<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION NO. 333-33639
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT
NO. 3
TO
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. [_]
----------------
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>
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PRIMARY STANDARD
STATE OR OTHER INDUSTRIAL I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION IDENTIFICATION
NAME INCORPORATION NUMBER NUMBER
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<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
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Talton Invision, Inc. ...... Delaware 4825 75-2722144
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One Source
Telecommunications, Inc. .. Delaware 4825 75-2724447
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</TABLE>
<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
-------------------------------- -------------------------------------
<S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Forepart of Registration Statement;
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
Information................... Forepart of Prospectus; Prospectus
Summary; Risk Factors; Summary Pro Forma
Financial Data; Summary Pro Forma
Financial Data; 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 Pro Forma
Financial Data
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
S-2 Registrants............... Prospectus Summary; Summary Pro Forma
Financial Data; 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
not to be Solicited or in an
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 JANUARY 9, 1998
OFFER TO EXCHANGE
11% SERIES B SENIOR NOTES DUE 2007
FOR ANY AND ALL OUTSTANDING 11% SENIOR NOTES DUE 2007
OF
TALTON HOLDINGS, INC.
GUARANTEED BY;
AMERITEL PAY PHONES, INC.
TALTON TELECOMMUNICATIONS CORPORATION
TALTON TELECOMMUNICATIONS OF CAROLINA, INC.
TALTON STC, INC.
TALTON INVISION, INC.
ONE SOURCE TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, 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." For terms of the guarantees
by the Subsidiary Guarantors, see "Description of Senior Notes--Subsidiary
Guarantees."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 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 , 1998
<PAGE>
The Exchange Offer is being made to satisfy certain obligations of the
Registrants under the Registration Rights Agreement, dated as of June 27,
1997, among the Company, 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 Securities and Exchange
Commission (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
subsidiary of the Company existing on the date of this Prospectus. As of the
date of this Prospectus, all subsidiaries of the Company are, directly or
indirectly, wholly owned by the Company. As of the date of this Prospectus
there is aggregate indebtedness of $600,000 of the Company's Subsidiaries that
is effectively senior to the Senior Notes because the Company is a holding
company. See "Risk Factors--Holding Company Structure."
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. BASED ON INTERPRETATIONS OF THE STAFF OF THE
COMMISSION, "AFFILIATES" OF THE COMPANY (AS SUCH TERM IS DEFINED IN RULE 405
UNDER THE SECURITIES ACT) ARE PROHIBITED FROM TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
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
2
<PAGE>
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 , 1998, unless extended (as
it may be so extended, the "Expiration Date"). 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 ANY 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.
CORPORATE STRUCTURE
Talton Holdings, Inc.
AmeriTel Pay Phones, Inc.(1)(2)
Talton Telecommunications Corporation(1)(2)
Talton Telecommunications of Carolina, Inc.(2)(3)
Talton STC, Inc.(1)(2)
Talton Invision, Inc.(1)(2)
One Source Telecommunications, Inc.(1)(2)
- --------
(1) Wholly owned by Talton Holdings, Inc.
(2) Subsidiary Guarantor.
(3) Wholly owned by Talton Telecommunications Corporation.
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"), and its affiliate Law Enforcement Technology, Inc. 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 September 30, 1997,
the Company owned and operated inmate telephones in 1,781 correctional
facilities in 43 states. Management believes that the Company provides inmate
telecommunications services to over 75% of the county correctional facilities
in the states of Alabama, Illinois, Iowa, Kansas, Missouri, Nebraska, and Utah
and to over 50% of the county correctional facilities in the states of
Colorado, Idaho, Indiana, Kentucky, Minnesota, Mississippi, Montana, Ohio,
Oklahoma, South Dakota, and Tennessee. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, the Company generated pro forma
operating revenues of $139.4 million and $102.4 million, respectively, and pro
forma EBITDA (as defined) of $24.9 million and $15.0 million, respectively.
Management estimates that the market for local and county correctional
facilities exceeds $700,000,000 in gross revenues annually. Management
estimates that approximately 55% of this market is controlled by RBOCs or other
LECs and by IXCs (as defined). The remainder of this market is served by
independent service providers such as the Company, with the Company accounting
for approximately 50% of the market served by independent service providers.
Management believes that no other independent provider accounts for more than
5% of the revenue derived from inmate telephone operations at local and county
correctional facilities.
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.
4
<PAGE>
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 negotiated commission to the correctional facility based upon
actual inmate telephone use. Under the terms of the Company's agreements with
correctional facilities, these commissions are a function of revenues generated
from inmate telephone use. For the nine months ended September 30, 1997 pro
forma facility commissions were approximately 28% of pro forma operating
revenues. 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 recognized 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. On July
31, 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. On October 6, 1997, the Company acquired substantially all of the inmate-
telephone assets ("Invision") of Communications Central Inc. for $42.0 million,
subject to adjustment and subject to a provision for working capital of
approximately $1.2 million provided to the Company pursuant to the purchase
agreement (the "Invision Acquisition"). Invision generated revenues of
approximately $48.9 million in 1996.
RECENT DEVELOPMENTS
On December 19, 1997, the Company completed the acquisition of the inmate
telecommunications assets of Peoples Telephone Company, Inc. ("Peoples
Telephone") for a purchase price of $10.625 million, subject to future
contingencies. On December 29, 1997, the Company completed the acquisition of
the operating assets of the inmate division of North American InTeleCom ("NAI")
from TSC Communications Corp. for a purchase price of $6.5 million, subject to
future contingencies.
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:
5
<PAGE>
. 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.
. 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
September 1997, the Company signed 72 new contracts for facilities,
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
6
<PAGE>
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 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 29 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; on July 31, 1997, the Company acquired substantially all of
the assets of CCC; and on October 6, 1997, the Company consummated the
Invision Acquisition.
. 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 Registrants under the
Registration 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 , 1998, or such later
date and time to which it is extended. Tenders of
Old Notes pursuant to the Exchange 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 expiration or termination
of the Exchange Offer.
Federal Income Tax
Considerations.............. The Exchange Offer will not result in any income,
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 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. Broker-
dealers that receive New Notes for its own account in exchange for Old Notes
may be considered statutory "underwriters" within the meaning of the Securities
Act and, therefore, each 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. BASED ON INTERPRETATIONS OF THE STAFF OF THE COMMISSION,
"AFFILIATES" OF THE COMPANY (AS SUCH TERM IS DEFINED IN RULE 405 UNDER THE
SECURITIES ACT) ARE PROHIBITED FROM TENDERING OLD NOTES IN THE EXCHANGE OFFER.
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"). Each
subsidiary of the Company is, directly or indi-
rectly, wholly owned by the Company, and the Se-
nior Notes will be jointly and severally guaran-
teed by each direct or indirect subsidiary of the
Company existing on the date of this Prospectus.
