not misleading, or if
it is necessary to amend or supplement the Offering Memorandum to comply
with applicable law, promptly to prepare an appropriate amendment or
supplement to the Offering Memorandum so that the statements of material
fact therein, as so amended or supplemented, will not, in light of the
circumstances existing when the Offering Memorandum is so delivered, be
misleading, and will comply with applicable law, and to furnish to the
Initial Purchaser, without charge, such number of copies thereof as the
Initial Purchaser may reasonably request.
(e) To cooperate with the Initial Purchaser and the Initial
Purchaser's counsel in connection with the registration or qualification of
the Notes and the Subsidiary Guarantees for offer and sale by the Initial
Purchaser in the Exempt Resales under the state securities or Blue Sky laws
of such jurisdictions as the Initial Purchaser may request and to continue
such qualification in effect so long as required to complete such offer and
sale of the Notes in the Exempt Resales; provided, however, that neither
the Company nor any Subsidiary Guarantor shall be obligated to qualify as a
foreign corporation in any jurisdiction in which they are not so qualified
or to take any
4
<PAGE>
action that would subject it to service of process in suits or taxation,
other than as to matters of and transactions relating to Exempt Resales, in
any jurisdiction in which it is not now so subject.
(f) Not to sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the
Securities Act) that would be integrated with the sale of the Notes in a
manner that would require the registration under the Securities Act of the
sale to the Initial Purchaser or to Eligible Purchasers of the Notes.
(g) Not to sell, offer for sale or solicit offers to buy any
Notes or debt securities of the Company that are substantially similar to
the Notes (other than the Series B Notes issuable in the Exchange Offer)
for a period of 180 days following the Closing Date.
(h) For so long as any of the Notes remain outstanding and
during any period in which neither the Company nor any Subsidiary Guarantor
is subject to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), to make available to any Eligible
------------
Purchaser or beneficial owner or holder of Notes in connection with any
sale thereof and any prospective purchaser of such Notes, the information
required by Rule 144A(d)(4) under the Securities Act.
(i) Prior to or concurrently with the Closing, to enter into the
Registration Rights Agreement in substantially the form attached hereto as
Exhibit A in order to permit registration of the Series B Notes to be
offered in exchange for the Series A Notes as contemplated thereby.
(j) To comply with all of the agreements set forth in the
Registration Rights Agreement, and all agreements set forth in the letter
of representations from the Company, the Subsidiary Guarantors and the
Trustee to DTC relating to the approval of the Notes by DTC for
"book-entry" transfer.
(k) To use their reasonable best efforts to effect the inclusion
of the Notes in the PORTAL market upon issuance.
(l) During a period of three years following the date of this
Agreement, to deliver to the Initial Purchaser promptly upon their becoming
available, copies of all current, regular and periodic reports and other
publicly available information filed by the Company or any Subsidiary
Guarantor with the Commission or any securities exchange or with any
governmental authority succeeding to any of the Commission's functions and
other such publicly available information concerning the Company and the
Subsidiary Guarantors as the Initial Purchaser shall reasonably request.
(m) To use the proceeds from the sale of the Notes in the manner
described in the Offering Memorandum under the caption "Use of Proceeds."
(n) Not to voluntarily claim, and to actively resist any
attempts to claim, the benefit of any usury laws against the holders of the
Notes.
(o) To use their reasonable best efforts to obtain all requisite
Authorizations (as defined below) and make all requisite declarations and
filings with the FCC and all applicable State Regulatory Agencies (as
defined below).
5
<PAGE>
(p) To use their reasonable best efforts to do and perform all
things required or necessary to be done and performed under this Agreement
by the Company and the Subsidiary Guarantors prior to or after the Closing
Date and to satisfy all conditions precedent on their part to the delivery
of the Notes.
5. Agreement Concerning Expenses. The Company and the Subsidiary
-----------------------------
Guarantors, jointly and severally, agree with the Initial Purchaser that,
whether or not the transactions contemplated by this Agreement are consummated
or this Agreement is terminated, the Company and the Subsidiary Guarantors shall
pay all costs, expenses, fees and taxes incident to and in connection with this
Agreement and the transactions contemplated hereby and by the other Operative
Documents as follows:
(i) the preparation, printing and distribution of the Preliminary
Offering Memorandum and the Offering Memorandum (including, without
limitation, financial statements and exhibits) and all amendments and
supplements thereto;
(ii) the preparation (including, without limitation, word
processing and duplication costs) and delivery of this Agreement, the
Registration Rights Agreement, the Notes, the Subsidiary Guarantees, the
Indenture, the Exchange Offer Registration Statement and any Shelf
Registration Statement and all preliminary and final Blue Sky memoranda and
all other agreements, memoranda, correspondence and other documents
prepared and delivered in connection herewith and with the Exempt Resales;
(iii) the qualification of the Notes for offer and sale under the
securities or Blue Sky laws of the several states (including, without
limitation, the reasonable fees and disbursements of counsel to the Initial
Purchaser) relating to such registration or qualification;
(iv) furnishing such copies of the Preliminary Offering Memorandum
and the Offering Memorandum, and all amendments and supplements thereto, as
may be reasonably requested for use in connection with Exempt Resales;
(v) the fees, disbursements and expenses of accountants and
counsel to the Company and the Subsidiary Guarantors;
(vi) the fees, disbursements and expenses of counsel to the Initial
Purchaser;
(vii) all expenses and listing fees in connection with the
application for quotation of the Notes in the PORTAL market;
(viii) the issuance and delivery by the Company of the Notes and by
the Subsidiary Guarantors of the Subsidiary Guarantees;
(ix) the preparation of certificates for the Notes (including,
without limitation, printing and engraving of the Notes);
(x) all fees and expenses (including fees and expenses of counsel)
of the Company in connection with approval of the Notes by DTC for "book-
entry" transfer;
6
<PAGE>
(xi) all "road show" and other marketing expenses related to the
preparation of slides, videotapes and printed marketing materials, and
travel, hotel, food and entertainment expenses of affiliates of the Company
and the Subsidiary Guarantors; and
(xii) the performance by the Company and the Subsidiary Guarantors
of their other respective obligations under this Agreement and the
Registration Rights Agreement, the Notes, the Subsidiary Guarantees, the
Indenture, the Exchange Offer Registration Statement and any Shelf
Registration Statement not specifically set forth in this Section 5.
6. Representations and Warranties of the Company and the Subsidiary
----------------------------------------------------------------
Guarantors. The Company and each of the Subsidiary Guarantors, jointly and
- ----------
severally, represent and warrant to the Initial Purchaser that:
(a) The Preliminary Offering Memorandum and the Offering
Memorandum do not, and any supplement or amendment to them will not,
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided that the
representations and warranties contained in this paragraph (a) shall not
apply to statements in or omissions from the Preliminary Offering
Memorandum and the Offering Memorandum (or any supplement or amendment
thereto) made in reliance upon and in conformity with information relating
to the Initial Purchaser furnished to the Company in writing by or on
behalf of the Initial Purchaser expressly for use therein. To the knowledge
of the Company and each of the Subsidiary Guarantors, no stop order
preventing the use of the Preliminary Offering Memorandum or the Offering
Memorandum, or any amendment or supplement thereto, or any order asserting
that any of the transactions contemplated by this Agreement are subject to
the registration requirements of the Securities Act, has been issued and no
proceedings for that purpose have been commenced or are pending or
contemplated.
(b) The Company and each of the Subsidiary Guarantors has been
duly incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, has the requisite
corporate power and authority to carry on its business as it is currently
being conducted and as described in the Offering Memorandum, and, to own,
lease and operate its properties, and is duly qualified and is in good
standing as a foreign corporation authorized to do business in each
jurisdiction where the operation, ownership or leasing of property or the
conduct of its business requires such qualification, except where the
failure to be so qualified would not (i) have a material adverse effect on
the properties, business, results of operations, condition (financial or
otherwise), affairs or prospects of the Company, and the Subsidiary
Guarantors, taken as a whole, (ii) have material adverse effect on the
ability of the Company or any of the Subsidiary Guarantors to perform its
obligations under this Agreement and the other Operative Documents, or
(iii) in any manner draw into question the validity of this Agreement or
any of the other Operative Documents (any of the events set forth in (i),
(ii) or (iii), a "Material Adverse Effect").
-----------------------
(c) The Company has all requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and
the other Operative Documents to which it is a party and to consummate the
transactions contemplated hereby and thereby, including, without
limitation, the corporate power and authority to issue, sell and deliver
the Notes as provided herein and therein. Each of the Subsidiary
Guarantors has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement, its Subsidiary
7
<PAGE>
Guarantee and the other Operative Documents to which it is a party and to
consummate the transactions contemplated hereby and thereby.
(d) (i) All of the issued and outstanding shares of capital
stock of the Company and each of the Subsidiary Guarantors have been duly
and validly authorized and issued and are fully paid and nonassessable;
(ii) the capital stock of the Company is owned as described in the Offering
Memorandum and the Company owns all of the issued and outstanding capital
stock of each of the Subsidiary Guarantors; (iii) all such shares of
capital stock described in the foregoing subsection (ii) are fully paid and
nonassessable, and are owned free and clear of any security interest,
mortgage, pledge, claim, lien or encumbrance (each, a "Lien"), except for
----
such Liens arising under the Senior Credit Facility and inchoate statutory
liens for amounts not yet due and payable, and all such capital stock was
not issued in violation of any preemptive or similar rights; (iv) except
for the ownership interests described in the subsection (ii) of this
paragraph, the Company, and the Subsidiary Guarantors have no other direct
or indirect subsidiaries; and (v) except as described in the Offering
Memorandum there are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or Liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, the Company
or any of the Subsidiary Guarantors.
(e) This Agreement has been duly and validly authorized,
executed and delivered by the Company and each of the Subsidiary
Guarantors, and (assuming the due execution and delivery hereof by you)
constitutes a valid and legally binding agreement of the Company and each
of the Subsidiary Guarantors, enforceable against each of them in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer
moratorium and other similar laws relating to or affecting creditors'
rights generally, by general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law) and
the discretion of the court before which any proceeding therefor may be
brought and, as to rights of indemnification or contribution, by principles
of public policy or federal or state securities laws relating thereto.
(f) The Indenture has been duly and validly authorized by the
Company and each of the Subsidiary Guarantors and, when duly executed and
delivered in accordance with its terms, will be the valid and legally
binding agreement of the Company and each of the Subsidiary Guarantors,
enforceable against each of them in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer moratorium and other
similar laws relating to or affecting creditors' rights generally, by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and the discretion of the
court before which any proceeding therefor may be brought, and, as to
rights of indemnification or contribution, by principles of public policy
or federal or state securities laws relating thereto.
(g) The Series A Notes have been duly and validly authorized for
issuance and sale to the Initial Purchaser by the Company pursuant to this
Agreement and, when issued and authenticated in accordance with the terms
of the Indenture and delivered against payment therefor in accordance with
the terms hereof, will be the legally valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such
8
<PAGE>
enforceability is considered in a proceeding in equity or at law) and the
discretion of the court before which any proceeding therefor may be brought
and, as to rights of indemnification or contribution, by principles of
public policy or federal or state securities laws relating thereto.
(h) The Series B Notes have been duly and validly authorized for
issuance by the Company, and when issued and authenticated in accordance
with the terms of the Indenture, the Registration Rights Agreement and the
Exchange Offer, will be the legally valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance or transfer moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such
(i) The Subsidiary Guarantees (issued in connection with the
issuance of the Series A Notes and to be issued in connection with the
issuance of the Series B Notes) have been duly and validly authorized for
issuance by each of the Subsidiary Guarantors pursuant to this Agreement
and, when issued in accordance with the terms of the Indenture, will be the
legally valid and binding obligation of each of the Subsidiary Guarantors,
enforceable against each of the Subsidiary Guarantors in accordance with
their terms and entitled to the benefits of the Indenture, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance or transfer moratorium and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law) and the discretion of the court before
which any proceeding therefor may be brought and, as to rights of
indemnification or contribution, by principles of public policy or federal
or state securities laws relating thereto.
(j) The Registration Rights Agreement has been duly authorized
by the Company and each of the Subsidiary Guarantors and, when duly
executed and delivered by the Company and the Subsidiary Guarantors
(assuming the due execution and delivery thereof by you) will be the
legally valid and binding obligation of the Company and the Subsidiary
Guarantors, enforceable against each of them in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer moratorium and other
similar laws relating to or affecting creditors' rights generally, by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and the discretion of the
court before which any proceeding therefor may be brought and, as to rights
of indemnification or contribution, by principles of public policy or
federal or state securities laws relating thereto.
(k) The Acquisition Agreements have been duly authorized,
executed and delivered by the Company and remain in full force and effect
and have not been modified or amended in any material respect since their
respective dates (except for such modifications or amendments copies of
which have previously been provided to the Initial Purchaser and its
counsel).
(l) This Agreement and the other Operative Documents, when
executed and delivered by the Company and the Subsidiary Guarantors, as
applicable, will conform in all material respects to the respective
descriptions thereof in the Offering Memorandum.
9
<PAGE>
(m) (i) Neither the Company nor any of the Subsidiary Guarantors
(x) is in violation of its respective certificate of incorporation or
bylaws or in default in the performance of any bond, debenture, note or any
other evidence of indebtedness or any indenture, mortgage, deed of trust or
other contract, lease or other instrument to which any of them is a party
or by which any of them is bound, or to which any of their respective
properties or assets is subject, or (y) is in violation of any law,
statute, rule, regulation, judgment or court decree applicable to the
Company or any of the Subsidiary Guarantors or their respective assets or
properties, and (ii) there exists no condition that, with notice, the
passage of time or otherwise, would constitute any such default under any
such document or instrument, except any such default, violation or
condition that could not reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect.
(n) The execution, delivery and performance by the Company and
each of the Subsidiary Guarantors of this Agreement and the other Operative
Documents to which each is a party and the consummation of the transactions
contemplated hereby and thereby and the issuance and sale of the Series A
Notes, and the issuance of the Series B Notes in the Exchange Offer, will
not violate, conflict with or result in a breach or violation of the terms
or provisions of, or constitute a default under (or an event that with
notice or the lapse of time, or both, would constitute a default under), or
require a consent under, or result in the imposition or creation of (or the
obligation to create or impose) a Lien or an acceleration of indebtedness
pursuant to, (i) the certificate of incorporation or bylaws of the Company
or any of the Subsidiary Guarantors, (ii) any bond, note, debenture or
other evidence of indebtedness or any indenture, mortgage, deed of trust or
other agreement or instrument presently in effect to which the Company or
any of the Subsidiary Guarantors is a party or by which any of them is
bound, or to which any properties of the Company or any of the Subsidiary
Guarantors is or may be subject, (iii) any statute, rule or regulation
presently in effect applicable to the Company or any of the Subsidiary
Guarantors or any of their assets or properties, (including, without
limitation, the Telecommunications Act of 1996 (the "Telecommunications
------------------
Act"), the rules and regulations of the Federal Communications Commission
(the "FCC") and the rules and regulations of any state or other regulatory
---
agency or body with jurisdiction over telecommunications matters in the
jurisdictions in which the Company, the Subsidiary Guarantors or STC
operate or provide telecommunications services (a "State Regulatory
----------------
Agency")) or (iv) any judgment, order or decree presently in effect of any
court or governmental agency or authority having jurisdiction over the
Company or any of the Subsidiary Guarantors or any of their properties,
except for Liens under the Senior Credit Facility as described in the
Offering Memorandum and any such violations, conflicts, breaches or
defaults which, individually or in the aggregate, (i) could not reasonably
be expected to result in a Material Adverse Effect or (ii) do not and will
not result in the termination or revocation of any of the material permits,
licenses, approvals, orders, certificates, franchises or authorizations of
state, federal or other governmental or regulatory authorities, including
those relating to the Telecommunications Act, the rules and regulations of
the FCC or the rules and regulations of any State Regulatory Agency, owned
or held by the Company or any of the Subsidiary Guarantors, or result in
any other material impairment of the rights of the holder of such permits
licenses, approvals, orders, certificates, franchises or authorizations.
(o) Assuming the accuracy of the Initial Purchaser's
representations and warranties set forth in Section 7 hereof, and the due
performance by the Initial Purchaser of the covenants and agreements to be
performed by it set forth in Section 7 hereof, no consent, waiver,
approval, authorization or order of, or filing, registration,
qualification, license or permit of or with, any court or governmental
agency, body or administrative agency (including, without limitation, the
FCC and any State Regulatory Agency) or other person is required for the
execution, delivery and
10
<PAGE>
performance of the Operative Documents by the Company and each of the
Subsidiary Guarantors, as applicable, the issuance and sale of the Notes
(including the Subsidiary Guarantees thereof) and the consummation of the
transactions contemplated hereby and thereby, except (i) as described in
the Offering Memorandum or (ii) such as have been obtained and made (or, in
the case of the Registration Rights Agreement, will be obtained and made)
under the Securities Act, the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), and state securities or Blue Sky laws and
-------------------
regulations or such as may be required by the National Association of
Security Dealers ("NASD"), or (iii) where the failure to obtain such
----
consents, waivers, approvals, authorizations, orders, filings,
registrations, qualifications, licenses or permits could not reasonably be
expected to have a Material Adverse Effect. No consents, waivers, approvals
or authorizations from any other person are required for the execution,
delivery and performance by the Company or the Subsidiary Guarantors of
this Agreement and the other Operative Documents, as applicable, and the
consummation of the transactions contemplated hereby and thereby, other
than such consents, waivers, approvals or authorizations as have been
obtained (or, in the case of the Registration Rights Agreement, which the
Company will seek to obtain pursuant to the terms thereof) except where the
failure to obtain such consents, waivers, approvals or authorizations could
not reasonably be expected to have a Material Adverse Effect.
(p) Except as described in the Offering Memorandum, there is (i)
no action, suit or proceeding before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign, now pending or
threatened or contemplated to which the Company or any of the Subsidiary
Guarantors is or may be a party, or affecting the Company or any of the
Subsidiary Guarantors or any of their respective businesses or properties,
(ii) no statute, rule, regulation or order that has been enacted, adopted
or issued by any governmental agency or that has been proposed by any
governmental body, (iii) no injunction, restraining order or order of any
nature by a federal or state court or foreign court of competent
jurisdiction to which the Company or any of the Subsidiary Guarantors is
subject, that would, in the case of (i), (ii) and (iii), reasonably be
expected, either individually or in the aggregate, (x) to have a Material
Adverse Effect, (y) to restrain, enjoin or prohibit the issuance and sale
of the Series A Notes or (z) to question the validity of any of the
Operative Documents.
(q) The Company and each of the Subsidiary Guarantors has good
and valid title to all property and assets described in the Offering
Memorandum as being owned by it, free and clear of all Liens, claims,
encumbrances and restrictions, except (i) inchoate statutory Liens for
amounts not yet due and payable, (ii) as described in the Offering
Memorandum or (iii) as could not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect. All leases to which the
Company or any of the Subsidiary Guarantors is a party are valid and
binding, no default has occurred or is continuing thereunder and the
Company and each such Subsidiary Guarantor enjoys peaceful and undisturbed
possession under all such leases to which any of them is a party as lessee,
except to the extent that such failure to be binding, default or failure to
enjoy peaceful and undisturbed possession could not reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(r) Except as described in the Offering Memorandum, neither the
Company nor any of the Subsidiary Guarantors has violated any
environmental, safety or similar law or regulation applicable to its
business or property relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), lacks any permits, licenses or other
------------------
approvals required of them under applicable
11
<PAGE>
Environmental Laws or is violating any term condition of any such permit,
license or approval, which could in such circumstance reasonably be
expected to have a Material Adverse Effect.
(s) Except as described in the Offering Memorandum, there is (i)
no unfair labor practice complaint pending against the Company or any of
the Subsidiary Guarantors nor, to the best knowledge of the Company and the
Subsidiary Guarantors, threatened against any of them, before the National
Labor Relations Board, any state or local labor relations board or any
foreign labor relations board, and no grievance or arbitration proceeding
arising out of or under any collective bargaining agreement is so pending
against the Company or any of the Subsidiary Guarantors, or to the best
knowledge of the Company and the Subsidiary Guarantors, threatened against
any of them, (ii) no strike, labor dispute, slowdown or stoppage against
the Company or any of the Subsidiary Guarantors or, to the best knowledge
of the Company and the Subsidiary Guarantors, threatened against the
Company or any of the Subsidiary Guarantors, and (iii) to the best
knowledge of the Company and the Subsidiary Guarantors, no union
representation question existing with respect to the employees of the
Company or any of the Subsidiary Guarantors and, to the best knowledge of
the Company and the Subsidiary Guarantors, no union organizing activities
are taking place, except (with respect to any matter specified in clause
(i), (ii) or (iii) above, individually or in the aggregate) such as would
not have a Material Adverse Effect. Neither the Company nor any of the
Subsidiary Guarantors has violated any Federal, state, local or foreign law
relating to discrimination in the hiring, promotion or pay of employees nor
any applicable wage or hour laws, nor any provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA") or the rules and
-----
regulations promulgated thereunder, nor has the Company or any of the
Subsidiary Guarantors engaged in any unfair labor practice, which in each
case could reasonably be expected to result, individually or in the
aggregate, in a Material Adverse Effect.
(t) Except as would not, individually or in the aggregate, have
a Material Adverse Effect, (i) each of the Company and the Subsidiary
Guarantors has all certificates, consents, exemptions, orders, permits,
licenses, authorizations, or other approvals (each, an "Authorization") of
-------------
and from, and has made all declarations and filings with, all Federal,
state, local and other governmental authorities (including, without
limitation, the FCC and all State Regulatory Agencies), all self-regulatory
organizations and all courts and other tribunals, necessary or required to
engage in its business currently conducted by it in the manner described in
the Offering Memorandum, (ii) all such Authorizations are valid and in full
force and effect and (iii) the Company and the Subsidiary Guarantors are in
compliance with the terms and conditions of all such Authorizations and
with the rules and regulations of the regulatory authorities and governing
bodies having jurisdiction with respect thereto.
(u) The Company and each of the Subsidiary Guarantors owns or
possesses or has the right to use the patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
(collectively, the "Intellectual Property") presently employed by them in
---------------------
connection with, and material individually or in the aggregate to the
operation of the businesses now operated by them, and neither the Company
nor any of the Subsidiary Guarantors has received any notice of
infringement of or conflict with asserted rights of others with respect to
the foregoing which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could reasonably be expected to
result in a Material Adverse Effect. To the knowledge of the Company and
each of the Subsidiary Guarantors, the use of such Intellectual Property in
connection with the business and operations of the Company and the
12
<PAGE>
Subsidiary Guarantors does not infringe on the rights of any person, except
as could not reasonably be expected to result, individually or in the
aggregate, in a Material Adverse Effect.
(v) All tax returns required to be filed by the Company or any
of the Subsidiary Guarantors in all jurisdictions have been timely and duly
filed, other than those filings being contested in good faith, except where
the failure to so file any such returns could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect; all
such tax returns were correct and complete, in all material respects, when
so filed; there are no tax returns of the Company or any of the Subsidiary
Guarantors that are currently being audited by state, local or federal
taxing authorities or agencies (and with respect to which the Company, or
any of the Subsidiary Guarantors has received notice), where the findings
of such audit, if adversely determined, could reasonably be expected to
result in a Material Adverse Effect; all taxes, including withholding
taxes, penalties and interest, assessments, fees and other charges due or
claimed to be due from such entities have been paid, other than those being
contested in good faith and for which adequate reserves have been provided
in accordance with generally accepted accounting principles or those
currently payable without penalty or interest; and neither the Company nor
any of the Subsidiary Guarantors knows of any material proposed additional
tax assessments against the Company or any of the Subsidiary Guarantors.
(w) Neither the Company nor any of the Subsidiary Guarantors is,
or intends to conduct its business in a manner that would cause it to
become, an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.
(x) Except pursuant to the Registration Rights Agreement, there
are no holders of securities of the Company or the Subsidiary Guarantors
who, by reason of the execution by the Company or any of the Subsidiary
Guarantors of this Agreement or any other Operative Document to which it is
a party or the consummation of the transactions contemplated hereby and
thereby, have the right to request or demand the Company or any Subsidiary
Guarantor register under the Securities Act or analogous foreign laws and
regulations securities held by them.
(y) The Company and each of the Subsidiary Guarantors maintain
insurance (including self-insurance) covering its respective properties,
operations, personnel and businesses. Such insurance insures against such
losses and risks as in the Company's reasonable determination are adequate
for the conduct of the business of the Company and the Subsidiary
Guarantors and the value of their property. Neither the Company nor any of
the Subsidiary Guarantors has received notice from any insurer or agent of
such insurer that material capital improvements or other expenditures will
have to be made in order to continue such insurance. All such insurance is
outstanding and duly in force on the date hereof and will be outstanding
and duly in force on the Closing Date.
(z) When the Notes are delivered pursuant to this Agreement,
none of the Notes will be of the same class (within the meaning of Rule
144A under the Securities Act ("Rule 144A")) as securities of the Company
---------
or any of the Subsidiary Guarantors that are listed on a national
securities exchange registered under Section 6 of the Exchange Act or that
are quoted in a United States automated inter-dealer quotation system.
(aa) Deloitte & Touche LLP are independent public accountants
with respect to the Company and Talton STC as required by the Securities
Act. Arthur Andersen LLP are
13
<PAGE>
independent public accountants with respect to AmeriTel as required by the
Securities Act. Borland, Benefield, Crawford & Webster, P.C. are
independent public accountants with respect to Talton Telecommunications
and its subsidiaries as required by the Securities Act. Davis, Clark and
Company, P.C. are independent public accountants with respect to STC as
required by the Securities Act. The historical financial statements,
together with related notes thereto, set forth in the Offering Memorandum
fairly present, in all material respects, the financial position and
condition of the applicable entities at the respective dates indicated and
the results of their operations and their cash flows for the respective
periods indicated (subject, in the case of unaudited financial statements,
to year-end adjustments), in accordance with generally accepted accounting
principles ("GAAP"), consistently applied throughout such periods (except
----
that the financial statements of the Company reflect the application of the
purchase method of accounting). The pro forma financial statements,
together with the related notes thereto, set forth in the Offering
Memorandum have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and
give effect, based on assumptions made on a reasonable basis, to certain
historical transactions described therein and to the transactions
contemplated by this Agreement and the other Operative Documents in
accordance with the applicable requirements of Regulation S-X and the
Securities Act. The other historical and pro forma financial and
statistical information and data included in the Offering Memorandum are,
in all material respects, fairly presented and prepared on a basis
consistent with such financial statements and the books and records of the
applicable entities.
(bb) The Company, each of the Subsidiary Guarantors and STC
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (1) transactions are executed in accordance with
management's general or specific authorizations; (2) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for assets; (3) access
to assets is permitted only in accordance with management's general or
specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect thereto.
(cc) No registration under the Securities Act of any of the
Series A Notes is required for the sale of the Series A Notes to the
Initial Purchaser as contemplated by this Agreement or for the Exempt
Resales assuming (i) that the Initial Purchaser's representations and
warranties in Section 7 are true and that the Initial Purchaser duly
performs the covenants and agreements to be performed by it set forth in
Section 7 hereof, (ii) that the representations of the Institutional
Accredited Investors set forth in the letters of representation of such
Institutional Accredited Investors in the form set forth as Annex A to the
Offering Memorandum are true, and (iii) that each of the Eligible
Purchasers is a QIB or an Institutional Accredited Investor. No form of
general solicitation or general advertising was used by the Company, the
Subsidiary Guarantors or any of their representatives in connection with
the offer and sale of the Notes or in connection with Exempt Resales,
including, but not limited to, articles, notices or other communications
published in any newspaper, magazine, or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising (it being
understood that the Company and the Subsidiary Guarantors are making no
representation in this sentence with respect to any actions taken by the
Initial Purchaser in connection with the Offering). No securities of the
same class as and of the Notes have been issued and sold by the Company or
any of the Subsidiary Guarantors within the six-month period immediately
prior to the date hereof.
14
<PAGE>
(dd) The Offering Memorandum, as of its date, contains, and the
Offering Memorandum as amended or supplemented by any amendment or
supplement thereto, as of its date, will contain all the information
specified in, and conforms, and as amended or supplemented, will conform,
in all material respects, to the requirements of Rule 144A(d)(4) under the
Securities Act.
(ee) The execution and delivery of this Agreement and the other
Operative Documents and the sale of the Notes to be purchased by the
Eligible Purchasers will not involve any prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue
Code of 1986. The representation made by the Company and the Subsidiary
Guarantors in the preceding sentence is made in reliance upon and subject
to the accuracy of, and compliance with, the representations and covenants
made or deemed made by the Eligible Purchasers as set forth in the Offering
Memorandum under the section entitled "Notice to Investors."
(ff) Prior to the Exchange Offer or the effectiveness of the
Shelf Registration Statement, the Indenture is not required to be qualified
under the Trust Indenture Act.
(gg) Subsequent to the respective dates as of which information
is given in the Offering Memorandum and up to the Closing Date, except as
set forth in the Offering Memorandum, neither the Company nor any of the
Subsidiary Guarantors has incurred any liabilities or obligations, direct
or contingent, that are material to the Company and the Subsidiary
Guarantors taken as a whole, nor entered into any material transaction not
in the ordinary course of business, and there has not been, individually or
in the aggregate, any material adverse change in the properties, business,
results of operations, condition (financial or otherwise), affairs or
prospects of the Company and the Subsidiary Guarantors taken as a whole (a
"Material Adverse Change") or any development which could reasonably be
-----------------------
expected to result in a Material Adverse Change.
(hh) The present fair saleable value of the assets of the Company
and the Subsidiary Guarantors, taken as a whole, exceeds the sum of the
stated liabilities (including the maximum amount of liability that may
reasonably be expected to result from contingent liabilities) of the
Company and the Subsidiary Guarantors, and the assets of the Company and
the Subsidiary Guarantors, taken as a whole, do not constitute unreasonably
small capital to carry on their business as conducted or as proposed to be
conducted. The Company does not intend to, or believe that it will, incur
debts beyond its ability to pay such debts as they mature. The Company does
not intend to permit the Subsidiary Guarantors to incur debts beyond their
respective ability to pay such debts as they mature. Upon the issuance of
the Series A Notes and the application of the net proceeds therefrom, the
present fair saleable value of the assets of the Company and the Subsidiary
Guarantors, taken as a whole, will exceed the sum of their stated
liabilities (including the maximum amount of liability that may reasonably
be expected to result from contingent liabilities), and the assets of the
Company and the Subsidiary Guarantors, taken as a whole, will not
constitute unreasonably small capital to carry on their business as now
conducted or as proposed to be conducted, including the capital needs of
the Company and the Subsidiary Guarantors, taking into account the
projected capital requirements and capital availability of the Company and
each of the Subsidiary Guarantors.
(ii) Neither the Company nor any of the Subsidiary Guarantors (i)
has taken, directly or indirectly, any action designed to cause or to
result in, or that has constituted or that constitutes, the stabilization
or manipulation of the price of any security of the Company or any of the
Subsidiary Guarantors to facilitate the sale or resale of the Notes (or the
Subsidiary Guarantees) or (ii) since the date of the Preliminary Offering
Memorandum (A) sold, bid for, purchased, or paid
15
<PAGE>
any person other than the Initial Purchaser pursuant to the terms of this
Agreement any compensation for soliciting purchases of, the Notes or (B)
paid or agreed to pay to any person other than the Initial Purchaser any
compensation for soliciting another to purchase any other securities of the
Company or any of the Subsidiary Guarantors.
(jj) No Subsidiary Guarantor is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distributions on such Subsidiary Guarantor's capital stock, from repaying
to the Company any loans or advances to such Subsidiary Guarantor or from
transferring any of such Subsidiary Guarantor's property or assets to the
Company or to any other Subsidiary Guarantor, except pursuant to the
provisions of the Senior Credit Facility or the Existing Credit Facility.
(kk) There are no contracts, agreements or understandings between
the Company or the Subsidiary Guarantors, on the one hand, and any person
other than the Initial Purchaser, on the other hand, that would give rise
to a valid claim against the Company or any Subsidiary Guarantor for a
brokerage commission, finder's fee or like payment in connection with the
issuance, purchase and sale of the Notes.
(ll) Each certificate signed by any authorized officer of the
Company or any of the Subsidiary Guarantors and delivered to the Initial
Purchaser or its representatives in connection with the Offering shall be
deemed to be a representation and warranty by the Company or such
Subsidiary Guarantor to the Initial Purchaser as to the matters covered
thereby.
The Company and the Subsidiary Guarantors acknowledge that the Initial
Purchaser and, for purposes of the opinions to be delivered to the Initial
Purchaser pursuant to Section 9 hereof, counsel to the Company and the
Subsidiary Guarantors and counsel to the Initial Purchaser will rely, as to
matters of fact, upon the accuracy and truth of the foregoing representations
and hereby consent to such reliance.
7. Initial Purchaser's Representations and Warranties. The Initial
--------------------------------------------------
Purchaser represents and warrants to the Company and the Subsidiary Guarantors
that:
(a) It is a QIB, with such knowledge and experience in financial
and business matters as are necessary in order to evaluate the merits and
risks of an investment in the Notes.
(b) It (i) is not acquiring the Series A Notes with a view to
any distribution thereof or with any present intention of offering or
selling any of the Series A Notes in a transaction that would violate the
Securities Act or the securities laws of any State of the United States or
any other applicable jurisdiction and (ii) will be reoffering and reselling
the Series A Notes only to QIBs in reliance on the exemption from the
registration requirements of the Securities Act provided by Rule 144A and
to a limited number of Institutional Accredited Investors that execute and
deliver a letter containing certain representations and agreements in the
form attached as Annex A to the Offering Memorandum in a private resale
exempt from the registration requirements of the Securities Act.
(c) In connection with the Exempt Resales, it will solicit
offers to buy the Series A Notes only from, and will offer to sell the
Series A Notes only to and will sell Series A Notes only to Eligible
Purchasers. The Initial Purchaser further agrees that it will offer to sell
the Series A Notes only to, and will solicit offers to buy the Series A
Notes only from, persons who in purchasing such Series A Notes will be
deemed to have represented and agreed (1) if such Eligible Purchasers
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<PAGE>
are QIBs, that they are purchasing the Series A Notes for their own account
or an account with respect to which they exercise sole investment
discretion and that they or such accounts are QIBs, (2) that such Series A
Notes will not have been registered under the Securities Act and may be
resold, pledged or otherwise transferred, only (A) (I) inside the United
States to a person who the seller reasonably believes is a QIB within the
meaning of Rule 144A in a transaction meeting the requirements of Rule
144A, or in accordance with Rule 144 under the Securities Act, or pursuant
to another exemption from the registration requirements of the Securities
Act (and based upon an opinion of counsel if the Company so requests), (II)
to the Company or (III) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act
and (B) in each case, in accordance with any applicable securities laws of
any State of the United States or any other applicable jurisdiction, (3)
that the holder will, and each subsequent holder is required to, notify any
purchaser from it of the security evidenced thereby of the resale
restrictions set forth in (2) above.
(d) No form of general solicitation or general advertising has
been or will be used by the Initial Purchaser or any of its representatives
in connection with the offer and sale of any of the Series A Notes,
including, but not limited to, articles, notices or other communications
published in any newspaper, magazine, or similar medium or broadcast over
television or radio, or any seminar or meeting whose attendees have been
invited by any general solicitation or general advertising.
(e) The Initial Purchaser also understands that the Company and
the Subsidiary Guarantors and, for purposes of the opinions to be delivered
to the Company and the Subsidiary Guarantors pursuant to Section 9 hereof,
counsel to the Company and the Subsidiary Guarantors and counsel to the
Initial Purchaser will rely, as to matters of fact, upon the accuracy and
truth of the foregoing representations and the Initial Purchaser hereby
consents to such reliance.
8. Indemnification.
---------------
(a) The Company and the Subsidiary Guarantors (for purposes of
this Section 8 collectively referred to as the "Talton Entities") jointly
---------------
and severally agree to indemnify and hold harmless the Initial Purchaser
and each person, if any, who controls (within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act) the Initial Purchaser
(a "controlling person") and the respective officers, directors, partners,
------------------
employees, representatives and agents of the Initial Purchaser or any
controlling person (each of the foregoing may hereinafter be referred to as
an "Indemnified Person") to the fullest extent lawful, from and against any
------------------
and all losses, claims, damages, liabilities, judgments, actions and
expenses directly or indirectly caused by, related to, based upon, arising
out of or in connection with: (1) any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Offering
Memorandum or the Offering Memorandum (or any amendment or supplement
thereto) or (2) any omission or alleged omission to state in the
Preliminary Offering Memorandum or the Offering Memorandum (or any
amendment or supplement thereto) a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading or (3) the failure by the Company or any of the
Subsidiary Guarantors to obtain any required Authorizations from, or make
any required declarations or filings with, the FCC or any State Regulatory
Agency; and will reimburse, as incurred, each Indemnified Person for any
legal or other expenses reasonably incurred by such Indemnified Person in
connection with investigating, preparing, pursuing or defending against any
claim or action, or any investigation or proceeding, commenced or
threatened, or appearing as a third-party witness in connection with any
such loss, claim, damage, liability, judgment, action or expense; provided,
however, that none
17
<PAGE>
of the Talton Entities will be liable in any such case to an Indemnified
Person to the extent that such losses, claims, damages, liabilities,
judgments, actions or expenses are caused by an untrue statement or alleged
untrue statement or omission or alleged omission that is made in the
Preliminary Offering Memorandum or the Offering Memorandum or any amendment
or supplement thereto in reliance upon and in conformity with information
relating to the Initial Purchaser furnished in writing to the Company or
the Subsidiary Guarantors by or on behalf of the Initial Purchaser
expressly for use therein; and provided, further, indemnity with respect to
the Preliminary Offering Memorandum and the Offering Memorandum shall not
inure to the benefit of any Indemnified Person from whom the person
asserting any such loss, claim, damage, liability, judgment, action or
expense purchased the Series A Notes which are the subject thereof if such
person did not receive a copy of the Offering Memorandum (or the Offering
Memorandum as amended or supplemented) excluding documents incorporated
therein by reference at or prior to the confirmation of the sale of such
Series A Notes to such person in any case where such delivery is required
by the Securities Act and the untrue statement or omission of a material
fact contained in the Preliminary Offering Memorandum was corrected in the
Offering Memorandum (or the Offering Memorandum as amended or
supplemented), unless such failure to deliver such Offering Memorandum (as
amended or supplemented) was a result of noncompliance by the Talton
Entities with Section 4(d) of this Agreement. The indemnity, contribution
and reimbursement obligations of the Talton Entities set forth in this
Section 8 shall be in addition to any liability or obligation the Talton
Entities may otherwise have to any Indemnified Person.
(b) The Initial Purchaser agrees to indemnify and hold harmless
the Company and the Subsidiary Guarantors and their respective directors
and officers, and any person controlling (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) the Company and
the Subsidiary Guarantors and the respective officers, directors,
employees, representatives and agents of each such person, to the same
extent as the foregoing indemnity set forth in clauses (1) and (2) of the
preceding paragraph from the Talton Entities to each of the Indemnified
Persons, but only with respect to losses, claims, damages, liabilities,
judgments, actions and expenses based on information relating to the
Initial Purchaser furnished in writing to the Company or the Subsidiary
Guarantors by or on behalf of the Initial Purchaser expressly for use in
the Preliminary Offering Memorandum and the Offering Memorandum or any
amendment or supplement thereto. The indemnity, contribution and
reimbursement obligations of the Initial Purchaser set forth in this
Section 8 shall be in addition to any liability or obligation the Initial
Purchaser may otherwise have to the Company or the Subsidiary Guarantors.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action or proceeding
(including any governmental or regulatory investigation or proceeding),
such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the
indemnifying party of the commencement thereof; provided, that the omission
so to notify the indemnifying party will not relieve it from any liability
that it may have to any indemnified party except to the extent that such
omission materially prejudices the rights or defenses of the indemnifying
party. In case any such action is brought against any indemnified party,
and such indemnified party notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the named parties in any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that there
may be one or more legal defenses
18
<PAGE>
available to it and/or other indemnified parties that are different from or
additional to those available to any such indemnifying party, then the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel to defend
such action on behalf of such indemnified party or parties. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof and approval by such indemnified party of
counsel appointed to defend such action, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable and documented out-of-pocket costs of
investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall
have employed separate counsel in accordance with the proviso to the
immediately preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for
the expenses of more than one separate counsel (in addition to local
counsel) in any one action or separate but substantially similar actions in
the same jurisdiction arising out of the same general allegations or
circumstances, designated by the Initial Purchaser in the case of paragraph
(a) of this Section 8 or the Company in the case of paragraph (b) of this
Section 8, representing the indemnified parties under such paragraph (a) or
paragraph (b), as the case may be, who are parties to such action or
actions); (ii) the indemnifying party has authorized in writing the
employment of counsel for the indemnified party at the expense of the
indemnifying parties; or (iii) the indemnifying party shall have failed to
assume the defense or retain counsel reasonably satisfactory to the
indemnified party. After such notice from the indemnifying parties to such
indemnified party (so long as the indemnified party shall have informed the
indemnifying parties of such action in accordance with this Section 8 on a
timely basis prior to the indemnified party seeking indemnification
hereunder), the indemnifying parties will not be liable under this Section
8 for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party,
unless such indemnified party waived its rights under this Section 8, in
which case the indemnified party may effect such a settlement without such
consent. No indemnifying party shall, without the prior written consent of
each indemnified party, settle or compromise or consent to the entry of
judgment in or otherwise seek to terminate any pending or threatened
action, claim, litigation or proceeding in respect of which indemnification
or contribution may be sought hereunder (whether or not any indemnified
party is a party thereto), unless such settlement, compromise, consent or
termination includes an unconditional release of each indemnified party
from all liability arising out of such action, claim, litigation or
proceeding. If any indemnifying party reimburses an indemnified party
hereunder for any expenses incurred in connection with an action or
proceeding for which indemnification is sought, the indemnified party
hereby agrees to refund such reimbursement of expenses to the extent that
it is determined by a court of competent jurisdiction that the indemnified
party is not entitled to indemnification pursuant to this Section 8 for
such expenses.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or expenses referred to herein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and expenses (i) in
such proportion as is appropriate to reflect the relative benefits received
by the indemnifying party on the one hand and the indemnified party on the
other hand from the offering of the Notes or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
indemnifying parties and the indemnified party, as well as any other
relevant equitable considerations. The relative benefits
19
<PAGE>
received by the Talton Entities, on the one hand, and the Initial
Purchaser, on the other hand, shall be deemed to be in the same proportion
as the total proceeds from the offering of the Notes (net of commissions
and discounts but before deducting expenses) received by the Talton
Entities bears to the total commissions and discounts received by the
Initial Purchaser. The relative fault of the Talton Entities, on the one
hand, and the Initial Purchaser, on the other hand, shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact related to information supplied by the Talton Entities or the
Initial Purchaser and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission and other equitable considerations appropriate in the
circumstances. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities, judgments, actions or
expenses referred to in this paragraph shall be deemed to include, subject
to the limitations set forth above, any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim.