The Subsidiary Guarantors' liability under the
Subsidiary Guarantees will be limited as de-
scribed in this Prospectus, and the Subsidiary
Guarantees will be released automatically in con-
nection with certain asset sales and disposi-
tions. See "Description of Notes--Subsidiary
Guarantees."
Ranking..................... 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 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 substantially all of the assets
of the Company (including 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 Subsidiary Guarantees, the
Indenture permits the Company and its
Subsidiaries to incur additional indebtedness,
including secured indebtedness, subject to
certain limitations. As of the date of this
Prospectus there is aggregate indebtedness of
$600,000 of the Company's Subsidiaries that is
effectively senior to the Senior Notes because
the Company is a holding company. See "Risk
Factors--Holding Company Structure."
10
<PAGE>
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 re-
deem up to 30% of the original aggregate princi-
pal amount of the Senior Notes with the net cash
proceeds of one or more Equity Offerings at a re-
demption 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." The failure to redeem the Senior
Notes upon the occurrence of a Change of Control
as required by the Indenture would constitute a
Default under the Indenture. A "Change of Con-
trol" is defined by the Indenture to include cer-
tain dispositions of all or substantially all the
assets of the Company; adoption of a plan of dis-
solution or liquidation by the Company; consumma-
tion of certain transactions that result in cer-
tain third parties acquiring beneficial ownership
of more than 50% of the Voting Stock (as defined)
of the Company; or a change in the membership of
the Board of Directors of the Company resulting
in a majority of the directors of the Company not
being Continuing Directors (as defined). For a
detailed description of "Change of Control" see
"Description of Senior Notes--Certain Defini-
tions." Certain events involving a Change of Con-
trol 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 Com-
pany that may be incurred in the future. An event
of default under the Senior Credit Facility or
other indebtedness could result in an accelera-
tion of such indebtedness, in which case the Se-
nior 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." Under New York law,
which governs the Indenture, it is not clear
which transactions would constitute a sale of
"all or substantially all of the assets" of the
Company. See "Risk Factors--Repurchase of Senior
Notes Upon a Change of Control." 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.
11
<PAGE>
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
under "Risk Factors."
12
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
The following unaudited summary pro forma financial and operating data for
the year ended December 31, 1996 and the nine months ended September 30, 1997
give effect to (i) the acquisitions of AmeriTel, Talton Telecommunications, and
Tataka; (ii) the STC Acquisition; (iii) the CCC Acquisition; (iv) the Invision
Acquisition; and (v) 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 gives effect to the Invision Acquisition, as
if such transaction had been consummated on September 30, 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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
PRO FORMA OPERATING DATA:
Operating revenues................................... $139,369 $102,474
Operating expenses:
Telecommunication costs............................ 60,069 45,368
Facility commissions............................... 36,723 28,564
Field operations and maintenance................... 5,451 5,162
Selling, general, and administrative............... 12,085 9,332
Depreciation....................................... 2,660 1,995
Amortization of intangibles........................ 20,936 15,702
Non-recurring expenses............................. 250 --
-------- --------
Total operating expenses......................... 138,174 106,123
-------- --------
Operating income (loss).............................. 1,195 (3,649)
Other (income) expense:
Interest expense, net.............................. 15,904 11,928
Other, net......................................... (116) (985)
-------- --------
Total other (income) expense..................... 15,788 10,943
Income (loss) before income taxes.................... (14,593) (14,592)
Income tax expense................................... -- --
-------- --------
Income (loss) from continuing operations............. $(14,593) $(14,592)
======== ========
OTHER PRO FORMA DATA:
EBITDA(1).......................................... $ 24,907 $ 15,033
Capital Expenditures(2)............................ 7,828 7,402
Ratio of EBITDA to net cash interest expense....... 1.6 1.3
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT
SEPTEMBER 30, 1997
------------------
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 1,000
Total assets............................................... 161,542
Total debt (including current maturities).................. 143,510
Total stockholders' deficit................................ (2,185)
</TABLE>
(see notes on the following page)
13
<PAGE>
NOTES TO SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation and amortization. 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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
EBITDA on a historical pro forma basis before
pro forma adjustments.......................... $16,769 $11,836
Pro forma adjustments:
Billing and collection savings................ 4,146 1,801
Long distance savings......................... 3,027 1,063
Elimination of selling, general, and
administrative costs of acquired businesses.. 512 345
Elimination of non-recurring expenses......... 434 --
Elimination of minority interest.............. 19 (12)
------- -------
Pro forma EBITDA................................ $24,907 $15,033
======= =======
</TABLE>
Although management believes that revenue enhancements, additional cost
reductions, and operating expense synergies will be realized after the Company
has integrated the acquired businesses and has consolidated administrative
functions, including (i) increased revenues resulting from increases in tariff
rates during 1996; (ii) increases in call blocking limits at Invision that were
substantially lowered by Invision in late 1996; and (iii) reductions in bad-
debt expense resulting from the full implementation of Talton
Telecommunications' billing and bad-debt management system, these and other
possible synergies in overhead expenses have not been reflected in the pro
forma financial data. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Revenue and Cost Synergies" for the
effects of these synergies on the financial performance of the Company.
(2) Capital expenditures include only amounts expended for purchase of property
and equipment and the installation of facility contracts.
14
<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 nine months ended
September 30, 1996 and the consolidated financial data of the Company for the
nine months ended September 30, 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 NINE MONTHS NINE MONTHS
DECEMBER 31, ENDED ENDED ENDED ENDED
---------------- NOVEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
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 $42,890 $53,407
Operating expenses:
Telecommunication
costs................. 11,761 18,673 23,317 2,299 19,155 21,571
Facility commissions... 3,901 9,595 13,962 1,455 11,197 14,419
Field operations and
maintenance........... 1,044 1,467 1,816 219 1,352 2,373
Selling, general, and
administrative........ 2,571 4,089 3,921 372 3,002 4,462
Depreciation........... 965 1,359 1,538 111 1,145 1,072
Amortization of intan-
gibles................ 1,392 1,605 1,746 741 1,412 7,788
Non-recurring ex-
penses................ -- -- 684 -- -- --
------- ------- ------- ------- ------- -------
Total operating ex-
penses................ 21,634 36,788 46,984 5,197 37,263 51,685
------- ------- ------- ------- ------- -------
Operating income........ 2,258 3,538 6,679 309 5,627 1,722
Other (income) expense:
Interest expense, net.. 745 1,360 1,469 612 1,210 7,320
Other, net............. (134) (52) 27 (20) 236 (126)
------- ------- ------- ------- ------- -------
Total other expense.... 611 1,308 1,496 592 1,446 7,194
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 2,230 5,183 (283) 4,181 (5,472)
Income tax expense
(benefit).............. (11) 891 1,917 (23) 1,572 (657)
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss..... 1,658 1,339 3,266 (260) 2,609 (4,815)
Extraordinary loss...... -- -- 52 -- -- 4,396
------- ------- ------- ------- ------- -------
Net Income (loss)....... $ 1,658 $ 1,339 $ 3,214 $ (260) $ 2,608 $(9,211)
======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 4,749 $ 6,554 $ 9,936 $ 1,181 $ 7,948 $10,708
Net cash provided (used)
by operating activi-
ties:.................. 4,413 4,809 5,883 (1,419) 6,380 1,048
Net cash provided (used)
by investing activi-
ties:.................. (9,976) (8,022) (7,515) (47,252) (5,692) (27,726)
Net cash provided (used)
by financing activi-
ties:.................. 5,700 4,087 870 48,966 (1,838) 42,971
Capital expendi-
tures(2)............... 3,223 4,669 2,804 269 993 4,457
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997
----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 16,588
Total assets................................................... 129,181
Total debt (including current maturities)...................... 131,366
Total stockholders' deficit.................................... (2,185)
</TABLE>
(see notes on the following page)
15
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL DATA
(1) For purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation, and amortization. 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.