The Talton Entities and the Initial Purchaser agree that it would
not be equitable if contribution pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Initial Purchaser and its
related Indemnified Persons were treated as one entity for such purpose) or
by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding
paragraph. Notwithstanding the provisions of this Section 8, the Initial
Purchaser (and the related Indemnified Persons) shall not be required to
contribute, in the aggregate, any amount in excess of the amount by which
the total discounts and commissions applicable to the Series A Notes
purchased by the Initial Purchaser under this Agreement exceeds the
aggregate amount of any damages which the Initial Purchaser has otherwise
been required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation.
(e) The Company and each Subsidiary Guarantor hereby designates
CT Corporation System, 1633 Broadway, New York, New York 10019 as its
authorized agent upon whom process may be served in any action, suit or
proceeding that may be instituted in any state or federal court in the
State of New York by the Initial Purchaser or any person asserting a claim
for indemnification or contribution under or pursuant to this Section 8,
and the Company and the Subsidiary Guarantors will accept the jurisdiction
of such court in such action, and waive, to the fullest extent permitted by
applicable law, any defense based upon lack of personal jurisdiction or
venue. A copy of any such process shall be sent or given to the Company
and the Subsidiary Guarantors at the address for notices specified in
Section 11 hereof.
(f) The parties hereto agree that the statements contained in
the Preliminary Offering Memorandum and the Offering Memorandum in the
fourth paragraph on page (ii) and the third, fourth, ninth and twelfth
paragraphs of the section entitled "Plan of Distribution" constitute the
only information heretofore furnished to the Company or the Subsidiary
Guarantors in writing by or behalf of the Initial Purchaser expressly for
use in the Preliminary Offering Memorandum or the Offering Memorandum or
any amendment or supplement thereto.
9. Conditions of Initial Purchaser's Obligations. The obligations
---------------------------------------------
of the Initial Purchaser under this Agreement are subject to the satisfaction of
each of the following conditions:
20
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(a) All of the representations and warranties of the Company and
the Subsidiary Guarantors contained in this Agreement shall be true and
correct on the Closing Date with the same force and effect as if made on
and as of the Closing Date. The Company and each of the Subsidiary
Guarantors shall have performed or complied with all of its obligations and
agreements herein contained and required to be performed or complied with
by it on or prior to the Closing Date.
(b) No stop order suspending the qualification or exemption from
qualification of any of the Notes or the Subsidiary Guarantees in any
jurisdiction referred to in Section 4(e) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending
or threatened.
(c) No action shall have been taken and no statute, rule,
regulation or order shall have been enacted, adopted or issued by any
governmental agency which would, as of the Closing Date, prevent the
issuance of any of the Series A Notes or the Subsidiary Guarantees or the
sale of any Notes and the Subsidiary Guarantees; and no injunction,
restraining order or order of any nature by a Federal or state court of
competent jurisdiction shall have been issued as of the Closing Date which
would prevent the issuance of the Notes or the Subsidiary Guarantees. No
action, suit or proceeding shall be pending against or affecting or, to the
knowledge of the Company or any of the Subsidiary Guarantors, threatened
against, the Company or any of the Subsidiary Guarantors, before any court
or arbitrator or any governmental body, agency or official that, if
adversely determined, would prohibit, interfere with or adversely affect
the issuance of the Series A Notes or the Subsidiary Guarantees or the sale
of any of the Notes or the Subsidiary Guarantees or would have a Material
Adverse Effect; and no stop order preventing the use of the Offering
Memorandum, or any amendment or supplement thereto, or any order asserting
that any of the transactions contemplated by this Agreement are subject to
the registration requirements of the Securities Act shall have been issued.
(d) Since the dates as of which information is given in the
Offering Memorandum, (i) there shall not have been any Material Adverse
Change, (ii) since the date of the latest balance sheet included in the
Offering Memorandum, or as otherwise described in the Offering Memorandum,
there shall not have been any material change in the capital stock,
material increase in long-term debt or short-term debt of the Company, or
any of the Subsidiary Guarantors from that set forth in the Offering
Memorandum and (iii) the Company and the Subsidiary Guarantors shall have
incurred no liability or obligation, direct or contingent, that is material
individually or in the aggregate, to the Company and the Subsidiary
Guarantors, taken as a whole, and is required to be disclosed on a balance
sheet in accordance with GAAP and is not disclosed on the latest balance
sheet included in the Offering Memorandum (other than liabilities and
obligations arising in the ordinary course of business since the date of
the latest balance sheet included in the Offering Memorandum, none of which
arose as a result of any breach of contract, breach of warranty, tort,
infringement or violation of law).
(e) You shall have received (i) certificates of the Company and
each of the Subsidiary Guarantors, dated the Closing Date, executed on
behalf of the Company and the Subsidiary Guarantors, by the Chairman, the
Chief Executive Officer, the President or any Vice President and a
principal financial or accounting officer of the Company and each of the
Subsidiary Guarantors, confirming, as of the Closing Date, the matters set
forth in paragraphs (a), (b), (c) and (d) of this Section 9, and (ii) the
Secretary of the Company and each of the Subsidiary Guarantors certifying
as true, accurate and complete, the bylaws, resolutions with respect to the
transactions
21
<PAGE>
contemplated herein and incumbency of certain officers and, in
each case, as to such other matters as you may reasonably request.
(f) The Offering Memorandum shall have been printed and
copies distributed to you not later than 10:00 a.m., New York City time, on
the second business day following the date of this Agreement or at such
later date and time as to which you may agree.
(g) You shall have received a copy of the certificate of
incorporation of the Company and each of the Subsidiary Guarantors,
certified as of a recent date by the Secretary of the State (or other
appropriate official) of their respective jurisdiction of incorporation.
(h) You shall have received appropriate certificates of
qualification to do business and of good standing issued on a recent date
by the Secretary of State (or other appropriate official) of each
jurisdiction in which of the Company or any Subsidiary Guarantor, as the
case may be, is qualified to do business.
(i) On the Closing Date, you shall have received an opinion
(satisfactory to you and your counsel), dated the Closing Date, of Hughes &
Luce, L.L.P., special counsel for the Company and the Subsidiary Guarantors
("Hughes & Luce"), to the effect that:
-------------
(1) The Company and each of the Subsidiary Guarantors has
been duly incorporated and is a validly existing corporation in good
standing under the laws of its jurisdiction of incorporation, has the
requisite corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the
Offering Memorandum, and is duly qualified as a foreign corporation
and in good standing in each jurisdiction in which it owns or leases
properties or conducts any business so as to require such
qualification, other than where the failure to be so qualified or in
good standing would not have a Material Adverse Effect.
(2) (i) All of the issued and outstanding shares of
capital stock of the Company and the Subsidiary Guarantors have been
duly and validly authorized and issued and are fully paid and non-
assessable; (ii) all of the issued and outstanding shares of capital
stock of each Subsidiary Guarantor is, as of the Closing Date, owned
of record by the Company; (iii) to the knowledge of such counsel, all
such shares of capital stock of the Company and the Subsidiary
Guarantors described in the foregoing subsections (i) and (ii) are
owned free and clear of any Lien, except for Liens described in the
Offering Memorandum and inchoate statutory liens for amounts not yet
due and payable, and were not issued in violation of any preemptive or
similar statutory rights; (iv) to the knowledge of such counsel, the
Company and the Subsidiary Guarantors have no other direct or indirect
subsidiaries; (v) to the knowledge of such counsel, except as set
forth in the Offering Memorandum, there are no outstanding
subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or Liens related to or entitling any
person to purchase or otherwise to acquire any shares of the capital
stock of, or other ownership interest in, the Company or the
Subsidiary Guarantors; and (vi) the Company had at the Closing Date,
the authorized and outstanding capitalization as set forth in the
Offering Memorandum.
(3) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under this
Agreement and the other Operative
22
<PAGE>
Documents, including the corporate power and authority to issue, sell
and deliver the Notes as contemplated by this Agreement. Each
Subsidiary Guarantor has the requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement
and the other Operative Documents to which it is a party.
(4) Each of this Agreement, the Notes, the Indenture, the
Registration Rights Agreement and the Acquisition Agreements has been
duly authorized, executed and delivered by the Company.
(5) Each of this Agreement, the Subsidiary Guarantees,
the Indenture and the Registration Rights Agreement has been duly
authorized, executed and delivered by each Subsidiary Guarantor.
(6) When issued and authenticated in accordance with the
terms of the Indenture and delivered to and paid for by you in
accordance with the terms of this Agreement, the Series A Notes will
constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms and
entitled to the benefits of the Indenture.
(7) When issued and authenticated in accordance with the
terms of the Indenture, the Registration Rights Agreement and the
Exchange Offer, the Series B Notes will constitute valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their terms and entitled to the benefits of the
Indenture.
(8) When issued in accordance with the terms of the
Indenture, the Subsidiary Guarantees of the Series A Notes executed by
the Subsidiary Guarantors will constitute valid and legally binding
obligations of the Subsidiary Guarantors, enforceable against the
Subsidiary Guarantors in accordance with their terms and entitled to
the benefits of the Indenture.
(9) When issued in accordance with the terms of the
Indenture, the Registration Rights Agreement and the Exchange Offer,
the Subsidiary Guarantees of the Series B Notes executed by the
Subsidiary Guarantors will constitute valid and legally binding
obligations of the Subsidiary Guarantors, enforceable against the
Subsidiary Guarantors in accordance with their terms and entitled to
the benefits of the Indenture.
(10) The Indenture, assuming due authorization, execution
and delivery thereof by the Trustee, constitutes a valid and legally
binding obligation of the Company and each of the Subsidiary
Guarantors, enforceable against the Company and the Subsidiary
Guarantors in accordance with its terms.
(11) The Registration Rights Agreement constitutes a valid
and legally binding agreement of the Company and each of the
Subsidiary Guarantors, enforceable against each of them in accordance
with its terms.
(12) The Notes, the Subsidiary Guarantees, the Indenture
and, the Registration Rights Agreement conform in all material
respects to the descriptions thereof contained in the Offering
Memorandum.
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(13) When the Notes are issued and delivered pursuant to
the Agreement, the Notes will not be of the same class (within the
meaning of Rule 144A) as securities of the Company or the Subsidiary
Guarantors that are listed on any national securities exchange
registered under Section 6 of the Exchange Act or that are quoted in a
United States automated inter-dealer quotation system.
(14) No registration under the Securities Act of the Notes
is required for the sale of the Notes to you as contemplated hereby or
for the Exempt Resales, and prior to the consummation of the Exchange
Offer or the effectiveness of the Shelf Registration Statement, the
Indenture is not required to be qualified under the Trust Indenture
Act, assuming (i) that Eligible Purchasers acquire the Notes in the
Exempt Resales; (ii) the accuracy of the Initial Purchaser's
representations and those of the Company and the Subsidiary Guarantors
regarding the absence of general solicitation in connection with the
Exempt Resales contained herein; (iii) the accuracy of the
representations made by each Institutional Accredited Investor who
purchases Notes pursuant to an Exempt Resale as set forth in the
letters of representation executed by such Institutional Accredited
Investor in the form of Annex A to the Offering Memorandum; and (iv)
the performance by each such Institutional Accredited Investor of its
obligations under such letters of representation.
(15) Each of the Preliminary Offering Memorandum and the
Offering Memorandum, as of its date, and each amendment or supplement
thereto, as of its date (except for the financial statements and the
notes thereto and schedules and other financial data included therein,
as to which no opinion need be expressed), complied in all material
respects with the requirements of Rule 144A.
(16) Neither the Company nor any of the Subsidiary
Guarantors is an "investment company" or a company "controlled by" an
investment company within the meaning of the Investment Company Act of
1940, as amended.
(17) To such counsel's knowledge, there are no legal,
regulatory or governmental proceedings pending or threatened to which
the Company or any of the Subsidiary Guarantors is a party or to which
any property of the Company or any Subsidiary Guarantor is subject
which, if determined adversely, could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(18) The execution, delivery and performance by the Company
and each of the Subsidiary Guarantors of this Agreement and the other
Operative Documents to which it is a party, and the issuance and sale
of the Notes and the Subsidiary Guarantees, will not violate, conflict
with or constitute a breach of any of the terms or provisions of, or a
default under (or an event that with notice or the lapse of time, or
both, would constitute a default) or require consent under, or result
in the imposition of a Lien on any properties of the Company or the
Subsidiary Guarantors (except as contemplated by the Senior Credit
Facility), or an acceleration of indebtedness pursuant to, (i) the
certificate of incorporation or bylaws of the Company or the
Subsidiary Guarantors, (ii) any bond, debenture, note, indenture,
mortgage, deed of trust or other agreement or instrument known to such
counsel to which the Company or any of the Subsidiary Guarantors is a
party or by which any of them or their property is bound, (iii) any
statute, rule or regulation applicable to the Company or any of the
Subsidiary Guarantors, or (iv) any judgment, order or decree known
24
<PAGE>
to such counsel of any United States federal or state court or
governmental agency or authority having jurisdiction over the Company
or any of the Subsidiary Guarantors.
(19) To such counsel's knowledge, no consent, approval,
authorization or order of, or filing, registration, qualification,
license or permit of or with, any Unites States federal or state court
or governmental agency, body or administrative agency (including,
without limitation, any State Regulatory Agency) is required for the
execution, delivery and performance of this Agreement and the other
Operative Documents, except such as may be required under state
securities or Blue Sky laws and regulations (as to which such counsel
may express no opinion), the Securities Act and the Trust Indenture
Act or such as may be required by the NASD.
(20) To the knowledge of such counsel, the Company and each
Subsidiary Guarantor have obtained all material consents, approvals,
orders, certificates, licenses, permits, franchises and other
authorizations of and from, and have made all material declarations
and filings with, all governmental and regulatory authorities, all
self-regulatory organizations, and all courts and other tribunals
necessary to own, lease, license, use and operate their respective
properties and assets and to conduct their respective businesses in
the manner described in the Offering Memorandum; the execution and
delivery by the Company and each of the Subsidiary Guarantors of, and
the performance by the Company and each of the Subsidiary Guarantors
of their respective obligations under, this Agreement, the Indenture,
the Notes, the Subsidiary Guarantees, the Registration Rights
Agreement and the Acquisition Agreements (to the extent a party
thereto) and the consummation by the Company and each of the
Subsidiary Guarantors of the transactions contemplated hereby and
thereby will not violate any such approval, certification, license or
permit.
(21) To the knowledge of such counsel, other than pursuant
to the Registration Rights Agreement, there are no holders of
securities of the Company or the Subsidiary Guarantors who, by reason
of the execution by the Company or the Subsidiary Guarantors of this
Agreement or any other Operative Document to which it is a party, or
the consummation of the transactions contemplated hereby and thereby,
have the right to request or demand that the Company or the Subsidiary
Guarantors register under the Securities Act any securities held by
them.
In addition, Hughes & Luce shall additionally state that they have
participated in conferences with officers and representatives of the Company and
the Subsidiary Guarantors, representatives of the independent certified public
accountants for the Company and the Subsidiary Guarantors, and representatives
of the Initial Purchaser at which the contents of the Offering Memorandum and
related matters were discussed, and have participated in the preparation of the
Offering Memorandum and any amendment thereof or supplement thereto, and
although such counsel is not passing upon and does not assume any responsibility
for, and have not verified, the accuracy, completeness or fairness of the
statements contained in the Offering Memorandum and any amendment thereof or
supplement thereto, on the basis of the foregoing and without independent check
or verification, such counsel advises you that no facts came to such counsel's
attention that have lead such counsel to believe that the Offering Memorandum
(as amended or supplemented, if applicable), as of its date and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that Hughes
25
<PAGE>
& Luce need express no belief or opinion with respect to the financial
statements and schedules and other financial and statistical data included
therein).
In rendering such opinion, Hughes & Luce may rely, with regard to
matters concerning the application of laws of jurisdictions other than the State
of Texas and the federal laws of the United States and the Delaware General
Corporation Law, on the opinions of (i) Brydon, Swearengen & England, (ii)
Rosenblum, Goldenhersh, Silverstein & Zafft, P.C., (iii) Berkowitz, Lefkovits,
Isom & Kushner, (iv) Shustak, Jalil, Sanders & Heller, or such other local
counsel reasonably acceptable to the Initial Purchaser as Hughes & Luce deems
necessary. Hughes & Luce will be permitted to except from its opinions with
respect to enforceability: (A) the effect of bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer moratorium and other similar
laws now or hereafter in effect relating to or affecting the rights and remedies
of creditors; (B) the effect of general equitable principles, whether such
enforceability is considered in a proceeding in equity or at law, and the
discretion of the court before which any proceeding therefor may be brought; (C)
the unenforceability under certain circumstances under law or court decisions of
provisions providing for the indemnification of or contribution to a party with
respect to a liability where such indemnification or contribution is contrary to
public policy; (D) the unenforceability of any provision requiring the payment
of attorney's fees, except to the extent that a court determines such fees to be
reasonable; and (E) compliance with laws relating to permissible rates of
interest.
(j) On the Closing Date, you shall have received an opinion
(satisfactory to you and your counsel), dated the Closing Date, of Stutzman
& Bromberg, counsel for the Company and the Subsidiary Guarantors
("Stutzman & Bromberg"), to the effect that:
-------------------
(1) Talton STC has been duly incorporated and is a
validly existing corporation in good standing under the laws of its
jurisdiction of incorporation, and has the requisite corporate power
and authority to own, lease and operate its properties and to conduct
its business as described in the Offering Memorandum. To the best of
such counsel's knowledge, the Company and each of the Subsidiary
Guarantors is duly qualified as a foreign corporation and in good
standing in each jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, other than
where the failure to be so qualified or in good standing would not
have a Material Adverse Effect.
(2) (i) All of the issued and outstanding shares of
capital stock of the Company and each of the Subsidiary Guarantors
have been duly and validly authorized and issued and are fully paid
and non-assessable (ii) the issued and outstanding shares of capital
stock of the Company is owned of record as described on a scheduled
attached to such opinion; (iii) all of the issued and outstanding
shares of capital stock of each of AmeriTel, Talton Telecommunications
and Talton of Carolina is owned of record by the Company and all of
the issued and outstanding shares of capital stock of Talton of
Carolina is owned of record by Talton Telecommunications; (iv) to the
best knowledge of such counsel, all such shares of capital stock of
the Company and the Subsidiary Guarantors described in the foregoing
subsections (i), (ii) and (iii) are owned free and clear of any Lien,
except for Liens arising under that certain credit facility dated as
of December 27, 1996 among the Company, AmeriTel, Talton
Telecommunications, Talton of Carolina and Canadian Imperial Bank of
Commerce, as agent for lenders (the "Existing Credit Facility"), and
------------------------
inchoate statutory liens for amounts not yet due and payable, and were
not issued in violation of any preemptive or similar statutory rights;
(v) except as described in clause (iii) above, to the best knowledge
of such counsel, the Company and the Subsidiary Guarantors have no
other direct or indirect subsidiaries; and (vi) to the best knowledge
of such counsel, except as set forth on a
26
<PAGE>
schedule attached to such opinion, there are no outstanding
subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or Liens related to or entitling any
person to purchase or otherwise to acquire any shares of the capital
stock of, or other ownership interest in, the Company or the
Subsidiary Guarantors.
(3) The Company has the requisite corporate power and
authority to execute, deliver and perform its obligations under the
Acquisition Agreements. The Acquisition Agreements have been duly
authorized, executed and delivered by the Company.
(4) To the best of such counsel's knowledge, there are no
legal, regulatory or governmental proceedings pending or threatened to
which the Company or any of the Subsidiary Guarantors is a party or to
which any property of the Company or any Subsidiary Guarantor is
subject which, if determined adversely, could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect.
(5) The execution, delivery and performance by the Company
and each of the Subsidiary Guarantors of this Agreement and the other
Operative Documents to which it is a party, and the issuance and sale
of the Notes and the Subsidiary Guarantees, will not violate, conflict
with or constitute a breach of any of the terms or provisions of, or a
default under (or an event that with notice or the lapse of time, or
both, would constitute a default) or require consent under, or result
in the imposition of a Lien on any properties of the Company or the
Subsidiary Guarantors except as contemplated by the Existing Credit
Facility, or an acceleration of indebtedness pursuant to, (i) the
respective certificate or articles of incorporation or bylaws of the
Company or the Subsidiary Guarantors, (ii) any bond, debenture, note,
indenture, mortgage, deed of trust or other agreement or instrument
known to such counsel to which the Company or any of the Subsidiary
Guarantors is a party or by which any of them or their property is
bound, (iii) any statute, rule or regulation applicable to the Company
or any of the Subsidiary Guarantors, or (iv) any judgment, order or
decree known to such counsel of any United States federal or state
court or governmental agency or authority having jurisdiction over the
Company or any of the Subsidiary Guarantors. To such counsel's
knowledge, no consent, approval, authorization or order of, or filing,
registration, qualification, license or permit of or with, any Unites
States federal or state court or governmental agency, body or
administrative agency is required for the execution, delivery and
performance of this Agreement and the other Operative Documents,
except such as may be required under state securities or Blue Sky laws
and regulations (as to which such counsel may express no opinion), the
Securities Act and the Trust Indenture Act or such as may be required
by the NASD.
(6) To the best knowledge of such counsel, other than
pursuant to the Registration Rights Agreement, there are no holders of
securities of the Company or the Subsidiary Guarantors who, by reason
of the execution by the Company or the Subsidiary Guarantors of this
Agreement or any other Operative Document to which it is a party, or
the consummation of the transactions contemplated hereby and thereby,
have the right to request or demand that the Company or the Subsidiary
Guarantors register under the Securities Act any securities held by
them.
(7) To the best knowledge of such counsel, the Company
and each Subsidiary Guarantor have obtained all material consents,
approvals, orders, certificates,
27
<PAGE>
licenses, permits, franchises and other authorizations of and from,
and have made all material declarations and filings with, all
governmental and regulatory authorities, all self-regulatory
organizations, and all courts and other tribunals necessary to own,
lease, license, use and operate their respective properties and assets
and to conduct their respective businesses in the manner described in
the Offering Memorandum; the execution and delivery by the Company and
each of the Subsidiary Guarantors of, and the performance by the
Company and each of the Subsidiary Guarantors of their respective
obligations under, this Agreement, the Indenture, the Notes, the
Subsidiary Guarantees, the Registration Rights Agreement and the
Acquisition Agreements (to the extent a party thereto) and the
consummation by the Company and each of the Subsidiary Guarantors of
the transactions contemplated hereby and thereby will not violate any
such approval, certification, license or permit.
In addition, Stutzman & Bromberg shall additionally state that such
counsel has participated in conferences with officers and representatives of the
Company and the Subsidiary Guarantors, representatives of the independent
certified public accountants for the Company and the Subsidiary Guarantors, and
representatives of the Initial Purchaser at which the contents of the Offering
Memorandum and related matters were discussed, and participated in the
preparation of the Offering Memorandum and any amendment thereof or supplement
thereto, and although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Offering Memorandum and any amendment thereof or supplement
thereto and has not independently verified the accuracy, completeness or
fairness of such statements, such counsel advises you that, on the basis of the
foregoing, no facts came to such counsel's attention that caused such counsel to
believe that the Offering Memorandum (as amended or supplemented, if
applicable), as of the date thereof and on the Closing Date, contained an untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief or opinion with respect to the
financial statements and schedules and other financial and statistical data
included therein).
(k) On the Closing Date, you shall have received an opinion
(satisfactory to you and your counsel), dated the Closing Date, of
Dickstein, Shapiro, Morin & Oshinsky L.L.P., special regulatory counsel for
the Company and the Subsidiary Guarantors ("Regulatory Counsel for the
--------------------------
Company"), to the effect that:
-------
(1) The statements in the Offering Memorandum under the
headings "Risk Factors--Regulatory Factors" and "Business--
Regulation," insofar as such statements constitute a summary of
statutes, regulations, rules, legal matters, documents or proceedings
referred to therein, fairly present the information set forth therein
with respect to such statutes, regulations, rules, legal matters,
documents or proceedings;
(2) The Company and each Subsidiary Guarantor have
obtained all consents, approvals, orders, certificates, licenses,
permits, franchises and other authorizations of and from, and have
made all declarations and filings with the FCC necessary to own,
lease, license, use and operate their respective properties and assets
and to conduct their respective businesses in the manner described in
the Offering Memorandum; and the approvals, certificates, licenses and
permits listed on a schedule attached to such opinion constitute all
such approvals, certificates, licenses and permits required by the
FCC; and
28
<PAGE>
(3) The execution and delivery by the Company and each of
the Subsidiary Guarantors of, and the performance by the Company and
each of the Subsidiary Guarantors of their respective obligations
under, this Agreement, the Indenture, the Notes, the Subsidiary
Guarantees, the Registration Rights Agreement and the Acquisition
Agreements (to the extent a party thereto) and the consummation by the
Company and each of the Subsidiary Guarantors of the transactions
contemplated hereby and thereby (i) will not violate any such
approval, certification, license or permit referred to in the
preceding paragraph (2), or (ii) require any consent or approval by
the FCC.
(l) On the Closing Date, you shall have received an opinion
(satisfactory to you and your counsel), dated the Closing Date, of Brydon
Swearangen & England, special state regulatory counsel for the Company and
the Subsidiary Guarantors ("State Regulatory Counsel for the Company"),
----------------------------------------
to the effect that:
(1) The Company and each Subsidiary Guarantor have
obtained all consents, approvals, orders, certificates, licenses,
permits, franchises and other authorizations of and from, and have
made all declarations and filings with all State Regulatory Agencies
necessary to own, lease, license, use and operate their respective
properties and assets and to conduct their respective businesses in
the manner described in the Offering Memorandum; and
(2) The execution and delivery by the Company and each of
the Subsidiary Guarantors of, and the performance by the Company and
each of the Subsidiary Guarantors of their respective obligations
under, this Agreement, the Indenture, the Notes, the Subsidiary
Guarantees, the Registration Rights Agreement and the Acquisition
Agreements (to the extent a party thereto) and the consummation by the
Company and each of the Subsidiary Guarantors of the transactions
contemplated hereby and thereby (i) will not violate any such
approval, certification, license or permit referred to in the
preceding paragraph (1), or (ii) require any consent or approval by
such State Regulatory Agencies.
(m) Counsel for the Company shall have delivered to you
copies of all opinions issued by them in connection with the Acquisition
Agreements and the transactions contemplated thereby, along with executed
letters addressed to you entitling you to rely upon such opinions as if
originally addressed to you.
(n) The Initial Purchaser shall have received an opinion, dated
the Closing Date, of Latham & Watkins, counsel for the Initial Purchaser
("Counsel for the Initial Purchaser"), in form and substance reasonably
---------------------------------
satisfactory to the Initial Purchaser.
(o) The Initial Purchaser shall have received letters on and as
of the date hereof as well as on and as of the Closing Date in form and
substance satisfactory to the Initial Purchaser, from each of Deloitte &
Touche, LLP, Arthur Andersen LLP, Benefield, Crawford & Webster, P.C., and
Davis, Clark and Company, P.C., independent public accountants, with
respect to the financial statements and certain financial information
contained in the Offering Memorandum.
(p) The Subsidiary Guarantors shall have entered into this
Agreement and you shall have received executed counterparts thereof.
29
<PAGE>
(q) The Company and the Subsidiary Guarantors shall have entered
into the Registration Rights Agreement and you shall have received executed
counterparts thereof.
(r) The Company, the Subsidiary Guarantors and the Trustee shall
have entered into the Indenture and you shall have received executed
counterparts thereof.
(s) The Acquisition Agreements shall be in full force and effect
and you shall have received counterparts, conformed as executed, thereof,
and all conditions precedent to the consummation of the acquisitions
thereunder shall have been satisfied or waived.
(t) Counsel for the Initial Purchaser shall have been furnished
with such documents and opinions, in addition to those set forth above, as
they may reasonably require for the purpose of enabling them to review or
pass upon the matters referred to in this Section 9 and in order to
evidence the accuracy, completeness or satisfaction in all material
respects of any of the representations, warranties or conditions herein
contained.
(u) Prior to the Closing Date, the Company and the Subsidiary
Guarantors shall have furnished to you such further information,
certificates and documents as you may reasonably request.
All opinions, certificates, letters and other documents required to be
delivered by the Company and the Subsidiary Guarantors will be in compliance
with the provisions hereof only if they are reasonably satisfactory in form and
substance to the Initial Purchaser. The Company and the Subsidiary Guarantors
will furnish the Initial Purchaser with such conformed copies of such opinions,
certificates, letters and other documents as the Initial Purchaser shall
reasonably request.
10. Effective Date of Agreement and Termination. This Agreement
-------------------------------------------
shall become effective upon the execution hereof.
This Agreement may be terminated at any time prior to the Closing by
you by notice to the Company if any of the following has occurred on or after
the date hereof: (i) subsequent to the date information is provided in the
Offering Memorandum, any Material Adverse Change which, in your judgment
materially impairs the investment quality of the Notes, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or material adverse change in the financial markets of the United States or
elsewhere, or any other substantial national or international calamity or
emergency if the effect of such outbreak, escalation, calamity, crisis or
emergency would, in your judgment, make it impracticable or inadvisable to
market the Notes or to enforce contracts for the sale of the Notes, (iii) any
suspension or limitation of trading generally in securities on the New York
Stock Exchange or in the over-the-counter markets or any setting of minimum
prices for trading on such exchange or markets, (iv) any declaration of a
general banking moratorium by either federal or New York authorities, (v) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs that in your judgment has a material
adverse effect on the financial markets in the United States, and would, in your
judgment, make it impracticable or inadvisable to market the Notes or to enforce
contracts for the sale of the Notes, or (vi) the enactment, publication, decree,
or other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority which, in your judgment, would have
a Material Adverse Effect.
The indemnities and contribution provisions and the other agreements,
representations and warranties of the Company and the Subsidiary Guarantors,
their respective officers and directors and of the
30
<PAGE>
Initial Purchaser set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Notes, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of the Initial Purchaser or by or on
behalf of the Company, the Subsidiary Guarantors, the officers or directors of
the Company or the Subsidiary Guarantors, or any controlling person of the
Company or the Subsidiary Guarantors, (ii) acceptance of the Notes and payment
therefor hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Initial Purchaser
pursuant to clause (i) of the second paragraph of this Section 10 or because of
the failure or refusal on the part of the Company or any of the Subsidiary
Guarantors to comply with the terms or to fulfill any of the conditions of this
Agreement, the Company and the Subsidiary Guarantors agree to reimburse you for
all out-of-pocket expenses (including the fees and disbursements of counsel)
incurred by you. Notwithstanding any termination of this Agreement, the Company
and each of the Subsidiary Guarantors shall be liable for all expenses which it
has agreed to pay pursuant to Section 5 hereof.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Subsidiary
Guarantors, the Initial Purchaser, any Indemnified Person referred to herein and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The terms "successors and assigns" shall not include
a purchaser of any of the Notes from the Initial Purchaser merely because of
such purchase.
11. Notices. Notices given pursuant to any provision of this
-------
Agreement shall be addressed as follows: (a) if to the Company or any of the
Subsidiary Guarantors, to it at 611 S.W. Third Street, Lee's Summit, Missouri
64063, with a copy in each case to Hughes & Luce, L.L.P., 1717 Main Street,
Suite 2800, Dallas, Texas 75201, Attention: Glen Hettinger; and (b) if to the
Initial Purchaser, to CIBC Wood Gundy Securities Corp. 425 Lexington Avenue,
Third Floor, New York, New York 10017, Attention: Syndicate Department, and, in
each case, with a copy to Latham & Watkins, 633 West Fifth Street, Suite 4000,
Los Angeles, California 90071, Attention: Mary Ellen Kanoff, Esq., or in any
case to such other address as the person to be notified may have requested in
writing.
12. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
31
<PAGE>
This Agreement may be signed in multiple counterparts which together
shall constitute one and the same instrument. Please confirm that the foregoing
correctly sets forth the agreement among the Company and you.
Talton Holdings, Inc.
By:__________________________________
Name:
Title:
AmeriTel Pay Phones, Inc.
By:__________________________________
Name:
Title:
Talton Telecommunications Corporation
By:__________________________________
Name:
Title:
Talton Telecommunications of Carolina,
INC.
By:__________________________________
Name:
Title:
Talton STC, Inc.
By:__________________________________
Name:
Title:
CIBC Wood Gundy Securities Corp.
By:____________________________
Name:
Title:
32
<PAGE>
EXHIBIT 10.2
[EXECUTION COPY]
================================================================================
U.S. $35,000,000
AMENDED AND RESTATED
CREDIT AGREEMENT,
dated as of
July 30, 1997
(amending and restating the Credit
Agreement, dated as of December 27, 1996),
among
TALTON HOLDINGS, INC.,
as the Borrower,
VARIOUS FINANCIAL INSTITUTIONS,
as the Lenders,
CANADIAN IMPERIAL BANK OF COMMERCE,
as the Administrative Agent and
the Documentation Agent,
and
FIRST SOURCE FINANCIAL LLP,
as Co-Agent.
___________________
Arranged by
CIBC WOOD GUNDY SECURITIES CORP.
================================================================================
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of July 30, 1997, among
TALTON HOLDINGS, INC., a Delaware corporation (the "Borrower"), the various
--------
financial institutions as are, or may from time to time become, parties hereto
(collectively, the "Lenders"), and CANADIAN IMPERIAL BANK OF COMMERCE, acting by
-------
or through one or more of its affiliates, branches or agencies ("CIBC"), as
----
administrative agent (in such capacity, the "Administrative Agent") and as
--------------------
documentation agent (in such capacity, the "Documentation Agent") for the
-------------------
Lenders.
W I T N E S S E T H:
WHEREAS, the Borrower, through its Subsidiaries (such capitalized term, and
other terms used herein, to have the meanings provided in Section 1.1), is
-----------
engaged in the business of providing telephone service to prisons for use by
prisoners located in such prisons, together with services ancillary thereto, as
well as providing general pay telephone services;
WHEREAS, pursuant to the Credit Agreement, dated as of December 27, 1996
(as amended, supplemented, and otherwise modified prior to the date hereof, the
"Existing Credit Agreement"), among the Borrower, certain financial institutions
-------------------------
from time to time party thereto (the "Existing Lenders") and CIBC, as
----------------
administrative agent and documentation agent thereunder, the Existing Lenders
made and were committed to make extensions of credit to the Borrower on the
terms and conditions set forth therein;
WHEREAS, the Borrower has requested that the Existing Credit Agreement be
amended and restated in its entirety to become effective and binding on the
Borrower pursuant to the terms of this Agreement, and the Lenders (including the
Existing Lenders) have agreed (subject to the terms of this Agreement) to amend
and restate the Existing Credit Agreement in its entirety to read as set forth
in this Agreement, and it has been agreed by the parties to the Existing Credit
Agreement that (a) the commitments which the Existing Lenders have agreed to
extend to the Borrower under the Existing Credit Agreement shall be extended or
advanced upon the amended and restated terms and conditions contained in this
Agreement, and (b) any outstanding credit extensions made and other Obligations
outstanding under the Existing Credit Agreement shall be governed by and deemed
to be outstanding under the amended and restated terms and conditions contained
in this Agreement, with the intent that the terms of this Agreement shall
supersede the terms of the Existing Credit Agreement (which shall hereafter have
no further effect upon the parties thereto, other than for accrued fees and
expenses, and indemnification provisions, accrued and owing under the terms of
the Existing Credit Agreement on or prior to the date hereof or arising under
the terms of the Existing Credit Agreement); provided, that any Rate Protection
--------
Agreements with any one or more Existing Lenders (or their respective
Affiliates) shall continue unamended and in full force and effect;
WHEREAS, in connection with amending and restating the Existing Credit
Agreement and at the time of the effectiveness of such amendment and
restatement, (a) the Borrower has issued to a group of investors Senior Notes in
an aggregate principal amount of $115,000,000 the proceeds of which shall be
used, in part, to repay in full the principal amount of all the Talton Seller
Subordinated Note, the Senior Subordinated Notes referred to in the Existing
Credit Agreement and all term loans and revolving loans outstanding under the
Existing Credit Agreement, and (b) the
Borrower desires to obtain pursuant to this Agreement from the Lenders a
Revolving Loan Commitment pursuant to which Borrowings of Revolving Loans, in a
maximum aggregate outstanding principal amount not to exceed $35,000,000 at any
one time
<PAGE>
outstanding, will be made to the Borrower from time to time from and
subsequent to the Closing Date, but prior to the Revolving Loan Commitment
Termination Date, with the proceeds of all Loans to be used for the purposes set
forth in Section 7.1.11;
--------------
WHEREAS, all Loans and other Obligations shall continue to be and shall be
fully guaranteed pursuant to the Subsidiary Guaranty and fully secured by, among
other things, the Borrower Security Agreement, the AmeriTel Security Agreement,
the Talton Security Agreement, the Talton Carolina Security Agreement, the
Talton STC Security Agreement, the Borrower Pledge Agreement, the Investor
Pledge Agreement and the Talton Pledge Agreement; and
WHEREAS, the Lenders are willing, on the terms and subject to the
conditions hereinafter set forth (including Article V), to so amend and restate
---------
the Existing Credit Agreement to extend such Commitments and make such Loans to
the Borrower;
NOW, THEREFORE, the parties hereto hereby agree to amend and restate the
Existing Credit Agreement, and the Existing Credit Agreement is hereby amended
and restated, as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Defined Terms. The following terms (whether or not
-------------
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):
"Acquisition" means any transaction, or any series of related transactions,
-----------
consummated on or after the Closing Date, by which the Borrower or any of its
Subsidiaries (a) acquires any business (whether through purchase of assets,
equity interests, merger or otherwise) or all or substantially all of the assets
of any firm, corporation or division thereof or (b) directly or indirectly
acquires (in one transaction or as the most recent transaction in a series of
transactions) at least a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of directors
(other than by reason of the happening of a contingency) or a majority (by
percentage or voting power) of the outstanding equity interests of a Person
(other than a corporation or a natural person).
"Administrative Agent" is defined in the preamble and includes each other
-------------------- --------
Person as shall have subsequently been appointed as the successor Administrative
Agent pursuant to Section 9.4.
-----------
"Affiliate" of any Person means any other Person which, directly or
---------
indirectly, controls, is controlled by or is under common control with such
Person (excluding any trustee under, or any committee with responsibility for
administering, any Plan). A Person shall be deemed to be "controlled by" any
other Person if such other Person possesses, directly or indirectly, power
(a) to vote 10% or more of the securities (on a fully diluted basis)
or other equity or membership interests having ordinary voting power for
the election of directors or managing general partners or members; or
(b) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
-2-
<PAGE>
"Affirmation and Consent" means the Affirmation and Consent to be executed
-----------------------
and delivered by each of Talton, AmeriTel and Talton Carolina pursuant to
Section 5.1.9, in form and substance satisfactory to the Administrative Agent,
- -------------
as amended, supplemented, amended and restated or otherwise modified from time
to time
"Agent" means, as the context may require, the Administrative Agent or the
-----
Documentation Agent; collectively, the "Agents".
------
"Agent-Related Persons" means the Agents, any successor thereto appointed
---------------------
in accordance with Section 9.4 and their respective Affiliates (including, in
-----------
the case of CIBC, CIBC Wood Gundy Securities Corp., in its role as Arranger of
the Commitments and Loans), together with the officers, directors, employees and
agents of each of the foregoing Persons.
"Agreement" means, on any date, the Existing Credit Agreement, as amended
---------
and restated hereby and as from time to time further amended, supplemented,
amended and restated or otherwise modified.
"Alternate Base Rate" means, on any date and with respect to all Base Rate
-------------------
Loans, a fluctuating rate of interest per annum equal to the higher of
(a) the rate of interest most recently announced or established by
CIBC at its Domestic Office as its base, reference or prime, as applicable,
rate for Dollar loans; and
(b) the Federal Funds Rate plus 1/2 of 1%.
The Alternate Base Rate is not necessarily intended to be the lowest rate of
interest determined by CIBC in connection with extensions of credit. Changes in
the rate of interest on that portion of any Loans maintained as Base Rate Loans
will take effect simultaneously with each change in the Alternate Base Rate.
The Administrative Agent will give notice promptly to the Borrower and the
Lenders of changes in the Alternate Base Rate.
"AmeriTel" means AmeriTel Pay Phones, Inc., a Missouri corporation.
--------
"AmeriTel Security Agreement" means the Security Agreement executed and
---------------------------
delivered by AmeriTel pursuant to Section 5.1.9 of the Existing Credit
Agreement, substantially in the form of Exhibit G-2 thereto, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Applicable Base Rate Margin" means, with respect to any Base Rate Loan,
---------------------------
the per annum percentage set forth below opposite the Total Debt to EBITDA
Ratio, as determined initially in accordance with the Compliance Certificate
delivered pursuant to Section 5.1.10, and thereafter in accordance with the
--------------
Compliance Certificate most recently delivered pursuant to clause (d) of Section
---------- -------
7.1.1:
- -----
<TABLE>
<CAPTION>
Total Debt Applicable
to EBITDA Ratio Base Rate Margin
--------------- -----------------
<S> <C>
greater than or equal to 5.5:1 2.75%
greater than or equal to 4.5:1 but 2.25%
less than 5.5:1
greater than or equal to 4.0:1 but 1.75%
less than 4.5:1
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Total Debt Applicable
to EBITDA Ratio Base Rate Margin
--------------- -----------------
<S> <C>
greater than or equal to 3.5:1 but 1.50%
less than 4.0:1
greater than or equal to 3.0:1 but 1.25%
less than 3.5:1
greater than or equal to 2.5:1 but 0.75%
less than 3.0:1
less than 2.5:1 0.25%
</TABLE>
provided that if the Borrower shall fail to deliver a Compliance Certificate for
- --------
a given Fiscal Quarter within the time required by clause (d) of Section 7.1.1,
---------- -------------
or if any Event of Default shall have occurred and be continuing, then the
Applicable Base Rate Margin for the period from the 46th day after the first day
of such Fiscal Quarter through (but excluding) the date such Compliance
Certificate is delivered shall be 2.75% for the Fiscal Quarter during which the
Compliance Certificate was not timely delivered. Any reduction in the
Applicable Base Rate Margin shall be effective beginning on the date that is
three days following the date on which the Administrative Agent receives the
Borrower's Compliance Certificate pursuant to clause (d) of Section 7.1.1. If
---------- -------------
the Applicable Base Rate Margin is required to be increased as a result of an
increase in the most recently determined Total Debt to EBITDA Ratio, such higher
Applicable Base Rate Margin shall be effective as of and retroactive to the
first day of the Fiscal Quarter in which such Compliance Certificate was
required to be delivered.