16
<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. Based on interpretations of the
staff of the Commission, "affiliates" of the Company (as such term is defined
in Rule 405 under the Securities Act) are prohibited from tendering Old Notes
in the Exchange Offer. 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 Registrants are 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 September
30, 1997, the Company had approximately $115.6 million of long-term debt
outstanding (including current maturities). In addition, for the nine months
ended September 30, 1997, the Company's earnings were insufficient to cover
fixed charges by approximately $5.5 million. After giving effect to the
acquisition of Tataka, the STC Acquisition, the CCC Acquisition, the Invision
Acquisition, the Offering, and the application of the net proceeds therefrom,
the Company has, as of September 30, 1997, on a pro forma basis $139.8 million
of long-term debt (including current maturities) and a deficit in
stockholders' equity of $2.2 million.
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
17
<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 Company's Subsidiaries are
distinct legal entities, and the rights of holders of the Senior Notes against
the Subsidiary Guarantors will be subject to the rights of the Subsidiary
Guarantors' creditors, to the extent senior to the obligations of the
Subsidiary Guarantors. 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. As of the date of
this Prospectus there is aggregate indebtedness of $600,000 of the Company's
Subsidiaries that is effectively senior to the Senior Notes because the
Company is a holding company. The Company has pledged all of the outstanding
capital stock of its Subsidiaries to secure its
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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 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, CCC, and
Invision. 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 $8.8 million, respectively, for the fiscal
year ended December 31, 1996 and the nine months ended September 30, 1997, or
9.2% and 8.6%, 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 $9.0 million for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively, representing
4.7% and 8.8% 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
senior management personnel. The Company is implementing strategies that
involve targeting the corrections industry with specialized products and
services; reducing operating costs and bad-debt expense; expanding through
internal growth; pursuing consolidating acquisitions; and capitalizing on
economies of scale. The officers and senior management of the Company have
experience in implementing various aspects of these strategies. The Company
believes that it would be difficult to replace the expertise and experience of
such persons in the event that the services of one or more such persons were
to become unavailable. Accordingly, the loss of the services of one or more of
these individuals could have a material adverse effect on the Company and its
ability to implement such strategies and to achieve its goals. 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
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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 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 SENIOR 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. The failure to redeem the Senior
Notes upon the occurrence of a Change of Control as required by the Indenture
would constitute a Default under the Indenture. A "Change of Control" is
defined by the Indenture to include certain dispositions of all or
substantially all the assets of the Company; adoption of a plan of dissolution
or liquidation by the Company; consummation of certain transactions that
result in certain third parties acquiring beneficial ownership of more than
50% of the Voting Stock (as defined) of the Company; or a change in the
membership of the Board of Directors of the Company resulting in a majority of
the directors of the Company not being Continuing Directors (as defined). For
a detailed description of "Change of Control" see "Description of Senior
Notes--Certain Definitions."
Under New York law, which governs the Indenture, it is not clear which
transactions will constitute a disposition of "all or substantially all" of
the assets of the Company. The Company is not aware of any controlling legal
precedent interpreting this phrase. In other contexts, the courts of the State
of New York have
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indicated that for a transaction to involve a transfer of "all or
substantially all the assets" of a New York business corporation, the sale
must be one that is not "in the normal operation of [the corporation's]
business" and that a disposition of "all or substantially all the assets" of a
corporation will result when a corporation disposes of its business so as to
virtually end its historic business or to "practically dissolve." It is not
clear whether a court would apply these same standards in the context of the
Indenture provisions involving a disposition of "all or substantially all the
assets" of the Company. Accordingly, under the law governing the Indenture
there is some uncertainty with respect to whether certain substantial asset
transfers would constitute a "Change of Control."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On June 27, 1997, the Company 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
Registrants entered into the Registration Rights Agreement, which requires the
Registrants 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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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.
Based on interpretations of the staff of the Commission, "affiliates" of the
Company (as such term is defined in Rule 405 under the Securities Act) are
prohibited from tendering Old Notes in the Exchange Offer. 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 ,
1998, 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.
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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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 that is not an "affiliate" of the Company as
defined in Rule 405 under the Securities Act 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 of Old Notes the Old Notes of which 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
26
<PAGE>
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.
27
<PAGE>
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; (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, a distribution of the New Notes.
28
<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 the Old Notes of which 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.
29
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be paid 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. Based on interpretations of the
staff of the Commission, "affiliates" of the Company (as such term is defined
in Rule 405 under the Securities Act) are prohibited from tendering Old Notes
in the Exchange Offer. 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.
30
<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.
31
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997 on an actual basis and on a pro forma basis,
after giving effect to the Invision Acquisition. This table should be read in
conjunction with the other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------
ACTUAL PRO FORMA
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents....................... $ 16,588 $ 1,000
Long-term debt, including current maturities:
Senior Credit Facility:
Revolving loan(1)........................... -- 27,912
Notes offered in the Offering(1).............. 115,000 115,000
Other......................................... 598 598
------------ ------------
Total Long-term debt...................... 115,598 143,510
Stockholders' equity:
Preferred Stock(2)............................ * *
Common Stock.................................. * *
Additional paid-in capital.................... 22,156 22,156
Accumulated deficit........................... (24,341)(3) (24,341)
------------ ------------
Total stockholders' equity................ (2,185) (2,185)
------------ ------------
Total capitalization............................ $ 113,413 $ 142,325
============ ============
</TABLE>
- --------
(1) On December 19, 1997, the Company entered into an amendment and
restatement of its Existing Credit Facility (as defined), which
established (a) a term loan acquisition facility of $55.0 million and (b)
a revolving loan facility of $25.0 million (which includes a $5.0 million
letter of credit 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 Preferred Stock represents 5,925 shares outstanding with a par value
of $.01 per share, and a liquidation value per share of $1,000 plus
accumulated but unpaid dividends. The cumulative liquidation value of the
outstanding shares of Preferred Stock is $5.9 million plus accumulated but
unpaid dividends, which as of September 30, 1997 were approximately
$355,500. See "Description of Capital Stock--Preferred Stock."
(3) 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."
* Rounds to 0.
32
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma statements of operations data for the year
ended December 31, 1996 and the nine months ended September 30, 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 CCC Acquisition and the Invision
Acquisition, as if each such transaction had been consummated on January 1,
1996. The pro forma balance sheet data as of September 30, 1997 give effect to
the Invision Acquisition, as if the transaction had been consummated on
September 30, 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 revenue enhancements,
additional cost reductions, and operating expense synergies will be realized
after the Company has integrated the acquired businesses and has consolidated
administrative functions, including (i) increased revenues resulting from
increases in tariff rates during 1996; (ii) increases in call blocking limits
at Invision that were substantially lowered by Invision in late 1996; and
(iii) reductions in bad-debt expense resulting from the full implementation of
Talton Telecommunications' billing and bad-debt management system, these and
other possible synergies in overhead expenses have not been reflected in the
pro forma financial data. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Revenue and Cost Synergies" for
the effects of these synergies on the financial performance of the Company.
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.
33
<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 CCC INVISION HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ------------- ------------- ------- ------ -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues......... $59,169 $2,623 $3,838 $15,282 $9,564 $48,893 $139,369 $ -- $139,369
Operating
expenses:
Telecommunication
costs........... 25,616 1,214 1,982 8,265 2,922 27,243 67,242 (7,173)(d) 60,069
Facility
commissions..... 15,417 737 1,097 3,246 3,668 12,558 36,723 36,723
Field operations
and
maintenance..... 2,035 86 115 1,056 289 1,870 5,451 5,451
Selling, general,
and
administrative.. 4,293 184 269 1,374 1,972 4,505 12,597 (512)(e) 12,085
Depreciation..... 1,649 -- -- 868 209 1,336 4,062 (1,402)(f) 2,660
Amortization of
intangibles..... 2,487 -- -- -- 124 3,499 6,110 14,826 (g) 20,936
Non-recurring
expenses........ 684 -- -- -- -- -- 684 (434)(h) 250
------- ------ ------ ------- ------ ------- -------- -------- --------
Total operating
expenses........ 52,181 2,221 3,463 14,809 9,184 51,011 132,869 5,305 138,174
------- ------ ------ ------- ------ ------- -------- -------- --------
Operating income
(loss)........... 6,988 402 375 473 380 (2,118) 6,500 (5,305) 1,195
Other (income)
expense:
Interest expense,
net............. 2,081 -- -- 447 40 3,416 5.984 9,920 (i) 15,904
Other, net....... 7 -- -- (66) 117 (155) (97) (19)(j) (116)
------- ------ ------ ------- ------ ------- -------- -------- --------
Total other
(income)
expense......... 2,088 -- -- 381 157 3,261 5,887 9,901 15,788
------- ------ ------ ------- ------ ------- -------- -------- --------
Income (loss)
before income
taxes............ 4,900 402 375 92 223 (5,379) 613 (15,206) (14,593)
Income tax expense
(benefit)........ 1,894 156 128 22 -- (285) 1,915 (1,915)(k) --
------- ------ ------ ------- ------ ------- -------- -------- --------
Income (loss) from
continuing
operations....... $ 3,006 $ 246 $ 247 $ 70 $ 223 $(5,094) $ (1,302) $(13,291) $(14,593)
======= ====== ====== ======= ====== ======= ======== ======== ========
EBITDA(1)......... $11,117 $ 402 $ 375 $ 1,407 $ 596 $ 2,872 $ 16,769 $ 8,138 $ 24,907
======= ====== ====== ======= ====== ======= ======== ======== ========
</TABLE>
34
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE TOTAL PRO FORMA
COMPANY TATAKA STC CCC INVISION HISTORICAL ADJUSTMENTS PRO FORMA
------- ------ ------- ------ -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $53,407 $528 $10,576 $6,339 $31,624 $102,474 $ -- $102,474
Operating expenses:
Telecommunication
costs................. 21,571 291 5,528 1,761 19,081 48,232 (2,864)(d) 45,368
Facility commissions... 14,419 87 2,691 2,580 8,787 28,564 28,564
Field operations and
maintenance........... 2,373 16 805 223 1,745 5,162 5,162
Selling, general, and
administrative........ 4,462 37 985 1,198 2,995 9,677 (345)(e) 9,332
Depreciation........... 1,072 -- 514 131 1,123 2,840 (845)(f) 1,995
Amortization and write-
offs of intangibles... 7,788 -- -- 113 2,595 10,496 5,206 (g) 15,702
------- ---- ------- ------ ------- -------- ------- --------
Total operating
expenses.............. 51,685 431 10,523 6,006 36,326 104,971 1,152 106,123
------- ---- ------- ------ ------- -------- ------- --------
Operating income
(loss)................. 1,722 97 53 333 (4,702) (2,497) (1,152) (3,649)
Other (income) expense:
Interest expense, net.. 7,320 -- 282 22 2,483 10,107 1,821 (i) 11,928
Other, net............. (126) -- (76) 64 (859) (997) 12 (j) (985)
------- ---- ------- ------ ------- -------- ------- --------
Total other (income)
expense............... 7,194 -- 206 86 1,624 9,110 1,833 10,943
------- ---- ------- ------ ------- -------- ------- --------
Income (loss) before
income taxes........... (5,472) 97 (153) 247 (6,326) (11,607) (2,985) (14,592)
Income tax expense
(benefit).............. (657) 31 6 -- (2) (622) 622 (k) --
------- ---- ------- ------ ------- -------- ------- --------
Income (loss) from
continuing operations.. $(4,815) $ 66 $ (159) $ 247 $(6,324) $(10,985) $(3,607) $(14,592)
======= ==== ======= ====== ======= ======== ======= ========
EBITDA(1)............... $10,708 $ 97 $ 643 $ 513 $ (125) $ 11,836 $ 3,197 $ 15,033
======= ==== ======= ====== ======= ======== ======= ========
</TABLE>
35
<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 pre-acquisition 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 NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Billing and collections savings......... $(4,146) $(1,801)
Long distance savings................... (3,027) (1,063)
------- -------
Pro forma adjustment.................. $(7,173) $(2,864)
======= =======
</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. In
addition, compensation costs of $59 in 1996 and $308 in 1997 have been
eliminated from Invision's general and administrative expenses for
Invision employees who were terminated upon the consummation of the
Invision Acquisition.