"Applicable LIBO Rate Margin" means, with respect to any LIBO Rate Loan,
---------------------------
the per annum percentage set forth below opposite the Total Debt to EBITDA
Ratio, as determined initially in accordance with the Compliance Certificate
delivered pursuant to Section 5.1.10, and thereafter in accordance with the
--------------
Compliance Certificate most recently delivered pursuant to clause (d) of Section
---------- -------
7.1.1:
- -----
<TABLE>
<CAPTION>
Total Debt Applicable
to EBITDA Ratio LIBO Rate Margin
--------------- -----------------
<S> <C>
greater than or equal to 5.5:1 4.00%
greater than or equal to 4.5:1 but 3.50%
less than 5.5:1
greater than or equal to 4.0:1 but 3.00%
less than 4.5:1
greater than or equal to 3.5:1 but 2.75%
less than 4.0:1
greater than or equal to 3.0:1 but 2.50%
less than 3.5:1
greater than or equal to 2.5:1 but 2.00%
less than 3.0:1
less than 2.5:1 1.50%
</TABLE>
provided that if the Borrower shall fail to deliver a Compliance Certificate for
- --------
a given Fiscal Quarter within the time required by clause (d) of Section 7.1.1,
---------- -------------
or if any Event of Default shall have occurred and
-4-
<PAGE>
be continuing, then the Applicable LIBO Rate Margin for the period from the 46th
day after the first day of such Fiscal Quarter through (but excluding) the date
such Compliance Certificate is delivered shall be 4.00% for the Fiscal Quarter
during which the Compliance Certificate was not timely delivered. Any reduction
in the Applicable LIBO Rate Margin shall be effective beginning on the date that
is three days following the date on which the Administrative Agent receives the
Borrower's Compliance Certificate pursuant to clause (d) of Section 7.1.1. If
---------- -------------
the Applicable LIBO Rate Margin is required to be increased as a result of an
increase in the most recently determined Total Debt to EBITDA Ratio, such higher
Applicable LIBO Rate Margin shall be effective as of and retroactive to the
first day of the Fiscal Quarter in which such Compliance Certificate was
required to be delivered.
"Assignee Lender" is defined in Section 10.11.1.
--------------- ---------------
"Authorized Officer" means, relative to any Obligor, those of its officers
------------------
whose signatures and incumbency shall have been certified to the Administrative
Agent and the Lenders pursuant to Section 5.1.1.
-------------
"Base Rate Loan" means a Loan bearing interest at a fluctuating rate
--------------
determined by reference to the Alternate Base Rate.
"Borrower" is defined in the preamble.
-------- --------
"Borrower Pledge Agreement" means the Pledge Agreement executed and
-------------------------
delivered by the Borrower pursuant to Section 5.1.8 of the Existing Credit
Agreement, substantially in the form of Exhibit H-1 thereto, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Borrower Pledge Agreement Supplement" means Supplement No. 1 to Borrower
------------------------------------
Pledge Agreement to be executed and delivered by the Borrower pursuant to
Section 5.1.7, in form and substance satisfactory to the Administrative Agent,
- -------------
as amended, supplemented, amended and restated or otherwise modified from time
to time.
"Borrower Security Agreement" means the Security Agreement executed and
---------------------------
delivered by the Borrower pursuant to Section 5.1.9 of the Existing Credit
Agreement, substantially in the form of Exhibit G-1 thereto, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Borrowing" means Loans of the same type and, in the case of LIBO Rate
---------
Loans, having the same Interest Period made by all Lenders on the same Business
Day and pursuant to the same Borrowing Request in accordance with Section 2.1.
-----------
"Borrowing Request" means a loan request and certificate duly executed by
-----------------
an Authorized Officer of the Borrower, substantially in the form of Exhibit C
---------
hereto.
"Business Day" means
------------
(a) any day which is neither a Saturday nor a Sunday nor a legal
holiday on which banks are authorized or required to be closed in New York,
New York; and
(b) relative to the making, continuing, prepaying or repaying of any
LIBO Rate Loans, any day which is covered in clause (a) immediately above
----------
and on which dealings in Dollars are carried on in the London interbank
market.
-5-
<PAGE>
"Capital Expenditures" means, for any period, the sum of
--------------------
(a) the aggregate amount of all expenditures of the Borrower and its
Subsidiaries for fixed or capital assets made during such period which, in
accordance with GAAP, would be classified as capital expenditures; and
(b) the aggregate amount of all Capitalized Lease Liabilities
incurred during such period.
"Capitalized Lease Liabilities" means all monetary obligations of the
-----------------------------
Borrower or any of its Subsidiaries under any leasing or similar arrangement
which, in accordance with GAAP, would be classified as capitalized leases, and,
for purposes of this Agreement and each other Loan Document, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP, and the stated maturity thereof shall be the date of the last payment
of rent or any other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment of a penalty.
"Cash Equivalent Investment" means, at any time:
--------------------------
(a) any evidence of Indebtedness, maturing not more than one year
after such time, issued or guaranteed by the United States Government or
any agency thereof;
(b) commercial paper, maturing not more than nine months from the
date of issue, which is issued by
(i) a corporation (other than an Affiliate of any Obligor)
organized under the laws of any state of the United States or of the
District of Columbia and rated at least A-1 by Standard & Poor's
Ratings Group or at least P-1 by Moody's Investors Service, Inc., or
(ii) any Lender (or its holding company);
(c) any certificate of deposit or bankers acceptance, maturing not
more than one year after such time, which is issued by either
(i) a commercial banking institution that is a member of the
Federal Reserve System and has a combined capital and surplus and
undivided profits of not less than $500,000,000, or
(ii) any Lender; or
(d) any repurchase agreement entered into with any Lender (or other
commercial banking institution of the stature referred to in clause (c)(i))
-------------
which
(i) is secured by a fully perfected security interest in any
obligation of the type described in any of clauses (a) through (c),
----------- ---
and
(ii) has a market value at the time such repurchase agreement is
entered into of not less than 100% of the repurchase obligation of
such Lender (or other commercial banking institution) thereunder.
-6-
<PAGE>
"Cash Interest Expense" means, for any period, the sum of (a) Interest
---------------------
Expense required to be paid in cash and (b) the amount of Preferred Dividends,
in each case for such period.
"CCC Acquisition" means the Acquisition by the Borrower of the assets of
---------------
Correctional Communication Corporation pursuant to a term sheet dated May 14,
1997.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
------
Liability Act of 1980, as amended.
"CERCLIS" means the Comprehensive Environmental Response Compensation
-------
Liability Information System List.
"Change in Control" means
-----------------
(a) the acquisition directly or indirectly by any Person, or two or
more Persons acting in concert, other than the Persons set forth in clause
------
(b) below, of beneficial ownership (within the meaning of Rule 13d-3 of the
---
Securities and Exchange Commission under the Securities Exchange Act of
1934) of 25% or more of the outstanding shares of voting stock of the
Borrower;
(b) the failure of (i) EUFCC and Onyx to own and control at least 10%
of the common stock of the Borrower in the aggregate on a fully diluted
basis and free and clear of all Liens, (ii) the Existing Talton
shareholders to own and control at least 10% of the common stock of the
Borrower in the aggregate on a fully diluted basis, and free and clear of
Liens, or (iii) the Borrower to own and control 100% of the outstanding
shares of voting and non-voting stock of each of AmeriTel, Talton and
Talton STC, in each case on a fully diluted basis and free and clear of all
Liens and other encumbrances (except in favor of the Administrative Agent,
on behalf of the Lenders) or (iv) the majority of the Board of Directors of
the Borrower to be comprised of the same members as those who serve on such
Board on the Effective Date; or
(c) any "Change in Control" or "Change of Control" as defined in any
Senior Debt Instrument.
"CIBC" is defined in the preamble.
---- --------
"CIBC Securities" means CIBC Wood Gundy Securities Corp., an Affiliate of
---------------
Canadian Imperial Bank of Commerce.
"Closing Date" means the date all closing conditions set forth in Section
------------ -------
5.1 are satisfied and the initial Borrowing is made under the amendment and
- ---
restatement of this Agreement.
"Closing Date Certificate" means a certificate of a duly Authorized Officer
------------------------
of the Borrower executed and delivered pursuant to Section 5.1.12, substantially
--------------
in the form of Exhibit F hereto.
---------
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
----
otherwise modified from time to time.
"Commitment" means a Lender's Revolving Loan Commitment.
----------
"Commitment Amount" means the Revolving Loan Commitment Amount.
-----------------
"Commitment Termination Date" means the Revolving Loan Commitment
---------------------------
Termination Date.
-7-
<PAGE>
"Commitment Termination Event" means
----------------------------
(a) the occurrence of any Default described in clauses (a) through
-----------
(d) of Section 8.1.9 with respect to the Borrower or any Subsidiary; or
--- -------------
(b) the occurrence and continuance of any other Event of Default and
either
(i) the declaration of any Loans to be due and payable pursuant
to Section 8.3, or
-----------
(ii) in the absence of such declaration, the giving of notice by
the Administrative Agent, acting at the direction of the Required
Lenders, to the Borrower that the Commitments have been terminated.
"Compliance Certificate" means a certificate duly executed by the financial
----------------------
Authorized Officer of the Borrower, substantially in the form of Exhibit E
---------
hereto, together with such changes as the Administrative Agent may from time to
time reasonably request for purposes of monitoring the Borrower's compliance
herewith.
"Contingent Liability" means any agreement, undertaking or arrangement by
--------------------
which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) the indebtedness,
obligation or any other liability of any other Person (other than by
endorsements of instruments in the course of collection), or guarantees the
payment of dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability shall
(subject to any limitation set forth therein) be deemed to be the outstanding
principal amount (or maximum principal amount, if larger) of the debt,
obligation or other liability guaranteed thereby.
"Continuation/Conversion Notice" means a notice of continuation or
------------------------------
conversion and certificate duly executed by an Authorized Officer of the
Borrower, substantially in the form of Exhibit D hereto.
---------
"Controlled Group" means all members of a controlled group of corporations
----------------
and all members of a controlled group of trades or businesses (whether or not
incorporated) under common control which, together with the Borrower, are
treated as a single employer under Section 414(b) or 414(c) of the Code or
section 4001 of ERISA.
"Debt Service" means, for any period, (a) all maturities of short-term
------------
Funded Debt and all current maturities of long term Funded Debt (including
actual scheduled payments in respect of Capitalized Lease Liabilities) during
such period, plus (b) Cash Interest Expense during such period.
----
"Default" means any Event of Default or any condition, occurrence or event
-------
which, after notice or lapse of time or both, would constitute an Event of
Default.
"Disclosure Schedule" means the Disclosure Schedule attached hereto as
-------------------
Schedule I, as it may be amended, supplemented or otherwise modified from time
- ----------
to time by the Borrower with the written consent of the Administrative Agent and
the Required Lenders.
"Documentation Agent" is defined in the preamble.
------------------- --------
"Dollar" and the sign "$" mean lawful money of the United States.
------ -
-8-
<PAGE>
"Domestic Office" means, relative to any Lender, the office of such Lender
---------------
designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a Lender (or any successor or
assign of such Lender) within the United States as may be designated from time
to time by written notice from such Lender, as the case may be, to each other
Person party hereto.
"EBITDA" means, with respect to any applicable fiscal period, the Net
------
Income (excluding profits generated from the amortization of negative good will)
of the Borrower and its Subsidiaries on a consolidated basis before taxes for
such period (excluding pre-tax gains or losses of the Borrower and its
Subsidiaries on a consolidated basis on the sale of assets (other than the sale
of inventory in the ordinary course of business) and excluding other pre-tax
extraordinary gains or losses of the Borrower and its Subsidiaries on a
consolidated basis), plus Interest Expense, depreciation and amortization
----
deducted in determining Net Income for such period; provided, however, that with
-------- -------
respect to EBITDA calculated for a Rolling Period, (i) for the period ended on
the Closing Date, EBITDA shall include the sum of EBITDA for the period from
January 1, 1997 through the end of the month prior to the Closing Date, adjusted
to be annualized and adjusted to include Permitted Acquisitions (the
"Acquisition Adjustment") made during such period (such adjustments to be
- -----------------------
satisfactory to the Administrative Agent) as if such acquisitions had been made
at the beginning of such period; (ii) for the three Fiscal Quarters ended
September 30, 1997, EBITDA shall include the sum of EBITDA for such Fiscal
Quarters, adjusted to be annualized and adjusted by the Acquisition Adjustment;
and (iii) for the four Fiscal Quarters ended December 31, 1997 and for each
Rolling Period thereafter, EBITDA shall include the sum of actual EBITDA for
such Rolling Period, adjusted by the Acquisition Adjustment.
"EBITDA to Cash Interest Expense Ratio" means, as at the last day of any
-------------------------------------
Fiscal Quarter, the ratio of (a) EBITDA for such Fiscal Quarter to (b) Cash
--
Interest Expense for such Fiscal Quarter.
"EBITDA to Fixed Charges Ratio" means, as at the last day of any Fiscal
-----------------------------
Quarter, the ratio of (a) EBITDA for the Rolling Period ended on the last day of
such Fiscal Quarter to (b) (i) Debt Service for the Rolling Period ended on the
--
last day of such Fiscal Quarter, plus (ii) Capital Expenditures made during the
----
Rolling Period ended on the last day of such Fiscal Quarter, plus (iii) Taxes
----
paid in cash or accrued during the Rolling Period ended on the last day of such
Fiscal Quarter, plus (iv) the amount expended for Permitted Acquisitions for the
----
Rolling Period ended on the last day of such Fiscal Quarter; provided, however,
-------- -------
that (A) for the period ending on the Closing Date, the amount computed in
accordance with clause (b) above shall include the product of the amount
----------
provided for in clause (b) above for the period ended on the month-end
----------
immediately preceding the Closing Date multiplied by the amount necessary to
annualize such amount; (B) for the three Fiscal Quarters ended September 30,
1997, the amount computed in accordance with clause (b) above shall include the
----------
product of the amount provided for in clause (b) above for such Fiscal Quarters
multiplied by 1.333; and (C) for the four Fiscal Quarters ended December 31,
1997 and for each Rolling Period thereafter, the amount computed in accordance
with clause (b)
----------
above shall include the actual amount provided for in clause (b) above;
----------
provided, further, however, that if any New Installations are consummated during
- -------- ------- -------
any Rolling Period or during the period ended on the last day of any such Fiscal
Quarter, EBITDA for such Rolling Period or period shall be deemed to include an
amount for EBITDA for such New Installations equal to the amount set forth in
the business plan (which shall be based on assumptions deemed reasonable by the
Administrative Agent in its discretion) submitted by the Borrower to the
Official Body permitting such New Installations.
"Effective Date" means the date this Agreement becomes effective pursuant
--------------
to Section 10.8.
------------
"Environmental Laws" means all applicable federal, state or local statutes,
------------------
laws, ordinances, codes, rules, regulations and guidelines (including consent
decrees and administrative orders) relating to public health and safety and
protection of the environment.
-9-
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA also refer to any successor sections.
"EUFCC" means Engles Urso Follmer Capital Corporation, a Texas corporation.
-----
"Event of Default" is defined in Section 8.1.
---------------- -----------
"Existing Credit Agreement" is defined in the second recital.
------------------------- ------ -------
"Existing Lenders" is defined in the second recital.
---------------- ------ -------
"Existing Talton Shareholders" means Julius E. Talton, Julius E. Talton,
----------------------------
Jr., immediate family members of the foregoing Persons and trusts for family
members of the foregoing Persons.
"Federal Funds Rate" means, for any period, a fluctuating interest rate per
------------------
annum equal for each day during such period to
(a) the weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank of
New York; or
(b) if such rate is not so published for any day which is a Business
Day, the average of the quotations for such day on such transactions
received by CIBC from three federal funds brokers of recognized standing
selected by it.
"Fee Letter" means the confidential fee letter, dated as of June 26, 1997,
----------
between the Borrower and CIBC.
"Fiscal Quarter" means any quarter of a Fiscal Year.
--------------
"Fiscal Year" means any period of twelve consecutive calendar months ending
-----------
on December 31; references to a Fiscal Year with a number corresponding to any
calendar year (e.g., the "1997 Fiscal Year") refer to the Fiscal Year ending on
the December 31 occurring during such calendar year.
"F.R.S. Board" means the Board of Governors of the Federal Reserve System
------------
or any successor thereto.
"Funded Debt" means, on any date of determination, the sum of the aggregate
-----------
amount of all Indebtedness of the type set forth in clauses (a), (b), (c) and
----------- --- ---
(g) (insofar as such Contingent Liability is in respect of Indebtedness of the
- ---
type set forth in clause (a), (b) or (c)) of the definition of Indebtedness as
---------- --- ---
of such date, and in any event includes the Loans and the Senior Notes.
"GAAP" is defined in Section 1.4.
---- -----------
"Hazardous Material" means
------------------
(a) any "hazardous substance", as defined by CERCLA;
(b) any "hazardous waste", as defined by the Resource Conservation
and Recovery Act, as amended;
-10-
<PAGE>
(c) any petroleum product; or
(d) any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material or substance within the meaning of any other applicable
federal, state or local law, regulation, ordinance or requirement
(including consent decrees and administrative orders) relating to or
imposing liability or standards of conduct concerning any hazardous, toxic
or dangerous waste, substance or material, all as amended or hereafter
amended.
"Hedging Obligations" means, with respect to any Person, all liabilities of
-------------------
such Person under interest rate swap agreements, interest rate cap agreements
and interest rate collar agreements, and all other agreements or arrangements
designed to protect such Person against fluctuations in interest rates or
currency exchange rates.
"herein", "hereof", "hereto", "hereunder" and similar terms contained in
------ ------ ------ ---------
this Agreement or any other Loan Document refer to this Agreement or such other
Loan Document, as the case may be, as a whole and not to any particular Section,
paragraph or provision of this Agreement or such other Loan Document.
"Impermissible Qualification" means, relative to the opinion or
---------------------------
certification of any independent public accountant as to any financial statement
of any Obligor, any qualification or exception to such opinion or certification
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of matters
relevant to such financial statement; or
(c) which relates to the treatment or classification of any item in
such financial statement and which, as a condition to its removal, would
require an adjustment to such item the effect of which would be to cause
such Obligor to be in default of any of its obligations under Section
-------
7.2.4.
"including" means including without limiting the generality of any
---------
description preceding such term, and, for purposes of this Agreement and each
other Loan Document, the parties hereto agree that the rule of ejusdem generis
------- -------
shall not be applicable to limit a general statement, which is followed by or
referable to an enumeration of specific matters, to matters similar to the
matters specifically mentioned.
"Indebtedness" of any Person means, without duplication:
------------
(a) all obligations of such Person for borrowed money and all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments;
(b) all obligations, contingent or otherwise, relative to the face
amount of all letters of credit, whether or not drawn, and banker's
acceptances, in each case issued for the account of such Person;
(c) all obligations of such Person as lessee under leases which have
been or should be, in accordance with GAAP, recorded as Capitalized Lease
Liabilities;
(d) all other items which, in accordance with GAAP, would be included
as liabilities on the liability side of the balance sheet of such Person as
of the date at which Indebtedness is to be determined;
-11-
<PAGE>
(e) net liabilities of such Person under all Hedging Obligations;
(f) whether or not so included as liabilities in accordance with
GAAP, all obligations of such Person to pay the deferred purchase price of
property or services, and indebtedness (excluding prepaid interest thereon)
secured by a Lien on property owned or being purchased by such Person
(including indebtedness arising under conditional sales or other title
retention agreements), whether or not such indebtedness shall have been
assumed by such Person or is limited in recourse; and
(g) all Contingent Liabilities of such Person in respect of any of
the foregoing.
For all purposes of this Agreement, the Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer.
"Indemnified Liabilities" is defined in Section 10.4.
----------------------- ------------
"Indemnified Parties" is defined in Section 10.4.
------------------- ------------
"Interest Expense" means, for any period, the total interest expense
----------------
(including commitment fees payable under this Agreement), that is payable by the
Borrower and its Subsidiaries, on a consolidated basis, in respect of Funded
Debt for such period, all as computed in accordance with GAAP.
"Interest Period" means, relative to any LIBO Rate Loans, the period
---------------
beginning on (and including) the date on which such LIBO Rate Loan is made or
continued as, or converted into, a LIBO Rate Loan pursuant to Section 2.3 or 2.4
----------- ---
and ending on (but excluding) the day which numerically corresponds to such date
one, two, three, six or (subject to availability to all Lenders) nine or twelve
months thereafter (or, if such month has no numerically corresponding day, on
the last Business Day of such month), in either case as the Borrower may select
in its relevant notice pursuant to Section 2.3 or 2.4; provided, however, that
----------- --- -------- -------
(a) the Borrower shall not be permitted to select Interest Periods to
be in effect at any one time which have expiration dates occurring on more
than four different dates;
(b) Interest Periods commencing on the same date for Loans comprising
part of the same Borrowing shall be of the same duration;
(c) if an Interest Period would otherwise end on a day which is not a
Business Day, such Interest Period shall end on the next following Business
Day (unless such next following Business Day is the first Business Day of a
calendar month, in which case such Interest Period shall end on the
Business Day next preceding such numerically corresponding day), and
Interest Periods shall be selected to coincide with amortization and
commitment reduction dates; and
(d) no Interest Period may end later than the date set forth in
clause (a) of the definition of "Revolving Loan Commitment Termination
---------- -------------------------------------
Date".
"Investment" means, relative to any Person,
----------
(a) any loan or advance made by such Person to any other Person
(excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business);
(b) any Contingent Liability of such Person; and
-12-
<PAGE>
(c) any ownership or similar interest held by such Person in any
other Person.
The amount of any Investment shall be the original principal or capital amount
thereof less all returns of principal or equity thereon (and without adjustment
by reason of the financial condition of such other Person) and shall, if made by
the transfer or exchange of property other than cash, be deemed to have been
made in an original principal or capital amount equal to the fair market value
of such property.
"Investor" means EUFCC, Onyx, the Existing Talton Shareholders, CIBC Wood
--------
Gundy Ventures, Inc. and each other owner of the capital stock of the Borrower.
"Investor Pledge Agreement" means, as the context may require, each Pledge
-------------------------
Agreement executed and delivered by an Investor pursuant to Section 5.1.8 of the
Existing Credit Agreement or Section 7.1.9, substantially in the form of Exhibit
-------------
H-3 thereto, as amended, supplemented, amended and restated or otherwise
modified from time to time.
"Lender Assignment Agreement" means a Lender Assignment Agreement, executed
---------------------------
and delivered pursuant to Section 10.11.1, substantially in the form of Exhibit
--------------- -------
D hereto.
- -
"Lenders" is defined in the preamble.
------- --------
"LIBO Rate" means, relative to each day during each Interest Period for
---------
LIBO Rate Loans, the rate of interest per annum determined on the basis of the
rate for deposits in Dollars for a period equal to such Interest Period
commencing on the first day of such Interest Period and appearing on Page 3750
of the Telerate screen at or about 11:00 a.m., London time, two Business Days
prior to the commencement of such Interest Period or, if such rate does not
appear on such page or otherwise on such service, such rate shall be determined
by reference to such other publicly available service for displaying Eurodollar
rates as may be agreed between the Administrative Agent and the Borrower or,
in the absence of such agreement, the "LIBO Rate" shall be the rate of interest
per annum equal to the average (rounded upwards, if necessary, to the nearest
1/16 of 1%) of the rates per annum at which Dollar deposits in immediately
available funds are offered by CIBC to prime international banks in the offshore
dollar market at or about 11:00 a.m. New York time two Business Days prior to
the beginning of such Interest Period for delivery on the first day of such
Interest Period, and in an amount approximately equal to the amount of CIBC's
LIBO Rate Loan and for a period approximately equal to such Interest Period.
"LIBO Rate Loan" means a Loan bearing interest, at all times during an
--------------
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the LIBO Rate (Reserve Adjusted).
"LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made,
----------------------------
continued or maintained as, or converted into, a LIBO Rate Loan for any Interest
Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of
1%) determined pursuant to the following formula:
LIBO Rate = LIBO Rate
--------------------------
(Reserve Adjusted) 1.00 - LIBOR Reserve Percentage
The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate
Loans will be determined by the Administrative Agent on the basis of the LIBOR
Reserve Percentage in effect on the date, and the applicable rates furnished to
and received by the Administrative Agent from CIBC, two Business Days before the
first day of such Interest Period.
"LIBOR Office" means, relative to any Lender, the office of such Lender
------------
designated as such below its signature hereto or designated in the Lender
Assignment Agreement or such other office of a
-13-
<PAGE>
Lender as designated from time to time by notice from such Lender to the
Borrower and the Administrative Agent, whether or not outside the United States,
which shall be making or maintaining LIBO Rate Loans of such Lender hereunder.
"LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO
------------------------
Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum
aggregate reserve requirements (including all basic, emergency, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the F.R.S. Board and then applicable to assets or
liabilities consisting of and including "Eurocurrency Liabilities", as defined
in Regulation D of the F.R.S. Board, having a term approximately equal or
comparable to such Interest Period.
"Lien" means any security interest, mortgage, pledge, hypothecation,
----
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement of
any kind or nature whatsoever.
"Loan" means a Revolving Loan of any type.
----
"Loan Document" means this Agreement, the Notes, the Fee Letter, each
-------------
Security Agreement, each Pledge Agreement, the Subsidiary Guaranty, the Borrower
Pledge Agreement Supplement, the Subsidiary Guaranty Supplement, the Affirmation
and Consent and each other agreement, document or instrument delivered in
connection with this Agreement and such other agreements, whether or not
specifically mentioned herein or therein.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
business, assets, revenues, properties, condition (financial or otherwise),
results of operations or prospects of the Borrower or any of its Subsidiaries,
(b) the ability of the Borrower or any of its Subsidiaries to perform its
obligations under any of the Loan Documents, (c) the validity or enforceability
of any of the Loan Documents, or (d) the rights or remedies of the
Administrative Agent or the Lenders under the Loan Documents.
"Net Debt Proceeds" means, with respect to the sale or issuance by the
-----------------
Borrower or any of its Subsidiaries to any Person of any Indebtedness permitted
by the Required Lenders after the Effective Date, the excess of:
------
(a) the gross cash proceeds received by the Borrower or any of its
Subsidiaries from such sale or issuance,
over
- ----
(b) all reasonable and customary underwriting commissions and legal,
investment banking, brokerage and accounting and other professional fees,
sales commissions and disbursements and all other reasonable fees, expenses
and charges, in each case actually incurred in connection with such sale or
issuance which have not been paid to Affiliates of the Borrower (other than
Affiliates comprising CIBC Securities, Onyx, EUFCC and their respective
Affiliates) in connection therewith.
"Net Disposition Proceeds" means, with respect to a Permitted Disposition
------------------------
of the assets of the Borrower or any of its Subsidiaries, the excess of
(a) the gross cash proceeds received by the Borrower or any of its
Subsidiaries from any Permitted Disposition,
-14-
<PAGE>
less
- ----
(b) the sum of
(i) all reasonable and customary fees and expenses with respect
to legal, investment banking, brokerage and accounting and other
professional fees, sales commissions and disbursements and all other
reasonable fees, expenses and charges, in each case actually incurred
in connection with such Permitted Disposition which have not been paid
to Affiliates of the Borrower (other than Affiliates comprising CIBC
Securities, Onyx, EUFCC and their respective Affiliates), and
(ii) all taxes and other governmental costs and expenses
actually paid or estimated by the Borrower (in good faith) to be
payable in cash in connection with such Permitted Disposition;
provided, however, that if, after the payment of all taxes with respect to such
- -------- -------
Permitted Disposition, the amount of estimated taxes, if any, pursuant to clause
------
(b)(ii) above exceeded the tax amount actually paid in cash in respect of such
- -------
Permitted Disposition, the aggregate amount of such excess shall be immediately
payable, pursuant to clause (d) of Section 3.1.1, as Net Disposition Proceeds.
---------- -------------
"Net Equity Proceeds" means, with respect to the sale or issuance by the
-------------------
Borrower (or, if any, any parent corporation or other entity with respect to the
Borrower) to any Person of any stock, warrants or options or the exercise of any
such warrants or options after the Effective Date, the excess of:
------
(a) the gross cash proceeds received by the Borrower or such parent
corporation or other entity from such sale, exercise or issuance,
over
- ----
(b) all reasonable and customary underwriting commissions and legal,
investment banking, brokerage and accounting and other professional fees,
sales commissions and disbursements and all other reasonable fees, expenses
and charges, in each case actually incurred in connection with such sale or
issuance which have not been paid to Affiliates of the Borrower (other than
Affiliates comprising CIBC Securities, Onyx, EUFCC and their respective
Affiliates) in connection therewith.
"Net Income" means, for any period, the net income of the Borrower and its
----------
Subsidiaries for such period on a consolidated basis as computed in accordance
with GAAP.
"New Installations" means the acquisition by the Borrower or any of its
-----------------
Subsidiaries of new contracts to provide telephone service from applicable
Official Bodies not involving an Acquisition.
"Note" means a Revolving Note.
----
"Obligations" means all obligations (monetary or otherwise) of the Borrower
-----------
and each other Obligor arising under or in connection with this Agreement, the
Notes and each other Loan Document.
"Obligor" means the Borrower, AmeriTel, Talton, Talton STC, Talton Carolina
-------
and/or any other Person (other than the Administrative Agent, the Documentation
Agent, any Agent-Related Person or any Lender) obligated under any Loan
Document.
-15-
<PAGE>
"Offering Memorandum" means the June 24, 1997 Offering Memorandum
-------------------
describing the $115,000,000 Senior Notes issued by the Borrower.
"Official Body" means any government or political subdivision or any
-------------
agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any prison authority, or any court, tribunal or
arbitrator, in each case whether foreign or domestic.
"Onyx" means Onyx Partners, Inc., a California corporation, together with
----
its Affiliates.
"Operating Contracts" means each of the contracts for the operation of
-------------------
telephones to which the Borrower or any of its Subsidiaries is a party.
"Organic Documents" means, relative to any Obligor, its certificate of
-----------------
incorporation, its by-laws and all shareholder agreements, voting trusts and
similar arrangements applicable to any of its authorized shares of capital
stock.
"Participant" is defined in Section 10.11.2.
----------- ---------------
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
----
succeeding to any or all of its functions under ERISA.
"Pension Plan" means a "pension plan", as such term is defined in section
------------
3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer
plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or
any corporation, trade or business that is, along with the Borrower, a member of
a Controlled Group, may have liability, including any liability by reason of
having been a substantial employer within the meaning of section 4063 of ERISA
at any time during the preceding five years, or by reason of being deemed to be
a contributing sponsor under section 4069 of ERISA.
"Percentage" means, relative to any Lender, the percentage set forth
----------
opposite its signature hereto or set forth in the then most recent Lender
Assignment Agreement executed by such Lender, as such percentage may be adjusted
from time to time pursuant to Lender Assignment Agreement(s) executed by such
Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11.
-------------
"Permitted Acquisition" means, at any time of determination, the Talton STC
---------------------
Acquisition, the Tataka Acquisition, the CCC Acquisition and any Acquisition by
the Borrower or any of its Subsidiaries with respect to which each of the
following requirements are met:
(a) such Acquisition has been approved and recommended by the board
of directors or general partner (or similar entity) of the Person to be
acquired or which owns the assets of the Person be acquired;
(b) the Borrower shall have furnished to the Administrative Agent
(which shall promptly distribute the same to the Lenders), prior to the
consummation of such Acquisition, pro forma projections and other details
--- -----
(with reasonable assumptions) with respect to the Person or Persons to be
acquired;
(c) prior to and after giving effect to such Acquisition, no Default
(including without limitation under the provisions of Section 7.2.4 and
-------------
Sections 7.1.9 and 7.1.10) shall have occurred and be continuing, or would
-------------- ------
result therefrom;
-16-
<PAGE>
(d) the Administrative Agent (on behalf of the Lenders) shall have
been provided a first-priority security interest in all acquired property;
(e) the documentation for such Acquisition shall permit the
Administrative Agent to obtain a lien on such documentation;
(f) the total consideration payable in respect of any one Acquisition
does not exceed $10,000,000; and
(g) the total consideration payable in respect of all Acquisitions
constituting Permitted Acquisitions in any Fiscal Year does not exceed
$35,000,000; provided, however, that to the extent the amount of all
-------- -------
Permitted Acquisitions permitted to be made in any Fiscal Year pursuant to
this clause (g) exceeds the aggregate amount of Permitted Acquisitions
----------
actually made during such Fiscal Year, such excess amount may be carried
forward to (but only to) the immediately succeeding Fiscal Year (any such
amount to be certified by the Borrower to the Administrative Agent in the
Compliance Certificate delivered following the last Fiscal Quarter of such
Fiscal Year), and any such amount carried forward to the succeeding Fiscal
Year shall be deemed to be used only after the Borrower has fully used the
scheduled amount of Permitted Acquisitions permitted by this clause (g)
----------
without giving effect to any carryforward amount; provided, further,
-------- -------
however, that the Talton STC Acquisition, the Tataka Acquisition and the
-------
CCC Acquisition shall not be included for purposes of the $35,000,000 limit
contained in this clause (g).
----------
"Permitted Disposition" means a sale, disposition or other conveyance of
---------------------
assets by the Borrower or any of its Subsidiaries in accordance with the terms
of clause (b) of Section 7.2.10.
---------- --------------
"Person" means any natural person, corporation, partnership, firm,
------
association, trust, government, governmental agency or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Plan" means any Pension Plan or Welfare Plan.
----
"Pledge Agreement" means, as the context may require, the Borrower Pledge
----------------
Agreement, the Talton Pledge Agreement and/or each Investor Pledge Agreement;
collectively, the "Pledge Agreements".
-----------------
"Preferred Dividends" means cash dividends on the Preferred Stock which are
-------------------
payable so long as no Default has occurred and is continuing in amounts not to
exceed $480,000 in any Fiscal Year.
"Preferred Stock" means the preferred equity issued by the Borrower on
---------------
December 27, 1996 with terms providing for no mandatory redemptions or
repurchases prior to December 21, 2001.
"Pro Forma Balance Sheet and Business Plan" means consolidated balance
-----------------------------------------
sheets, income statements and cash flow statements for the Borrower and its
Subsidiaries as of the Closing Date giving pro forma effect to all acquisitions
--- -----
made subsequent to December 27, 1996, the issuance of the Senior Notes, the
repayment of the Senior Subordinated Notes and the Talton Seller Subordinated
Note referred to in the Existing Credit Agreement, the repayment of the
$45,000,000 in term loans (and of any revolving loans) made under the Existing
Credit Agreement and the initial Borrowing hereunder, all for the period 1997-
2007 and to include 1996 performance for Talton/AmeriTel on a combined pro forma
--- -----
basis, with assumptions considered reasonable by the Administrative Agent, and
all certified by the chief financial officer of the Borrower.
-17-
<PAGE>
"Quarterly Payment Date" means the last day of each March, June, September
----------------------
and December or, if any such day is not a Business Day, the next succeeding
Business Day.
"Release" means a "release", as such term is defined in CERCLA.
-------
"Required Lenders" means, (a) at any time that CIBC Inc.'s outstanding
----------------
Loans and Commitments are greater than or equal to $14,000,000, Lenders holding
66-2/3% of the then aggregate outstanding principal amount of the Notes and
Commitments, and (b) at any time thereafter, Lenders holding at least 51% of the
then aggregate outstanding principal amount of the Notes or, if no such
principal amount is then outstanding, Lenders having at least 51% of the
Commitments.
"Resource Conservation and Recovery Act" means the Resource Conservation
--------------------------------------
and Recovery Act, 42 U.S.C. Section 6901, et seq., as in effect from time to
-- ----
time.
"Revolving Loan" is defined in Section 2.1.1.
-------------- -------------
"Revolving Loan Commitment" means, relative to any Lender, such Lender's
-------------------------
obligation to make Revolving Loans pursuant to Section 2.1.1.
-------------
"Revolving Loan Commitment Amount" means, on any date, $35,000,000, as such
--------------------------------
amount may be reduced from time to time pursuant to Section 2.2.
-----------
"Revolving Loan Commitment Termination Date" means the earliest of
------------------------------------------
(a) December 31, 2000;
(b) the date on which the Revolving Loan Commitment Amount is
terminated in full or reduced to zero pursuant to Section 2.2; and
-----------
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described in clause (b) or (c), the Revolving
---------- ---
Loan Commitments shall terminate automatically and without any further action.
"Revolving Note" means a promissory note of the Borrower payable to any
--------------
Lender, substantially in the form of Exhibit A hereto (as such promissory note
---------
may be amended, endorsed or otherwise modified from time to time), evidencing
the aggregate Indebtedness of the Borrower to such Lender resulting from
outstanding Revolving Loans, and also means all other promissory notes accepted
from time to time in substitution therefor or renewal thereof.
"Rolling Period" means, with respect to any Fiscal Quarter, the period
--------------
comprising such Fiscal Quarter and the three immediately preceding Fiscal
Quarters.
"Security Agreement" means, as the context may require, the Borrower
------------------
Security Agreement, the AmeriTel Security Agreement, the Talton Security
Agreement, the Talton Carolina Security Agreement and/or the Talton STC Security
Agreement; collectively, the "Security Agreements".
-------------------
"Senior Debt" means, at any time, all outstanding Total Debt which is not
-----------
Subordinated Debt as of such time.
"Senior Debt to EBITDA Ratio" means, as of the last day of any Fiscal
---------------------------
Quarter, the ratio of (a) Senior Debt outstanding on such date to (b) EBITDA for
--
the Rolling Period ending on such date;
-18-
<PAGE>
provided, however, that if any New Installations are consummated during the
- -------- -------
Rolling Period ended on the last day of such Fiscal Quarter, EBITDA for such
Rolling Period shall be deemed to include an amount for EBITDA for such New
Installations equal to the amount set forth in the business plan (which shall be
based on assumptions deemed reasonable by the Administrative Agent in its
discretion) submitted by the Borrower to the Official Body permitting such New
Installations.
"Senior Noteholders" means any and all holders of Senior Notes.
------------------
"Senior Note Instruments" means the Senior Notes and all agreements and
-----------------------
instruments in connection therewith or pursuant to which the same shall have
been issued or are governed, as the same may be amended, supplemented, amended
and restated or otherwise modified in accordance with Section 7.2.11 or
--------------
refinanced in accordance with, and subject to, the provisions of Section 7.2.6.
-------------
"Senior Notes" means the Senior Notes issued by the Borrower in accordance
------------
with Section 5.1.15, as the same may be refinanced in accordance with, and
--------------
subject to, the provisions of Section 7.2.6.
-------------
"Solvency Certificate" means the Solvency Certificate, dated the Closing
--------------------
Date, to be duly executed and delivered by the chief financial officer of the
Borrower, covering the Borrower and each Subsidiary of the Borrower pursuant to
Section 5.1.11, substantially in the form of Exhibit G hereto.
- -------------- ---------
"Stated Maturity Date" means December 31, 2000.
--------------------
"Subordinated Debt" means any Indebtedness subordinated to the Obligations
-----------------
on terms and conditions satisfactory to the Administrative Agent and the
Required Lenders, as evidenced by their written approval thereof.
"Subsidiary" means, with respect to any Person, any corporation of which
----------
more than 50% of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, by such
Person and one or more other Subsidiaries of such Person, or by one or more
other Subsidiaries of such Person.
"Subsidiary Guaranty" means the Guaranty executed and delivered by
-------------------
AmeriTel, Talton and Talton Carolina pursuant to Section 5.1.7 of the Existing
Credit Agreement, by Talton STC pursuant to Section 5.1.6 or by any future
-------------
Subsidiary pursuant to clause (a) of Section 7.1.10, substantially in the form
---------- --------------
of Exhibit F to the Existing Credit Agreement, as amended, supplemented, amended
and restated or otherwise modified from time to time.
"Subsidiary Guaranty Supplement" means Supplement No. 1 to the Subsidiary
------------------------------
Guaranty to be executed and delivered by Talton STC pursuant to Section 5.1.6,
-------------
substantially in the form of Annex I to the Subsidiary Guaranty, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Subsidiary Pledge Agreement" means a Pledge Agreement executed and
---------------------------
delivered by a Subsidiary pursuant to Section 5.1.8 of the Existing Credit
Agreement or Section 7.1.9, substantially in the form of Exhibit H-2 to the
-------------
Existing Credit Agreement, as amended, supplemented, amended and restated or
otherwise modified from time to time.
"Subsidiary Security Agreement" means a Security Agreement executed and
-----------------------------
delivered by a Subsidiary pursuant to Section 5.1.9 of the Existing Credit
Agreement or Section 7.1.9, substantially in
-19-
<PAGE>
the form of Exhibit G-2 to the Credit Agreement, as amended, supplemented,
amended and restated or otherwise modified from time to time.
"Talton" means Talton Telecommunications Corporation, an Alabama
------
corporation.
"Talton Carolina" means Talton Telecommunications of Carolina, Inc., an
---------------
Alabama corporation.