(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 NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma depreciation expense.......... $ 2,660 $ 1,995
Historical depreciation expense......... (4,062) (2,840)
------- -------
Pro forma adjustment.................. $(1,402) $ (845)
======= =======
</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).
36
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma amortization expense:
Acquired contracts.................... $17,468 $13,104
Goodwill.............................. 3,376 2,532
Other intangible assets............... 92 66
Historical amortization expense:
Acquired contracts.................... (4,355) (7,827)
Goodwill.............................. (1,703) (2,530)
Other intangible assets............... (52) (139)
------- -------
Pro forma adjustment................ $14,826 $ 5,206
======= =======
</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 NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma interest expense on the
Senior Notes at an interest rate of
11.0%................................. $12,650 $ 9,487
Pro forma interest expense on the pro
forma incremental borrowings required
to purchase Invision at an effective
interest rate of 9.5%................. 2,652 1,989
Pro forma amortization of new deferred
financing costs....................... 584 438
Pro forma interest expense on other
long-term debt........................ 18 14
Combined historical interest expense,
including amortization of deferred
financing costs....................... (5,984) (10,107)
------- --------
Pro forma adjustment................. $ 9,920 $ 1,821
======= ========
</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, and amortization. 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 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.
37
<PAGE>
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY INVISION ADJUSTMENTS PRO FORMA
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 16,588 $ 12 $(43,500)(a) $ 1,000
(12)(b)
27,912 (c)
Accounts receivable............. 12,683 5,649 18,332
Refundable income taxes......... 612 420 (420)(b) 612
Inventories..................... 1,011 -- -- 1,011
Prepaid expenses................ 676 360 -- 1,036
Deferred income tax asset....... 447 -- -- 447
-------- ------- -------- --------
Total current assets.......... 32,017 6,441 (16,020) 22,438
Property and equipment............ 13,728 9,126 (1,101)(a) 21,753
Intangible and other assets....... 83,436 27,194 6,721 (a) 117,351
-------- ------- -------- --------
Total assets.................. $129,181 $42,761 $(10,400) $161,542
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable................ $ 3,173 $ 4,748 $ (299)(b) $ 7,622
Accrued expenses................ 12,148 3,415 (3,415)(b) 12,148
Current portion of long-term
debt........................... 38 -- -- 38
-------- ------- -------- --------
Current liabilities........... 15,359 8,163 (3,714) 19,808
Long-term debt.................... 115,560 -- 27,912 (c) 143,472
Debt owed to Related Party........ 42,820 (42,820)(b) --
Deferred income taxes............. 447 -- -- 447
Minority interest................. -- -- --
Stockholders' Equity:
Preferred stock................. -- -- -- --
Common stock.................... -- 1 (1)(b) --
Additional paid-in capital...... 22,156 1,688 (1,688)(b) 22,156
Retained earnings (deficit)..... (24,341) (9,911) 9,911 (b) (24,341)
-------- ------- -------- --------
Total stockholders' equity.... (2,185) (8,222) 8,222 (2,185)
-------- ------- -------- --------
Total liabilities and
stockholders' equity......... $129,181 $42,761 $(10,400) $161,542
======== ======= ======== ========
</TABLE>
38
<PAGE>
NOTES TO PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(a) Represents the allocation of the excess of the aggregate purchase price of
Invision, including expenses, over the historical carrying value of the
net assets acquired to the fair values of net assets acquired, as follows:
<TABLE>
<CAPTION>
INVISION
--------
<S> <C>
Aggregate purchase price.......................................... $ 43,500
Less historical carrying value of net assets acquired............. (37,880)
--------
Excess purchase prices............................................ $ 5,620
========
Allocation of excess purchase prices:
Excess fair value of property and equipment................... $ (1,101)
Excess fair value of intangibles.............................. 6,721
--------
Total....................................................... $ 5,620
========
</TABLE>
(b) Represents the elimination of assets, liabilities, and stockholders'
equity of Invision that were not purchased or assumed in the Invision
Acquisition.
(c) Represents the pro forma cash required to be borrowed under the Company's
existing debt facilities to fund the Invision Acquisition.
39
<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 nine months ended September 30, 1996, and the
selected consolidated financial data of the Company for the nine months ended
September 30, 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.
40
<PAGE>
<TABLE>
<CAPTION>
COMBINED THE COMBINED THE
COMBINED PREDECESSORS PREDECESSORS COMPANY PREDECESSORS COMPANY
--------------------------------- ------------- ------------ ------------- -------------
ELEVEN MONTHS ONE MONTH NINE MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED
--------------------------------- NOVEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
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 $42,890 $53,407
Operating expenses:
Telecommunication
costs................. 4,414 7,025 11,761 18,673 23,317 2,299 19,155 21,571
Facility commissions... 1,177 2,225 3,901 9,595 13,962 1,455 11,197 14,419
Field operations and
maintenance........... 310 538 1,044 1,467 1,816 219 1,352 2,373
Selling, general, and
administration........ 884 1,566 2,571 4,089 3,921 372 3,002 4,462
Depreciation........... 496 780 965 1,359 1,538 111 1,145 1,072
Amortization of
intangibles........... 3 684 1,392 1,605 1,746 741 1,412 7,788
Nonrecurring expenses.. -- -- -- -- 684 -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 7,284 12,818 21,634 36,788 46,984 5,197 37,263 51,685
------ ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (147) 775 2,258 3,538 6,679 309 5,627 1,722
Other (income) expense:
Interest expense, net.. 131 331 745 1,360 1,469 612 1,210 7,320
Other, net............. (2) (153) (134) (52) 27 (20) 236 (126)
------ ------- ------- ------- ------- ------- ------- -------
Total other (income)
expense............... 129 178 611 1,308 1,496 592 1,446 7,194
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (276) 597 1,647 2,230 5,183 (283) 4,181 (5,472)
Income tax expense
(benefit).............. 1 -- (11) 891 1,917 (23) 1,572 (657)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (277) 597 1,658 1,339 3,266 (260) 2,609 (4,815)
Extraordinary loss...... -- -- -- -- 52 -- -- 4,396
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (277) $ 597 $ 1,658 $ 1,339 $ 3,214 $ (260) $ 2,609 $(9,211)
====== ======= ======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 354 $ 2,392 $ 4,749 $ 6,554 $ 9,936 $ 1,181 $ 7,948 $10,708
Net cash provided (used)
by operating
activities............. 371 1,317 3,445 4,069 7,300 (1,419) 6,380 1,048
Net cash provided (used)
by investing
activities............. (1,445) (1,494) (9,976) (8,022) (7,515) (47,252) (5,692) (27,726)
Net cash provided (used)
by financing
activities............. 1,462 (36) 6,668 4,827 (547) 48,966 (1,838) 42,971
Capital
expenditures(2)........ 1,774 1,978 3,223 4,669 2,804 269 993 4,457
Ratio of earnings to
fixed charges(3)....... -- 2.8 3.0 2.5 4.2 -- 4.3 --
Deficiency of earnings
to fixed charges....... $ 276 -- -- -- -- $ 283 -- $ 5,472
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents............ $ 370 $ 283 $ 419 $ 1,293 $ 531 $ 294 $ 144 16,588
Total assets............ 4,100 8,528 17,639 26,592 34,708 80,134 31,715 129,181
Total debt (including
current maturities).... 1,938 4,854 10,750 15,074 14,845 63,315 15,663 115,598
Total stockholders'
equity (deficit)....... (40) 556 2,027 4,850 9,361 6,481 7,368 (2,185)
</TABLE>
- -------
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation and amortization. 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.