"Talton Carolina Security Agreement" means the Security Agreement executed
----------------------------------
and delivered by Talton Carolina pursuant to Section 5.1.9 of the Existing
Credit Agreement, substantially in the form of Exhibit G-2 thereto, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Talton Pledge Agreement" means the Pledge Agreement executed and delivered
-----------------------
by Talton pursuant to Section 5.1.8 of the Existing Credit Agreement,
substantially in the form of Exhibit H-3 thereto, as amended, supplemented,
amended and restated or otherwise modified from time to time.
"Talton Security Agreement" means the Security Agreement executed and
-------------------------
delivered by Talton pursuant to Section 5.1.9 of the Existing Credit Agreement,
substantially in the form of Exhibit G-2 thereto, as amended, supplemented,
amended and restated or otherwise modified from time to time.
"Talton STC" means Talton STC, Inc., a Delaware corporation.
----------
"Talton STC Acquisition" means the Acquisition by Talton STC of the assets
----------------------
of Security Telecom Corporation on May 9, 1997.
"Talton STC Security Agreement" means the Security Agreement to be executed
-----------------------------
and delivered by Talton STC pursuant to Section 5.1.8, substantially in the form
-------------
of Exhibit G-2 to the Existing Credit Agreement, as amended, supplemented,
amended and restated or otherwise modified from time to time.
"Tataka Acquisition" means the Acquisition by AmeriTel of the assets of
------------------
Tri-T, Inc. in May, 1997.
"Taxes" is defined in Section 4.6.
----- -----------
"Total Debt" means, at any time, the sum of (a) the outstanding principal
----------
amount of all Loans, (b) the aggregate outstanding principal amount of all
Subordinated Debt and (c) the outstanding amount of all Senior Notes and all
other items comprising Indebtedness of the Borrower and its Subsidiaries under
clauses (a), (b), (c) and (f) of the definition thereof contained herein,
- ----------- --- --- ---
together with all guarantees of such items, in each case as of such time.
"Total Debt to EBITDA Ratio" means, as at the last day of any Fiscal
--------------------------
Quarter, the ratio of (a) Total Debt outstanding on such date to (b) EBITDA for
--
the Rolling Period ended on such date; provided, however, that if any New
-------- -------
Installations are consummated during the Rolling Period ended on the last day of
such Fiscal Quarter, EBITDA for such Rolling Period shall be deemed to include
an amount for EBITDA for such New Installations equal to the amount set forth in
the business plan (which shall be based on assumptions deemed reasonable by the
Administrative Agent in its discretion) submitted by the Borrower to the
Official Body permitting such New Installations.
"type" means, relative to any Loan, the portion thereof, if any, being
----
maintained as a Base Rate Loan or a LIBO Rate Loan.
-20-
<PAGE>
"United States" or "U.S." means the United States of America, its fifty
------------- ----
States and the District of Columbia.
"Welfare Plan" means a "welfare plan", as such term is defined in section
------------
3(1) of ERISA.
"Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the
-----------------------
outstanding voting securities of which shall at the time be owned or controlled,
directly or indirectly, by such Person, or by such Person and one or more
Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association,
limited liability company, joint venture or similar business organization 100%
of the ownership interests having ordinary voting power of which shall at the
time be so owned or controlled.
SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the
--------------------
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in the Disclosure Schedule and in
each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document,
notice and other communication delivered from time to time in connection with
this Agreement or any other Loan Document.
SECTION 1.3. Cross-References. Unless otherwise specified, references in
----------------
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.
SECTION 1.4. Accounting and Financial Determinations. Unless otherwise
---------------------------------------
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, all accounting determinations and computations hereunder or
thereunder (including under Section 7.2.4) shall be made, and all financial
-------------
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with, those generally accepted accounting principles ("GAAP") applied
----
in the preparation of the financial statements referred to in Section 6.5.
-----------
ARTICLE II
COMMITMENTS, LOANS, BORROWING PROCEDURES
AND NOTES
SECTION 2.1. Commitments. On the terms and subject to the conditions of
-----------
this Agreement (including Article V), each Lender severally agrees to make Loans
---------
pursuant to the Commitments described in this Section 2.1.
-----------
SECTION 2.1.1. Revolving Loan Commitment. From time to time on any
-------------------------
Business Day occurring on or after the Closing Date and prior to the Revolving
Loan Commitment Termination Date, each Lender agrees to make Loans (relative to
such Lender, its "Revolving Loans") to the Borrower equal to such Lender's
---------------
Percentage of the aggregate amount of the Borrowing of the Revolving Loans
requested by the Borrower to be made on such day. The Commitment of each Lender
described in this Section 2.1.1 is herein referred to as its "Revolving Loan
------------- --------------
Commitment". On the terms and subject to the conditions hereof, the Borrower may
- ----------
from time to time borrow, prepay and reborrow the Revolving Loans.
SECTION 2.1.2. Lenders Not Required to Make the Loans. No Lender shall
--------------------------------------
be required to make any Revolving Loan if, after giving effect thereto, the
aggregate outstanding principal amount of all the Revolving Loans,
-21-
<PAGE>
(a) of all the Lenders with Revolving Loan Commitments would exceed
the Revolving Loan Commitment Amount; or
(b) of such Lender with a Revolving Loan Commitment would exceed such
Lender's Percentage of the Revolving Loan Commitment Amount.
SECTION 2.2. Reduction of Revolving Loan Commitment Amount. The Borrower
---------------------------------------------
may, from time to time on any Business Day occurring after the time of the
initial Borrowing hereunder, voluntarily reduce the amount of the Revolving Loan
Commitment Amount; provided, however, that all such reductions shall require at
-------- -------
least three Business Days' prior notice to the Administrative Agent and be
permanent, and any partial reduction of the Revolving Loan Commitment Amount
shall be in a minimum amount of $1,000,000 and in an integral multiple of
$500,000. In addition, the Revolving Loan Commitment Amount shall automatically
immediately be reduced at the time of and by the amount of any required or
mandatory prepayments required under Section 3.1.1.
-------------
SECTION 2.3. Borrowing Procedure. By delivering a Borrowing Request to
-------------------
the Administrative Agent on or before 11:00 a.m., New York time, on a Business
Day, the Borrower may from time to time irrevocably request, on not less than
one (in the case of Borrowings of Base Rate Loans) and not less than three (in
the case of Borrowings of LIBO Rate Loans) nor more than five (in all cases)
Business Days' notice, that a Borrowing be made in a minimum amount of
$3,000,000 for the initial drawdown on the Revolving Loan Commitment and, for
each drawdown thereafter, in a minimum amount of $500,000 and an integral
multiple of $100,000 (in the case of LIBO Rate Loans) or in a minimum amount of
$100,000 and an integral multiple of $100,000 (in the case of Base Rate Loans)
or in the unused amount of the Revolving Loan Commitment Amount. On the terms
and subject to the conditions of this Agreement, each Borrowing shall be
comprised of the type of Loans, and shall be made on the Business Day, specified
in such Borrowing Request (provided that the Borrowing made on the Closing Date
--------
shall be comprised solely of Base Rate Loans). On or before 12:00 noon, New York
time, on such Business Day each Lender shall deposit with the Administrative
Agent same day funds in an amount equal to such Lender's Percentage of the
requested Borrowing. Such deposit will be made to an account which the
Administrative Agent shall specify from time to time by notice to the Lenders.
To the extent funds are received from the Lenders, the Administrative Agent
shall make such funds available to the Borrower by wire transfer to the accounts
the Borrower shall have specified in its Borrowing Request. No Lender's
obligation to make any Loan shall be affected by any other Lender's failure to
make any Loan.
SECTION 2.4. Continuation and Conversion Elections. By delivering a
-------------------------------------
Continuation/Conversion Notice to the Administrative Agent on or before 11:00
a.m., New York time, on a Business Day, the Borrower may from time to time
irrevocably elect, on not less than one (in the case of continuations of or
conversions into Base Rate Loans) and not less than three (in the case of
continuations of or conversions into LIBO Rate Loans) nor more than five (in all
cases) Business Days' notice that all, or any portion in an aggregate minimum
amount of $500,000 and an integral multiple of $100,000 (in the case of LIBO
Rate Loans) or in an aggregate minimum amount of $100,000 and an integral
multiple of $100,000 (in the case of Base Rate Loans), of any Loans, in the case
of Base Rate Loans, be converted into LIBO Rate Loans or, in the case of LIBO
Rate Loans, be converted into a Base Rate Loan or continued as a LIBO Rate Loan
(in the absence of delivery of a Continuation/Conversion Notice with respect to
any LIBO Rate Loan at least three Business Days before the last day of the then
current Interest Period with respect thereto, such LIBO Rate Loan shall, on such
last day, automatically convert to a Base Rate Loan); provided, however, that
-------- -------
(x) each such conversion or continuation shall be pro rated among the applicable
outstanding Loans of all Lenders, and (y) the Borrower shall not have the right
to request that any portion of the outstanding principal amount of any Loans may
be continued as, or be converted into, LIBO Rate Loans when any Default has
occurred and is continuing.
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<PAGE>
SECTION 2.5. Funding. Each Lender may, if it so elects, fulfill its
-------
obligation to make, continue or convert LIBO Rate Loans hereunder by causing one
of its foreign branches or Affiliates (or an international banking facility
created by such Lender) to make or maintain such LIBO Rate Loan; provided,
--------
however, that such LIBO Rate Loan shall nonetheless be deemed to have been made
- -------
and to be held by such Lender, and the obligation of the Borrower to repay such
LIBO Rate Loan shall nevertheless be to such Lender for the account of such
foreign branch, Affiliate or international banking facility. In addition, the
Borrower hereby consents and agrees that, for purposes of any determination to
be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall be conclusively
----------- --- --- ---
assumed that each Lender elected to fund all LIBO Rate Loans by purchasing
Dollar deposits in its LIBOR Office's interbank Eurodollar market.
SECTION 2.6. Notes. Each Lender's Loans under its Revolving Loan
-----
Commitment shall be evidenced by a Note payable to the order of such Lender in a
maximum principal amount equal to such Lender's Percentage of the original
Revolving Loan Commitment Amount. The Borrower hereby irrevocably authorizes
each Lender to make (or cause to be made) appropriate notations on the grid
attached to such Lender's Notes (or on any continuation of such grid), which
notations, if made, shall evidence, inter alia, the date of, the outstanding
----- ----
principal of, and the interest rate and Interest Period applicable to the Loans
evidenced thereby. Such notations shall be conclusive and binding on the
Borrower absent manifest error; provided, however, that the failure of any
-------- -------
Lender to make any such notations shall not limit or otherwise affect any
Obligations of the Borrower or any other Obligor.
ARTICLE III
REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
SECTION 3.1. Repayments and Prepayments; Application.
---------------------------------------
SECTION 3.1.1. Repayments and Prepayments. The Borrower shall repay in
--------------------------
full the unpaid principal amount of each Loan upon the Stated Maturity Date
therefor. Prior thereto, the Borrower
(a) may, from time to time on any Business Day, make a voluntary
prepayment, in whole or in part, of the outstanding principal amount of any
Loans; provided, however, that
-------- -------
(i) any such prepayment of the Revolving Loans shall be made
pro rata among the Revolving Loans of the same type and, if
--- ----
applicable, having the same Interest Period of all Lenders that have
made such Revolving Loans;
(ii) no such prepayment of any LIBO Rate Loan may be made on any
day other than the last day of the Interest Period for such Loan;
(iii) all such voluntary prepayments shall require at least
three but no more than five Business Days' prior written notice to the
Administrative Agent; and
(iv) all such voluntary partial prepayments shall be, in the
case of LIBO Rate Loans, in an aggregate minimum amount of $500,000
and an integral multiple of $100,000 and, in the case of Base Rate
Loans, in an aggregate minimum amount of $100,000 and an integral
multiple of $100,000;
(b) shall, on each date when any reduction in the Revolving Loan
Commitment Amount shall become effective, make a mandatory prepayment of
all Revolving Loans in an aggregate
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<PAGE>
amount equal to the excess, if any, of the aggregate, outstanding principal
amount of all Revolving Loans over the Revolving Loan Commitment Amount as
so reduced;
(c) shall, immediately upon any acceleration of the Stated Maturity
Date of any Loans pursuant to Section 8.2 or Section 8.3, repay all Loans,
----------- -----------
unless, pursuant to Section 8.3, only a portion of all Loans is so
-----------
accelerated (in which case the portion so accelerated shall be so prepaid);
(d) shall, no later than 180 days following receipt of any Net
Disposition Proceeds, make a mandatory prepayment of the Revolving Loans in
an amount equal to 100% of such Net Disposition Proceeds, to be applied as
set forth in Section 3.1.2; provided, however, that, at the option of the
------------- -------- -------
Borrower and so long as no Default shall have occurred and be continuing,
the Borrower may reinvest all or any portion of such Net Disposition
Proceeds in related assets so long as (A) within 120 days following receipt
of such Net Disposition Proceeds, a definitive purchase agreement for the
purchase of such assets with such proceeds shall have been entered into (as
certified by the Borrower in writing to the Administrative Agent) and (B)
within 180 days after the receipt of such Net Disposition Proceeds, such
purchase shall have been consummated (as certified by the Borrower in
writing to the Administrative Agent); provided, further, however, that any
-------- ------- -------
Net Disposition Proceeds not so reinvested shall be immediately applied to
the prepayment of the Revolving Loans as set forth above;
(e) concurrently with the creation of any Net Equity Proceeds, the
Borrower shall make a mandatory prepayment of the Revolving Loans in an
amount equal to 100% of such Net Equity Proceeds, to be applied as set
forth in Section 3.1.2, except to the extent, if any, that such Net Equity
------------- ------
Proceeds (i) arise from an initial public offering of the Borrower's common
stock and, after giving effect to such offering, the Borrower's Total Debt
to EBITDA Ratio is less than or equal to 4.50 to 1.0 or (ii) are applied
substantially concurrently with such creation to the consummation of
Permitted Acquisitions (provided that, if such Net Equity Proceeds arise
from an initial public offering of the Borrower's common stock, after
giving effect to such Permitted Acquisitions, the Borrower's Total Debt to
EBITDA Ratio is less than or equal to 4.50 to 1.0, with the determination
of EBITDA resulting from any Permitted Acquisition to be applied to the
calculation of Total Debt to EBITDA on terms satisfactory to the
Administrative Agent) and
(f) concurrently with the creation of any Net Debt Proceeds (other
than the issuance of the Senior Notes), the Borrower shall make a mandatory
prepayment of the Revolving Loans in an amount equal to 100% of such Net
Debt Proceeds, to be applied as set forth in Section 3.1.2, except to the
------------- ------
extent, if any, that such Net Debt Proceeds shall comprise refinancing debt
issued in accordance with, and subject to the provisions of, Section 7.2.6
-------------
and such proceeds are immediately applied to the repayment of Senior Notes
(or notes issued in substitution therefor pursuant to ordinary course
assignments not constituting a refinancing); and
(g) concurrently with the receipt by the Borrower or any of its
Subsidiaries of any escrow monies under the Talton Acquisition Agreement or
the AmeriTel Acquisition Agreement (each as defined in the Existing Credit
Agreement) or any other acquisition agreement (other than monies in respect
of claims of third parties), the Borrower shall make a mandatory prepayment
of the Revolving Loans with such monies.
Each prepayment of any Loans made pursuant to this Section shall be without
premium or penalty, except as may be required by Section 4.4. No voluntary
-----------
prepayment of principal of any Revolving Loans shall cause a reduction in the
Revolving Loan Commitment Amount.
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<PAGE>
SECTION 3.1.2. Application. Each prepayment or repayment of the
-----------
principal of the Loans shall be applied, to the extent of such prepayment or
repayment, first, to the principal amount thereof being maintained as Base Rate
-----
Loans, and second, to the principal amount thereof being maintained as LIBO Rate
------
Loans (with such application to earliest maturing LIBO Rate Loans first).
SECTION 3.2. Interest Provisions. Interest on the outstanding principal
-------------------
amount of Loans shall accrue and be payable in accordance with this Section 3.2.
-----------
SECTION 3.2.1. Rates. Pursuant to an appropriately delivered Borrowing
-----
Request or Continuation/Conversion Notice, the Borrower may elect that Loans
comprising a Borrowing accrue interest at a rate per annum:
(a) on that portion maintained from time to time as a Base Rate Loan,
equal to the sum of the Alternate Base Rate from time to time in effect
plus the Applicable Base Rate Margin; or
(b) on that portion maintained from time to time as a LIBO Rate Loan,
during each Interest Period applicable thereto, equal to the sum of the
LIBO Rate (Reserve Adjusted) for such Interest Period plus the Applicable
LIBO Rate Margin.
All LIBO Rate Loans shall bear interest from and including the first day of the
applicable Interest Period to (but not including) the last day of such Interest
Period at the interest rate determined as applicable to such LIBO Rate Loan.
SECTION 3.2.2. Post-Maturity Rates. After the date any principal amount
-------------------
of any Loan is due and payable (whether on the Stated Maturity Date, upon
acceleration or otherwise), or after any other monetary Obligation of the
Borrower shall have become due and payable, the Borrower shall pay, to the
extent permitted by law, interest (after as well as before judgment) on such
amounts at a rate per annum equal to the Alternate Base Rate plus the Applicable
----
Base Rate Margin plus a margin of 2.0%.
----
SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall be
-------------
payable, without duplication:
(a) on the Stated Maturity Date therefor;
(b) on the date of any payment or prepayment, in whole or in part, of
principal outstanding on such Loan with respect to the amount so paid or
prepaid;
(c) with respect to Base Rate Loans, on each Quarterly Payment Date
occurring after the date of the initial Borrowing hereunder;
(d) with respect to LIBO Rate Loans, on the last day of each
applicable Interest Period (and, if such Interest Period shall exceed three
months, at the end of each three month period occurring during such
Interest Period);
(e) with respect to any Base Rate Loans converted into LIBO Rate
Loans on a day when interest would not otherwise have been payable pursuant
to clause (c), on the date of such conversion; and
----------
(f) on that portion of any Loans the Stated Maturity Date of which is
accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such
----------- -----------
acceleration.
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<PAGE>
Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date such amount is due and
payable (whether on the Stated Maturity Date, upon acceleration or otherwise)
shall be payable upon demand.
SECTION 3.3. Fees. The Borrower agrees to pay the fees set forth in this
----
Section 3.3. All such fees shall be non-refundable.
- -----------
SECTION 3.3.1. Commitment Fee. The Borrower agrees to pay to the
--------------
Administrative Agent for the account of each Lender having an outstanding
Commitment, for the period (including any portion thereof when any of its
Commitments are suspended by reason of the Borrower's inability to satisfy any
condition of Article V) commencing on the Effective Date and continuing through
---------
the Revolving Loan Commitment Termination Date, a commitment fee at the rate of
1/2 of 1% per annum on such Lender's Percentage of the sum of the average daily
unused portion of the Revolving Loan Commitment Amount. Such commitment fees
shall be payable by the Borrower in arrears on each Quarterly Payment Date,
commencing with the first such day following the Effective Date, and on the
Revolving Loan Commitment Termination Date.
SECTION 3.3.2. Administrative Agent's Fee. The Borrower agrees to pay to
--------------------------
the Administrative Agent, for its own account, the non-refundable fees in the
amounts and on the dates set forth in the Fee Letter.
SECTION 3.3.3. No Other Fees. Except as set forth in this Agreement, the
-------------
other Loan Documents and in the Fee Letter, as of the Closing Date there are no
other fees owing to the Administrative Agent or the Lenders.
ARTICLE IV
CERTAIN LIBO RATE AND OTHER PROVISIONS
SECTION 4.1. LIBO Rate Lending Unlawful. If any Lender shall determine
--------------------------
(which determination shall, upon notice thereof to the Borrower and the Lenders,
be conclusive and binding on the Borrower) that the introduction of or any
change in or in the interpretation of any law makes it unlawful, or any central
bank or other governmental authority asserts that it is unlawful, for such
Lender to make, continue or maintain any Loan as, or to convert any Loan into, a
LIBO Rate Loan, the obligations of all Lenders to make, continue, maintain or
convert any such Loans shall, upon such determination, forthwith be suspended
until such Lender shall notify the Administrative Agent that the circumstances
causing such suspension no longer exist, and all LIBO Rate Loans shall
automatically convert into Base Rate Loans at the end of the then current
Interest Periods with respect thereto or sooner, if required by such law or
assertion.
SECTION 4.2. Deposits Unavailable. If the Administrative Agent shall
--------------------
have determined that
(a) Dollar deposits in the relevant amount and for the relevant
Interest Period are not available to CIBC in its relevant market; or
(b) by reason of circumstances affecting CIBC's relevant market,
adequate means do not exist for ascertaining the interest rate applicable
hereunder to LIBO Rate Loans,
then, upon notice from the Administrative Agent to the Borrower and the Lenders,
the obligations of all Lenders under Section 2.3 and Section 2.4 to make or
----------- -----------
continue any Loans as, or to convert any Loans
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<PAGE>
into, LIBO Rate Loans shall forthwith be suspended until the Administrative
Agent shall notify the Borrower and the Lenders that the circumstances causing
such suspension no longer exist.
SECTION 4.3. Increased LIBO Rate Loan Costs, etc. The Borrower agrees to
-----------------------------------
reimburse each Lender for any increase in the cost to such Lender of, or any
reduction in the amount of any sum receivable by such Lender in respect of,
making, continuing or maintaining (or of its obligation to make, continue or
maintain) any Loans as, or of converting (or of its obligation to convert) any
Loans into, LIBO Rate Loans. Such Lender shall promptly notify the
Administrative Agent and the Borrower in writing of the occurrence of any such
event, such notice to state, in reasonable detail, the reasons therefor and the
additional amount required fully to compensate such Lender for such increased
cost or reduced amount. Such additional amounts shall be payable by the
Borrower directly to such Lender within five days of its receipt of such notice,
and such notice shall, in the absence of manifest error, be conclusive and
binding on the Borrower.
SECTION 4.4. Funding Losses. In the event any Lender shall incur any
--------------
loss or expense (including any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Lender
to make, continue or maintain any portion of the principal amount of any Loan
as, or to convert any portion of the principal amount of any Loan into, a LIBO
Rate Loan) as a result of
(a) any conversion or repayment or prepayment of the principal amount
of any LIBO Rate Loans on a date other than the scheduled last day of the
Interest Period applicable thereto, whether pursuant to Section 3.1 or
-----------
otherwise;
(b) any Loans not being made as LIBO Rate Loans in accordance with
the Borrowing Request therefor; or
(c) any Loans not being continued as, or converted into, LIBO Rate
Loans in accordance with the Continuation/ Conversion Notice therefor,
then, upon the written notice of such Lender to the Borrower (with a copy to the
Administrative Agent), the Borrower shall, within five days of its receipt
thereof, pay directly to such Lender such amount as will (in the reasonable
determination of such Lender) reimburse such Lender for such loss or expense.
Such written notice (which shall include calculations in reasonable detail)
shall, in the absence of manifest error, be conclusive and binding on the
Borrower.
SECTION 4.5. Increased Capital Costs. If any change in, or the
-----------------------
introduction, adoption, effectiveness, interpretation, reinterpretation or
phase-in of, any law or regulation, directive, guideline, decision or request
(whether or not having the force of law) of any court, central bank, regulator
or other governmental authority affects or would affect the amount of capital
required or expected to be maintained by any Lender or any Person controlling
such Lender, and such Lender determines (in its sole and absolute discretion)
that the rate of return on its or such controlling Person's capital as a
consequence of its Commitments or the Loans made by such Lender is reduced to a
level below that which such Lender or such controlling Person could have
achieved but for the occurrence of any such circumstance, then, in any such case
upon notice from time to time by such Lender to the Borrower, the Borrower shall
immediately pay directly to such Lender additional amounts sufficient to
compensate such Lender or such controlling Person for such reduction in rate of
return. A statement of such Lender as to any such additional amount or amounts
(including calculations thereof in reasonable detail) shall, in the absence of
manifest error, be conclusive and binding on the Borrower. In determining such
amount, such Lender may use any reasonable method of averaging and attribution
that it shall deem applicable.
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<PAGE>
SECTION 4.6. Taxes. All payments by the Borrower and its Subsidiaries of
-----
principal of, and interest on, the Loans and all other amounts payable hereunder
and under the Loan Documents (including fees) shall be made free and clear of
and without deduction for any present or future income, excise, stamp or
franchise taxes and other taxes, fees, duties, withholdings or other charges of
any nature whatsoever imposed by any taxing authority, but excluding franchise
taxes and taxes imposed on or measured by any Lender's net income or receipts
(such non-excluded items being called "Taxes"). In the event that any
-----
withholding or deduction from any payment to be made by the Borrower or any of
its Subsidiaries hereunder or under any Loan Document is required in respect of
any Taxes pursuant to any applicable law, rule or regulation, then the Borrower
or such Subsidiary will
(a) pay directly to the relevant authority the full amount required
to be so withheld or deducted;
(b) promptly forward to the Administrative Agent an official receipt
or other documentation satisfactory to the Administrative Agent evidencing
such payment to such authority; and
(c) pay to the Administrative Agent for the account of the Lenders on
demand such additional amount or amounts as is necessary (including after
giving effect to withholdings or deductions applicable to sums paid
pursuant to this Section 4.6) to ensure that the net amount actually
-----------
received by each Lender will equal the full amount such Lender would have
received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the Administrative Agent or
any Lender with respect to any payment received by the Administrative Agent or
such Lender hereunder, the Administrative Agent or such Lender may pay such
Taxes and the Borrower will promptly pay such additional amounts (including any
penalties, interest or expenses) as is necessary in order that the net amount
received by such person after the payment of such Taxes (including any Taxes on
such additional amount) shall equal the amount such person would have received
had not such Taxes been asserted.
If the Borrower or any of its Subsidiaries fails to pay any Taxes when due
to the appropriate taxing authority or fails to remit to the Administrative
Agent, for the account of the respective Lenders, the required receipts or other
required documentary evidence, the Borrower shall indemnify the Lenders on
demand for any incremental Taxes, interest or penalties that may become payable
by any Lender as a result of any such failure. For purposes of this Section
-------
4.6, a distribution hereunder by the Administrative Agent or any Lender to or
for the account of any Lender shall be deemed a payment by the Borrower.
Upon the request of the Borrower or the Administrative Agent, each Lender
that is organized under the laws of a jurisdiction other than the United States
shall, prior to the due date of any payments under the Notes, execute and
deliver to the Borrower and the Administrative Agent, on or about the first
scheduled payment date in each Fiscal Year, one or more (as the Borrower or the
Administrative Agent may reasonably request) United States Internal Revenue
Service Forms 4224 or Forms 1001 or such other forms or documents (or successor
forms or documents), appropriately completed, as may be applicable to establish
the extent, if any, to which a payment to such Lender is exempt from withholding
or deduction of Taxes.
SECTION 4.7. Payments, Computations, etc. Unless otherwise expressly
---------------------------
provided, all payments by the Borrower pursuant to this Agreement, the Notes or
any other Loan Document shall be made by the Borrower to the Administrative
Agent for the pro rata account of the Lenders entitled to receive such payment.
--- ----
All such payments required to be made to the Administrative Agent shall be made,
without setoff, deduction or counterclaim, not later than 11:00 a.m., New York
time, on the date
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<PAGE>
due, in same day or immediately available funds, to such account as the
Administrative Agent shall specify from time to time by notice to the Borrower.
Funds received after that time shall be deemed to have been received by the
Administrative Agent on the next succeeding Business Day. The Administrative
Agent shall promptly remit in same day funds to each Lender its share, if any,
of such payments received by the Administrative Agent for the account of such
Lender. All interest and fees shall be computed on the basis of the actual
number of days (including the first day but excluding the last day) occurring
during the period for which such interest or fee is payable over a year
comprised of 365 or, if appropriate, 366 days (or, in the case of interest on a
LIBO Rate Loan or a Base Rate Loan calculated at the Federal Funds Rate, 360
days). Whenever any payment to be made shall otherwise be due on a day which is
not a Business Day, such payment shall (except as otherwise required by
clause (c) of the definition of the term "Interest Period") be made on the next
- ----------
succeeding Business Day and such extension of time shall be included in
computing interest and fees, if any, in connection with such payment.
SECTION 4.8. Sharing of Payments. If any Lender shall obtain any payment
-------------------
or other recovery (whether voluntary, involuntary, by application of setoff or
otherwise) on account of any Loan (other than pursuant to the terms of Sections
--------
4.3, 4.4, 4.5 and 4.6) in excess of its pro rata share of payments then or
- --- --- --- --- --- ----
therewith obtained by all Lenders entitled thereto, such Lender shall purchase
from the other Lenders such participations in Loans made by them as shall be
necessary to cause such purchasing Lender to share the excess payment or other
recovery ratably with each of them; provided, however, that if all or any
-------- -------
portion of the excess payment or other recovery is thereafter recovered from
such purchasing Lender, the purchase shall be rescinded and each Lender which
has sold a participation to the purchasing Lender shall repay to the purchasing
Lender the purchase price to the ratable extent of such recovery together with
an amount equal to such selling Lender's ratable share (according to the
proportion of
(a) the amount of such selling Lender's required repayment to the
purchasing Lender
to
- --
(b) the total amount so recovered from the purchasing Lender)
of any interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. The Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this Section may,
to the fullest extent permitted by law, exercise all its rights of payment
(including pursuant to Section 4.9) with respect to such participation as fully
-----------
as if such Lender were the direct creditor of the Borrower in the amount of such
participation. If under any applicable bankruptcy, insolvency or other similar
law, any Lender receives a secured claim in lieu of a setoff to which this
Section applies, such Lender shall, to the extent practicable, exercise its
rights in respect of such secured claim in a manner consistent with the rights
of the Lenders entitled under this Section to share in the benefits of any
recovery on such secured claim.
SECTION 4.9. Setoff. Each Lender shall, upon the occurrence of any
------
Default described in clauses (a) through (d) of Section 8.1.9 or, with the
----------- --- -------------
consent of the Required Lenders, upon the occurrence of any other Event of
Default, have the right to appropriate and apply to the payment of the
Obligations owing to it (whether or not then due), and (as security for such
Obligations) the Borrower hereby grants to each Lender a continuing security
interest in, any and all balances, credits, deposits, accounts or moneys of the
Borrower then or thereafter maintained with such Lender; provided, however, that
-------- -------
any such appropriation and application shall be subject to the provisions of
Section 4.8. Each Lender agrees promptly to notify the Borrower and the
- -----------
Administrative Agent after any such setoff and application made by such Lender;
provided, however, that the failure to give such notice shall not affect the
- -------- -------
validity of such setoff and application. The rights of each Lender under this
Section are in addition to
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<PAGE>
other rights and remedies (including other rights of setoff under applicable
law or otherwise) which such Lender may have.
ARTICLE V
CONDITIONS TO BORROWING
SECTION 5.1. Initial Borrowing. The obligations of the Lenders to fund the
-----------------
initial Borrowing shall be subject to the prior or concurrent fulfillment of
each of the conditions precedent set forth in this Section 5.1 to
-----------
the satisfaction of the Administrative Agent.
SECTION 5.1.1. Resolutions, etc. The Documentation Agent shall have
----------------
received from the Borrower and Talton STC a certificate, dated the Closing Date,
in form and substance satisfactory to the Documentation Agent, of its Secretary
or Assistant Secretary as to
(a) resolutions of its Board of Directors then in full force and
effect authorizing the execution, delivery and performance of this
Agreement, the Notes and each other Loan Document to be executed by it; and
(b) the incumbency and signatures of those of its officers authorized
to act with respect to this Agreement, the Notes and each other Loan
Document executed by it,
upon which certificate each Lender may conclusively rely until it shall have
received a further certificate of the Secretary or Assistant Secretary of the
Borrower or Talton STC canceling or amending such prior certificate.
SECTION 5.1.2. Delivery of Notes. The Documentation Agent shall have
-----------------
received, for the account of each Lender, its Notes duly executed and delivered
by the Borrower.
SECTION 5.1.3. Delivery of Certain Documents. The Documentation Agent
-----------------------------
shall have received certified copies of the Organic Documents of each of the
Borrower and Talton STC, together with all amendments thereto, and a certificate
of good standing for each of the Borrower and Talton STC, in each case certified
as of a recent date by the appropriate governmental officer in its jurisdiction
of incorporation.
SECTION 5.1.4. Refinancing or Payment of Outstanding Indebtedness, etc.
-------------------------------------------------------
All Indebtedness owing by the Borrower, AmeriTel, Talton or Talton Carolina and
all other Indebtedness identified in Item 7.2.2(b) ("Indebtedness to be Paid")
-------------
of the Disclosure Schedule, together with all interest, all prepayment premiums
and other amounts due and payable with respect thereto, shall have been paid in
full (including, to the extent necessary, from proceeds of the initial
Borrowing); and the Documentation Agent shall have received executed copies of
proper Uniform Commercial Code Form UCC-3 termination statements necessary to
release all Liens and other rights of any Person (a) in any collateral described
in any security agreement previously granted by any Person, and (b) securing any
of the Indebtedness identified in Item 7.2.2(b) ("Indebtedness to be Paid") of
-------------
the Disclosure Schedule, together with such termination documents and pay-off
letters in form and substance satisfactory to the Administrative Agent from such
other lenders and such other Uniform Commercial Code Form UCC-3 termination
statements or similar documents as the Documentation Agent may reasonably
request from the Borrower. Without limiting the foregoing, the Administrative
Agent shall have received (a) satisfactory evidence of the payment in full of
the Senior Subordinated Notes referred to in the Existing Credit Agreement and
of the Talton Seller Subordinated Note referred to in the Existing Credit
Agreement and (b) payment in full of all principal of the term loans and
revolving loans outstanding
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<PAGE>
under the Existing Credit Agreement as well as all accrued interest thereon for
ratable distribution to the Existing Lenders.
SECTION 5.1.5. Pro Forma Balance Sheet and Business Plan. The Lenders
-----------------------------------------
shall have received and be satisfied in all respects with the Pro Forma Balance
Sheet and Business Plan.
SECTION 5.1.6. Subsidiary Guaranty Supplement. The Documentation Agent
------------------------------
shall have received executed counterparts of the Subsidiary Guaranty Supplement,
duly executed by Talton STC.
SECTION 5.1.7. Borrower Pledge Agreement Supplement. The Documentation
------------------------------------
Agent shall have received executed counterparts of the Borrower Pledge Agreement
Supplement, duly executed by the Borrower, together with certificates evidencing
all of the issued and outstanding shares of capital stock of Talton STC, which
certificates shall be accompanied by undated stock powers duly executed in
blank.
SECTION 5.1.8. Talton STC Security Agreement. The Documentation Agent
-----------------------------
shall have received executed counterparts of the Talton STC Security Agreement,
duly executed by Talton STC, together with
(a) duly executed appropriate Uniform Commercial Code financing
statements (Form UCC-1), naming Talton STC as the debtor and the
Administrative Agent as the secured party or other similar instruments or
documents, such documents to be suitable for filing under the Uniform
Commercial Code of all jurisdictions as may be necessary or, in the opinion
of the Administrative Agent, desirable to perfect the security interest of
the Administrative Agent pursuant to such Security Agreement;
(b) executed copies of proper Uniform Commercial Code Form UCC-3
termination statements, if any, necessary to release all Liens and other
rights of any Person
(i) in any collateral described in such Security Agreement
previously granted by any Person, and
(ii) securing any of the Indebtedness identified in Item
----
7.2.2(b) ("Indebtedness to be Paid") of the Disclosure Schedule,
--------
together with such other Uniform Commercial Code Form UCC-3 termination
statements as the Documentation Agent may reasonably request from Talton
STC; and
(c) certified copies of Uniform Commercial Code Requests for
Information or Copies (Form UCC-11), or a similar search report certified
by a party acceptable to the Administrative Agent, dated a date reasonably
near to the date of the initial Borrowing, listing all effective financing
statements which name Talton STC (under its present name and any previous
names) as the debtor and which are filed in the jurisdictions in which
filings were made pursuant to clause (a) above, together with copies of
----------
such financing statements (none of which (other than those described in
clause (a), if such Form UCC-11 or search report, as the case may be, is
----------
current enough to list such financing statements described in clause (a))
----------
shall cover any collateral described in such Security Agreement).
SECTION 5.1.9. Affirmation and Consent. The Documentation Agent shall
-----------------------
have received executed counterparts of the Affirmation and Consent, duly
executed by each of Talton, AmeriTel and Talton Carolina.
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<PAGE>
SECTION 5.1.10. Pro Forma Compliance Certificate. The Documentation
--------------------------------
Agent shall have received, with counterparts for each Lender, an initial
Compliance Certificate, dated the Closing Date and computed on a pro forma basis
--- -----
as of June 30, 1997 as if the initial Borrowing had been made, duly executed
(and with all schedules thereto duly completed) and delivered by a financial or
accounting Authorized Officer of the Borrower.
SECTION 5.1.11. Solvency Certificate. The Documentation Agent shall have
--------------------
received duly executed and delivered counterparts of the Solvency Certificate,
dated the Closing Date.
SECTION 5.1.12. Closing Date Certificate. The Documentation Agent shall
------------------------
have received the Closing Date Certificate, dated the Closing Date and duly
executed by an Authorized Officer of the Borrower, in which the Borrower shall
agree and acknowledge that the statements made therein shall be deemed to be
true and correct representations and warranties made as of such date under this
Agreement, and, at the time such certificate is delivered, such statements shall
in fact be true and correct. All documents and agreements required to be
appended to the Closing Date Certificate (including any and all consents
necessary to be obtained in connection with the transactions contemplated
hereby) shall be in form and substance satisfactory to the Administrative Agent.
SECTION 5.1.13. Opinions of Counsel. The Documentation Agent shall have
-------------------
received legal opinions, dated the Closing Date and addressed to the
Administrative Agent and all Lenders, from
(a) Stutzman & Bromberg, counsel to the Obligors, satisfactory in
form and substance to the Administrative Agent
(b) Shustak, Jalil & Heller, New York counsel to the Obligors,
satisfactory in form and substance to the Administrative Agent; and
(c) Various local counsel to the Obligors, satisfactory in form and
substance to the Administrative Agent.
SECTION 5.1.14. Insurance. The Documentation Agent shall have received
---------
copies of the policies of insurance maintained and in effect on the Effective
Date as required pursuant to Section 7.1.6 and each Security Agreement,
-------------
certified by an Authorized Officer of the Borrower, together with an insurance
broker's certificate confirming that the Borrower and each Subsidiary maintains
customary coverages as well as coverages which satisfy the requirements of the
Loan Documents.
SECTION 5.1.15. Senior Notes. The Borrower shall have received not less
------------
than $115,000,000 in gross proceeds from the issuance of the Senior Notes to the
Senior Noteholders, which Senior Notes and all other Senior Note Instruments
shall be in form and substance satisfactory to the Administrative Agent.
SECTION 5.1.16. Closing Fees, Expenses, etc. The Administrative Agent
---------------------------
and the Lenders shall have received all fees due and payable on or before the
Closing Date and all costs and expenses (including, without limitation, legal
fees and expenses) due and payable pursuant to Sections 3.3 and 10.3, if then
------------ ----
invoiced.
SECTION 5.1.17. Operating Contracts. The Documentation Agent shall have
-------------------
received a satisfactory sampling of Operating Contracts executed subsequent to
December 27, 1996, and such Contracts shall be in form and substance
satisfactory to the Administrative Agent.
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<PAGE>
SECTION 5.2. All Borrowings. The obligation of each Lender to fund any
--------------
Loan on the occasion of any Borrowing (including the initial Borrowing) shall be
subject to the satisfaction of each of the conditions precedent set forth in
this Section 5.2.
-----------
SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both before
-------------------------------------------
and after giving effect to any Borrowing (but, if any Default of the nature
referred to in Section 8.1.5 shall have occurred with respect to any other
-------------
Indebtedness, without giving effect to the application, directly or indirectly,
of the proceeds thereof) the following statements shall be true and correct:
(a) the representations and warranties set forth in Article VI
----------
(excluding, however, those contained in Section 6.7) and in each other Loan
-----------
Document shall be true and correct in all material respects with the same
effect as if then made (unless stated to relate solely to an earlier date,
in which case such representations and warranties shall be true and correct
as of such earlier date);
(b) except as disclosed by the Borrower to the Administrative Agent
and the Lenders pursuant to Section 6.7,
-----------
(i) no labor controversy, litigation, arbitration or
governmental investigation or proceeding shall be pending or, to the
knowledge of the Borrower, threatened against the Borrower or any of
its Subsidiaries which might materially adversely affect the
Borrower's consolidated business, operations, assets, revenues,
properties, financial condition or prospects or which purports to
affect the legality, validity or enforceability of this Agreement, the
Notes or any other Loan Document; and
(ii) no development shall have occurred in any labor
controversy, litigation, arbitration or governmental investigation or
proceeding disclosed pursuant to Section 6.7 which might materially
-----------
adversely affect the consolidated businesses, operations, assets,
revenues, properties, financial condition or prospects of the Borrower
and its Subsidiaries; and
(c) no Default shall have then occurred and be continuing, and
neither the Borrower, any other Obligor, nor any of its Subsidiaries are in
violation in any material respect of any law or governmental regulation or
court order or decree.
SECTION 5.2.2. Borrowing Request. The Administrative Agent shall have
-----------------
received a Borrowing Request for such Borrowing. Each of the delivery of a
Borrowing Request and the acceptance by the Borrower of the proceeds of such
Borrowing shall constitute a representation and warranty by the Borrower that on
the date of such Borrowing (both immediately before and after giving effect to
such Borrowing and the application of the proceeds thereof) the statements made
in Section 5.2.1 are true and correct.
-------------
SECTION 5.2.3. Satisfactory Legal Form. All documents executed or
-----------------------
submitted pursuant hereto by or on behalf of the Borrower or any of its
Subsidiaries or any other Obligors shall be satisfactory in form and substance
to the Administrative Agent and its counsel; the Administrative Agent and its
counsel shall have received all information, approvals, opinions, documents or
instruments as the Administrative Agent or its counsel may reasonably request.
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<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders and each Agent to enter into this Agreement
and to make Loans hereunder, the Borrower represents and warrants to each Lender
and each Agent as set forth in this Article VI.
----------
SECTION 6.1. Organization, etc. The Borrower and each of its
-----------------
Subsidiaries is a corporation validly organized and existing and in good
standing under the laws of the State of its incorporation, is duly qualified to
do business and is in good standing as a foreign corporation in each
jurisdiction where the nature of its business requires such qualification, and
has full power and authority and holds all requisite governmental licenses,
permits and other approvals to enter into and perform its Obligations under this
Agreement, the Notes and each other Loan Document to which it is a party and,
subject to the provisions of Section 6.3, to own and hold under lease its
-----------
property and to conduct its business substantially as currently conducted by it.
SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution,
-----------------------------------------
delivery and performance by the Borrower and each other Obligor of this
Agreement, the Notes and each other Loan Document executed or to be executed by
it and the Borrower's and each other Obligor's granting of the Liens provided
for in the Loan Documents are within the Borrower's and each other Obligor's
corporate powers, have been duly authorized by all necessary corporate action,
and do not
(a) contravene the Borrower's or any other Obligor's Organic
Documents;
(b) contravene or result in a default under any contractual
restriction, law or governmental regulation or court decree or order
binding on or affecting the Borrower or any of its Subsidiaries; or
(c) result in, or require the creation or imposition of, any Lien on
any of the Borrower's or any of its Subsidiaries' properties other than
pursuant to the Loan Documents.
SECTION 6.3. Government Approval, Regulation, etc. Except as disclosed
------------------------------------
in Item 6.3 ("Approvals") of the Disclosure Schedule, no authorization or
--------
approval or other action by, and no notice to or filing with, any Official Body
or other Person (including shareholders) is required for the due execution,
delivery or performance by the Borrower or any other Obligor of this Agreement,
the Notes or any other Loan Document to which it is a party, or for the
Borrower's or any other Obligor's granting of the Liens provided for in the Loan
Documents or issuance of the Senior Notes, all of which have been duly obtained
or made and are in full force and effect. Neither the Borrower nor any of its
Subsidiaries is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended, or a "holding company", or a "subsidiary
company" of a "holding company", or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company", within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
SECTION 6.4. Validity, etc. This Agreement has been duly executed and
-------------
delivered and constitutes, and the Notes and each other Loan Document executed
by the Borrower and/or each other Obligor will, on the due execution and
delivery thereof, constitute, the legal, valid and binding obligations of the
Borrower and/or the other Obligor party or parties thereto, as the case may be,
enforceable in accordance with their respective terms.
SECTION 6.5. Financial Information. The audited balance sheets of Talton
---------------------
and AmeriTel as at December 31, 1995, and the quarterly unaudited balance sheets
of Talton and AmeriTel as at March 31,
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<PAGE>
1996, June 30, 1996 and September 30, 1996, and the respective related
statements of earnings and cash flow of Talton and AmeriTel as at such dates, as
well as the audited consolidated balance sheet, income statement and cash flow
statement for the Borrower and its Subsidiaries as of December 31, 1996 and the
unaudited quarterly consolidated and consolidating balance sheet and income
statement and consolidated statement of cash flow for the Borrower and its
Subsidiaries as of March 31, 1997, copies of which have been furnished to the
Administrative Agent and each Lender, have been prepared in accordance with GAAP
consistently applied, and present fairly the consolidated financial condition of
the corporations covered thereby as at the dates thereof and the results of
their operations for the periods then ended. The Pro Forma Balance Sheet and
Business Plan has been prepared based upon reasonable assumptions and presents
fairly the consolidated financial condition of the Borrower on a pro forma basis
--- -----
after giving effect to this Agreement and the Loan Documents.
SECTION 6.6. No Material Adverse Change. (a) For the period ending on
--------------------------
the Closing Date, since the date of the financial statements described in
Section 6.5, there has been no material adverse change in the financial
- -----------
condition, operations, assets, business, revenues, properties or prospects of
the Borrower and its Subsidiaries.
(b) For the period from and after the Closing Date, since the Closing
Date, there has been no material adverse change in the financial condition,
operations, assets, business, revenues, properties or prospects of the Borrower
or any of its Subsidiaries.
SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending
------------------------------------
or, to the knowledge of the Borrower, threatened litigation, action, proceeding,
or labor controversy affecting the Borrower or any of its Subsidiaries, or any
of their respective properties, businesses, assets or revenues, which purports
to affect the legality, validity or enforceability of this Agreement, the Notes
or any other Loan Document or which, except as disclosed in Item 6.7
--------
("Litigation") of the Disclosure Schedule, may have a Material Adverse Effect.
Neither the Borrower nor any of its Subsidiaries is a party to any contract or
agreement, or subject to any charge, corporate restriction, judgment,
injunction, decree, rule, regulation or order of any court or other Official
Body, that could have a Material Adverse Effect. None of the Borrower nor any
Subsidiary is a party to, and there is not pending or threatened, any labor
dispute, strikes, lock-out, grievance, work stoppage or walkouts relating to any
labor contract to which the Borrower or any Subsidiary is a party, in each case,
which could have a Material Adverse Effect.
SECTION 6.8. Compliance With Laws; Authorizations. Except as disclosed
------------------------------------
in Item 6.3 of the Disclosure Schedule, the Borrower and its Subsidiaries have
--------
complied in all material respects with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government, or
any instrumentality or agency thereof, having jurisdiction over the conduct of
its businesses or the ownership of its properties, including, without
limitation, those relating to public health and safety and protection of the
environment. Neither the Borrower nor any of its Subsidiaries has received any
notice to the effect that its operations are not in material compliance with any
of the requirements of applicable federal, state and local environmental, health
and safety statutes and regulations or are the subject of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release of any toxic or hazardous waste or substance into the environment, which
non-compliance or remedial action could have a Material Adverse Effect. The
Borrower and its Subsidiaries have obtained all authorizations necessary and
appropriate to own and operate their businesses and all such authorizations are
in full force and effect, except where the failure to so obtain such
authorizations or to so keep such Authorizations in full force and effect would
not have a Material Adverse Effect.
SECTION 6.9. Subsidiaries. The Borrower has no Subsidiaries, except
------------
AmeriTel, Talton, Talton Carolina, Talton STC and any Subsidiaries which are
permitted to have been created or acquired after the Closing Date by the
Required Lenders under express written consents in accordance with Section
-------
7.1.10.
- ------
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<PAGE>
SECTION 6.10. Ownership of Properties. The Borrower and each of its
-----------------------
Subsidiaries has good and marketable title to all of its properties and assets,
real and personal, tangible and intangible, of any nature whatsoever (including
patents, trademarks, trade names, service marks and copyrights), free and clear
of all Liens, charges or claims (including infringement claims with respect to
patents, trademarks, copyrights and the like) except as permitted pursuant to
Section 7.2.3. All of the outstanding shares of capital stock of the Borrower
- -------------
and each of its Subsidiaries have been duly authorized and validly issued, have
been fully paid and are non-assessable. The Borrower and its Subsidiaries own or
are licensed or otherwise have the right to use all of the trademarks,
copyrights, patents, licenses and intellectual property and other rights that
are necessary for the operation of their businesses, without conflict with the
rights of other Persons and free and clear of burdensome restrictions.
SECTION 6.11. Taxes. The Borrower and each of its Subsidiaries has filed
-----
all tax returns and reports required by law to have been filed by it and has
paid all taxes and governmental charges thereby shown to be owing, except any
such taxes or charges which are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books. The Borrower and each of its
Subsidiaries is current with respect to payment of all federal and state
withholding taxes, social security taxes and other payroll taxes, except where
such taxes are being contested in good faith by appropriate proceedings with
adequate reserves therefor.
SECTION 6.12. Pension and Welfare Plans. During the twelve-consecutive-
-------------------------
month period prior to the date of the execution and delivery of this Agreement
and prior to the date of any Borrowing hereunder, no steps have been taken to
terminate any Pension Plan, and no contribution failure has occurred with
respect to any Pension Plan sufficient to give rise to a Lien under section
302(f) of ERISA. No condition exists or event or transaction has occurred with
respect to any Pension Plan which might result in the incurrence by the Borrower
or any member of the Controlled Group of any material liability, fine or
penalty. Except as disclosed in Item 6.12 ("Employee Benefit Plans") of the
---------
Disclosure Schedule, neither the Borrower nor any member of the Controlled Group
has any contingent liability with respect to any post-retirement benefit under a
Welfare Plan, other than liability for continuation coverage described in Part 6
of Title I of ERISA.
SECTION 6.13. Environmental Warranties. Except as set forth in Item 6.13
------------------------ ---------
("Environmental Matters") of the Disclosure Schedule:
(a) all facilities and property (including underlying groundwater)
owned or leased by the Borrower or any of its Subsidiaries have been, and
continue to be, owned or leased by the Borrower and its Subsidiaries in
material compliance with all Environmental Laws;
(b) there have been no past, and there are no pending or threatened
(i) claims, complaints, notices or requests for information
received by the Borrower or any of its Subsidiaries with respect to
any alleged violation of any Environmental Law, or
(ii) complaints, notices or inquiries to the Borrower or any of
its Subsidiaries regarding potential liability under any Environmental
Law;
(c) there have been no Releases of Hazardous Materials at, on or
under any property now or previously owned or leased by the Borrower or any
of its Subsidiaries that, singly or in the aggregate, have, or may
reasonably be expected to have, a material adverse effect on the financial
condition, operations, assets, business, properties or prospects of the
Borrower and its Subsidiaries;
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<PAGE>
(d) the Borrower and its Subsidiaries have been issued and are in
material compliance with all permits, certificates, approvals, licenses and
other authorizations relating to environmental matters and necessary or
desirable for their businesses;
(e) no property now or previously owned or leased by the Borrower or
any of its Subsidiaries is listed or proposed for listing (with respect to
owned property only) on the National Priorities List pursuant to CERCLA, on
the CERCLIS or on any similar state list of sites requiring investigation
or clean-up;
(f) there are no underground storage tanks, active or abandoned,
including petroleum storage tanks, on or under any property now or
previously owned or leased by the Borrower or any of its Subsidiaries that,
singly or in the aggregate, have, or may reasonably be expected to have, a
material adverse effect on the financial condition, operations, assets,
business, properties or prospects of the Borrower and its Subsidiaries;
(g) neither Borrower nor any Subsidiary of the Borrower has directly
transported or directly arranged for the transportation of any Hazardous
Material to any location which is listed or proposed for listing on the
National Priorities List pursuant to CERCLA, on the CERCLIS or on any
similar state list or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to material
claims against the Borrower or such Subsidiary thereof for any remedial
work, damage to natural resources or personal injury, including claims
under CERCLA;
(h) there are no polychlorinated biphenyls or friable asbestos
present at any property now or previously owned or leased by the Borrower
or any Subsidiary of the Borrower that, singly or in the aggregate, have,
or may reasonably be expected to have, a material adverse effect on the
financial condition, operations, assets, business, properties or prospects
of the Borrower and its Subsidiaries; and
(i) no conditions exist at, on or under any property now or
previously owned or leased by the Borrower which, with the passage of time,
or the giving of notice or both, would give rise to liability under any
Environmental Law.
SECTION 6.14. Regulations G, U and X. The Borrower is not engaged in the
----------------------
business of extending credit for the purpose of purchasing or carrying margin
stock, and no proceeds of any Loans will be used to purchase or carry any margin
stock or for a purpose which violates, or would be inconsistent with, F.R.S.
Board Regulation G, U or X. Terms for which meanings are provided in F.R.S.
Board Regulation G, U or X or any regulations substituted therefor, as from time
to time in effect, are used in this Section with such meanings.
SECTION 6.15. Accuracy of Information. All factual information
-----------------------
heretofore or contemporaneously furnished by or on behalf of the Borrower in
writing to the Administrative Agent or any Lender for purposes of or in
connection with this Agreement or any transaction contemplated hereby (including
the Offering Memorandum, a true and complete copy of which was furnished to the
Administrative Agent and each Lender in connection with its execution and
delivery hereof) is, and all other such factual information hereafter furnished
by or on behalf of the Borrower to the Administrative Agent or any Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified and as of the date of execution and delivery
of this Agreement by the Administrative Agent and such Lender, and such
information is not, or shall not be, as the case may be, incomplete by omitting
to state any material fact necessary to make such information not misleading.
All projections have been prepared in good faith on the basis of reasonable
assumptions and represent the Borrower's best estimate of its future
performance.
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<PAGE>
SECTION 6.16. Operating Contracts. Except as set forth in Item 6.16
------------------- ---------
("Operating Contracts") of the Disclosure Schedule, Talton, AmeriTel, Talton
Carolina and Talton STC are in compliance in all material respects with each of
their Operating Contracts and all related agreements.
SECTION 6.17. Solvency. Both before and immediately after giving effect
--------
to any Borrowing requested hereunder:
(a) the fair value of the assets of Borrower and its Subsidiaries on
a consolidated basis will exceed the total amount of liabilities (including
contingent, subordinated, unmatured and unliquidated liabilities) of
Borrower and its Subsidiaries on a consolidated basis, on a going-concern
basis;
(b) the present fair salable value (as defined below) of the assets
of Borrower and its Subsidiaries on a consolidated basis will exceed the
probable total liabilities (including contingent, subordinated, unmatured
and unliquidated liabilities) of Borrower and its Subsidiaries on a
consolidated basis as they become absolute and matured;
(c) the Borrower and its Subsidiaries on a consolidated basis will be
able to pay their debts, including contingent liabilities, as they mature
and become due;
(d) the Borrower and its Subsidiaries on a consolidated basis are
not, and will not be, engaged in a business for which their consolidated
capital is, or would be, unreasonably small for their consolidated
business; and
(e) the Borrower and its Subsidiaries on a consolidated basis have
not incurred (by way of assumption or otherwise) any obligations or
liabilities (contingent or otherwise) under this Agreement or any other
Loan Document, nor have they made any conveyance pursuant to or in
connection therewith, with actual intent to hinder, delay or defraud either
present or future creditors of the Borrower or any of its Subsidiaries.
For purposes of this Section, the "fair salable value" of the Borrower's and its
Subsidiaries' assets means the amount which may be realized within a reasonable
time, either through collection or sale of such assets at the regular market
value, based upon the amount which could be obtained for such assets within such
period by a capable and diligent seller from an interested buyer who is willing
(but is under no compulsion) to purchase under ordinary selling conditions.
SECTION 6.18. Senior Note Instruments. All of the representations and
-----------------------
warranties contained in the Senior Note Instruments are true and correct as of
the Closing Date in all material respects.
SECTION 6.19. No Contractual or Other Restrictions. None of AmeriTel,
------------------------------------
Talton, Talton STC or any other Subsidiary is a party to any agreement or
arrangement or subject to any law, rule, regulation or decision that limits its
ability to pay dividends to, or otherwise make Investments in or other payments
to, the Borrower or that limits its ability to grant Liens solely in favor of
the Administrative Agent.
SECTION 6.20. True Copies of Documents. The Borrower has provided to the
------------------------
Administrative Agent true and complete copies of the Offering Memorandum, the
Senior Note Instruments and all documents related to any of the foregoing, in
each case as in effect on the Closing Date.
SECTION 6.21. Absence of any Undisclosed Liabilities. There are no
--------------------------------------
material liabilities of the Borrower or any of its Subsidiaries of any kind
whatsoever, whether accrued, contingent, absolute, determined, determinable or
otherwise, and there is no existing condition, situation or set of
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<PAGE>
circumstances which could reasonably be expected to result in such a liability,
other than those liabilities provided for or disclosed in the most recently
delivered financial statements.
ARTICLE VII
COVENANTS
SECTION 7.1. Affirmative Covenants. The Borrower agrees with the
---------------------
Administrative Agent and each Lender that, until all Commitments have terminated
and all Obligations have been paid and performed in full, the Borrower will
perform the obligations set forth in this Section 7.1.
-----------
SECTION 7.1.1. Financial Information, Reports, Notices, etc. The
--------------------------------------------
Borrower will furnish, or will cause to be furnished, to the Administrative
Agent (for distribution to each Lender) copies of the following financial
statements, reports, notices and information:
(a) as soon as available and in any event within 45 days after the
end of each Fiscal Quarter of each Fiscal Year of the Borrower,
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the end of such Fiscal Quarter (including comparisons to
the then current budget and to the comparable period for the prior year)
and consolidated and consolidating statements of earnings and a
consolidated statement of cash flow of the Borrower and its Subsidiaries
for such Fiscal Quarter and for the period commencing at the end of the
previous Fiscal Year and ending with the end of such Fiscal Quarter
(including comparisons to the then current budget and to the comparable
period for the prior year), certified by the chief financial Authorized
Officer of the Borrower;
(b) as soon as available and in any event within 90 days after the
end of each Fiscal Year of the Borrower, a copy of the annual audit report
for such Fiscal Year for the Borrower and its Subsidiaries, including
therein consolidated and consolidating balance sheets of the Borrower and
its Subsidiaries as of the end of such Fiscal Year and consolidated and
consolidating statements of earnings and a consolidated statement of cash
flow of the Borrower and its Subsidiaries for such Fiscal Year, in each
case certified (without any Impermissible Qualification) in a manner
acceptable to the Administrative Agent and the Required Lenders by Deloitte
& Touche, L.L.P. or other independent certified public accountants
reasonably acceptable to the Administrative Agent and the Required Lenders,
together with a certificate from such accountants containing a computation
of, and showing compliance with, each of the financial ratios and
restrictions contained in Section 7.2.4 and to the effect that, in making
-------------
the examination necessary for the signing of such annual report by such
accountants, they have not become aware of any Default or Event of Default
that has occurred and is continuing, or, if they have become aware of such
Default or Event of Default, the steps, if any, being taken to cure it;
(c) as soon as available and in any event within 45 days after the
end of each calendar month of each Fiscal Year of the Borrower,
consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the end of such calendar month (including comparisons to
the then current budget and to the comparable period for the prior year)
and consolidated and consolidating statements of earnings and a
consolidated statement of cash flow of the Borrower and its Subsidiaries
for such calendar month and for the period commencing at the end of the
previous Fiscal Year and ending with the end of such calendar month
(including comparisons to the then current budget and to the comparable
period for the prior year), certified by the chief financial Authorized
Officer of the Borrower;
-39-
<PAGE>
(d) as soon as available and in any event within 45 days after the
end of each Fiscal Quarter, (i) a Compliance Certificate, executed by the
chief financial Authorized Officer of the Borrower, showing (in reasonable
detail and with appropriate calculations and computations in all respects
satisfactory to the Administrative Agent) compliance with the financial
covenants set forth in Sections 7.2.4 and (ii) a written statement setting
--------------
forth management's discussion and analysis of the financial condition and
results of operations of the Borrower and its Subsidiaries for such Fiscal
Quarter, which statement shall also be delivered in connection with the
monthly financial statements required pursuant to clause (c) of this
----------
Section 7.1.1;
-------------
(e) as soon as possible and in any event within three days after the
Borrower has knowledge of any Default, a statement of the chief financial
Authorized Officer of the Borrower setting forth details of such Default
and the action which the Borrower has taken and proposes to take with
respect thereto;
(f) as soon as possible and in any event within three days after the
Borrower has knowledge of (i) the occurrence of any adverse development
with respect to any litigation, action, proceeding, or labor controversy
described in Section 6.7 or (ii) the commencement of any labor controversy,
-----------
litigation, action, proceeding of the type described in Section 6.7, notice
-----------
thereof and copies of all documentation relating thereto;
(g) promptly after the sending or filing thereof, copies of all
reports which the Borrower sends to any of its securityholders, and all
reports and registration statements which the Borrower or any of its
Subsidiaries files with the Securities and Exchange Commission or any
national securities exchange;
(h) immediately upon becoming aware of the institution of any steps
by the Borrower or any other Person to terminate any Pension Plan, or the
failure to make a required contribution to any Pension Plan if such failure
is sufficient to give rise to a Lien under section 302(f) of ERISA, or the
taking of any action with respect to a Pension Plan which could result in
the requirement that the Borrower furnish a bond or other security to the
PBGC or such Pension Plan, or the occurrence of any event with respect to
any Pension Plan which could result in the incurrence by the Borrower or
any of its Subsidiaries of any material liability, fine or penalty, or any
material increase in the contingent liability of the Borrower or any of its
Subsidiaries with respect to any post-retirement Welfare Plan benefit,
notice thereof and copies of all documentation relating thereto;
(i) notice to the Administrative Agent promptly following the
issuance or adoption after the date of this Agreement of any federal, state
or local statute, regulation or ordinance or judicial or administrative
order limiting or controlling the operations of the Borrower or any of its
Subsidiaries which might have a Material Adverse Effect, together with a
copy of such statute, regulation, ordinance or judicial or administrative
order;
(j) promptly, and in any event within 60 days after the end of each
Fiscal Year, quarterly cash flow, income statement and capital expenditure
budgets for the current Fiscal Year (including a description of the
assumptions used in the preparation thereof) and a revised business plan
through the Stated Maturity Date in scope and form consistent with the
business plan furnished to the Administrative Agent prior to the Closing
Date, all in reasonable detail satisfactory to the Administrative Agent and
certified by an Authorized Officer of the Borrower, and, within 30 days
after the end of each Fiscal Quarter, an explanation of any material
deviation from the most recently submitted budgets;
-40-
<PAGE>
(k) promptly upon the occurrence thereof, notice of (i) any lapse or
other termination of any authorization issued to the Borrower or any
Subsidiary by any Official Body, (ii) any refusal by any Official Body to
renew or extend any such authorization (unless the Borrower or its
Subsidiary is still in the process of negotiating the terms of an extension
of such authorization, and has a good faith expectation that such
authorization will be renewed or extended), or (iii) any dispute between
the Borrower or a Subsidiary and any Official Body which may have a
Material Adverse Effect;
(l) promptly after the receipt thereof, copies of all notices and
demands received pursuant to any Senior Note Instruments;
(m) by June 30, 2000, an updated and detailed Business Plan showing
how the Borrower plans to meet all obligations as they are then scheduled
to become due, all with reasonable assumptions and all satisfactory to the
Required Lenders; and
(n) such other information respecting the condition or operations,
financial or otherwise, of the Borrower or any of its Subsidiaries as any
Lender through the Administrative Agent may from time to time reasonably
request.
SECTION 7.1.2. Compliance with Laws, etc. The Borrower will, and will
-------------------------
cause each of its Subsidiaries to, comply in all material respects with all
applicable laws, rules, regulations and orders, such compliance to include
(without limitation):
(a) the maintenance and preservation of its corporate existence and
qualification as a foreign corporation; and
(b) the payment, before the same become delinquent, of all taxes,
assessments and governmental charges imposed upon it or upon its property
except to the extent being diligently contested in good faith by
appropriate proceedings and for which adequate reserves in accordance with
GAAP shall have been set aside on its books.
SECTION 7.1.3. Maintenance of Operating Contracts. The Borrower will,
----------------------------------
and will cause each of its Subsidiaries to, use its reasonable best efforts to
maintain, preserve, protect, keep, renew or extend each Operating Contract. The
Borrower will not, and will not permit any of its Subsidiaries to, without the
prior written consent of the Required Lenders, directly or indirectly, make or
cause to be made any material changes, modifications or alterations in the terms
or conditions of any of its Operating Contracts, or any other material contracts
or leases, if the result of such changes, modifications or alterations would
have a material adverse effect on the ability of the Borrower or any of its
Subsidiaries to perform its obligations under the Loan Documents.
SECTION 7.1.4. Conduct of Business; Separate Existence; Maintenance of
-------------------------------------------------------
Authorizations. The Borrower will, and will cause each of its Subsidiaries to
- --------------
(a) carry on and conduct its business in the same manner and in substantially
the same fields of enterprise as it is presently conducted; (b) do all things
necessary to remain duly organized, validly existing and in good standing in its
jurisdiction of organization and maintain all requisite authority to conduct its
business in each jurisdiction in which its business is conducted; and (c) do all
things reasonably necessary to renew, extend and continue in effect all
authorizations which may at any time and from time to time be necessary to
operate and own the business and assets of the Borrower and its Subsidiaries in
compliance with all applicable laws and regulations, except where the failure to
so comply would not have a Material Adverse Effect.
SECTION 7.1.5. Maintenance of Properties. The Borrower will, and will
-------------------------
cause each of its Subsidiaries to, maintain, preserve, protect and keep its
properties in good repair, working order and
-41-
<PAGE>
condition, and make necessary and proper repairs, renewals and replacements so
that its business carried on in connection therewith may be properly conducted
at all times unless the Borrower reasonably determines in good faith that the
continued maintenance of any of its properties is no longer economical.
SECTION 7.1.6. Insurance. The Borrower will, and will cause each of its
---------
Subsidiaries to, maintain or cause to be maintained with responsible insurance
companies insurance with respect to its properties and business against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses and will, upon request of the
Administrative Agent, furnish to each Lender at reasonable intervals a
certificate of an Authorized Officer of the Borrower setting forth the nature
and extent of all insurance maintained by the Borrower and its Subsidiaries in
accordance with this Section.
SECTION 7.1.7. Books and Records. The Borrower will, and will cause each
-----------------
of its Subsidiaries to, keep books and records which accurately reflect all of
its business affairs and transactions and permit the Administrative Agent and
each Lender or any of their respective representatives, at reasonable times and
intervals, to visit all of its offices, to discuss its financial matters with
its officers and independent public accountant (and the Borrower hereby
authorizes such independent public accountant to discuss the Borrower's
financial matters with each Lender or its representatives whether or not any
representative of the Borrower is present) and to examine (and, at the expense
of the Borrower, photocopy extracts from) any of its books or other corporate
records. The Borrower shall pay any fees of such independent public accountant
incurred in connection with the Administrative Agent's or any Lender's exercise
of its rights pursuant to this Section.
SECTION 7.1.8. Environmental Covenant. The Borrower will, and will cause
----------------------
each of its Subsidiaries to,
(a) use and operate all of its facilities and properties in material
compliance with all Environmental Laws, keep all necessary permits,
approvals, certificates, licenses and other authorizations relating to
environmental matters in effect and remain in material compliance
therewith, and handle all Hazardous Materials in material compliance with
all applicable Environmental Laws;
(b) immediately notify the Administrative Agent and provide copies
upon receipt of all written claims, complaints, notices or inquiries
relating to the condition of its facilities and properties or compliance
with Environmental Laws; and
(c) provide such information and certifications which the
Administrative Agent may reasonably request from time to time to evidence
compliance with this Section 7.1.8.
-------------
SECTION 7.1.9. Additional Collateral. The Borrower shall, and shall
---------------------
cause each of its Subsidiaries to, cause the Administrative Agent and the
Lenders to have at all times a first priority perfected security interest
(unless otherwise agreed to by the Required Lenders) in all of the assets of the
Borrower and its Subsidiaries, all of the issued and outstanding shares of
capital stock of the Borrower's Subsidiaries and any personal or material real
property acquired by the Borrower or any of its Subsidiaries (including all
assets acquired in a Permitted Acquisition) after the Effective Date. Without
limiting the generality of the foregoing, the Borrower shall, and shall cause
each of its Subsidiaries to, deliver to the Administrative Agent all assets or
deliver or cause to be delivered to the Administrative Agent all shares of
capital stock of the Borrower's Subsidiaries, for which possession by the
Administrative Agent is required for perfection of such security interest, and
shall, and shall cause each of its Subsidiaries to, execute, deliver and/or file
(as applicable), or cause to be executed, delivered and/or filed (as
applicable), each Pledge Agreement, Security Agreement, Uniform Commercial Code
(Form UCC-1) financing statements, Uniform Commercial Code (Form UCC-3)
termination statements,
-42-
<PAGE>
and other documentation necessary to grant and perfect such security interest,
in each case in form and substance satisfactory to the Administrative Agent. In
furtherance of the foregoing, the Borrower shall (a) promptly cause all
Preferred Stock that is converted into common capital stock of the Borrower to
be pledged to the Administrative Agent pursuant to an Investor Pledge Agreement,
(b) within 30 days after the Closing Date, cause all of the issued and
outstanding capital stock of the Borrower not pledged on the Closing Date to be
pledged pursuant to an Investor Pledge Agreement and (c) within 60 days after
the Closing Date, cause to be delivered to the Administrative Agent satisfactory
duly executed consents to the Liens created by the Security Agreements on
Operating Agreements from the other parties thereto (and/or confirmations that
no such consents are required) in respect of Operating Contracts with gross
revenues constituting not less than 50% of the gross revenues of all Operating
Contracts (and, in any event, satisfactory duly executed consents with respect
to the Operating Contract between Talton and the State of Alabama.
SECTION 7.1.10. Future Subsidiaries. Promptly after creation or
-------------------
acquisition (directly or indirectly) by the Borrower of any Subsidiary (to the
extent permitted by the Required Lenders),
(a) the Borrower shall cause such Subsidiary to execute and deliver
to the Administrative Agent, with counterparts for each Lender, the
Subsidiary Guaranty and a security agreement, satisfactory in form and
substance to the Administrative Agent, providing a security interest in all
of its assets to the fullest extent permitted by applicable law (it being
understood and agreed that no such Subsidiary, if incorporated under the
laws of any jurisdiction outside of the United States, shall be required to
execute the Subsidiary Guaranty if doing so would, in the opinion of the
Administrative Agent, involve material legal impediments, material foreign
exchange control ramifications or material tax costs); and
(b) the Borrower shall deliver, or cause to be delivered, to the
Administrative Agent under a pledge agreement satisfactory in form and
substance to the Administrative Agent certificates (if any) representing
all of the outstanding shares of capital stock of such Subsidiary, along
with undated stock powers for such certificates, executed in blank, or, if
any securities subject thereto are uncertificated securities, confirmation
and evidence satisfactory to the Administrative Agent that appropriate book
entries have been made in the relevant books or records of a financial
intermediary or the issuer of such securities, as the case may be, under
applicable law resulting in the perfection of the security interest granted
in favor of the Administrative Agent pursuant to the terms of a pledge
agreement satisfactory in form and substance satisfactory to the
Administrative Agent,
together, in each case, with such opinions, in form and substance and from
counsel satisfactory to the Administrative Agent, as the Administrative Agent
may require. In addition, any Subsidiary that meets the above criteria but
cannot execute a guaranty or security agreement, because of applicable law, or
whose guaranty or security agreement is limited by applicable law, shall
promptly, upon any change of such law which results in such execution being no
longer prohibited or such guaranty or security agreement being no longer so
limited, enter into a guaranty or security agreement or shall promptly amend its
previously executed guaranty and security agreement in a manner satisfactory to
the Administrative Agent.
SECTION 7.1.11. Use of Proceeds. The Borrower shall apply the proceeds
---------------
of Revolving Loans made from and after the Closing Date for working capital
purposes (including to pay the fees and expenses associated with the
transactions contemplated by this Agreement), capital expenditure purposes and
the funding of Permitted Acquisitions, but not, in any event, for making
payments of principal of the Senior Notes. Without limiting the foregoing, no
proceeds of any Loan will be used to acquire any equity security of a class
which is registered pursuant to Section 12 of the Securities Exchange Act of
1934 or any "margin stock", as defined in F.R.S. Board Regulation U.
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<PAGE>
SECTION 7.2. Negative Covenants. The Borrower agrees with the
------------------
Administrative Agent and each Lender that, until all Commitments have terminated
and all Obligations have been paid and performed in full, the Borrower will
perform the obligations set forth in this Section 7.2.
-----------
SECTION 7.2.1. Business Activities. The Borrower will not, and will not
-------------------
permit any of its Subsidiaries to, engage in any business activity, except those
described in the first recital and such activities as may be incidental or
-------------
related thereto.
SECTION 7.2.2. Indebtedness. The Borrower will not, and will not permit
------------
any of its Subsidiaries to, create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any Indebtedness, other than,
without duplication, the following:
(a) Indebtedness in respect of the Loans and other Obligations;
(b) until the date of the initial Borrowing, Indebtedness identified
in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure Schedule;
-------------
(c) Indebtedness existing as of the Effective Date which is
identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure
-------------
Schedule;
(d) unsecured Indebtedness in an aggregate principal amount not to
exceed $115,000,000 (minus any and all payments made thereon) pursuant to
the Senior Notes;
(e) Indebtedness in an aggregate principal amount not to exceed
$2,500,000 at any time outstanding which is incurred by the Borrower or any
of its Subsidiaries to a vendor of any assets to finance its acquisition of
such assets and/or for Capitalized Lease Liabilities;
(f) unsecured Indebtedness incurred in the ordinary course of
business (including open accounts extended by suppliers on normal trade
terms in connection with purchases of goods and services, but excluding any
Indebtedness of the type described in clauses (a), (b), (c) and (f) of the
----------- --- --- ---
definition of Indebtedness); and
(g) other Indebtedness of the Borrower and its Subsidiaries in an
aggregate amount not to exceed $5,000,000 at any one time outstanding, so
long as the covenants contained therein are no more restrictive than the
covenants contained in this Agreement;
provided, however, that no Indebtedness otherwise permitted by clause (f), (g)
- -------- ------- ---------- ---
or (h) shall be permitted if, after giving effect to the incurrence thereof, any
---
Default shall have occurred and be continuing.
SECTION 7.2.3. Liens. The Borrower will not, and will not permit any of
-----
its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any
of its properties, revenues or assets, whether now owned or hereafter acquired,
except:
(a) Liens securing payment of the Obligations, granted pursuant to
any Loan Document;
(b) until the date of the initial Borrowing, Liens securing payment
of the Indebtedness of the type permitted and described in clause (b) of
----------
Section 7.2.2;
-------------
(c) Liens granted prior to the Effective Date to secure payment of
the Indebtedness of the type permitted and described in clause (c) of
----------
Section 7.2.2, which Liens are described in Item 7.2.2(c) of the Disclosure
------------- -------------
Schedule;
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<PAGE>
(d) Liens granted to secure payment of the Indebtedness of the type
permitted and described in clause (e) of Section 7.2.2 and covering only
---------- -------------
those assets acquired with the proceeds of such Indebtedness;
(e) Liens for taxes, assessments or other governmental charges or
levies not at the time delinquent or thereafter payable without penalty or
being diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have been set aside
on its books;
(f) Liens of carriers, warehousemen, mechanics, materialmen and
landlords incurred in the ordinary course of business for sums not overdue
or being diligently contested in good faith by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have been set
aside on its books;
(g) Liens incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of tenders,
statutory obligations, leases and contracts (other than for borrowed money)
entered into in the ordinary course of business or to secure obligations on
surety or appeal bonds;
(h) judgment Liens in existence less than 15 days after the entry
thereof or with respect to which execution has been stayed or the payment
of which is covered in full (subject to a customary deductible) by
insurance maintained with responsible insurance companies; and
(i) other Liens, securing Indebtedness (but not any Subordinated
Debt) in an aggregate amount not exceeding $5,000,000.
SECTION 7.2.4. Financial Condition. The Borrower will not permit:
-------------------
(a) the Total Debt to EBITDA Ratio at any time during any period set
forth below to be greater than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
Total Debt
Period to EBITDA Ratio
------ ---------------
<S> <C>
Closing Date to (and 6.0:1
including) 06/29/98
06/30/98 to (and 5.5:1
including) 12/30/98
12/31/98 to (and 5.0:1
including) 12 /30/99
12/31/99 and thereafter 4.5:1;
</TABLE>
(b) the Senior Debt to EBITDA Ratio at any time during any period set
forth below to be greater than the ratio set forth opposite such period:
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<PAGE>
<TABLE>
<CAPTION>
Senior Debt
Period to EBITDA Ratio
------ ---------------
<S> <C>
Closing Date to (and 3.5:1
including) 12/30/98
12/31/98 and thereafter 3.0:1;
</TABLE>
(c) the EBITDA to Cash Interest Expense Ratio as at the last day of
any Fiscal Quarter ending on a date set forth below to be less than the
ratio set forth opposite such date:
<TABLE>
<CAPTION>
EBTIDA to Cash
Period Interest Expense Ratio
------ ----------------------
<S> <C>
Closing Date to (and 1.5:1
including) 12/31/97
01/01/98 and thereafter 1.75:1;
</TABLE>
(d) the EBITDA to Fixed Charges Ratio as at the last day of any
Fiscal Quarter for the Rolling Period ending on such date to be less than
1.25:1.
SECTION 7.2.5. Investments. The Borrower will not, and will not permit
-----------
any of its Subsidiaries to, make, incur, assume or suffer to exist any
Investment in any other Person, except:
(a) Investments existing on the Effective Date identified in Item
----
7.2.5(a) ("Ongoing Investments") of the Disclosure Schedule;
--------
(b) Cash Equivalent Investments;
(c) without duplication, Investments permitted as Indebtedness
pursuant to Section 7.2.2;
-------------
(d) without duplication, Investments permitted as Capital
Expenditures;
(e) without duplication, Investments made to consummate Permitted
Acquisitions; and
(f) other Investments in an aggregate amount at any one time not to
exceed $500,000; provided, however, that
-------- -------
(g) any Investment which when made complies with the requirements of
the definition of the term "Cash Equivalent Investment" may continue to be
--------------------------
held notwithstanding that such Investment if made thereafter would not
comply with such requirements; and
(h) no Investment otherwise permitted by clause (e) or (f) shall be
---------- ---
permitted to be made if, immediately before or after giving effect thereto,
any Default shall have occurred and be continuing.
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<PAGE>
SECTION 7.2.6. Restricted Payments, etc. On and at all times after the
------------------------
Effective Date:
(a) the Borrower will not declare, pay or make any dividends or other
distributions (in cash, property or obligations) on its capital stock or
other equity interests (now or hereafter outstanding) of the Borrower
(other than dividends payable in its own capital stock) or apply, or permit
any of its Subsidiaries to apply, any of its funds, property or assets to
the payment, purchase, redemption, sinking fund or other retirement or
acquisition of, or agree or permit any of its Subsidiaries to pay for,
purchase, redeem, retire or acquire, any capital stock or other equity
interests (including warrants and options) of the Borrower or any of its
Subsidiaries or any Subordinated Debt, any Senior Notes or tax sharing
payments, except that, so long as no Default has occurred and is
------
continuing, (i) the Borrower may pay the Preferred Dividends on the
Preferred Stock commencing in the 1997 Fiscal Year in a maximum aggregate
amount not to exceed $480,000 in any Fiscal Year and (ii) the Borrower may
pay interest on the Senior Notes in accordance with the terms thereof as in
effect on the Closing Date;
(b) the Borrower will not permit any Subsidiary to declare or pay any
dividends or make any other distributions on its capital stock or other
equity interests (other than, in the case of a corporation, dividends
payable in its own capital stock) or redeem, repurchase or otherwise
acquire or retire any of its capital stock or other equity interests at any
time outstanding, or pay any Indebtedness, except any Subsidiary may
declare and pay distributions or dividends to the Borrower or to a Wholly-
Owned Subsidiary of the Borrower; and
(c) the Borrower will not, and will not permit any Subsidiary to,
make any deposit for any of the foregoing purposes.
SECTION 7.2.7. Limitation on Management and Advisory Fees. The Borrower
------------------------------------------
will not, and will not permit any of its Subsidiaries to, enter into any
arrangement for the payment of, or pay, management, advisory or similar fees
(whether with EUFCC, Onyx or otherwise) in excess of $500,000 in any Fiscal Year
other than, in connection with a Permitted Acquisition, a fee to EUFCC equal to
2.0% of that portion of the acquisition price of any Permitted Acquisition that
does not exceed $15,000,000 and 1.5% of that portion of the acquisition price of
any Permitted Acquisition that does exceed $15,000,000 ("Acquisition Fees"), so
----------------
long as the aggregate of all such Acquisition Fees in any event does not exceed
$40,000 in the aggregate in any Fiscal Year; provided, however, that the fees
-------- -------
permitted pursuant to this Section may only be paid so long as no Default has
occurred and is continuing.
SECTION 7.2.8. Take or Pay Contracts. The Borrower will not, and will
---------------------
not permit any of its Subsidiaries to, enter into or be a party to any
arrangement for the purchase of materials, supplies, other property or services
if such arrangement by its express terms requires that payment be made by the
Borrower or such Subsidiary regardless of whether such materials, supplies,
other property or services are delivered or furnished to it.
SECTION 7.2.9. Consolidation, Merger, etc. The Borrower will not, and
--------------------------
will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate
with, or merge into or with, any other Person, or purchase or otherwise acquire
all or any part of the assets of any Person (or of any division thereof) except
(a) any such Subsidiary may liquidate or dissolve voluntarily into,
and may merge with and into, the Borrower or any Wholly-Owned Subsidiary,
and the assets or stock of any theretofore existing Subsidiary may be
purchased or otherwise acquired by the Borrower or any other Wholly-Owned
Subsidiary (with the Borrower or such Wholly-Owned Subsidiary to be the
surviving corporation in any such transaction); and
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<PAGE>
(b) Permitted Acquisitions; so long as (i) no Default has occurred
and is continuing or would result therefrom, (ii) such other Person is
organized or incorporated under the laws of a state of the United States
and (iii) the Borrower or the survivor of the merger or consolidation has
executed such agreements and instruments as requested by the Administrative
Agent to evidence the continued compliance with the obligations of the
Borrower and its Subsidiaries under this Agreement and the Loan Documents
to which it is a party.
SECTION 7.2.10. Asset Dispositions, etc. The Borrower will not, and will
-----------------------
not permit any of its Subsidiaries to, sell, transfer, lease, contribute or
otherwise convey all or any part of its assets (including accounts receivable
and capital stock of Subsidiaries), or issue stock of or grant options, warrants
or other equity rights in the Borrower or its Subsidiaries to any Person, unless
(a) such sale, transfer, lease, contribution or conveyance (i) is in
the ordinary course of its business and is, in the reasonable and good
faith opinion of the Borrower, of obsolete or worn out property or property
no longer used in its business, (ii) is to the Borrower or (iii) is
permitted by Section 7.2.9; or
-------------
(b) such sale, transfer, lease, contribution or conveyance is for
fair market value to any Person other than an Affiliate, and the following
conditions are met:
(i) the aggregate fair market value, as well as the
aggregate book value, of all such asset sales do not exceed $100,000
in any Fiscal Year or $250,000 from and after the Closing Date;
(ii) immediately prior to and immediately after giving
effect to such disposition, no Default or Event of Default shall have
occurred or would result therefrom;
(iii) the Borrower has applied any Net Disposition Proceeds
pursuant to Section 3.1.1(d); and
----------------
(iv) all the consideration for such sale, transfer, lease,
contribution or conveyance is cash.