41
<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 nine months ended
September 30, 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.
42
<PAGE>
AMERITEL PAY PHONES, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------------- NOVEMBER 30, SEPTEMBER 30,
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 $23,331
Operating expenses:
Telecommunication
costs................. 701 1,826 5,347 9,747 13,729 11,099
Facility commissions... 170 623 1,861 3,497 6,087 4,737
Field operations and
maintenance........... 83 192 508 864 1,166 899
Selling, general and
administration........ 162 376 928 1,759 2,281 1,727
Depreciation........... 156 213 194 384 536 431
Amortization of
intangibles........... 2 81 595 1,224 1,624 1,312
Nonrecurring expenses.. -- -- -- -- 684 --
------ ------ ------- ------- ------- -------
Total operating
expenses.............. 1,274 3,311 9,433 17,475 26,107 20,205
------ ------ ------- ------- ------- -------
Operating income
(loss)................. (83) 547 2,266 2,896 3,199 3,126
Other (income) expense:
Interest expense, net.. 90 188 564 1,028 1,355 1,094
Other, net............. -- (123) -- 66 39 248
------ ------ ------- ------- ------- -------
Total other expense.... 90 65 564 1,094 1,394 1,342
------ ------ ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (173) 482 1,702 1,802 1,805 1,784
Income tax expense...... -- -- -- 734 693 714
------ ------ ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (173) 482 1,702 1,068 1,112 1,070
Extraordinary loss...... -- -- -- -- 52 --
------ ------ ------- ------- ------- -------
Net income (loss)....... $ (173) 482 $ 1,702 $ 1,068 $ 1,060 1,070
====== ====== ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 75 $ 964 $ 3,055 $ 4,438 $ 5,320 $ 4,621
Net cash provided (used)
by operating
activities............. (94) 344 1,428 2,315 2,568 1,556
Net cash provided (used)
by investing
activities............. (725) (860) (8,605) (5,665) (6,215) (5,855)
Net cash provided (used)
by financing
activities............. 957 470 7,217 4,012 2,837 3,442
Capital
expenditures(2)........ 725 175 1,779 2,051 1,516 1,287
Ratio of earnings to
fixed charges(3)....... -- 3.5 3.9 2.7 2.3 2.6
Deficiency of earnings
to fixed charges....... 173 -- -- -- -- --
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents............ $ 234 $ 189 $ 229 $ 891 $ 81 $ 34
Total assets............ 1,780 2,800 12,449 18,586 26,885 25,071
Long-term debt
(including current
maturities)............ 955 1,735 8,181 11,690 14,845 15,663
Total stockholders'
equity (deficit)....... (12) 470 1,985 4,537 6,894 5,522
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means as income before
interest, income taxes, depreciation, and amortization. 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>
TALTON TELECOMMUNICATIONS CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
---------------------------------------- NOVEMBER 30, SEPTEMBER 30,
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 $19,559
Operating expenses:
Telecommunication costs... 3,713 5,199 6,414 8,926 9,588 8,057
Facility commissions...... 1,007 1,602 2,040 6,098 7,875 6,460
Field operations and
maintenance.............. 227 346 536 603 650 454
Selling, general and
administration........... 722 1,190 1,643 2,330 1,640 1,275
Depreciation.............. 340 567 771 975 1,002 713
Amortization of
intangibles.............. 1 603 797 381 122 100
------ ------ ------- ------- ------- -------
Total operating
expenses................. 6,010 9,507 12,201 19,313 20,877 17,059
------ ------ ------- ------- ------- -------
Operating income (loss).... (64) 228 (8) 642 3,480 2,500
Other (income) expense:
Interest expense, net..... 41 143 181 332 114 116
Other, net................ (2) (30) (134) (118) (12) (12)
------ ------ ------- ------- ------- -------
Total other (income)
expense.................. 39 113 47 214 102 104
------ ------ ------- ------- ------- -------
Income (loss) before income
taxes..................... (103) 115 (55) 428 3,378 2,396
Income tax expense
(benefit)................. 1 -- (11) 157 1,224 859
------ ------ ------- ------- ------- -------
Net income (loss).......... $ (104) $ 115 $ (44) $ 271 $ 2,154 $ 1,537
====== ====== ======= ======= ======= =======
OTHER DATA:
EBITDA(1).................. $ 279 $1,428 $ 1,694 $ 2,116 $ 4,616 $ 3,326
Net cash provided (used) by
operating activities...... 464 973 2,017 1,754 4,733 3,133
Net cash provided (used) by
investing activities...... (720) (634) (1,372) (2,357) (1,301) (437)
Net cash provided (used) by
financing activities...... 505 (507) (549) 815 (3,284) (2,987)
Capital expenditures(2).... 1,049 1,803 1,444 2,618 1,288 437
Ratio of earnings to fixed
charges(3)................... -- 1.8 -- 2.1 17.4 18.1
Deficiency of earnings to
fixed charges............. $ 103 -- $ 55 -- -- --
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents.. $ 136 $ 94 $ 190 $ 402 $ 450 $ 110
Total assets............... 2,320 5,728 5,190 8,006 7,823 6,644
Long-term debt (including
current maturities).......... 983 3,118 2,569 3,384 -- --
Total stockholders' equity
(deficit).................... (28) 86 42 313 2,467 1,847
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means income before interest,
income taxes, depreciation and amortization. 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.