SECTION 7.2.11. Modification of Certain Agreements. The Borrower will
----------------------------------
not, without the prior written consent of the Required Lenders and the
Administrative Agent, consent to or enter into any amendment, supplement or
other modification of any of the terms or provisions contained in, or applicable
to, (a) any Operating Contract, if the effect of such amendment, supplement or
modification might individually or in the aggregate have a material adverse
effect on the ability of the Borrower or any of its Subsidiaries to perform its
obligations under the Loan Documents, (b) the Senior Note Instruments, (c) the
documents relating to the Preferred Stock, or (d) documents relating to any
warrant or option granted by the Borrower if the effect of such amendment,
supplement or other modification is to impose or increase any monetary
obligation on the Borrower.
SECTION 7.2.12. Transactions with Affiliates. The Borrower will not, and
----------------------------
will not permit any of its Subsidiaries to, enter into, or cause, suffer or
permit to exist, any arrangement or contract with any of its other Affiliates
unless such arrangement or contract is fair and equitable to the Borrower or
such Subsidiary comparable to the terms that would be achieved in an arm's
length transaction with a Person that is not an Affiliate and is an arrangement
or contract of the kind which would be entered into by a prudent Person in the
position of the Borrower or such Subsidiary with a Person which is not one of
its Affiliates.
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SECTION 7.2.13. Negative Pledges, Restrictive Agreements, etc. The
---------------------------------------------
Borrower will not, and will not permit any of its Subsidiaries to, enter into
any agreement (excluding this Agreement, any other Loan Document and the Senior
Note Instruments, as in effect on the date hereof) prohibiting
(a) the creation or assumption of any Lien upon its properties,
revenues or assets, whether now owned or hereafter acquired, or the ability
of the Borrower or any other Obligor to amend or otherwise modify this
Agreement or any other Loan Document; or
(b) the ability of any Subsidiary to make any payments, directly or
indirectly, to the Borrower by way of dividends, advances, repayments of
loans or advances, reimbursements of management and other intercompany
charges, expenses and accruals or other returns on investments, or any
other agreement or arrangement which restricts the ability of any such
Subsidiary to make any payment, directly or indirectly, to the Borrower.
SECTION 7.2.14. Changes to Fiscal Year. The Borrower will not, and will
----------------------
not permit any of its Subsidiaries to, change its Fiscal Year.
ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. Listing of Events of Default. Each of the following events
----------------------------
or occurrences described in this Section 8.1 shall constitute an "Event of
----------- --------
Default".
- -------
SECTION 8.1.1. Non-Payment of Obligations. The Borrower shall default in
--------------------------
the payment or prepayment when due of any principal of any Loan, or the Borrower
shall default (and such default shall continue for a period of three days) in
the payment when due of any interest on any Loan, or the Borrower shall default
(and such default shall continue unremedied for a period of five days) in the
payment when due of any commitment fee or of any other Obligation.
SECTION 8.1.2. Breach of Warranty. Any representation or warranty of the
------------------
Borrower or any other Obligor made or deemed to be made hereunder or in any
other Loan Document executed by it or any other writing or certificate furnished
by or on behalf of the Borrower or any other Obligor to the Administrative Agent
or any Lender for the purposes of or in connection with this Agreement or any
such other Loan Document (including any certificates delivered pursuant to
Article V) is or shall be incorrect when made in any material and adverse
- ---------
respect.
SECTION 8.1.3. Non-Performance of Certain Covenants and Obligations. The
----------------------------------------------------
Borrower shall default in the due performance and observance of any of its
obligations under Section 7.1.1(e), Section 7.1.9, Section 7.1.10, Section
---------------- ------------- -------------- -------
7.1.11 or Section 7.2.
- ------ -----------
SECTION 8.1.4. Non-Performance of Other Covenants and Obligations. Any
--------------------------------------------------
Obligor shall default in the due performance and observance of any other
agreement contained herein or in any other Loan Document executed by it, and
such default shall continue unremedied for a period of 30 days after such
Obligor has knowledge thereof or notice thereof shall have been given to the
Borrower by the Administrative Agent or any Lender.
SECTION 8.1.5. Default on Other Indebtedness. A default shall occur in
-----------------------------
the payment when due, whether by acceleration or otherwise, of any other
Indebtedness (including any Subordinated Debt but other than Indebtedness
described in Section 8.1.1) of the Borrower or any of its Subsidiaries or any
-------------
other Obligor having a principal amount, individually or in the aggregate, in
excess of $2,500,000, or a
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default shall occur in the performance or observance of any obligation or
condition with respect to such other Indebtedness if the effect of such default
is to accelerate the maturity of any such Indebtedness or such default shall
continue unremedied for any applicable period of time sufficient to permit the
holder or holders of such Indebtedness, or any trustee or agent for such
holders, to cause such Indebtedness to become due and payable prior to its
expressed maturity.
SECTION 8.1.6. Judgments. Any judgment or order for the payment of money
---------
in excess of $2,500,000 shall be rendered against the Borrower or any of its
Subsidiaries or any other Obligor and either
(a) enforcement proceedings shall have been commenced by any creditor
upon such judgment or order; or
(b) there shall be any period of ten consecutive days during which a
stay of enforcement of such judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect.
SECTION 8.1.7. Pension Plans. Any of the following events shall occur
-------------
with respect to any Pension Plan
(a) the institution of any steps by the Borrower, any member of its
Controlled Group or any other Person to terminate a Pension Plan if, as a
result of such termination, the Borrower or any such member could be
required to make a contribution to such Pension Plan, or could reasonably
expect to incur a liability or obligation to such Pension Plan, in excess
of $500,000; or
(b) a contribution failure occurs with respect to any Pension Plan
sufficient to give rise to a Lien under section 302(f) of ERISA.
SECTION 8.1.8. Control of the Borrower. Any Change in Control shall
-----------------------
occur.
SECTION 8.1.9. Bankruptcy, Insolvency, etc. The Borrower or any of its
---------------------------
Subsidiaries or any other Obligor shall
(a) become insolvent or generally fail to pay, or admit in writing
its inability or unwillingness to pay, debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of a
trustee, receiver, sequestrator or other custodian for the Borrower or any
of its Subsidiaries or any other Obligor or any property of any thereof, or
make a general assignment for the benefit of creditors;
(c) in the absence of such application, consent or acquiescence,
permit or suffer to exist the appointment of a trustee, receiver,
sequestrator or other custodian for the Borrower or any of its Subsidiaries
or any other Obligor or for a substantial part of the property of any
thereof, and such trustee, receiver, sequestrator or other custodian shall
not be discharged within 60 days, provided that the Borrower, each
Subsidiary and each other Obligor hereby expressly authorizes the
Administrative Agent and each Lender to appear in any court conducting any
relevant proceeding during such 60-day period to preserve, protect and
defend their rights under the Loan Documents;
(d) permit or suffer to exist the commencement of or commence any
bankruptcy, reorganization, debt arrangement or other case or proceeding
under any bankruptcy or insolvency law, or any dissolution, winding up or
liquidation proceeding, in respect of the Borrower or any
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of its Subsidiaries or any other Obligor, and, if any such case or
proceeding is not commenced by the Borrower or such Subsidiary or such
other Obligor, such case or proceeding shall be consented to or acquiesced
in by the Borrower or such Subsidiary or such other Obligor or shall result
in the entry of an order for relief or shall remain for 60 days
undismissed, provided that the Borrower, each Subsidiary and each other
Obligor hereby expressly authorizes the Administrative Agent and each
Lender to appear in any court conducting any such case or proceeding during
such 60-day period to preserve, protect and defend their rights under the
Loan Documents; or
(e) take any corporate action authorizing, or in furtherance of, any
of the foregoing.
SECTION 8.1.10. Impairment of Security, etc. Any Loan Document, or any
---------------------------
Lien granted thereunder, shall (except in accordance with its terms), in whole
or in part, terminate, cease to be effective or cease to be the legally valid,
binding and enforceable obligation of any Obligor party thereto; the Borrower,
any other Obligor or any other party shall, directly or indirectly, contest in
any manner such effectiveness, validity, binding nature or enforceability; or
any Lien securing any Obligation shall, in whole or in part, cease to be a
perfected first priority Lien, subject only to those exceptions expressly
permitted by such Loan Document.
SECTION 8.1.11. Impairment of Operating Contracts, etc. Any Operating
--------------------------------------
Contract or Operating Contracts, in the aggregate, the cancellation or
termination of which might have a material adverse effect on the ability of the
Borrower or any of its Subsidiaries to perform its obligations under any of the
Loan Documents, expires without renewal (unless the Borrower or such Subsidiary
is, following such expiration date, still in the process of negotiating the
terms of an extension of such Operating Contract, and has a good faith
expectation that such Operating Contract will be extended or renewed) or is
suspended (and as a result of such expiration or suspension, the operation of
the applicable equipment is terminated or otherwise disrupted) or revoked, and
is not replaced, or the Borrower or a Subsidiary shall become subject to any
injunction or other order with respect to such Operating Contract which might
have a material adverse effect on the ability of the Borrower or any of its
Subsidiaries to perform its obligations under any of the Loan Documents.
SECTION 8.2. Action if Bankruptcy. If any Event of Default described in
--------------------
clauses (a) through (d) of Section 8.1.9 shall occur, the Commitments (if not
- ----------- --- -------------
theretofore terminated) shall automatically terminate immediately and the
outstanding principal amount of all outstanding Loans and all other Obligations
shall automatically be and become immediately due and payable, without notice or
demand.
SECTION 8.3. Action if Other Event of Default. If any Event of Default
--------------------------------
(other than any Event of Default described in clauses (a) through (d) of Section
----------- --- -------
8.1.9) shall occur for any reason, whether voluntary or involuntary, and be
- -----
continuing, the Administrative Agent, upon the direction of the Required
Lenders, shall by notice to the Borrower declare all or any portion of the
outstanding principal amount of the Loans and other Obligations to be due and
payable and/or the Commitments (if not theretofore terminated) to be terminated,
whereupon the full unpaid amount of such Loans and other Obligations which shall
be so declared due and payable shall be and become immediately due and payable,
without further notice, demand or presentment, and/or, as the case may be, the
Commitments shall terminate.
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ARTICLE IX
THE AGENTS AND AGENT-RELATED PERSONS
SECTION 9.1. Actions and Indemnity. Each Lender hereby appoints CIBC as
---------------------
its Administrative Agent and Documentation Agent under and for purposes of this
Agreement, the Notes and each other Loan Document. Each Lender authorizes the
Administrative Agent and the Documentation Agent to act on behalf of such Lender
under this Agreement, the Notes, each other Loan Document and, in the absence of
other written instructions from the Required Lenders received from time to time
by the Administrative Agent or the Documentation Agent, to exercise such powers
hereunder and thereunder as are specifically delegated to or required of the
Administrative Agent or the Documentation Agent by the terms hereof and thereof,
together with such powers as may be reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or any other Loan Document, no Agent or Agent-Related Person shall
have any duties or responsibilities except those expressly set forth herein, nor
shall any Agent or Agent-Related Person have or be deemed to have any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or shall otherwise exist against any Agent
or Agent-Related Person. Each Lender hereby indemnifies (which indemnity shall
survive any termination of this Agreement) the Agents and the Agent-Related
Persons, pro rata according to such Lender's Percentage (or, after termination
--- ----
of this Agreement, according to the Percentages in effect immediately prior
thereto), from and against any and all liabilities, obligations, losses,
damages, claims, costs or expenses of any kind or nature whatsoever which may at
any time be imposed on, incurred by, or asserted against, any Agent or Agent-
Related Persons, in any way relating to or arising out of this Agreement, the
Notes and any other Loan Document, including reasonable attorneys' fees and
expenses, and as to which such Agent or Agent-Related Person is not reimbursed
by the Borrower; provided, however, that no Lender shall be liable for the
-------- -------
payment of any portion of such liabilities, obligations, losses, damages,
claims, costs or expenses which are determined by a court of competent
jurisdiction in a final proceeding to have resulted solely from such Agent's or
Agent-Related Person's gross negligence or wilful misconduct. No Agent or
Agent-Related Person shall be required to take any action hereunder, under the
Notes or under any other Loan Document, or to prosecute or defend any suit in
respect of this Agreement, the Notes or any other Loan Document, unless it is
indemnified hereunder to its satisfaction. If any indemnity in favor of an
Agent or Agent-Related Person shall be or become, in such Person's
determination, inadequate, such Person may call for additional indemnification
from the Lenders and cease to do the acts indemnified against hereunder until
such additional indemnity is given.
SECTION 9.2. Funding Reliance, etc. Unless the Administrative Agent
---------------------
shall have been notified by telephone, confirmed in writing, by any Lender by
5:00 p.m., New York time, on the day prior to a Borrowing that such Lender will
not make available the amount which would constitute its Percentage of such
Borrowing on the date specified therefor, the Administrative Agent may assume
that such Lender has made such amount available to the Administrative Agent and,
in reliance upon such assumption, make available to the Borrower a corresponding
amount. If and to the extent that such Lender shall not have made such amount
available to the Administrative Agent, such Lender and the Borrower severally
agree to repay the Administrative Agent forthwith on demand such corresponding
amount together with interest thereon, for each day from the date the
Administrative Agent made such amount available to the Borrower to the date such
amount is repaid to the Administrative Agent, at the interest rate applicable at
the time to Loans comprising such Borrowing.
SECTION 9.3. Exculpation. Neither the Administrative Agent, the
-----------
Documentation Agent, nor any Agent-Related Person shall be liable to any Lender
for any action taken or omitted to be taken by it under this Agreement or any
other Loan Document, or in connection herewith or therewith, except for its own
wilful misconduct or gross negligence, nor responsible for any recitals or
warranties herein or
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therein, nor for the effectiveness, enforceability, validity or due execution of
this Agreement or any other Loan Document, nor for the creation, perfection or
priority of any Liens purported to be created by any of the Loan Documents, or
the validity, genuineness, enforceability, existence, value or sufficiency of
any collateral security, nor to make any inquiry respecting the performance by
the Borrower of its obligations hereunder or under any other Loan Document. Any
such inquiry which may be made by any Agent or Agent-Related Person shall not
obligate it to make any further inquiry or to take any action. Each Agent and
Agent-Related Person shall be entitled to rely upon advice of counsel concerning
legal matters and upon any notice, consent, certificate, statement or writing
which such Agent or Agent-Related Person believes to be genuine and to have been
presented by a proper Person.
SECTION 9.4. Successor. The Administrative Agent may resign as such at
---------
any time upon at least 30 days' prior notice to the Borrower and all Lenders.
If the Administrative Agent at any time shall resign, the Required Lenders may
appoint another Lender as a successor Administrative Agent which shall thereupon
become the Administrative Agent hereunder, subject (so long as no Default or
Event of Default shall have occurred and be continuing) to the consent of the
Borrower (not to be unreasonably withheld or delayed). If no successor
Administrative Agent shall have been so appointed by the Required Lenders, and
shall have accepted such appointment, within 30 days after the retiring
Administrative Agent's giving notice of resignation, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent, which shall be one of the Lenders or a commercial banking
institution organized under the laws of the U.S. (or any State thereof) or a
U.S. branch or agency of a commercial banking institution, and having a combined
capital and surplus of at least $500,000,000. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent, such successor Administrative Agent shall be entitled to receive from the
retiring Administrative Agent such documents of transfer and assignment as such
successor Administrative Agent may reasonably request, and shall thereupon
succeed to and become vested with all rights, powers, privileges and duties of
the retiring Administrative Agent, and the retiring Administrative Agent shall
be discharged from its duties and obligations under this Agreement. After any
retiring Administrative Agent's resignation hereunder as the Administrative
Agent, the provisions of:
(a) this Article IX shall inure to its benefit as to any actions
----------
taken or omitted to be taken by it while it was the Administrative Agent
under this Agreement; and
(b) Section 10.3 and Section 10.4 shall continue to inure to its
------------ ------------
benefit.
SECTION 9.5. Loans by CIBC. CIBC shall have the same rights and powers
-------------
with respect to (x) the Loans made by it or any of its Affiliates, and (y) the
Notes held by it or any of its Affiliates, as any other Lender and may exercise
the same as if it and/or any of its Affiliates were not the Administrative
Agent, the Documentation Agent, an Arranger, a subordinated lender or an equity
investor, as the case may be. CIBC and its Affiliates may accept deposits from,
lend money to, and generally engage in any kind of business with the Borrower or
any Subsidiary or Affiliate of the Borrower as if CIBC were not the
Administrative Agent, the Documentation Agent, an Arranger, a subordinated
lender or an equity investor.
SECTION 9.6. Credit Decisions. Each Lender acknowledges that it has,
----------------
independently of the Agents, each Agent-Related Person and each other Lender,
and based on such Lender's review of the financial information of the Borrower,
this Agreement, the other Loan Documents (the terms and provisions of which
being satisfactory to such Lender) and such other documents, information and
investigations as such Lender has deemed appropriate, made its own credit
decision to extend its Commitments. Each Lender also acknowledges that it will,
independently of the Agents, each Agent-Related Person and each other Lender,
and based on such other documents, information and investigations as it shall
deem appropriate at any time, continue to make its own credit decisions as to
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exercising or not exercising from time to time any rights and privileges
available to it under this Agreement or any other Loan Document.
SECTION 9.7. Copies, etc. The Administrative Agent shall give prompt
-----------
notice to each Lender of each notice or request required to be given and
actually given to the Administrative Agent by the Borrower pursuant to the terms
of this Agreement (unless concurrently delivered to the Lenders by the
Borrower). The Administrative Agent will distribute to each Lender each
document or instrument received for its account, and copies of all other
communications received by the Administrative Agent, in each case from the
Borrower for distribution to the Lenders by the Administrative Agent in
accordance with the terms of this Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.1. Waivers, Amendments, etc. The provisions of this Agreement
------------------------
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Required Lenders (or the Administrative Agent on behalf
of the Required Lenders); provided, however, that no such amendment,
-------- -------
modification or waiver which would:
(a) modify any requirement hereunder that any particular action be
taken by all the Lenders or by the Required Lenders shall be effective
unless consented to by each Lender;
(b) modify this Section 10.1, change the definition of "Required
------------
Lenders", increase the Revolving Loan Commitment Amount or the Percentage
of any Lender, reduce any fees described in Article III, release any
-----------
guarantor (if any) party to a Loan Document or all or substantially all
collateral security, except as otherwise specifically provided in any Loan
Document, or extend the Revolving Loan Commitment Termination Date shall be
made without the consent of each Lender directly affected thereby;
(c) extend the due date for, or reduce the amount of, any scheduled
repayment or prepayment of principal of or interest on any Loan (or reduce
the principal amount of or rate of interest on any Loan) shall be made
without the consent of the holder of the Note evidencing such Loan; or
(d) affect adversely the interests, rights or obligations of (i) the
Administrative Agent qua the Administrative Agent, unless consented to by
---
the Administrative Agent or (ii) the Documentation Agent qua the
---
Documentation Agent, unless consented to by the Documentation Agent.
No failure or delay on the part of the Administrative Agent, the Documentation
Agent, any Lender or the holder of any Note in exercising any power or right
under this Agreement or any other Loan Document shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power or right
preclude any other or further exercise thereof or the exercise of any other
power or right. No notice to or demand on the Borrower in any case shall entitle
it to any notice or demand in similar or other circumstances. No waiver or
approval by the Administrative Agent, the Documentation Agent, any Lender or the
holder of any Note under this Agreement or any other Loan Document shall, except
as may be otherwise stated in such waiver or approval, be applicable to
subsequent transactions. No waiver or approval hereunder shall require any
similar or dissimilar waiver or approval thereafter to be granted
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hereunder. All rights and remedies hereunder are cumulative, and not exclusive
of rights and remedies provided under law or otherwise.
SECTION 10.2. Notices. All notices and other communications provided to
-------
any party hereto under this Agreement or any other Loan Document shall be in
writing or by facsimile and addressed, delivered or transmitted to such party at
its address or facsimile number set forth below its signature hereto or set
forth in the Lender Assignment Agreement or at such other address or facsimile
number as may be designated by such party in a notice to the other parties. Any
notice, if mailed and properly addressed with postage prepaid or if properly
addressed and sent by pre-paid courier service, shall be deemed given, in the
case of notices to the Administrative Agent or any Lender, when received and, in
the case of notices to the Borrower or any other Obligor, the earlier of when
received and three days after being sent; any notice, if transmitted by
facsimile, shall be deemed given when transmitted and electronically confirmed.
SECTION 10.3. Payment of Costs and Expenses. The Borrower agrees to pay
-----------------------------
on demand all expenses of the Administrative Agent and the Documentation Agent
(including due diligence expenses, syndication expenses and the fees and other
charges of Mayer, Brown & Platt, counsel to the Administrative Agent and the
Documentation Agent, and of local counsel, if any, who may be retained by
counsel to the Administrative Agent or the Documentation Agent) in connection
with
(a) the negotiation, preparation, execution, delivery and
administration of this Agreement and of each other Loan Document, including
schedules and exhibits, and any amendments, waivers, consents, supplements
or other modifications to this Agreement or any other Loan Document as may
from time to time hereafter be required, whether or not the transactions
contemplated hereby or thereby are consummated, and
(b) the custody, preservation, use or operation of any collateral
security provided under any Loan Document, the filing, recording, refiling
or rerecording of each Pledge Agreement, each Security Agreement, each
instrument relating to real property or leases and/or any Uniform
Commercial Code financing statements and any other security instruments
relating thereto and all amendments, supplements and modifications to any
thereof and any and all other documents or instruments of further assurance
required to be filed or recorded or refiled or rerecorded by the terms
hereof or of such Pledge Agreement, such Security Agreement, instruments
relating to real property or leases or other security instrument, and
(c) the preparation and review of the form of any document or
instrument relevant to this Agreement or any other Loan Document and/or the
consideration of legal issues relevant to this Agreement or any other Loan
Document, and
(d) the syndication of the Loans to the Lenders.
The Borrower further agrees to pay, and to save the Administrative Agent, the
Documentation Agent and the Lenders harmless from all liability for, any stamp
or other taxes (other than franchise taxes and taxes imposed on or measured by
any Lender's net income) which may be payable in connection with the execution
or delivery of this Agreement, the Loans made hereunder, or the issuance of the
Notes or any other Loan Documents. The Borrower also agrees to reimburse the
Administrative Agent and each Lender upon demand for all reasonable out-of-
pocket expenses (including attorneys' fees and legal expenses) incurred by the
Administrative Agent or such Lender in connection with (x) the negotiation of
any restructuring or "work-out", whether or not consummated, of any Obligations
and (y) the enforcement of any Obligations and/or any collateral security or
guarantee therefor.
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SECTION 10.4. Indemnification. In consideration of the execution and
---------------
delivery of this Agreement by each Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds the Administrative Agent,
each Agent-Related Person, the Documentation Agent and each Lender and each of
their respective affiliates, officers, directors, employees and agents
(collectively, the "Indemnified Parties") free and harmless from and against any
-------------------
and all actions, causes of action, suits, losses, costs, liabilities and
damages, and expenses incurred in connection therewith (irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought), including reasonable attorneys' fees and disbursements
(collectively, the "Indemnified Liabilities"), incurred by the Indemnified
-----------------------
Parties or any of them as a result of, or arising out of, or relating to
(a) any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of any Loan;
(b) the entering into and performance of this Agreement and any other
Loan Document by any of the Indemnified Parties (including any action
brought by or on behalf of the Borrower as the result of any determination
by the Required Lenders pursuant to Article V not to fund any Borrowing);
---------
(c) any investigation, litigation or proceeding related to any
proposed acquisition by the Borrower or any of its Subsidiaries of all or
any portion of the stock or assets of any Person, whether or not the
Administrative Agent or such Lender is party thereto;
(d) any investigation, litigation or proceeding related to any
environmental cleanup, audit, compliance or other matter relating to the
protection of the environment or the Release by the Borrower or any of its
Subsidiaries of any Hazardous Material; or
(e) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or releases from, any real
property owned or operated by the Borrower or any Subsidiary thereof of any
Hazardous Material (including any losses, liabilities, damages, injuries,
costs, expenses or claims asserted or arising under any Environmental Law),
regardless of whether caused by, or within the control of, the Borrower or
such Subsidiary,
except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or wilful misconduct. The Borrower and its successors and assigns
hereby waive, release and agree not to make any claim or bring any cost recovery
action against the Administrative Agent, any Agent-Related Person or any Lender
under CERCLA or any state equivalent, or any similar law now existing or
hereafter enacted. It is expressly understood and agreed that to the extent
that any of such Persons is strictly liable under any Environmental Laws, the
Borrower's obligation to such Person under this indemnity shall likewise be
without regard to fault on the part of the Borrower with respect to the
violation or condition which results in liability of such Person. If and to the
extent that the foregoing undertaking may be unenforceable for any reason, the
Borrower hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.
SECTION 10.5. Survival. The obligations of the Borrower under Sections
-------- --------
4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under
- --- --- --- --- ---- ----
Section 9.1, shall in each case survive any termination of this Agreement, the
- -----------
payment in full of all the Obligations and the termination of all the
Commitments. The representations and warranties made by each Obligor in this
Agreement and in each other Loan Document shall survive the execution and
delivery of this Agreement and each such other Loan Document.
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SECTION 10.6. Severability. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.
SECTION 10.7. Headings. The various headings of this Agreement and of
each other Loan Document are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement or such other Loan Document or
any provisions hereof or thereof.
SECTION 10.8. Execution in Counterparts, Effectiveness, etc. This
Agreement may be executed by the parties hereto in several counterparts, each of
which shall be executed by the Borrower and the Administrative Agent and be
deemed to be an original and all of which shall constitute together but one and
the same agreement. This Agreement shall become effective when counterparts
hereof executed on behalf of the Borrower and each Lender (or notice thereof
satisfactory to the Administrative Agent) shall have been received by the
Administrative Agent and notice thereof shall have been given by the
Administrative Agent to the Borrower and each Lender.
SECTION 10.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES
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EXHIBIT 10.3
ASSET PURCHASE AGREEMENT
BY AND AMONG
TALTON HOLDINGS, INC.,
A DELAWARE CORPORATION
AND
SECURITY TELECOM CORPORATION, A TEXAS CORPORATION,
AND
WILLIAM M. OHLAND
Dated as of May 9, 1997
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made as of May 9, 1997, by
and among TALTON HOLDINGS, INC., a Delaware corporation ("Buyer") and SECURITY
TELECOM CORPORATION (the "Company" or the "Seller") and WILLIAM M. OHLAND (the
"Principal").
RECITALS
WHEREAS, the Company is engaged primarily in the business of providing
inmate pay telephone service, law enforcement management systems and related
and/or ancillary services or systems to jails and other inmate or correctional
facilities.
WHEREAS, the Principal is actively involved in the ownership and/or
management of the business of Company, and will derive substantial benefit from
the Contemplated Transactions (hereinafter defined).
WHEREAS, for the consideration and on the terms set forth in this
Agreement, the Seller desires to sell, and Buyer desires to purchase, all of the
assets, rights, leases, fixtures and contracts of the Company, including,
without limitation, those assets, rights, leases and fixtures referred to in
Section 3.6 hereof, but specifically excluding the Excluded Assets described in
Section 2.1(b) hereof.
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein, and for other good and valuable consideration, the receipt, sufficiency
and adequacy of which are hereby acknowledged, the parties intending to be
legally bound, do hereby agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ADJUSTMENT AMOUNT": (i) the Company's Net Working Capital Amount as
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reflected on the Closing Date Balance Sheet minus (ii) the Company's Net Working
Capital Amount as reflected on the Interim Balance Sheet (as defined in Section
3.4). [An example of the calculation of the Adjustment Amount is attached as
Exhibit 1(a)].
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"BILLING AND COLLECTION AGREEMENT": any billing and collecting agreement,
--------------------------------
local exchange company billing agreement or other Contract relating to the
provision of billing and collection services to the Company.
"BREACH": a "Breach" of a representation, warranty, covenant, obligation,
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or other provision of this Agreement or any instrument delivered pursuant to
this Agreement will be deemed to have occurred if there is or has been any
inaccuracy in or breach of, or any failure to perform or comply with, such
representation, warranty, covenant, obligation, or other provision.
"CCA RECEIVABLE": the receivable shown as the CCA Receivable on the Pro
--------------
Forma Balance Sheet and Closing Date Balance Sheet, as applicable.
"CONSENT": any approval, consent, ratification, waiver, or other
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authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS": all of the transactions contemplated by this
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Agreement, including: (a) the sale by the Seller to Buyer and the purchase (and
payment therefor) by Buyer from the Seller of the Company Assets; (b) the
execution, delivery and performance of the Non-Competition Agreement, the
Consulting Agreement, the Employment Agreements, the Post-Closing Escrow
Agreement, the Pre-Closing Escrow Agreement, the STC Subordinated Note Agreement
and the Assumption Agreement; and (c) the performance by Buyer, the Company, the
Principal and the Seller of their respective covenants and obligations under
this Agreement, including without limitation their obligations under Section 2
hereof.
"CONTRACT": any agreement, contract, license, obligation, promise or
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undertaking: (a) under which the Company has acquired any rights, (b) under
which the Company has become subject to any obligation or liability, or (c) by
which the Company or any of the assets owned or used by it are bound.
"ENCUMBRANCE": any charge, claim, community property interest,
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condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.
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"ERISA": the Employee Retirement Income Security Act of 1974 or any
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successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"GAAP": generally accepted United States accounting principles, applied
----
on a consistent basis.
"GOVERNMENTAL AUTHORIZATION": any approval, consent, license, permit,
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waiver, tariff, or other written authorization issued, granted, given, or
otherwise made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement.
"GOVERNMENTAL BODY": any: (a) nation, state, county, city, town, village,
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district, or other properly constituted local government; (b) federal, state,
local, municipal, foreign, or other government; (c) governmental authority of
any nature (including any governmental agency, branch, department, official, or
entity and any court or other tribunal); (d) any properly constituted and
authorized body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature in the United States.
"HSR ACT": the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or
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any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"INSTALLED DEVICE": a Telephone and/or LEMS that is in good working order
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and operable, is subject to a Pay Telephone Location Agreement, and is installed
at the location provided for in its related Pay Telephone Location Agreement.
"INSTALLED LINE": any telephone lines and related facilities providing
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telephone service to Installed Devices, including those Telephone lines
identified by installation, location and telephone number in Exhibit 3.6(a)(ii).
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"INTELLECTUAL PROPERTY ASSETS": any patents, patent applications,
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inventions, trademarks, tradenames, business names, service marks, copyrights,
trade secrets, know-how, customer lists, software, software licenses, technical
information, plans, drawings, blue prints or other intellectual property owned
by or licensed to the Company.
"IRC": the Internal Revenue Code of 1986 or any successor law, and
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regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
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"IRS": the United States Internal Revenue Service or any successor agency,
---
and, to the extent relevant, the United States Department of the Treasury.
"KNOWLEDGE": in the case of Seller, information known to the Seller
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without independent investigation beyond the Company's officers, directors and
shareholders; in the case of the Principal, information known by the Principal
without independent investigation.
"LEGAL REQUIREMENT": any federal, state, local, municipal, foreign,
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international, multinational, or other administrative order, constitution, law,
ordinance, ruling, regulation, or statute (as to representations and warranties
set forth in this Agreement, such orders, constitutions, laws, ordinances,
rulings, regulations, or statutes in effect as of the date such representation
or warranty is made).
"LEMS": any law enforcement management systems, jail management systems,
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victim notification systems and/or other tracking or record systems (including
all associated hardware and software) provided to inmate, jail or correctional
facilities, including those LEMS identified in EXHIBIT 3.15(A)(I).
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"LEMS MARKETING AGREEMENT": that certain Exclusive Marketing Agreement
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between the Company and Law Enforcement Technologies, Inc., dated July 15, 1993,
which grants to the Company the exclusive right to purchase certain LEMS and to
install, operate and maintain them.
"LONG DISTANCE SERVICE AGREEMENTS": any long distance service provider
--------------------------------
agreement, telecommunications agreement or other Contract relating to provision
of long distance service or other similar services to the Company.
"NET WORKING CAPITAL AMOUNT": the Company's current assets (which for
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purposes of the definitions shall be deemed to include the CCA Receivable but
shall not include cash or cash equivalents) less the Company's current
liabilities, all as shown on the Interim Balance Sheet, the Pro Forma Balance
Sheet or the Closing Date Balance Sheet, as applicable.
"OPERATOR SERVICE AGREEMENT": any agreement or other Contract relating to
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the provision of operator or other telephone services to the Company.
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"ORDER": any award, decision, injunction, judgment, order, ruling,
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subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS": an action taken by a Person will be deemed
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to have been taken in the "Ordinary Course of Business" only if: (a) such
action is consistent with the past practices of such Person and is taken in the
ordinary course of the normal day-to-day operations of such Person; (b) such
action is consistent with past practices normal in the inmate telephone
industry; and (c) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority).
"ORGANIZATIONAL DOCUMENTS": (a) the articles or certificate of
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incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter, articles of organization, shareholders agreement,
operating agreement or similar document adopted or filed in connection with the
creation, formation, or organization of a Person; and (e) any amendment to any
of the foregoing.
"PARTS AND SUPPLIES AGREEMENT": any Contract relating to the provision of
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Telephone and/or LEMS parts, inventory or equipment, or other parts, equipment
or services to the Company.
"PAY TELEPHONE LOCATION AGREEMENTS": all written lease agreements,
---------------------------------
telephone location agreements, telephone service agreements, license agreements,
royalty agreements or other contracts relating to the Installed Devices, which
agreements grant the right to the Company to install and operate the Installed
Devices upon the premises set forth within any such document.
"PERSON": any individual, corporation (including any non-profit
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corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PRELIMINARY ADJUSTMENT AMOUNT": (i) the Company's Net Working Capital
-----------------------------
Amount as reflected on the Pro Forma Balance Sheet, minus (ii) the Company's Net
Working Capital Amount as reflected on the Interim Balance Sheet.
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"PROCEEDING": any action, arbitration, audit, hearing, investigation,
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litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"REPRESENTATIVE": with respect to a particular Person, any director,
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officer, employee, legal counsel, accountants or financial advisors of such
Person.
"SECURITIES ACT": the Securities Act of 1933 or any successor law, and
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regulations and rules issued pursuant to that Act or any successor law.
"SERVICE AGREEMENTS": any Long Distance Service Agreement, Billing and
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Collection Agreement, Parts and Supplies Agreement, Operator Service Agreement,
LEMS Marketing Agreement or similar agreement or Contract relating to the
provision of parts, equipment or services to the Company.
"STC SUBORDINATED NOTE AGREEMENT": means the STC Subordinated Note
-------------------------------
Agreement to be executed and delivered at Closing in the form attached hereto as
Exhibit 1(b).
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"TAXES": any tax, charge, fee, duty, levy or other assessment, including,
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without limitation, income, gross receipts, net proceeds, ad valorem, turnover,
real and personal property (tangible and intangible), sales, use, franchise,
excise, value added, license, payroll, unemployment, environmental, customs
duties, capital stock, disability, stamp, leasing, lease, user, transfer, fuel,
excess profits, occupational and interest equalization, windfall profits,
severance and employees' income withholding and Social Security taxes imposed by
the United States or any foreign country or by any state, municipality,
subdivision or instrumentality of the United States or of any foreign country or
by any other tax authority, including all applicable penalties and interest, and
such term shall include any interest, penalties or additions to tax attributable
to such taxes.
"TAX RETURN": any return (including any information return), report,
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statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
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"TELEPHONES": any of the coin, credit card operated or collect call only
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telephones, owned or operated by the Company, including any hardware, enclosure,
pedestal or any other personal property installed with any Telephone.
"THREATENED": a claim, Proceeding, dispute, action, or other matter will
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be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist that would lead
Seller, Principal or Buyer to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
2. PURCHASE AND SALE OF ASSETS, CLOSING AND OTHER AGREEMENTS
2.1 ASSETS
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(a) COMPANY ASSETS. Subject to the terms and conditions of this Agreement,
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Seller shall grant, sell, convey, assign, transfer and deliver to the Buyer
(and/or, at Buyer's election, to an affiliate or subsidiary of Buyer), and the
Buyer shall purchase and acquire from the Seller, all the assets, rights,
leases, fixtures, accessions, claims and contracts of the Seller at the Closing
Date, including all of the following assets, rights, leases, fixtures,
accessions, claims and contracts: (a) those underlying the Interim Balance
Sheet with such changes to such assets as may occur from the date thereof to the
Closing Date in the Ordinary Course of Business; (b) those located at the
Seller's facilities in Grand Prairie, Texas (the "Principal Office") on the
Closing Date; and (c) those otherwise substantially related to the operation of
the business of the Company on the Closing Date, including, without limitation,
the assets, or categories thereof, referred to in Section 3.6 hereof (all such
assets, rights, leases, fixtures, accessions, claims and contracts being
hereinafter collectively referred to as the "Company Assets").
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(b) EXCLUDED ASSETS. Notwithstanding anything to the contrary provided in
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Section 2.1(a) hereof, none of the assets set forth on EXHIBIT 2.1(A) hereto
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shall be included in the Company Assets to be purchased and sold hereunder.
2.2 PURCHASE PRICE; ADJUSTMENT OF PURCHASE PRICE.
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(a) PURCHASE PRICE The aggregate purchase price (the "Purchase Price") for
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the Company Assets will be (i) $12,650,000
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cash (subject to positive or negative adjustment, as applicable, by the
Adjustment Amount), plus (ii) the Subordinated STC Note (herein so called) to be
executed and delivered at Closing in accordance with the STC Subordinated Note
Agreement, plus (iii) Buyer's assumption or payment of certain costs or
liabilities as expressly provided in Section 2.5 below. The cash portion of the
Purchase Price, as adjusted by the Preliminary Adjustment Amount, shall be paid
by Buyer on the Closing Date. Any difference between the Preliminary Adjustment
Amount and the Adjustment Amount shall be paid or remitted to Seller or Buyer
(as appropriate) promptly upon demand after determination as provided in Section
2.2(d).
(b) PRELIMINARY ADJUSTMENT AMOUNT Prior to the Closing Date, Seller shall
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prepare and deliver to Buyer (i) a pro forma balance sheet (together with
related notes and appropriate supporting schedules and work papers) of the
Company estimated as of the Closing Date prepared in accordance with generally
accepted accounting principles applied on a basis consistent with that used in
preparation of the Company's balance sheet (the "Pro Forma Balance Sheet"), and
(ii) a statement of the Preliminary Adjustment Amount, accompanied by a
certificate of the Seller to the effect that such statement has been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with that used in the preparation of the Company's balance sheet and
the terms of this Agreement (the "Pre-Closing Certificate"). A Preliminary
Adjustment Amount greater than one shall increase the Purchase Price and a
Preliminary Adjustment Amount less than one shall reduce the Purchase Price.
(c) ADJUSTMENT AMOUNT As soon as possible after the Closing and in any
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event within 90 days following the Closing Date, Buyer shall prepare and deliver
to the Seller (i) a balance sheet of the Company as of the Closing Date audited
by Deloitte & Touche prepared in accordance with generally accepted accounting
principles consistent with past practices of the Seller (the "Closing Date
Balance Sheet") and (ii) a statement of the Adjustment Amount as of the Closing
Date (the "Post-Closing Certificate"). An Adjustment Amount greater than one
shall increase the Purchase Price (as earlier adjusted by the Preliminary
Adjustment Amount) and an Adjustment Amount less than one shall reduce the
Purchase Price (as earlier adjusted by the Preliminary Adjustment Amount). If
the Adjustment Amount is between {$20,000} and $20,000, no payments or
adjustments shall be made between the parties, the Purchase Price established at
the Closing shall be final and the provisions of Section 2.2(d) below shall be
inapplicable.
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(d) DISPUTES REGARDING THE ADJUSTMENT AMOUNT Subject to Section 2.2(c)
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above, Seller shall notify Buyer in writing ("Seller's Dispute Notice") within
twenty business days after receiving the Post-Closing Certificate if Seller
disagrees with Buyer's calculation of the Adjustment Amount as set forth in the
Post-Closing Certificate, which notice shall set forth in reasonable detail the
basis for such disagreement, the dollar amounts involved and the Seller's
calculation of the Adjustment Amount. Buyer will give Seller, Principal and
their accountants and attorneys access during the normal business hours of the
Company to the personnel, books and records of the Company to assist Seller in
the analysis of any such disagreement. In the event of such a disagreement,
Buyer and Seller shall negotiate in good faith to resolve any dispute with
respect to the Post-Closing Certificate. If such dispute cannot be so resolved,
the matter shall be submitted to Price Waterhouse for final determination. If
no Seller's Dispute Notice is received by Buyer within such twenty business day
period, Buyer's calculation of the Adjustment Amount as set forth in the Post-
Closing Certificate shall be final and binding upon the parties hereto.
2.3 DEPOSIT; POST-CLOSING ESCROW FUND; SATISFACTION OF
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DEBT AND CLOSING
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(a) POST-CLOSING ESCROW FUND At the Closing, Seller shall deliver Three
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Hundred Thousand ($300,000.00) to Texas Commerce Bank as escrow agent for
deposit in a fund (the "Post-Closing Escrow Fund") created pursuant to the Post-
Closing Escrow Agreement attached hereto as EXHIBIT 2.3(A).
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(b) CLOSING The closing of the transactions contemplated by this Agreement
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(the "Closing") will take place at the offices of Buyer's counsel in Dallas,
Texas (or such other location within Dallas, Texas as Buyer shall designate) at
10:00 a.m. (local time) on June 20, 1997, or within five business days of the
satisfaction or waiver of the last condition to Closing contained in Articles 6
and 7, whichever is later (the "Closing Date").
2.4 CLOSING OBLIGATIONS
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At the Closing:
(a) Seller or the Principal, as applicable, will deliver or cause to
be delivered to Buyer:
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(i) such bills of sale, endorsements, consents, assignments,
and other good and sufficient instruments of conveyance and assignment
as shall be reasonably required by the Buyer and its counsel and as
shall be effective to vest in the Buyer (or at Buyer's election, its
affiliates) good and marketable title in and to all the Company
Assets, together with copies of all the contracts, agreements,
commitments, books, records, files, computer data, computer disks,
electronic storage media, documents and the like relating to the
Company Assets.