44
<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 43
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 its
predecessors, AmeriTel and Talton Telecommunications, effective December 1,
1996. Because the Company's acquisitions of its predecessors, AmeriTel and
Talton Telecommunications, 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 December 1, 1996. In
addition to the acquisitions of its predecessors, AmeriTel and Talton
Telecommunications, the Company also acquired the operations of Security
Telecom Corporation ("STC") on June 27, 1997 and Correctional Communications
Corporation ("CCC") on July 31, 1997. Because these acquisitions of STC and
CCC have also been accounted for using the purchase method of accounting, the
Company's results of operations only reflect the operations of these companies
subsequent to the effective dates of their acquisitions. Management believes
that the growth of the Company and its predecessors, AmeriTel and Talton
Telecommunications, 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, AmeriTel
and Talton Telecommunications, on a combined basis for the periods discussed
below.
45
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the combined historical results of operations
of the Company and its predecessors, AmeriTel and Talton Telecommunications,
without any adjustments to historical results to reflect changes in
depreciation and amortization resulting from purchase accounting revaluations
as follows:
<TABLE>
<S> <C>
Years ended December 31, Combined results of operations of the predecessors,
1994 and 1995 and the AmeriTel and Talton Telecommunications, for those
nine months ended periods
September 30, 1996
Year ended December 31, Combined results of operations of the predecessors,
1996 AmeriTel and Talton Telecommunications, for the eleven
months ended November 30, 1996 and of the Company for
the one month ended December 31, 1996
Nine months ended Results of operations of the Company for the period
September 30, 1997
</TABLE>
These above described combined results of operations include the results of
operations of STC and CCC in the Company's results of operations only for the
periods subsequent to the effective dates of their acquisitions.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $23,892 100% $40,326 100% $59,169 100.0% $42,890 100.0% $53,407 100.0%
Operating expenses:
Telecommunication
costs................. 11,761 49.2 18,673 46.3 25,616 43.3 19,155 44.7 21,571 40.4
Facility commissions... 3,901 16.3 9,595 23.8 15,417 26.1 11,197 26.1 14,419 27.0
Field operations and
maintenance........... 1,044 4.4 1,467 3.6 2,035 3.4 1,352 3.1 2,373 4.4
Selling, general, and
administrative........ 2,571 10.8 4,089 10.1 4,293 7.3 3,002 7.0 4,462 8.4
Depreciation........... 965 4.0 1,359 3.4 1,649 2.8 1,145 2.7 1,072 2.0
Amortization of
intangibles........... 1,392 5.8 1,605 4.0 2,487 4.2 1,412 3.3 7,788 14.6
Non-recurring
expenses.............. -- -- -- -- 684 1.2 -- -- -- --
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Total operating
expenses............... 21,634 90.5 36,788 91.2 52,181 88.3 37,263 86.9 51,685 96.8
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Operating income........ 2,258 9.5 3,538 8.8 6,988 11.7 5,627 13.1 1,722 3.2
Other (income) expense:
Interest expense, net.. 745 3.1 1,360 3.4 2,081 3.5 1,210 2.8 7,320 13.7
Other, net............. (134) (0.6) (52) (0.1) 7 0.0 236 0.6 (126) (0.2)
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Total other expense..... 611 2.5 1,308 3.3 2,088 3.5 1,446 3.4 7,194 13.5
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 7.0 2,230 5.5 4,900 8.2 4,181 9.7 (5,472) (10.2)
Income tax expense
(benefit).............. (11) 0.0 891 2.2 1,894 3.2 1,572 3.7 (657) (1.2)
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Income (loss) before
extraordinary loss..... 1,658 7.0 1,339 3.3 3,006 5.0 2,609 6.0 (4,815) (9.0)
Extraordinary loss...... -- -- -- -- 52 0.1 4,396 8.2
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Net income (loss)....... $ 1,658 7.0% $ 1,339 3.3% $ 2,954 4.9% $ 2,609 6.0% $ (9,211) (17.2)%
======= ==== ======= ==== ======= ===== ======== ====== ======== ======
EBITDA.................. $ 4,749 19.9% $ 6,554 16.3% $11,117 18.8% $ 7,948 18.5% $10,708 20.0%
======= ==== ======= ==== ======= ===== ======== ====== ======== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (RESULTS OF OPERATION OF THE COMPANY)
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 (COMBINED RESULTS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS)
Operating Revenues--The Company's operating revenues increased by $10.5
million, or 24.5%, from $42.9 million for the nine months ended September 30,
1996 to $53.4 million for the nine months ended September 30, 1997. The
increase in operating revenues was primarily due to acquisitions by the
Company of inmate contracts during 1996, acquisitions of STC, CCC, and other
inmate facility contracts during the first nine months of 1997, and new
contract installations.
Operating Expenses--Total operating expenses increased by $14.4 million, or
38.7%, from $37.3 million for the nine months ended September 30, 1996 to
$51.7 million for the nine months ended September 30, 1997. Operating expenses
as a percentage of operating revenues increased 9.9% from 86.9% for the nine
months ended September 30, 1996 to 96.8% for the nine months ended September
1997. Excluding depreciation and amortization, operating expenses as a
percentage of operating revenues decreased from 80.9% for the nine
46
<PAGE>
months ended September 30, 1996 to 80.2% for the nine months ended September
30, 1997. The percentage decrease in operating expenses, excluding
depreciation and amortization, was caused by the factors discussed below.
Telecommunication costs increased by $2.4 million, from $19.2 million for
the nine months ended September 30, 1996 to $21.6 million for the nine months
ended September 30, 1997. Telecommunication costs represented 44.7% of
operating revenues for the nine months ended September 30, 1996 and 40.4% of
operating revenues for the nine months ended September 30, 1997, a decrease of
4.3%. The decrease as a percentage of operating revenues is primarily due to
lower billing and collection costs as a result of direct billing arrangements
entered into with various major LECs, lower relative costs for long distance
as a result of new long distance agreements, and a reduction in bad debts as a
result of the Company's efforts to reduce bad debt exposure and to improved
collection practices.
Facility commissions increased by $3.2 million, from $11.2 million for the
nine months ended September 30, 1996 to $14.4 million for the nine months
ended September 30, 1997. Facility commissions represented 26.1% of operating
revenues for the nine months ended September 30, 1996 and 27.0% of operating
revenues for the nine months ended September 30, 1997, an increase of 0.9%.
The increase as a percentage of operating revenues is primarily due to higher
commission percentages paid as a result of periodic increases in percentages
paid to existing customers as contracts are renewed, due to competitive
pressures, and to the effects of higher commission rates paid by STC and CCC,
both of which were acquired in 1997.
Field operations and maintenance costs increased by $1.0 million, from $1.4
million for the nine months ended September 30, 1996 to $2.4 million for the
nine months ended September 30, 1997. Field operations and maintenance costs
represented 3.1% of operating revenues for the nine months ended September 30,
1996 and 4.4% of operating revenues for the nine months ended September 30,
1997, an increase of 1.3%. The increase as a percentage of operating revenues
is primarily due to an increase in costs associated with servicing acquired
inmate facilities.