(ii) the Consulting Agreement executed by William M. Ohland in
the form attached hereto as EXHIBIT 2.4(A)(II) (the "Consulting
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Agreement");
(iii) separate Employment Agreements for each of the employees
listed on EXHIBIT 2.4(A)(III)-1 and in the form attached hereto as
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EXHIBIT 2.4(A)(III)-2 (the "Employment Agreements"), provided,
----------------------
however, the delivery of the Employment Agreements shall only be a
condition of Closing (which may be waived by Buyer) and neither Seller
nor Principal shall have any liability for the failure to deliver the
Employment Agreements at Closing);
(iv) the Non-Competition Agreement executed by the Seller in
the form attached hereto as EXHIBIT 2.4(A)(IV) (the "Non-Competition
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Agreement");
(v) the STC Subordinated Note Agreement executed by Seller;
(vi) a joint writing pursuant to the Pre-Closing Escrow
Agreement executed by Seller and directing the escrow agent to
disburse the Escrow Fund to Seller to be applied against the cash
portion of the Purchase Price;
(vii) a certificate executed by Seller and the Principal
representing and warranting to Buyer that each of Seller's and the
Principal's representations and warranties in this Agreement was
accurate in all material respects as of the date of this Agreement and
is accurate in all material respects as of the Closing Date as if made
on the Closing Date (the "Seller's Closing Certificate");
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(viii) opinion(s) of counsel, dated the Closing Date, in the
form of EXHIBIT 2.4(A)(VIII);
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(ix) such other documents as Buyer may reasonably request for
the purpose of (1) enabling its counsel to provide the opinion
referred to in Section 2.4(b), (2) evidencing the accuracy of any of
Seller's and/or the Principal's representations and warranties, (3)
evidencing the performance by Seller of, or the compliance by Seller
with, any covenant or obligation required to be performed or complied
with by the Seller, or (4) otherwise facilitating the consummation or
performance of any of the Contemplated Transactions; and
(x) a joint venture agreement between Seller, Principal and/or
an affiliate thereof, and Buyer (or its affiliate), in form and
substance reasonably satisfactory to both parties, pertaining to the
ownership and operation of the inmate telephone business outside of
the United States and particularly including Seller's current
ownership and operation of International Transmissions &
Communications, Inc., a Mexican corporation.
(b) Buyer will deliver to the Seller (or to such other Persons
designated below):
(i) the cash portion of the Purchase Price (less the Escrow
Fund held under the Pre-Closing Escrow Agreement), the STC
Subordinated Note Agreement, the Subordinated STC Note and the
Assumption Agreement (as provided in Section 2.5 below);
(ii) any consulting fees or other compensation required to be
paid at Closing pursuant to the terms of the Consulting Agreement, the
Non-Competition Agreement and/or the Employment Agreements;
(iii) the Consulting Agreement, the Non-Competition Agreement
and the Employment Agreements, all executed by Buyer;
(iv) a joint writing pursuant to the Pre-Closing Escrow
Agreement executed by Buyer and directing the escrow agent to disburse
the Escrow Fund to Seller to be applied against the cash portion of
the Purchase Price;
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(v) a certificate executed by Buyer representing and
warranting to the Seller that each of Buyer's representations and
warranties in this Agreement was accurate in all material respects as
of the date of this Agreement and is accurate in all material respects
as of the Closing Date as if made on the Closing Date (the "Buyer's
Closing Certificate").
(vi) opinion(s) of counsel, dated the Closing Date, in the form
of EXHIBIT 2.4(B)(VI);
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(vii) such other documents as Seller may reasonably request for
the purpose of (1) enabling its counsel to provide the opinion
referred to in Section 2.4(a), (2) evidencing the accuracy of any
representation or warranty of Buyer, (3) evidencing the performance by
Buyer of, or the compliance by Buyer with, any covenant or obligation
required to be performed or complied with by Buyer, or (4) otherwise
facilitating the consummation of the Contemplated Transactions; and
(viii) a joint venture agreement between Seller, Principal
and/or an affiliate thereof, and Buyer (or its affiliate), in form and
substance reasonably satisfactory to both parties, pertaining to the
ownership and operation of the inmate telephone business outside of
the United States and particularly including Seller's current
ownership and operation of International Transmissions &
Communications, Inc., a Mexican corporation.
2.5 TREATMENT OF CERTAIN MATTERS AND ADJUSTMENTS.
--------------------------------------------
(a) Seller shall discharge on or at Closing, and Buyer will acquire the
Company Assets free of all the Company's loans, lines of credit, installment or
conditional sale agreements, capital leases, financing leases, leases of revenue
generating assets (whether capital, finance or operating leases) and other
Encumbrances. In lieu of discharging the aforesaid obligations, Buyer and
Seller may agree that Buyer will assume certain specific obligations and receive
a credit against the Purchase Price in an amount mutually determined to
approximate the present value of all future payments under the obligations so
assumed.
(b) Seller shall remain responsible for and shall also discharge, or cause
to be discharged, all federal and state
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taxes, tariffs and assessments related to the Company Assets for the period up
to the Closing Date.
(c) Seller shall also remain responsible for and shall discharge on or at
Closing, all bonuses or other such compensation to its employees which may vest
or become payable on the sale of or change of ownership or control of the
Company's Assets, including, without limitation, any such compensation arising
out of or triggered by the Contemplated Transactions.
(d) As additional consideration for the purchase of the Company Assets,
the Buyer agrees as follows: (i) to pay to Seller at Closing an amount (not to
exceed $30,000) which is equal to any prepayment penalty or premium relating to
the Company's prepayment of that certain $1,000,000 promissory note payable to
the order of Lyon Credit Corporation; (ii) to pay to Seller at Closing an amount
equal to any direct costs incurred by the Company for the installation of new
Installed Devices after November 30, 1996, and prior to the Closing Date
provided such costs were previously approved by Buyer (such approval not to be
unreasonably withheld); and (iii) to execute and deliver to the Seller an
assumption agreement (the "Assumption Agreement"), whereby the Buyer assumes,
and agrees to pay, perform and discharge when due, the liabilities and
obligations of the Seller set forth therein. The Assumption Agreement shall
provide that the Buyer will assume all current liabilities reflected in the Pro
Forma Balance Sheet which were incurred by the Company in the usual, regular and
ordinary manner, on a basis consistent with past practices (and otherwise in the
Ordinary Course of Business). The Assumption Agreement will further provide that
the Buyer will assume all obligations arising from and after the Closing Date
under the terms of (i) the Pay Telephone Location Agreements, (ii) the Service
Agreements, (iii) the other Contracts listed on EXHIBIT 3.15(A)(I)-(V) (except
----------------------
for those Contracts Seller is obligated to discharge pursuant to Section
2.5(a)), and (iv) the employee benefit plans specifically disclosed on EXHIBIT
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3.11.
- ----
(e) Notwithstanding anything in this Agreement to the contrary, except as
expressly provided in Section 2.5(d), the Buyer shall not assume any, and the
Seller shall retain and be responsible for all, of the liabilities and
obligations of the Seller and its affiliates.
2.6 PRE-CLOSING ESCROW. Upon the execution and delivery of this
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Agreement, Buyer shall deliver One Hundred Fifty Thousand ($150,000) (the
"Escrow Fund") to Texas Commerce Bank,
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as escrow agent, to be held under the terms of the Pre-Closing Escrow Agreement
attached hereto as EXHIBIT 2.6 (the "Pre-Closing Escrow Agreement").
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At the Closing, any available funds included in the Escrow Fund shall be
applied to the payment of the Purchase Price, or if Buyer fails to proceed with
the Closing on or before the Closing Date or if the conditions to Seller's
obligation to close have not been satisfied (other than by reason of Seller's
default or the failure of any condition to Buyer's obligation to close), Seller
shall have the right to terminate this Agreement as provided in Section 9 below
and, in accordance with the terms of the Pre-Closing Escrow Agreement, to retain
the Escrow Fund (and interest thereon) as liquidated damages, in lieu of all
other damages of any nature whatsoever. The parties acknowledge that Seller's
damages due to such default are difficult to ascertain and agree that the amount
of the Escrow Fund represents a reasonable estimate of the damages incurred by
Seller. Similarly, if Seller fails to proceed with the Closing on or before the
Closing Date or if the conditions to Buyer's obligation to close have not been
satisfied (other than by reason of Buyer's default or the failure of any
condition to Seller's obligation to close), Buyer shall have the right to
terminate this Agreement as provided in Section 9 below and, in accordance with
the terms of the Pre-Closing Escrow Agreement, to receive a refund of the Escrow
Fund (and interest thereon), in which event the Buyer will be deemed to have
waived any rights it may have to seek damages for Seller's failure to proceed
with Closing.
2.7 NAME CHANGE. On the Closing Date, the Company will cease using the
-----------
name "Security Telecom" and/or any name similar thereto, and will assign to the
Buyer all rights in and to the name "Security Telecom".
3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller and the Principal represent and warrant to Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING
------------------------------
The Company is a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it purports to own or
use, and to perform all its obligations under the Contracts. The Company is
duly qualified to do business as a foreign
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corporation and is in good standing under the laws of the states in which the
nature of the activities conducted by it requires such qualification. Except as
set forth on EXHIBIT 3.1, the Company does not have and never has had any
-----------
subsidiaries. The Company's principal place of business is, and has been for the
last five (5) years or if it has not done business for five (5) years, for the
entire period that it has done business, in Grand Prairie, Texas and, except as
set forth on EXHIBIT 3.1, the Company has not had any other offices, other
-----------
corporate names or done business in any other names during said five (5) year
period.
3.2 AUTHORITY; NO CONFLICT
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation
of the Seller and the Principal, enforceable against the Seller and the
Principal in accordance with its terms except as such enforcement may be limited
by applicable bankruptcy laws. Upon the execution and delivery of the Consulting
Agreement, the Employment Agreements, the Non-Competition Agreement, the STC
Subordinated Note Agreement, the Post-Closing Escrow Agreement, the Pre-Closing
Escrow Agreement and Seller's Closing Certificate (collectively, the "Seller's
Closing Documents"), the Seller's Closing Documents will constitute the legal,
valid, and binding obligations of the parties (other than Buyer) enforceable
against each of them in accordance with their respective terms except as such
enforcement may be limited by applicable bankruptcy laws. The Seller and the
Principal have the absolute and unrestricted right, power, authority, and
capacity to execute and deliver this Agreement and the Seller's Closing
Documents to which each is a party and to perform their obligations under this
Agreement and the Seller's Closing Documents to which each is a party.
(b) Neither the execution, delivery or performance of this Agreement nor
any other consummation or performance of any of the Contemplated Transactions
will, directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a violation of (A) any
provision of the Organizational Documents of the Company, (B) any
resolution adopted by the board of directors or the stockholders of the
Company, (C) to the best Knowledge of the Seller and the Principal, any
duty owed by the Principal or the Company to any Person, or (D) any Legal
Requirement, any Governmental Authorization or any Order to which the
Company or the Principal, or any of the Company Assets may be subject; or
15
<PAGE>
(ii) except as otherwise disclosed in EXHIBIT 3.15(B), contravene,
---------------
conflict with, or result in a violation or breach of any provision of, or,
to the best Knowledge of the Seller and the Principal, give any Person the
right to declare a default or exercise any remedy under, or to accelerate
the maturity or performance of, or to cancel,
16
<PAGE>
terminate, or modify, any Contract, or any contract or other agreement to
which the Principal or Seller is a party.
3.3 OPTIONS
-------
There are no options, warrants, rights of first refusal or other rights to
acquire all or any portion of the Company Assets.
3.4 FINANCIAL STATEMENTS
--------------------
The Company has delivered to Buyer: (a) audited balance sheets of the
Company as at December 31, in each of the years 1994 and 1995, and the related
audited consolidated statements of income, changes in stockholders' equity, and
cash flow for each of the fiscal years then ended, and (b) an audited balance
sheet of the Company as at November 30, 1996 (the "Interim Balance Sheet") and
the related audited consolidated statements of income, and cash flow for the
eleven months then ended, including in each case the notes thereto. The Company
shall deliver to Buyer audited financial statements for the year ended December
31, 1996, and such other balance sheets, statements of income, cash flow and
other financial statements of the Company as Buyer may reasonably request. All
such financial statements and notes fairly present the financial condition and
the results of operations, and cash flow of the Company as at the respective
dates of and for the periods referred to in such financial statements, all in
accordance with GAAP. The financial statements referred to in this Section 3.4
reflect the consistent application of such accounting principles throughout the
periods involved, except as disclosed in the notes to such financial statements.
No financial statements of any Person other than the Company are required by
GAAP to be included in the consolidated financial statements of the Company.
3.5 BOOKS AND RECORDS
-----------------
The books of account, ledgers, financial data and other records of the
Company, all of which have been made available to Buyer, are complete and
correct in all material respects. At the Closing, all of such books of account
and records will be delivered to Buyer to the extent that they relate to the
Company Assets.
3.6 BALANCE SHEET ON THE CLOSING DATE
---------------------------------
(a) COMPANY ASSETS. On the Closing Date, the Company shall convey, and
--------------
the Buyer shall own and have, good and marketable
17
<PAGE>
title, without Encumbrance (other than Encumbrances evidenced by Contracts which
are assumed by the Buyer under the Assumption Agreement), to all of the Company
Assets (which assets are
18
<PAGE>
accurately reflected in the Company's Interim Balance Sheet and which assets
will be accurately reflected in the Pro Forma Balance Sheet) including, without
limitation:
(i) all rights and interest of the Company in and under the Pay
Telephone Location Agreements listed on EXHIBIT 3.15(A)(I)
------------------
(subject to obtaining any consents required thereunder
necessary to effectuate an assignment thereof to Buyer, such
consents being specifically listed on EXHIBIT 3.15(B), and
---------------
provided that Buyer may waive the requirement that such
consents be obtained and may accept an assignment without such
consents);
(ii) all Installed Lines listed on EXHIBIT 3.6(A)(II);
------------------
(iii) all rights and interests of the Company in and under the
Service Agreements listed on EXHIBIT 3.15(A)(II);
-------------------
(iv) all uninstalled Telephones, LEMS, parts, hardware and equipment
listed on EXHIBIT 3.6(A)(IV) (subject to turn over of inventory
------------------
in the Ordinary Course of Business);
(v) all vehicles, if any, listed on EXHIBIT 3.6(A)(V);
-----------------
(vi) all Accounts Receivable and all shares of Law Enforcement
Technologies, Inc. owned by the Company (which shares represent
a 25% ownership interest in Law Enforcement Technologies,
Inc.);
(vii) the name "Security Telecom" and all trademarks and tradenames
associated therewith;
(viii) all rights and interest of the Company in the LEMS Marketing
Agreement listed on EXHIBIT 3.15(A)(IV);
-------------------
(ix) all rights and interest of the Company in the office lease
agreement listed on EXHIBIT 3.15(A)(III) pertaining to the
--------------------
Principal Office (subject to obtaining any consents required
thereunder necessary to effectuate an assignment thereof to
Buyer, such consents being specifically listed on EXHIBIT
-------
3.15(B), and
19
<PAGE>
provided that Buyer may waive the requirement that such
consents be obtained and may accept an assignment without such
consents);
(x) all other furniture, fixtures, equipment, personalty or
Intellectual Property Assets of any kind used by the Company in
the operation of its business, including without limitation,
each of those items having a value in excess of $1,000 listed
on EXHIBIT 3.6(A)(X) (subject to obtaining any consents
-----------------
required under the Contracts applicable thereto which are
necessary to effectuate an assignment thereof to Buyer, such
consents being specifically listed on EXHIBIT 3.15(B), and
---------------
provided that Buyer may waive the requirement that such
consents be obtained and may accept an assignment without such
consents); and
(xi) all tariffs and Governmental Authorizations that relate to the
business of, or to any assets of the Company which are listed
on EXHIBIT 3.12 (subject to obtaining any consents required
------------
thereunder necessary to effectuate an assignment thereof to
Buyer, such consents being specifically listed on EXHIBIT
-------
3.15(B), and provided that Buyer may waive the requirement that
-------
such consents be obtained and may accept an assignment without
such consents).
3.7 ACCOUNTS RECEIVABLE
-------------------
(a) All accounts receivable of the Company that are reflected on the
Interim Balance Sheet or on the accounting records of the Company as of the
Closing Date (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the Ordinary Course of Business. The reserves reflected
in the Interim Balance Sheet have been calculated consistent with past
practices. Except as set forth in EXHIBIT 3.7, there is no contest, claim, or
-----------
right of set-off, other than returns in the Ordinary Course of Business, under
any Contract with any obligor of an Accounts Receivable relating to the amount
or validity of such Accounts Receivable. EXHIBIT 3.7 hereof contains a complete
-----------
and accurate list of all Accounts Receivable as of the date of the Interim
Balance Sheet, which list sets forth the aging of such Accounts Receivable.
20
<PAGE>
(b) Seller represents and warrants that from and after the date of the
Interim Balance Sheet through the Closing Date: (i) the Company has and shall
collect all sums and amounts due the Company, whether evidenced in writing, on
account, designated as a receivable or otherwise (collectively, "Pre-Closing
Receivables"), only in its usual, regular and ordinary manner, on a basis
consistent with past practices (and otherwise in the Ordinary Course of
Business); and (ii) the Company has not and will not accelerate collection of
the Pre-Closing Receivables.
3.8 RELATIONSHIPS WITH RELATED PERSONS
----------------------------------
Except as set forth in EXHIBIT 3.8 hereof, neither the Principal nor any
-----------
Person related or affiliated with the Principal or the Company is a party to any
Contract with, or has any claim or right against, the Company. Except as set
forth in EXHIBIT 3.8 hereof, neither the Principal nor any Person related or
-----------
affiliated with the Principal owns, directly or indirectly, any interest in any
person or entity that is a competitor, customer or supplier of the Company, that
otherwise has any business dealings with the Company or that is engaged in the
same or similar business as the Company.
3.9 TAXES
-----
(a) To the best Knowledge of the Seller and the Principal, the Company
has filed or caused to be filed all Tax Returns that are or were required to be
filed by it, either separately or as a member of a group of corporations,
pursuant to applicable Legal Requirements. Seller has delivered to Buyer copies
of all Tax Returns, filed since 1993 (including the Tax Returns for 1993). To
the best Knowledge of the Seller and the Principal, the Company has paid, or
made provision for the payment of, all Taxes that have or may have become due
pursuant to those Tax Returns or otherwise, or pursuant to any assessment
received by the Company, except such Taxes, if any, as are listed in EXHIBIT 3.9
-----------
hereof and are being contested in good faith and as to which adequate reserves
(determined in accordance with GAAP) have been provided in the Interim Balance
Sheet. To the best Knowledge of the Seller and the Principal, all Tax Returns
filed by (or that include on a consolidated basis) the Company are true, correct
and complete.
(b) To the best Knowledge of the Seller and the Principal, there exists
no proposed tax assessment against the Company and/or the Company Assets except
as disclosed in the Interim Balance Sheet or in EXHIBIT 3.9 hereof. To the best
-----------
Knowledge of the Seller and the Principal, all Taxes that the Company is or
21
<PAGE>
was required by Legal Requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Body or other Person.
3.10 NO MATERIAL ADVERSE CHANGE
--------------------------
Except as set forth on EXHIBIT 3.10, since the date of the Interim Balance
------------
Sheet, there has not been any material adverse change in the business, client
relations, operations, or assets of the Company, and no event has occurred or
circumstance exists that may result in such a material adverse change. Without
in any way limiting the generality of the foregoing, there exists no actual or
threatened terminations, cancellations or limitations of, or any modification or
change in (i) the current business relationship of the Company with any material
customer or group of customers whose business is material to the operation of
the Company's business; or (ii) the current business relationship of the Company
with any supplier, and the Company has no reason to believe that any such
customers or suppliers shall not continue a business relationship with Buyer
subsequent to the Closing on a basis no less favorable to Buyer than that
heretofore conducted (except where such change would not have a material adverse
effect on the Company); and (iii) to the best Knowledge of the Seller and the
Principal, there exists no other condition or state of facts or circumstances
which would materially adversely affect the Company's business or prevent Buyer
from conducting such business after the Closing on a basis not materially
adversely less favorable to Buyer than that of which it has heretofore been
conducted by the Company.
3.11 EMPLOYEE BENEFITS
-----------------
(a) The term "Employee Benefit Plan" means any "employee benefit plan"
(as defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), any plan or policy providing for "fringe benefits" (including but
not limited to vacation, paid holidays, personal leave, employee discount,
educational benefit or similar programs), and any other bonus, incentive,
compensation, profit-sharing, stock, severance, retirement, health, life,
disability, group insurance, employment, fringe benefit, or any other similar
plan, agreement, policy or understanding (whether written or oral, qualified or
nonqualified), and any trust, escrow, or other agreement related thereto. Except
as set forth on EXHIBIT 3.11, the Company maintains no Employee Benefit
------------
Plans. Each Employee Benefit Plan set forth on Exhibit 3.11 has been operated
------------
in compliance with ERISA, applicable tax qualification requirements and all
other applicable laws.
22
<PAGE>
(b) Except as otherwise expressly provided in Section 2.5(d) and in the
Assumption Agreement, Buyer has not agreed to, and shall not, assume, adopt or
succeed to, or have any liability or responsibility with respect to, any
Employee Benefit Plan maintained or formerly maintained by Seller or any
affiliate, or any obligations under any such plans, and Seller shall indemnify
Buyer to the extent Buyer incurs any liability with respect to any such plans.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL
------------------------------------------------
AUTHORIZATIONS AND ORDERS
- -------------------------
(a) To the best Knowledge of the Principal and the Company: (i) the
Company is, and at all times has been, in material compliance with each Legal
Requirement, Governmental Authorization and Order that is or was applicable to
it or to the conduct or operation of its business or the ownership or use of any
of its assets; and (ii) no event has occurred or circumstance exists that (with
or without notice or lapse of time) may constitute or result in a violation by
the Company of, or a failure on the part of the Company to comply with, any
Legal Requirement, Governmental Authorization or Order.
(b) To the best Knowledge of the Principal and the Company, EXHIBIT 3.12
------------
contains a complete and accurate list of each Governmental Authorization that
relates to the business of, or to any of the assets used in the operation of the
Company. Each Governmental Authorization of the Company is valid and in full
force and effect. The Governmental Authorizations listed in Exhibit 3.12 hereof
------------
collectively constitute all of the Governmental Authorizations necessary to
permit the Company to lawfully conduct and operate the business of the Company
in the manner they currently conduct and operate such business and to permit the
Company to own and use the assets used in the operation of the Company in the
manner in which they currently own and use such assets. A true and complete
copy of each Governmental Authorization listed in Exhibit 3.12 has been
------------
delivered to Buyer.
3.13 LEGAL PROCEEDINGS
-----------------
(a) Except as set forth in EXHIBIT 3.13(A) hereof, there is no pending
---------------
Proceeding: (i) that has been commenced by or against the Company or that
otherwise relates to or may affect the business of, or any of the assets owned
or used by, the Company; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions or any Contract. To the best Knowledge of the Seller
and the Principal, no such
23
<PAGE>
Proceeding has been Threatened, and no event has occurred or circumstance exists
that may reasonably be expected to give rise to or serve as a basis for the
commencement of any such Proceeding. The Proceedings listed in Exhibit 3.13(a)
---------------
hereof will not have a material adverse effect on the business, operations or
assets of the Company.
(b) All Proceedings in which the Company has been named or otherwise
involved since 1993 are listed on EXHIBIT 3.13(B). Seller has delivered to
---------------
Buyer true and complete copies of all material pleadings and other documentation
relating to each Proceeding listed on Exhibit 3.13(b).
3.14 ABSENCE OF CERTAIN CHANGES AND EVENTS
-------------------------------------
Except as set forth in EXHIBIT 3.14 hereof, since the date of the Interim
------------
Balance Sheet, the Company has conducted its business only in the Ordinary
Course of Business and there has not been any:
(a) damage to or destruction or loss of any asset or property of the
Company, whether or not covered by insurance, materially and adversely affecting
the properties, assets, business, financial condition, or prospects of the
Company or its business;
(b) entry into, termination of, or receipt of notice of termination of
any Contract or transaction involving a total remaining commitment by or to the
Company of at least $10,000;
(c) sale (other than sales in the Ordinary Course of Business), lease, or
other disposition of any asset or property of the Company or mortgage, pledge,
or imposition of any lien or other encumbrance on any material asset or property
of the Company;
(d) material change in the accounting methods used by the Company;
(e) material adverse change in the financial condition, assets,
liabilities or business of the Company;
(f) change in the method of collecting accounts receivable or
acceleration in the collection of accounts receivable;
(g) failure to pay expenses incurred in connection with the operation of
the Company on a basis consistent with past practices (and otherwise in the
Ordinary Course of Business).
24
<PAGE>
3.15 CONTRACTS; NO DEFAULTS
----------------------
(a) Seller has delivered to Buyer true and complete copies of and
Exhibits 3.15(a)(i) - (v) hereof contain a complete and accurate list, of the
- -------------------------
following:
(i) each Pay Telephone Location Agreement is described on EXHIBIT
-------
3.15(A)(I);
----------
(ii) each Service Agreement is described on EXHIBIT 3.15(A)(II);
-------------------
(iii) each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other Contract affecting the ownership
of, leasing of, title to, use of, or any leasehold or other interest in,
any real or personal property (including the lease pertaining to the
Principal Office) is described on EXHIBIT 3.15(A)(III);
--------------------
(iv) each licensing agreement or other Contract with respect to LEMS
and/or the Intellectual Property Assets (including the LEMS Marketing
Agreement) is described in EXHIBIT 3.15(A)(IV);
-------------------
(v) each Contract not otherwise listed in EXHIBITS 3.15(A)(I)-(IV)
------------------------
above that (1) provides for payments to or by any Person based on sales,
purchases, or profits, other than direct payments for goods, in excess of
$1,000, or (2) involves performance of services or delivery of goods or
materials by the Company of an amount or value in excess of $1,000 or (3)
involves expenditures or receipts by the Company in excess of $1,000, is
described on EXHIBIT 3.15(A)(V); and
------------------
EXHIBITS 3.15(A)(I) - (V) hereof set forth reasonably complete details
-------------------------
concerning such Contracts, including the date of the Contracts and the parties
to the Contracts. Additionally, EXHIBIT 3.15(A)(I) separately identifies under
------------------
each Pay Telephone Location Agreement, the Installed Devices (Telephones and/or
LEMS) which are provided thereunder, and EXHIBIT 3.15(A)(II) separately
-------------------
classifies the Service Agreements under the subcategories Long Distance Service
Agreements, Billing and Collection Agreements, Parts and Supplies Agreements and
Operator Service Agreements.
(b) Except as set forth in EXHIBIT 3.15(B) hereof, with respect to each
---------------
Contract identified or required to be identified in
25
<PAGE>
In EXHIBIT 3.15(A) hereof (and/or any other material Contract by which the
---------------
Company is bound even if not so identified):
(i) such Contract is in full force and effect and is valid and
enforceable in accordance with its terms and is fully transferable and/or
assignable to Buyer without the consent of any Person;
(ii) the Company is, and at all times since the later of 1993 or the
Contract's date of inception, has been, in substantial compliance with all
applicable terms and requirements of such Contract;
(iii) each other Person that has or had any obligation or liability
under such Contract is, and at all times since
the later of 1993 or the Contract's date of inception, has been, in
substantial compliance with all applicable terms and requirements of such
Contract;
(iv) to the best Knowledge of the Principal and the Company, no
event has occurred or circumstance exists (including without limitation,
the Contemplated Transaction) that (with or without notice or lapse of
time) may contravene, conflict with, or result in a violation or breach of,
or give the Company or other Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of,
or to cancel, terminate, or modify, any such Contract; and
(v) neither the Company nor the Principal has given to or received
from any other Person, at any time since the later of 1993 or the
Contract's date of inception, any notice or other communication (whether
oral or written) regarding any actual, alleged, possible, or potential
material violation or breach by the Company of, or default by the Company
under such Contract.
(vi) to the best Knowledge of the Principal and the Company, there
are no renegotiations of, attempts to renegotiate, or outstanding rights to
renegotiate any material amounts paid or payable to the Company under such
Contracts with any Person (and, no such Person has made written demand for
such renegotiation) where the effect of such renegotiation would have a
material adverse effect on the Company or its operations.
(vii) such Contracts have been entered into in the Ordinary Course of
Business and have been entered into without the commission of any act alone
or in concert with
26
<PAGE>
any other Person, or any consideration having been paid or promised, that
is or would be in violation of any Legal Requirement.
(viii) such Contracts constitute the sole and entire agreement among
the parties thereto with respect to the subject matter thereof, and there
are no other agreements or understandings among the parties which in any
way pertain to or otherwise affect such Contracts.
3.16 INSURANCE
---------
Seller has delivered or made available to Buyer true and complete copies of
all policies of insurance to which the Company is a party or under which the
Company is covered. All such policies: (i) are listed on EXHIBIT 3.16; (ii)
------------
are valid, outstanding, and enforceable; (iii) taken together, provide in the
judgment of the Company and the Principal adequate insurance coverage for the
assets and the operations of the Company; (iv) to the best Knowledge of the
Company and the Principal, are sufficient for compliance with all Legal
Requirements and Contracts to which the Company is a party or by which any of
them is bound; and (v) will continue in full force and effect following the
consummation of the Contemplated Transactions with respect to losses or claims
accruing or arising prior to the Closing Date.
3.17 ENVIRONMENTAL MATTERS
---------------------
(a) To the best Knowledge of the Company and the Principal, the Company
and the Company Assets are, and at all
27
<PAGE>
times have been, in material compliance with, and have not been and are not in
violation of or liable under, any Environmental Laws.
(b) To the best Knowledge of the Company and the Principal, the Company
has not generated, handled, manufactured, processed, treated, stored, used,
transferred, released, disposed of or otherwise conducted any hazardous process
or activity with respect to (collectively, "Hazardous Activities") any hazardous
substances, hazardous wastes, hazardous wastes constituents and reaction by-
products, hazardous materials, pesticides, oil and other petroleum products,
pollutents, and/or toxic substances, including asbestos and polychlorinated
biphenyls as those terms are defined pursuant to Environmental Laws
(collectively, "Hazardous Substances"), except in full compliance with
Environmental Laws, or where any alleged noncompliance is not material.
(c) To the best of the Company's and the Principal's Knowledge, neither
the Principal nor the Company has any basis to expect, nor has either of them or
any other Person for whose conduct they are or may be held to be responsible
received, any actual or Threatened Order, notice, or other communication from
any Person that relates to Hazardous Activities, Hazardous Substances, or any
alleged actual or potential violation or failure to comply with any
Environmental Law with respect to any properties or assets (whether real,
personal, or mixed) in which the Company has or had an interest.
(d) For purposes hereof, Environmental Laws shall mean all Legal
Requirements that relate or pertain to environmental matters, pollution and/or
public health, safety or welfare, including without limitation, the Resource
Conservation and Recovery Act (42 U.S.C. 6901 et seq.), as amended, the
------
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
9601 et seq.), as amended, the Federal Clean Water Act (33 U.S.C. 1251 et seq.),
------ ------
as amended, and state and federal environmental clean up programs.
3.18 EMPLOYEES
---------
(a) EXHIBIT 3.18 hereof contains a complete and accurate list of the
------------
following information for each employee of the Company as of the date specified
therein: name; job title; current compensation paid or payable and any change in
compensation since January 1, 1997; vacation accrued; service credited for
purposes of vesting and eligibility to participate under any Employee Benefit
Plan; severance pay; vacation pay; and any other employee benefit.
28
<PAGE>
(b) To the best Knowledge of the Principal and the Company, no employee
of the Company is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or proprietary
rights agreement, between such employee and any other Person ("Proprietary
Rights Agreement") that in any way adversely affects or will affect the conduct
of the Company's business (either before or after the consummation of the
Contemplated Transactions).
3.19 LABOR RELATIONS; COMPLIANCE
---------------------------
Since 1993, the Company has not been nor is a party to any collective
bargaining or other labor Contract. Except as disclosed on EXHIBIT 3.13(A),
---------------
since 1993, there has not been, there is not presently pending or existing, and
to the best Knowledge of Seller and the Principal, there is not Threatened, (a)
any strike, slowdown, picketing, work stoppage, or employee grievance process,
(b) any Proceeding against or affecting the Company relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting any of the Company or their premises, or
(c) any application for certification of a collective bargaining agent.
3.20 INTELLECTUAL PROPERTY
---------------------
(a) Seller has delivered to Buyer true and complete copies of, and
EXHIBIT 3.20 hereof contains a complete and accurate list of, the Intellectual
- ------------
Property Assets.
(b) To the best Knowledge of the Seller and the Principal, the
Intellectual Property Assets are all those necessary for the operation of the
Company's business as it is currently conducted. The Company is the owner of
and/or the licensee of (and at Closing, Buyer will be the owner of and/or the
licensee of) all right, title, and interest in and to each of the Intellectual
Property Assets, free and clear of all liens, security interests, charges,
encumbrances, equities, and other adverse claims, and the Company has (and at
Closing the Buyer will have) the right to use, without payment to a third party,
all of the Intellectual Property Assets.
29
<PAGE>
(c) To the best Knowledge of the Seller and the Principal, the Intellectual
Property Assets and the use thereof does not nor does the subject matter of any
of the Intellectual Property Assets infringe or is alleged to infringe any
rights of any third party or is a derivative work based on the work of a third
party.
(d) To the best Knowledge of the Seller and the Principal, the Intellectual
Property Assets are fully transferable to the Buyer without the Consent of any
Person and without creating a default, violation of, or requiring a payment
under any Contract relating to any Intellectual Property Asset.
3.21 CERTAIN PAYMENTS
----------------
Since 1993, neither the Company nor any director, officer, agent, or
employee of the Company, nor any Representative, has directly or indirectly (a)
made any contribution, gift, bribe, rebate, payoff, influence payment, kickback,
or other payment to any Person, private or public, regardless of form, whether
in money, property, or services (i) to obtain favorable treatment in securing
business on behalf of the Company, (ii) to pay for favorable treatment for
business secured on behalf of the Company, (iii) to obtain special concessions
or for special concessions already obtained, for or in respect of the Company,
or (iv) in violation of any Legal Requirement, and/or (b) established or
maintained any fund or asset that has not been recorded in the books and records
of the Company.
3.22 DISCLOSURE
----------
To the best Knowledge of the Seller and the Principal, no representation or
warranty of Seller or the Principal in this Agreement omits to state a material
fact necessary to make the statements herein or therein, in light of the
circumstances in which they were made, not misleading.
3.23 BROKERS OR FINDERS
------------------
Except as set forth in EXHIBIT 3.23, Seller and its agents have incurred no
------------
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement.
3.24 HSR ACT
-------
Company is the "acquired person" within the meaning of the HSR Act and has
for the purposes of the "size of person" test
30
<PAGE>
under the HSR Act less than $100,000,000 in annual net sales or total assets.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
4.1 ORGANIZATION AND GOOD STANDING
------------------------------
Buyer is a corporation duly organized, validly existing, and in good
standing under the laws of the state of its incorporation. Buyer is duly
qualified to do business as a
31
<PAGE>
foreign corporation and is in good standing under the laws of the states in
which the nature of the activities conducted by it requires such qualification.
4.2 AUTHORITY; NO CONFLICT
----------------------
(a) This Agreement constitutes the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Upon the
execution and delivery by Buyer of the Consulting Agreement, the Employment
Agreements, the Non-Competition Agreement, the STC Subordinated Note Agreement,
the Subordinated STC Note, the Assumption Agreement and the Buyer's Closing
Certificate (collectively, the "Buyer's Closing Documents"), the Buyer's Closing
Documents will constitute the legal, valid, and binding obligations of Buyer,
enforceable against Buyer in accordance with their respective terms. Buyer has
the absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and the Buyer's Closing Documents and to perform its obligations
under this Agreement and the Buyer's Closing Documents.
(b) Except for any filings or approvals in order to comply with Legal
Requirements, including obtaining appropriate Governmental Authorizations (as
contemplated in Section 6.1), neither the execution and delivery of this
Agreement by Buyer nor the consummation or performance of any of the
Contemplated Transactions by Buyer will give any Person the right to prevent,
delay, or otherwise interfere with any of the Contemplated Transactions pursuant
to:
(i) any provision of Buyer's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Buyer;
(iii) any Order to which Buyer may be subject; or
(iv) any contract to which Buyer is a party or by which Buyer may be
bound.
Except for any filings or approvals in order to comply with Legal
Requirements, including obtaining appropriate Governmental Authorizations (as
contemplated in Section 6.1), Buyer is not and will not be required to obtain
any Consent from any Person in connection with the execution and delivery of
this Agreement or the consummation or performance of any of the Contemplated
Transactions.
32
<PAGE>
4.3 CERTAIN PROCEEDINGS
-------------------
There is no pending or Threatened Proceeding that has been commenced
against Buyer and that challenges, or may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the Contemplated
Transactions.
4.4 BROKERS OR FINDERS
------------------
Except as set forth in EXHIBIT 4.4, Buyer and its officers and agents have
-----------
incurred no obligation or liability, contingent or otherwise, for brokerage or
finders' fees or agents' commissions or other similar payment in connection with
this Agreement and will indemnify and hold Seller harmless from any such payment
alleged to be due by or through Buyer as a result of the action of Buyer or its
officers or agents.
4.5 HSR ACT
-------
Buyer is the "acquiring person" within the meaning of the HSR Act and has
for the purposes of the "size of person" test under the HSR Act less than
$100,000,000 in annual net sales or total assets.
5. COVENANTS OF THE SELLER PRIOR TO/ON CLOSING DATE
5.1 REQUIRED APPROVALS
------------------
As promptly as practicable after the date of this Agreement, Seller will
use its good faith efforts to make all filings required by Legal Requirements to
be made by them in order to consummate the Contemplated Transactions. Between
the date of this Agreement and the Closing Date, Seller will cooperate with
Buyer with respect to all filings and approvals that Buyer elects to make or
seek or is required by Legal Requirements to make or seek in connection with the
Contemplated Transactions (and/or the financing thereof).
5.2 CURRENT INFORMATION AND ACCESS
------------------------------
(a) During the period from the date of this Agreement to the Closing Date,
the Company shall cause one or more of its Representatives to confer on a
regular and frequent basis with Representatives of Buyer to report on the
general status of the ongoing operations of the Company. The Company shall
promptly notify Buyer of any material change in the normal course of its
business or in the operation of its properties and of any governmental
complaints, investigations, or hearings (or
33
<PAGE>
communications indicating that the same may be contemplated), or the institution
or the threat of material litigation involving such party, and will keep Buyer
fully informed with respect to such events.
(b) Between the date of this Agreement and the Closing Date, the Company
will, and will cause their Representatives during reasonable business hours and
as coordinated with the Company's management, to, (a) afford Buyer and its
Representatives and advisors (collectively, "Buyer's Advisors") full and free
access to all Company employees and personnel and to all Company Contracts,
books and records, and other documents and data, (b) furnish Buyer and Buyer's
Advisors with copies of all such Contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (c) furnish
Buyer and Buyer's Advisors with such additional financial, operating, and other
data and information as Buyer may reasonably request.
(c) In the event the Agreement is terminated as provided in Section 9.1,
Buyer agrees to return to the Company all Contracts, books, records, documents,
data and other information which were provided to Buyer by the Company,
including all copies thereof and/or extracts therefrom.
5.3 OPERATIONS PRIOR TO CLOSING DATE
--------------------------------
(a) In addition to any other express obligation under this Agreement,
between the date of this Agreement and the Closing Date, the Company will do
each of the following, and the Company also represents that from the date of the
Interim Balance Sheet to the date of this Agreement the Company has done the
following:
(i) conduct the business of the Company only in the usual, regular
and ordinary manner, on a basis consistent with past practice, maintain the
Company's books, accounts and records in the usual, regular and ordinary
manner, on a
basis consistent with past practices, maintain and comply with the terms of
all licenses, permits and other Legal Requirements, and otherwise conduct
the business of the Company only in the Ordinary Course of Business;
(ii) use their best efforts to preserve intact the current
organization of the Company, keep available the services of the current
officers, employees, and agents of the current organization of the Company,
and maintain the relations and good will with all suppliers, customers,
34
<PAGE>
landlords, creditors, employees, agents, and others having business
relationships with the Company;
(iii) conduct the business and affairs of the Company in a manner so
that all representations and warranties herein will be true and correct at
Closing;
(iv) maintain all of the Company Assets in good repair, order and
condition, and continue to perform all of the Company's obligations under
the Contracts; and
(v) pay all expenses and accounts payable incurred in connection
with the operation of the Company's business in the usual, regular and
ordinary manner on a basis consistent with past practice.
(b) Except as set forth in EXHIBIT 3.14, the Company agrees that during the
------------
period from the date of this Agreement to and including the Closing Date,
without the prior written consent of Buyer, it will not do any of the following
and the Company also represents that from the date of the Interim Balance Sheet
to the date of this Agreement the Company has not done any of the following:
(i) except in the Ordinary Course of Business, permit any of the
Company Assets to be subjected to any Encumbrance;
(ii) sell, transfer or otherwise dispose of any Company Assets
except in the Ordinary Course of Business;
(iii) write off as uncollectible any note or accounts receivable,
except write-offs in the Ordinary Course of Business charged to applicable
reserves, which individually or in the aggregate are not material to the
Company;
(iv) accelerate the collection of any accounts receivable or other
amounts payable to the Company;
(v) cancel or waive any claims or rights of substantial value; or
(vi) make any change in any method of accounting or auditing practice.
5.4 NOTIFICATION
------------
Between the date of this Agreement and the Closing Date, the Principal and
the Company will promptly notify Buyer in
35
<PAGE>
writing if the Principal or the Company becomes aware of any fact or condition
that causes or constitutes a Breach of any of representations and warranties of
the Principal or the Company as of the date of this Agreement and before
Closing, or if the Principal or the Company becomes aware of the occurrence
after the date of this Agreement of any fact or condition that would (except as
expressly contemplated by this Agreement) cause or constitute a Breach of any
such representation or warranty had such representation or warranty been made as
of the time of occurrence or discovery of such fact or condition. During the
same period, the Company will promptly notify Buyer of the occurrence of any
Breach of any covenant of the Company in this
36
<PAGE>
Section 5 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 7 impossible or unlikely.
5.5 NO NEGOTIATION
--------------
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, the Principal and the Company will not, and will not permit any of
their Representatives to, directly or indirectly solicit, initiate, respond to
or encourage any inquiries or proposals from, discuss or negotiate with, provide
any non-public information to, or consider the merits of any unsolicited
inquiries or proposals from, any Person (other than Buyer) relating to any
transaction involving the sale of the business or assets (other than in the
Ordinary Course of Business) of the Company, or any of the capital stock of the
Company, or any merger, consolidation, business combination, or similar
transaction involving the Company.
6. COVENANTS OF BUYER PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
--------------------------------
As promptly as practicable after the date of this Agreement, Buyer will use
its good faith efforts to make all filings and seek all approvals required by
Legal Requirements and obtain all Governmental Authorizations necessary or
advisable to consummate the Contemplated Transactions (including, without
limitation, those filings, approvals and authorizations necessary or advisable
for the Buyer's financing of the Contemplated Transactions). Between the date
of this Agreement and the Closing Date, Buyer will cooperate with Seller with
respect to all filings that Seller is required by Legal Requirements to make in
connection with the Contemplated Transactions.
6.2 NOTIFICATION
------------
Between the date of this Agreement and the Closing Date, Buyer will
promptly notify the Company in writing if Buyer becomes aware of any fact or
condition that causes or constitutes a Breach of any representations and
warranties of Buyer as of the date of this Agreement and before Closing, or if
Buyer becomes aware of the occurrence after the date of this Agreement of any
fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
by Buyer had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. During the
37
<PAGE>
same period, Buyer will promptly notify the Company of the occurrence of any
Breach of any covenant of Buyer in this
38
<PAGE>
Section 6 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 8 impossible or unlikely.
6.3 NO NEGOTIATION
--------------
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, the Buyer will not, and will not permit any of their Representatives
to, directly or indirectly solicit, initiate, respond to or encourage any
inquiries or proposals from, discuss or negotiate with, provide any non-public
information to, or consider the merits of any unsolicited inquiries or proposals
from, any Person (other than Seller) relating to any transaction involving the
sale of the business or assets (other than in the Ordinary Course of Business)
of the Company, or any merger, consolidation, business combination, or similar
transaction involving the Company. Buyer, however, shall not be precluded from
taking any of the foregoing actions in relation to the financing of the
Contemplated Transaction and/or Buyer's business.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Company Assets and to take the other
actions required to be taken by Buyer at the Closing are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
---------------------------
All of the representations and warranties of the Principal and the Company
in this Agreement (considered collectively), and each of these representations
and warranties (considered individually), must have been materially accurate as
of the date of this Agreement, and must be materially accurate as of the Closing
Date as if made on the Closing Date.
7.2 PERFORMANCE
-----------
(a) All of the covenants and obligations that the Principal and the Company
are required to perform or to comply with pursuant to this Agreement at or prior
to the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
(b) Each document required to be delivered by Seller pursuant to Section
2.4 must have been delivered.
39
<PAGE>
7.3 GOVERNMENTAL AUTHORIZATIONS
---------------------------
Each of the filings, approvals and authorizations required by any state
agency or other Governmental Body in order to consummate the Contemplated
Transactions must have been obtained and must be in full force and effect (it
being agreed that no closing shall take place until such filings, approvals and
authorizations are obtained). All Governmental Authorizations required by
Buyer's lender in order to finance the Contemplated Transactions must also have
been obtained and be in full force and effect.
7.4 NO PROHIBITION
--------------
Neither the consummation nor the performance of any of the Contemplated
Transactions (or the financing thereof) will, directly or indirectly (with or
without notice or lapse of time), materially contravene, or conflict with, or
result in a material violation of, or cause Buyer or any Person affiliated with
Buyer to suffer any material adverse consequence under any applicable Legal
Requirement or Order.
7.5 MATERIAL ADVERSE CHANGE
-----------------------
There shall not have occurred any change in the Company's financial
condition, business, property or prospects nor shall have there occurred any
change in the business condition of the Company's customers or suppliers nor any
change in the regulatory or competitive environment, which in the reasonable
judgment of Buyer materially adversely affects the Company, the business of the
Company or the condition (financial or otherwise) of the Company.
7.6 FINANCIAL STATEMENTS
--------------------
The Company must have delivered to Buyer an audited balance sheet of the
Company for the year end December 31, 1996, and the related audited consolidated
statements of income, changes in stockholders' equity, and cash flow
(collectively, the "1996 Financial Statements"). The 1996 Financial Statements
must be reasonably satisfactory to Buyer in form and substance, and must not
disclose any material change in the financial condition of the Company from that
shown in the Interim Balance Sheet.
In the event that each and every one of these conditions precedent to the
obligations of Buyer shall not have been satisfied prior to or at the Closing,
then Buyer may (but shall not be obligated to) waive such unsatisfied condition
or extend the Closing Date to allow additional time for such condition to
40
<PAGE>
be satisfied. Any such waiver or extension shall be without prejudice to any
other rights and remedies Buyer may have hereunder or at law or in equity.
8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to sell the Company Assets and to take the other
actions required to be taken by Seller at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Seller, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
---------------------------
All of Buyer's representations and warranties in this Agreement (considered
collectively), and each of these representations and warranties (considered
individually), must have been materially accurate as of the date of this
Agreement and must be materially accurate as of the Closing Date as if made on
the Closing Date.
8.2 BUYER'S PERFORMANCE
-------------------
(a) All of the covenants and obligations that Buyer is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied with in all
material respects.
(b) Each of the documents required to be delivered by Buyer pursuant to
Section 2.4 must have been delivered and the cash payments required to be made
by Buyer pursuant to Section 2.4 must have been made.
9. TERMINATION
9.1 TERMINATION
-----------
(a) This Agreement may be terminated:
(i) by Buyer, if a material Breach of any provision of this Agreement has
been committed by Seller and/or the Principal and such Breach has not been
waived;
(ii) by Seller, if a material Breach of any provision of this Agreement has
been committed by Buyer and such Breach has not been waived.
41
<PAGE>
(iii) by Buyer: if any of the conditions in Section 7 have not been
satisfied as of July 31, 1997; or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this Agreement) and Buyer has not waived such condition on or
before July 31, 1997;
(iv) by Seller: if any of the conditions in Section 8 have not been
satisfied as of July 31, 1997; or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Seller to comply with its
obligations under this Agreement) and Seller has not waived such condition on or
before July 31, 1997;
(v) by Seller: if any of the conditions in Section 7.3 or 7.4 have
not been satisfied as of July 31, 1997, and Buyer has not waived such
conditions; or
(vi) by mutual consent of Buyer and Seller.
(b) If this Agreement is terminated pursuant to Section 9.1(a), all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Section 11.3 will survive, and the Escrow Fund may be
recovered as provided in the Pre-Closing Escrow Agreement and Section 2.6
hereof.
(c) The aforesaid right of termination shall be in addition to, and not
in lieu of, any other legal or equitable remedy, including specific performance.
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL
--------
All representations, warranties, covenants, and obligations in this
Agreement, the certificates delivered pursuant to Section 2.4(a) and (b), and
any other certificate or document delivered pursuant to this Agreement shall
survive the Closing for a period of one (1) year.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLER
------------------------------------------------
(a) The Company and the Principal will indemnify and hold harmless Buyer
and its respective Representatives, stockholders, controlling persons, and
affiliates (collectively, the "Indemnified Persons") for, and will pay to the
Indemnified Persons the amount of, any loss, liability, claim, damage or expense
(including costs of investigation and defense and
42
<PAGE>
reasonable attorneys' fees), whether or not involving a third-party claim
(collectively, "Damages"), arising or resulting from, directly or indirectly,
from or in connection with:
(i) any Breach of any representation or warranty made by the Company
or the Principal in this Agreement or any other certificate or document
delivered by the Company or the Principal pursuant to this Agreement;
(ii) any Breach by the Company or the Principal of any covenant or
obligation of the Company or the Principal in this Agreement or in any
Seller's Closing Documents or any other document delivered by the Company
or the Principal pursuant to this Agreement;
(iii) regardless of whether it may also constitute a Breach under
Section 10.2 (a)(i) or (ii) above, the operation, management or ownership
of the Company Assets, arising or related to the period on or prior to the
Closing Date (whether known or unknown on the Closing Date), but excluding
those matters expressly assumed by Buyer under the Assumption Agreement.
(b) With respect to the aforesaid indemnification obligation, the parties
agree as follows: (i) the Post Closing Escrow Fund has been established to
provide a source of funds to satisfy the aforesaid indemnification obligation
but the Principal's and the Seller's liability for Damages is not limited to the
Post-Closing Escrow Fund, (ii) that the aggregate amount of Damages that Buyer
may recover from the Seller and the Principal shall not exceed $3,000,000, and
(iii) Buyer shall not be entitled to assert any right to indemnification
hereunder against the Seller or the Principal until Buyer's good faith estimate
of all Damages for which the Seller and/or the Principal indemnify Buyer
hereunder exceeds $20,000 at which time Buyer shall be entitled to the
indemnification for all Damages (subject to the limitations described in subpart
(ii) above).
(c) Notwithstanding the foregoing, the parties agree that Buyer shall not
be entitled to assert, seek or obtain any Damages from Seller or the Principal
resulting from the issuance of any Order against Seller or the Principal which
prohibits or enjoins the Closing.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER
-----------------------------------------------
Buyer will indemnify and hold harmless the Seller and its respective
Representatives, stockholders, controlling persons,
43
<PAGE>
and affiliates (collectively, the "Seller's Indemnified Persons"), and will pay
to Seller's Indemnified Persons the amount of any Damages arising, directly or
indirectly, from or in connection with:
(a) any Breach of any representation or warranty made by Buyer in this
Agreement or in any certificate delivered by Buyer pursuant to this
Agreement; or
(b) any Breach by Buyer of any covenant or obligation of Buyer in this
Agreement.
44
<PAGE>
10.4 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
-------------------------------------------------
(a) Promptly after receipt by an indemnified party under Section 10.2 or
10.3, of notice of the commencement of any Proceeding against it or of notice
that such Proceeding has been Threatened against it, such indemnified party
will, if a claim is to be made against an indemnifying party under such Section,
give notice to the indemnifying party of the commencement of such claim or
threatened Proceeding, but the failure to notify the indemnifying party will not
relieve the indemnifying party of any liability that it may have to any
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action or the ability of the indemnifying party to
obtain otherwise available insurance proceeds is materially prejudiced by the
indemnified party's failure to give such notice.
(b) If any Proceeding referred to in Section 10.4(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such Proceeding, the indemnifying party will be entitled to
participate in such Proceeding and, to the extent that it wishes (unless (i) the
indemnifying party is also a party to such Proceeding and the indemnified party
determines in good faith that joint representation would be inappropriate, or
(ii) the indemnifying party fails to provide reasonable assurance to the
indemnified party of its financial capacity to defend such Proceeding and
provide indemnification with respect to such Proceeding), to assume the defense
of such Proceeding with counsel satisfactory to the indemnified party and, after
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such Proceeding, the indemnifying party will not, as long
as it diligently conducts such defense, be liable to the indemnified party under
this Section 10 for any fees of other counsel or any other expenses with respect
to the defense of such Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such Proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the
defense of a Proceeding, (i) no compromise or settlement of such claims may be
effected by the indemnifying party without the indemnified party's consent
unless (A) there is no finding or admission of any violation of Legal
Requirements or any violation of the rights of any Person and no effect on any
other claims that may be made against the indemnified party, and (B) the sole
relief provided is monetary damages that are paid in full by the indemnifying
party; and (ii) the indemnified party will have no liability with respect to any
compromise or settlement of such claims effected without its consent. If notice
is given to an indemnifying party of the
45
<PAGE>
commencement of any Proceeding and the indemnifying party does not, within ten
business days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
(c) Notwithstanding the foregoing, if an indemnified party determines in
good faith that there is a reasonable probability that a Proceeding may
materially adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party, and
following a good faith attempt to consult with the indemnifying party, assume
the exclusive right to defend, compromise, or settle such Proceeding, but the
indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
10.5 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS
-------------------------------------------
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
--------
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants.
11.2 INTENTIONALLY DELETED
---------------------
11.3 CONFIDENTIALITY
---------------
All information and documentation furnished to Buyer shall be covered by
that certain agreement dated March 10, 1997 (the "Confidentiality Agreement").
Prior to Closing, no party or affiliate of a party hereto or to the
Confidentiality Agreement will issue or cause publication of any press release
or other announcement or public communications with respect to the
46
<PAGE>
Contemplated Transactions, including without limitation a general announcement
to such party's employees, without the prior consent of the other parties
hereto, which consent will not be unreasonably withheld; provided, however, that
nothing herein will prohibit any party (or affiliate) from issuing or causing
publication of any such press release, announcement or public communication to
the extent that such party (or affiliate) reasonably determines such action to
be required by law, any regulatory agency or the rules of any national stock
exchange or association applicable to it, in which case the party (or affiliate)
making such determination will use reasonable efforts to allow the other party
reasonable time to comment on such release or announcement in advance of its
issuance or to make any disclosure necessary to obtain any consents required or
deemed appropriate by Buyer.
11.4 NOTICES
-------
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by facsimile
(with written confirmation of receipt), provided that a copy is mailed by
registered mail, return receipt requested, or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):
If to Buyer:
c/o Talton Holdings, Inc.
3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Telephone: (214) 528-7247
Facsimile: (214) 528-9929
Attention: Todd W. Follmer
With a copy to:
Stutzman & Bromberg,
A Professional Corporation
2323 Bryan Street, Suite 2200
Dallas, Texas 75201
Telephone: (214) 969-4900
Facsimile: (214) 969-4999
Attention: Carl C. Christoff
47
<PAGE>
If to any Seller and/or the Company:
c/o Security Telecom Corporation
P. O. Box 595789
Dallas, Texas 75359
Telephone: (214) 808-9777
Facsimile: (972) 770-2156
Attention: William M. Ohland
48
<PAGE>
With a copy to:
Graham, Bright & Smith
Third Floor, Two Lincoln Centre
5420 LBJ Freeway
Dallas, Texas 75240-2384
Telephone: (972) 788-5300
Facsimile: (972) 770-2156
Attention: Thomas J. Colven, III
11.5 JURISDICTION; SERVICE OF PROCESS
--------------------------------
Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
parties in the courts of the State of Texas, County of Dallas, or, if it has or
can acquire jurisdiction, in the United States District Court for the Northern
District of Texas, and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any
action or proceeding referred to in the preceding sentence may be served on any
party anywhere in the world.
11.6 FURTHER ASSURANCES
------------------
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.7 WAIVER
------
The rights and remedies of the parties to this Agreement are cumulative and
not alternative. Neither the failure nor any delay by any party in exercising
any right, power, or privilege under this Agreement or the documents referred to
in this Agreement will operate as a waiver of such right, power, or privilege,
and no single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or the
exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this Agreement
or the documents referred to in this Agreement can be discharged by one party,
in whole or in part, by a waiver or renunciation of the claim or right unless in
writing signed by the other party; (b) no waiver that may be given by a party
will be
49
<PAGE>
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the
50
<PAGE>
right of the
party giving such notice or demand to take further action without notice or
demand as provided in this Agreement or the documents referred to in this
Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION
---------------------------------
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter and constitutes (along with the documents referred
to in this Agreement) a complete and exclusive statement of the terms of the
agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the party
to be charged with the amendment.
11.9 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
--------------------------------------------------
No party may assign any of its rights under this Agreement without the
prior consent of the other parties, except that Buyer may assign this Agreement
and/or any of its rights under this Agreement to (i) any affiliate of Buyer, or
(ii) any bank, financial institution and/or other party providing any loans or
financing to Buyer. No such assignment by Buyer shall affect or release Buyer
from liability hereunder. Subject to the preceding sentences, this Agreement
will apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties. Nothing expressed or referred
to in this Agreement will be construed to give any Person other than the parties
to this Agreement any legal or equitable right, remedy, or claim under or with
respect to this Agreement or any provision of this Agreement. This Agreement
and all of its provisions and conditions are for the sole and exclusive benefit
of the parties to this Agreement and their successors and assigns.
11.10 SEVERABILITY
------------
If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid
or unenforceable only in part or degree will remain in full force and effect to
the extent not held invalid or unenforceable.
11.11 SECTION HEADINGS, CONSTRUCTION
------------------------------
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All
51
<PAGE>
words used in this Agreement will be construed to be of such gender or number as
the circumstances require. Unless otherwise expressly provided, the word
"including" does not limit the preceding words or terms. The parties, in
acknowledgment that all of them have been represented by counsel and that this
Agreement has been carefully negotiated, agree that the construction and
interpretation of this Agreement and other documents entered into in connection
herewith shall not be affected by the identity of the party or parties under
whose direction or at whose expense this Agreement and such documents were
prepared or drafted.
11.12 TIME OF ESSENCE
---------------
With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.
11.13 GOVERNING LAW
-------------
This Agreement will be governed by the laws of the State of Texas without
regard to conflicts of laws principles.
11.14 COUNTERPARTS
------------
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
52
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
TALTON HOLDINGS, INC.,
a Delaware corporation
By: ________________________
Name:
Title:
_______________________________
WILLIAM M. OHLAND
SECURITY TELECOM CORPORATION,
a Texas corporation
By:_________________________
Name:
Title:
53
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit 1(a): Calculation of the Adjustment Amount
Exhibit 1(b): STC Subordinated Note Agreement
Exhibit 2.1(a): Excluded Assets
Exhibit 2.3(a): Post-Closing Escrow Fund
Exhibit 2.4(a)(ii): Consulting Agreement
Exhibit 2.4(a)(iii)-1: List of employees signing
Employment Agreements
Exhibit 2.4(a)(iii)-2:` Employment Agreement
Exhibit 2.4(a)(iv): Non-Competition Agreement
Exhibit 2.4(a)(viii): Legal Opinion - Seller's counsel
Exhibit 2.4(b)(vi): Legal Opinion - Buyer's counsel
Exhibit 2.6: Pre-Closing Escrow Agreement
Exhibit 3.1 Former Subsidiaries and Corporate
Names
Exhibit 3.6(a)(ii): Installed Lines
Exhibit 3.6(a)(iv): Inventory
Exhibit 3.6(a)(v): Vehicles
Exhibit 3.6(a)(x): Furniture, Fixtures and Equipment
Exhibit 3.7: Accounts Receivable
Exhibit 3.8: Related Party Contracts
Exhibit 3.9: Contested Taxes and Proposed
Assessments
Exhibit 3.10: Material Adverse Change
Exhibit 3.11: Employee Benefit Plans
Exhibit 3.12: Governmental Authorizations
Exhibit 3.13(a): Pending Proceedings
Exhibit 3.13(b) Past Proceedings
Exhibit 3.14: Events outside the Ordinary
Course of Business
Exhibit 3.15(a)(i): Pay Telephone Location Agreements
Exhibit 3.15(a)(ii): Service Agreements
Exhibit 3.15(a)(iii): Leases
Exhibit 3.15(a)(iv): Agreements regarding LEMS and
Intellectual Property
Exhibit 3.15(a)(v): Miscellaneous Contracts
Exhibit 3.15(b): Contract Defaults
Exhibit 3.16 List of Insurance Policies
Exhibit 3.18: List of Employees
Exhibit 3.20: Intellectual Property Assets
Exhibit 3.23: Seller's Brokers
Exhibit 4.4: Buyer's Brokers
LIST OF EXHIBITS
<PAGE>
EXHIBIT 10.4
FIRST AMENDMENT TO ASSET
PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Amendment") is made
---------
and entered into as of June 21, 1997 by and among TALTON HOLDINGS, INC.
("Buyer"), SECURITY TELECOM CORPORATION ("Seller") and WILLIAM M. OHLAND
----- ------
("Principal").
- -----------
W I T N E S S E T H:
WHEREAS, Buyer, Seller and Principal have entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") dated as of May 9, 1997, pursuant to
------------------------
which Buyer has agreed to purchase from Seller all of the Company Assets for the
Purchase Price set forth therein (unless the context otherwise requires, all
capitalized terms utilized herein shall have the meanings ascribed to them in
the Asset Purchase Agreement);
WHEREAS, the parties desire to amend the Asset Purchase Agreement in
certain respects as more specifically set forth herein.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
and undertakings set forth herein and in the Asset Purchase Agreement, the
parties hereby agree as follows:
1. The parties have agreed to revise the Purchase Price by (a)
eliminating the Subordination STC Note and the STC Subordinated Note
Agreement,(b) decreasing the cash portion of the Purchase Price to be paid at
closing by $1,500,000 and (c) providing that Buyer shall issue 900 shares of
Buyer's Class A Common Stock to Seller. Accordingly, the Asset Purchase
Agreement is hereby amended by deleting all references therein to the
Subordinated STC Note and the STC Subordinated Note Agreement, by changing the
$12,650,000 figure in Section 2.2(a)(i) to $11,150,000 and by providing that
Buyer shall issue to Seller 900 shares of the Buyer's Class A Common Stock at
Closing.
2. The following amendments to the Exhibits to the Asset Purchase
Agreement are hereby made:
Exhibits 2.3(a), 2.4(a)(iii)-1, 2.4(a)(iii)-2, 3.12, 3.14,
3.15(a)(ii), 3.15(a)(iii), 3.15(a)(v) and 3.15(b) are each hereby
replaced with Exhibits 2.3(a), 2.4(a)(iii)-1, 2.4(a)(iii)-2, 3.12,
3.14, 3.15(a)(ii), 3.15(a)(iii), 3.15(a)(v) and 3.15(b) attached
hereto.
3. In all other respects, the Asset Purchase Agreement is ratified and
confirmed.
<PAGE>
4. This Amendment may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Amendment and all of which,
when taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the date first written above.
TALTON HOLDINGS, INC.,
a Delaware corporation
By: __________________________
Todd W. Follmer,
Vice President
________________________________
WILLIAM M. OHLAND
SECURITY TELECOM CORPORATION,
a Texas corporation
By: __________________________
William M. Ohland,
Vice President
<PAGE>
EXHIBIT 2.4(A)(III)-1
---------------------
LIST OF EMPLOYEES SIGNING EMPLOYMENT AGREEMENT
1. Jeff Rothell
<PAGE>
EXHIBIT 2.5(F)(II)
------------------
STATE HOLDBACK AMOUNT
- ----- ---------------
Arizona
Colorado
Florida
Alabama
Georgia
Kansas
Kentucky
Louisiana
Minnesota
Missouri
New Mexico
Nevada
Oklahoma
Tennessee
Texas
Iowa
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Talton Holdings,
Inc. on Form S-4 of our report dated April 4, 1997 (August 11, 1997 as to Note
13) with respect to the consolidated financial statements of Talton Holdings,
Inc. as of December 31, 1996 and for the one month period from December 1,
1996 (date of acquisition) to December 31, 1996; our report dated April 4,
1997 with respect to the financial statements of AmeriTel Pay Phones, Inc. as
of November 30, 1996 and for the eleven months ended November 30, 1996; and
our report dated April 4, 1997 with respect to the consolidated financial
statements of Talton Telecommunications Corporation as of November 30, 1996
and for the eleven months ended November 30, 1996; all appearing in the
Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche llp
Dallas, Texas
August 11, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 22, 1996, and to all references to our firm, included in or made a
part of this registration statement.
Kansas City, Missouri,
August 11, 1997
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' REPORT
We consent to the use in this registration statement of Talton Holdings,
Inc. on Form S-4 of our report dated March 4, 1996, with respect to the
consolidated financial statements of Talton Telecommunications as of December
31, 1995, and for each of the two years in the period ended December 31, 1995;
all appearing in the prospective, which is part of this registration
statement. We also consent to the reference to us under the heading "experts"
in such prospective.
Borland, Benefield, Crawford &
Webster, P.C.
Birmingham, Alabama
March 4, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Talton Holdings,
Inc. on Form S-4 of our report dated May 23, 1997 with respect to the
consolidated financial statements of Security Telecom Corporation and
subsidiary as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996 appearing in the Prospectus, which is part
of this Registration Statement. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
Davis, Clark and Company, P.C.
Dallas, Texas
August 11, 1997
<PAGE>
Exhibit 99.1
------------
LETTER OF TRANSMITTAL
for
11% Senior Notes Due 2007
of
Talton Holdings, Inc.
Pursuant to the Exchange Offer in Respect of
All of their Outstanding 11% Senior Notes due 2007
for
11% Senior Notes due 2007, Series B
Pursuant to the Prospectus Dated, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, OR SUCH LATER DATE AND TIME TO WHICH THE EXCHANGE OFFER MAY BE EXTENDED
(THE "EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN PRIOR TO THE
EXPIRATION DATE.
To: U.S. Trust Company of Texas, N.A., Exchange Agent
By Registered or Certified Mail, By Facsimile
Hand or Overnight Courier U.S. Trust Company of Texas, N. A.
U.S. Trust Company of Texas, N.A. Attention: Corporate Trust Department
2001 Ross Avenue, Suite 2700 (214) 754-1303
Dallas, TX 75201
Attention: Corporate Trust Department Confirm by Telephone:
(214) [______________]
Delivery of this Letter of Transmittal to an address, or transmission via
telegram, telex or facsimile, other than as set forth above will not constitute
a valid delivery. The instructions in this Letter of Transmittal should be read
carefully before this Letter of Transmittal is completed.
HOLDERS THAT WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution of this Letter of Transmittal, the undersigned acknowledges
receipt of the Prospectus (the "Prospectus"), dated , 1997, of Talton Holdings,
Inc. (the "Issuer"), which, together with this Letter of Transmittal and the
Instructions to this Letter of Transmittal (the "Letter of Transmittal"),
constitute the Issuer's offer (the "Exchange Offer") to exchange its 11% Series
B Senior Notes due 2007 (the "New Notes") that have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which the Prospectus constitutes a part, for an equal
principal amount of its outstanding 11%
1
<PAGE>
Senior Notes due 2007 (the "Old Notes") tendered under this Letter of
Transmittal, upon the terms and subject to the conditions set forth in the
Prospectus.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, is
acquiring the New Notes in its ordinary course of business, and has no
arrangement or understanding with any person to participate in the distribution
of the New Notes to be received in the Exchange Offer.
This Letter of Transmittal is to be used by Holders if (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent with
this Letter of Transmittal by Holders; (ii) tender of Old Notes is to be made by
book-entry transfer to the Exchange Agent's account at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in the Prospectus under
"The Exchange Offer--Procedures for Tendering" by any financial institution that
is a participant in DTC and whose name appears on a security position listing as
the owner of Old Notes (such participants, acting on behalf of Holders (as
defined below), are referred to in this Letter of Transmittal, together with
such Holders, as "Acting Holders"); or (iii) tender of Old Notes is to be made
according to the guaranteed delivery procedures set forth in the Prospectus
under "The Exchange Offer--Guaranteed Delivery Procedures." Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person (i)
in whose name Old Notes are registered on the books of the Issuer or any other
person that has obtained a properly completed bond power from the registered
Holder or (ii) whose Old Notes are held of record by DTC and who desires to
deliver such Old Notes by book entry transfer at DTC.
The undersigned has completed, executed, and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders that wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
All capitalized terms used in this Letter of Transmittal and not defined in
this Letter of Transmittal have the meaning ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS THAT WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal.
2
<PAGE>
DESCRIPTION OF OLD NOTES
Certificate Aggregate
Number(s)* (Attach Principal
Name(s) and Address(es) of Holder(s) signed list if Amount Tendered
(Please fill in, if blank) necessary) (if less than all)**
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders that wish to tender with respect to all
Old Notes listed. See Instruction 2.
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
---------------------------------------------
DTC Book-Entry Account No.:
------------------------------------------------
Transaction Code No.:
------------------------------------------------------
If Holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available; (ii) time will not permit this Letter of Transmittal,
certificates representing such Old Notes, or other required documents to reach
the Exchange Agent prior to the Expiration Date; or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange Offer--
Guaranteed Delivery Procedures."
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
3
<PAGE>
Name(s) of Holder(s) of Old Notes:
----------------------------------
Window Ticket No. (if any):
--------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
------------------------------
Name of Eligible Institution that Guaranteed Delivery:
----------------
DTC Book-Entry Account No.:
----------------------------------
If Delivered by Book-Entry Transfer,
Name of Tendering Institution:
-------------------------------------
Transaction Code No.:
-------------------------------------------
[_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
----------------------------------------
Address:
------------------------------------
-------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Issuer the principal amount of Old Notes indicated above. Subject to and
effective upon the acceptance for exchange of the principal amount of Old Notes
tendered in accordance with this Letter of Transmittal, the undersigned sells,
assigns, and transfers to, or upon the order of, the Issuer all right, title,
and interest in and to the Old Notes tendered by this Letter of Transmittal.
The undersigned hereby irrevocably constitutes and appoints the Exchange Agent
and its agent and
4
<PAGE>
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Issuer and as Trustee under the Indenture for the Old Notes and the
New Notes) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Issuer, or
transfer ownership of such Old Notes on the account books maintained by DTC,
together, in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Issuer and (ii) present such Old
Notes for transfer on the books of the Issuer and receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph is and will be deemed irrevocable and coupled with an
interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign, and transfer the Old Notes tendered
by this Letter of Transmittal and that the Issuer will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions, charges,
and encumbrances and not subject to any adverse claim when the same are acquired
by the Issuer. The undersigned also acknowledges that this Exchange Offer is
being made in reliance upon an interpretation by the staff of the Securities and
Exchange Commission that the New Notes issued in exchange for the Old Notes
pursuant to the Exchange Offer may be offered for resale, resold, and otherwise
transferred by the holders thereof (other than any such holder that is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holders' business and such holders have no arrangement with any
person to participate in the distribution of such New Notes. The undersigned
acknowledges that if he or she is participating in the Exchange Offer for the
purpose of distributing the New Notes, the undersigned must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. If the undersigned is not a
broker-dealer, the undersigned represents that it is not engaged in, and does
not intend to engage in, a distribution of the New Notes. If the undersigned is
a broker-dealer that will receive New Notes for its own account in exchange for
Old Notes and the undersigned represents that such Old Notes were acquired as a
result of market-making activities or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Notes, the undersigned will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such Holder's
business; (ii) such Holder has no arrangements with any person to participate in
the distribution of such New Notes; and (iii) such Holder is not an "affiliate,"
as defined under Rule 405 of the Securities Act, of the Issuer or, if such
Holder is an affiliate, that such Holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Issuer to be necessary or
desirable to complete the assignment and transfer of the Old Notes tendered by
this Letter of Transmittal.
5
<PAGE>
For purposes of the Exchange Offer, the Issuer will be deemed to have
accepted validly tendered Old Notes when, as, and if the Issuer has given oral
or written notice of such acceptance to the Exchange Agent. If any tendered Old
Notes are not accepted for exchange pursuant to the Exchange Offer for any
reason, certificates for any such unaccepted Old Notes will be terminated
(except as noted below with respect to tenders through DTC), without expense, to
the undersigned at the address shown below or at a different address shown below
or at a different address as may be indicated under "Special Issuance
Instructions" as soon as practicable following the Expiration Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal will survive the death, incapacity, or dissolution of the
undersigned and every obligation under this Letter of Transmittal will be
binding upon the undersigned's heirs, personal representatives, successors, and
assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer--Procedures for
Tendering" in the Prospectus and in the instructions to this Letter of
Transmittal will constitute a binding agreement between the undersigned and the
Issuer upon the terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in such event in the case of
Old Notes tendered by DTC, by credit to the account at DTC). Similarly, unless
otherwise indicated under "Special Delivery Instructions," please send the
certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signatures, unless, in either event,
tender is being made through DTC. In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and return any Old Notes not tendered or not exchanged in
the name(s) of, and send said certificates to, the person(s) so indicated. The
undersigned recognizes that the Issuer has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Old Notes from the name of the registered holder(s) thereof if the Issuer
does not accept for exchange any of the Old Notes so tendered.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES
REGARDLESS OF WHETHER OLD NOTES ARE BEING PHYSICALLY
DELIVERED WITH THIS LETTER OF TRANSMITTAL)
6
<PAGE>
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears on
a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer, or other person
acting in a fiduciary or representative capacity, such person must set forth his
or her full title below under "Capacity" and submit evidence satisfactory to the
Issuer of such person's authority to so act. See Instruction 3.
If the signature appearing below is not of the registered Holder(s) of the
Old Notes, then the registered Holder(s) must sign a valid proxy.
X Date:
- ----------------------- ----------------------
X Date:
- ----------------------- ----------------------
Signature(s) of
Holder(s) or
Authorized Signatory
Name(s): Address
- ----------------------- -----------------------
- ----------------------- -----------------------
(Please Print) (Including Zip Code)
Capacity: Area Code and Telephone No.:
- ----------------------- -----------------------
Social Security No.:
- ---------------
SIGNATURE GUARANTEE (See Instruction 3)
Certain Signatures Must Be Guaranteed by an Eligible Institution
--------------------------------------------------------------
(Name of Eligible Institution Guaranteeing Signatures)
7
<PAGE>
--------------------------------------------------------------
(Address (Including zip code) and Telephone Number
(including area code) of Firm)
--------------------------------------------------------------
(Authorized Signature)
--------------------------------------------------------------
(Printed Name)
--------------------------------------------------------------
(Title)
Date: _____________
<TABLE>
<S> <C>
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 3 and 4)
To be completed ONLY if certificates for To be completed ONLY if certificates for Old Notes in a
Old Notes in a principal amount not tendered are principal amount not tendered or not accepted for purchase
are to be issued in the name of, or the New or the New Notes issued pursuant to the Exchange Offer are
Notes issued pursuant to the Exchange Offer to be sent to someone other than the person or persons
are to be issued to the order of, someone whose signature(s) appear(s) within this Letter of
other than the person or persons whose Transmittal or to an address different from that shown in
signature(s) appear(s) within this Letter of the box entitled "Description of Old Notes" within this
Transmittal or issued to an address Letter of Transmittal.
different from that shown in the box
entitled "Description of Old Notes" within
this Letter of Transmittal, or if Old Notes
tendered by book-entry transfer that are not
accepted for purchase are to be credited to
an account maintained at DTC.
Name:.............................. Name:..........................
(Please Print) (Please Print)
Address:........................... Address:.......................
(Please Print) (Please Print)
................................... ...............................
Zip Code Zip Code
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
................................... ...............................
Taxpayer Identification or Taxpayer Identification or
Social Security Number Social Security Number
</TABLE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Old Notes. The certificates
for the tendered Old Notes (or a confirmation of a book-entry into the Exchange
Agent's account at DTC of all Old Notes delivered electronically), as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile of this Letter of Transmittal and any other documents required by this
Letter of Transmittal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. The
method of delivery of the tendered Old Notes, this Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the Holder and, except as otherwise provided below, the delivery will be deemed
made only when actually received by the Exchange Agent. Instead of delivery by
mail, it is recommended that the Holder use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assume timely
delivery. No Letter of Transmittal or Old Notes should be sent to the Issuer.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) that cannot deliver their Old Notes, this Letter
of Transmittal, or any other documents required by this Letter of Transmittal to
the Exchange Agent prior to the Expiration Date must tender their Old Notes and
follow the guaranteed delivery procedures set forth in the Prospectus. Pursuant
to such procedures (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail, or hand
delivery) setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes, and the principal amount of Old
Notes tendered, stating that the tender is being made thereby, and guaranteeing
that, within five business days after the Expiration Date, this Letter of
Transmittal (or facsimile of this Letter of Transmittal) together with the
certificate(s) representing the Old Notes (or a confirmation of electronic
delivery of book-entry delivery into the Exchange Agent's account at DTC) and
any of the required documents will be deposited by the Eligible Institution with
the Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or facsimile of this Letter of Transmittal), as well as all other
documents required by this Letter of Transmittal and the certificate(s)
representing all tendered Old Notes in proper form for transfer (or a
confirmation of electronic mail delivery of book-entry delivery into the
Exchange Agent's account at DTC), must be received by the Exchange Agent within
five business days after the Expiration Date, all as provided in the Prospectus
under the caption "Guaranteed Delivery Procedures." Any Holder of Old Notes that
wishes to tender his or her Old Notes pursuant to the
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guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York
City time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Issuer in its sole discretion, which determination will be final and
binding. The Issuer reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Issuer's acceptance of which would,
in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Issuer's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in this Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Issuer determines. Neither the Issuer, the Exchange Agent, nor any
other person will be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor will any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering Holders of Old Notes, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
2. Partial Tenders. If less than the entire principal amount of any Old
Notes is tendered, the tendering Holders should fill in the principal amount
tendered in the third column of the chart entitled "Description of Old Notes."
The entire principal amount of Old Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated. If the entire principal
amount of all Old Notes is not tendered, Old Notes for the principal amount of
Old Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated. If the entire principal amount of all Old Notes is
not tendered, Old Notes for the principal amount of Old Notes not tendered and a
certificate or certificates representing New Notes issued in exchange of any Old
Notes accepted will be sent to the Holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal or unless tender is made through DTC, promptly after the Old Notes
are accepted for exchange.
3. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered Holder(s) of the Old Notes tendered by this Letter of
Transmittal, the signature must correspond with the name(s) as written on the
face of the Old Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or facsimile of this Letter of Transmittal)
is signed by the registered Holder(s) of Old Notes tendered and the
certificate(s) for New Notes issued in exchange thereof is to be issued (or any
untendered principal amount of Old Notes is to be reissued) to the registered
Holder, such Holder need not and should not endorse any tendered Old
10
<PAGE>
Note, nor provide a separate bond power. In any other case, such Holder must
either properly endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal, with the signatures on the
endorsement or bond power guaranteed by an Eligible Institution.
If this Letter of Transmittal (or facsimile of this Letter of Transmittal)
or any Old Notes or bond powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, or officers of corporations or
others acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and unless waived by the Issuer, evidence satisfactory to
the Issuer of their authority so to act must be submitted with this Letter of
Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile of this Letter of
Transmittal) must be guaranteed by an Eligible Institution unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered Holder (including any
participant in DTC whose name appears on a security position listing as the
owner of Old Notes) who has not completed the box set forth herein entitled
"Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" or (ii) for the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal (or in the case of tender of the Old
Notes through DTC, if different from DTC). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
5. Transfer Taxes. The Issuer will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered by this Letter of Transmittal, or if tendered Old
Notes are registered in the name of any person other than the person signing
this Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered Holder or any
other person) will be payable by the tendering Holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted with this
Letter of Transmittal, the amount of such transfer taxes will be billed directly
to such tendering Holder
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
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<PAGE>
6. Waiver of Conditions. The Issuer reserves the absolute right to amend,
waive, or modify specified conditions in the Exchange Offer in the case of any
Old Notes tendered.
7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen, or destroyed should contact
the Exchange Agent at the address indicated in this Letter of Transmittal for
further instruction.
8. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified in the Prospectus. Holders may also contact their broker, dealer,
commercial bank, trust company, or other nominee for assistance concerning the
Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
Certificate Surrendered Old Notes Tendered Old Notes Accepted
Delivery Prepared by __________ Check by __________ Date __________
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<PAGE>
Notice of Guaranteed Delivery
for Tender of
11% Senior Notes due 2007
(the "Old Notes")
of
Talton Holdings, Inc.
This form, or one substantially equivalent to this form, must be used to
tender Old Notes pursuant to the Exchange Offer described in the Prospectus
dated ___________, 1997 (the "Prospectus") of Talton Holdings, Inc. (the
"Company"), if a holder of Old Notes cannot deliver a Letter of Transmittal to
the Exchange Agent listed below (the "Exchange Agent") or cannot either deliver
the Old Notes to be tendered or complete the procedure for book-entry transfer
prior to 5:00 P.M., New York City time, on _______, 1997 or such later date and
time to which the Exchange Offer may be extended (the "Expiration Date"). This
form, or one substantially equivalent to this form, must be delivered by hand or
sent by facsimile transmission or mail to the Exchange Agent, and must be
received by the Exchange Agent on or prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering" in the Prospectus. Capitalized terms
used in this form and not defined herein have the meanings ascribed to them in
the Prospectus.
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<PAGE>
To: U.S. Trust Company of Texas, N.A., Exchange Agent
By Registered or Certified Mail, Hand or Overnight Courier
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, TX 75201
Attn: Corporate Trust Department
By Facsimile:
U.S. Trust Company of Texas, N.A.
Attention: Corporate Trust Department
(214) 754-1303
Confirm by Telephone:
(214) [___________]
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via facsimile other than as set forth above does
not constitute a valid delivery.
Ladies and Gentlemen:
The undersigned hereby represents that he or she is the holder of the Old
Notes indicated below and that the Letter of Transmittal cannot be delivered to
the Exchange Agent and/or either the certificates representing such Old Notes
cannot be delivered to the Exchange Agent or the procedure for book-entry
transfer cannot be completed prior to the Expiration Date. The undersigned
hereby tenders the Old Notes indicated below pursuant to the guaranteed delivery
procedures set forth in the Prospectus and the Letter of Transmittal, receipt of
which is hereby acknowledged.
Name(s) of Tender Holder(s):
- --------------------------------------
- --------------------------------------------
Please Print or Type
- --------------------------------------------
Signature
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<PAGE>
Address(es):
- ----------------------------------------
- ---------------------------------------------
Telephone Number(s):
- ------------------------------------------
Name(s) in which Old Notes are registered:
- --------------------------------------
- --------------------------------------------------
Certificate No(s) Principal Amount
(if applicable)* Transferred
------------------ ---------------
------------------ ---------------
------------------ ---------------
------------------ ---------------
------------------ ---------------
_______________
*Need not be completed by book-entry holders.
GUARANTEE OF DELIVERY
(Not to be used for signature guarantee)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or a correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees
that the undersigned will deliver to the Exchange Agent the certificates
representing the Old Notes being tendered by this form in proper form for
transfer (or a confirmation of book-entry transfer of such Old Notes, into the
Exchange Agent's account at the book-entry transfer facility) with delivery of a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, all within five business days after the Expiration Date.
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Name of Firm: ---------------------- ---------------------------------
Authorized Signature
(Please Print) (Please Print)
Address: --------------------------- Name: -------------------------
Please Print or Type
- ------------------------------------ --------------------
Title Zip Code
Telephone No. --------------------- Dated: ------------------------
The institution that completes this form must communicate the guarantee to
the Exchange Agent and must deliver the certificates representing any Old Notes
(or a confirmation of book-entry transfer of such Old Notes into the Exchange
Agent's account at the book-entry transfer facility) and the Letter of
Transmittal to the Exchange Agent within the time period shown herein. Failure
to do so could result in a financial loss to such institution.
16