Selling, general, and administrative expenses ("SG&A") increased by $1.5
million, from $3.0 million for the nine months ended September 30, 1996 to
$4.5 million for the nine months ended September 30, 1997. SG&A represented
7.0% of operating revenues for the nine months ended September 30, 1996 and
8.4% of operating expenses for the nine months ended September 30, 1997, an
increase of 1.4%. The increase as a percentage of operating revenues is
primarily due to the increased infrastructure necessary to support the
Company's acquisitions and the Company's more aggressive sales efforts.
DEPRECIATION AND AMORTIZATION--depreciation and amortization costs increased
by $6.3 million, from $2.6 million for the nine months ended September 30,
1996 to $8.9 million for the nine months ended September 30, 1997.
Depreciation and amortization costs represented 6.0% of operating revenues for
the nine months ended September 30, 1996 and 16.6% of operating revenues for
the nine months ended September 30, 1997, an increase of 10.6%. The increase
as a percentage of operating revenues is primarily due to additional
amortization expense associated with the acquisitions by the Company of inmate
facility contracts and from the intangible assets related to the acquisition
of AmeriTel and Talton Telecommunications in December 1996, and the
acquisition of STC and CCC in June and July of 1997, respectively.
Operating Income--The Company's operating income decreased by $3.9 million,
from $5.6 million for the nine months ended September 30, 1996 to $1.7 million
for the nine months ended September 30, 1997, as a result of the factors
described above. The Company's operating margin decreased from 13.1% for the
nine months ended September 30, 1996 to 3.2% for the nine months ended
September 30, 1997 primarily due to the increase in amortization expense
associated with the Company's acquisitions described above.
Other (Income) Expense--Other (income) expense, consisting primarily of
interest expense, increased by $5.8 million, from $1.4 million for the nine
months ended September 30, 1996 to $7.2 million for the nine months ended
September 30, 1997. The increase was primarily due to interest expense
associated with indebtedness incurred by the Company in connection with
acquisitions and completion of the Offering in the principal amount of $115.0
million in June 1997.
47
<PAGE>
Extraordinary Loss--The Company incurred an extraordinary loss of $4.4
million in 1997 related to the write-off of the unamortized deferred loan
costs and the unamortized discount on its senior subordinated notes, in
conjunction with the repayment of this debt.
Net Income (Loss)--The Company's net income decreased by $11.8 million, from
$2.6 million for the nine months ended September 30, 1996 to a loss of $9.2
million for the nine months ended September 30, 1997, as a result of the
factors described above.
EBITDA--EBITDA increased by $2.8 million, from $7.9 million for the nine
months ended September 30, 1996 to $10.7 million for the nine months ended
September 30, 1997. EBITDA as a percentage of operating revenues increased
from 18.5% for the nine months ended September 30, 1996 to 20.0% for the nine
months ended September 30, 1997, primarily due to increased revenues and lower
operating costs, excluding amortization and depreciation, as a percentage of
revenue as discussed above.
YEAR ENDED DECEMBER 31, 1996 (COMBINED RESULTS OF OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS, FOR ELEVEN MONTHS ENDED
NOVEMBER 30, 1996 AND OF THE COMPANY FOR THE ONE MONTH ENDED DECEMBER 31,
1996) COMPARED TO YEAR ENDED DECEMBER 31, 1995 (COMBINED OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS)
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.
48
<PAGE>
Depreciation and Amortization--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 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 $4.5 million from $6.6 million in 1995 to $11.1
million in 1996. EBITDA as a percentage of operating revenues increased from
16.3% in 1995 to 18.8% in 1996 due to the factors described above.
YEAR ENDED DECEMBER 31, 1995 (COMBINED RESULTS OF OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS) COMPARED TO YEAR ENDED
DECEMBER 31, 1994 (COMBINED RESULTS OF OPERATIONS OF THE PREDECESSORS,
AMERITEL AND TALTON TELECOMMUNICATIONS)
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.
49
<PAGE>
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.
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--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 due primarily 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 due primarily to the increases in facility
commissions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.0 million for the nine
months ended September 30, 1997, as compared to $4.7 million for the nine
months ended September 30, 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 $27.8 million for the nine months
ended September 30, 1997, consisting primarily of cash outflows to purchase
STC and CCC, as compared to $6.3 million for the nine months ended September
30, 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 $43.0 million for the nine months
ended September 30, 1997 consisting primarily of the issuance of the $115.0
million Senior Notes, and offset by the repayment of the Company's Senior
Credit Facility, Senior Subordinated Notes, and Subordinated Notes, as
compared to $.5
50
<PAGE>
million for the nine months ended September 30, 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 raised $115.0 million in proceeds in connection
with the issuance of the Senior Notes in June 1997, of which $67.2 million was
used to repay amounts outstanding under the Company's Senior Credit Facility,
Senior Subordinated Notes, and Subordinated Notes; $9.9 million (subject to
adjustment) was used to acquire STC and 100% of its affiliate, LETI; and $5.8
million was used to pay deferred financing costs related to the Senior Notes.
The remaining net proceeds of $32.1 million along with $18.4 million of
proceeds from the Company's Senior Credit Facility were used to consummate the
CCC Acquisition and the Invision Acquisition.
As of September 30, 1997, the Company had approximately $115.6 of long-term
indebtedness outstanding, a deficit in stockholders' equity of $2.2 million,
and $16.6 million of cash. On July 30, 1997, the Company's Senior Credit
Agreement was amended to provide the Company a $35 million revolving loan
commitment. Subsequent to September 30, 1997, the Company borrowed $30 million
under its revolving loan committment to fund the Invision Acquisition and
provide additional liquidity.
The Company expects that its principal sources of liquidity will be cash
flow from operations, and borrowings under the revolving loan commitment. The
Company anticipates that its principal uses of liquidity will be to provide
working capital, finance future acquisitions, and meet debt service
requirements. The Company anticipates that its primary capital expenditures
for the next 12 months will be for upgrades to its technology infrastructure
of approximately $500,000 and for capital items required to implement new
contracts entered into by the Company. Management believes that cash flow from
operations and from credit facilities that management believes will be
available to the Company will be sufficient to fund the requirements of the
Company for the next 12 months.
As of September 30, 1997, the Company had approximately $115.6 million of
long-term indebtedness outstanding, including (i) $115 million of Senior Notes
outstanding at an interest rate of 11.0% and (ii) $.6 million of other
indebtedness consisting primarily of contingent acquisition costs and capital
leases.
51
<PAGE>
As of December 19, 1997 the Company and its Lenders (as defined) entered
into an amendment and restatement of the Existing Credit Facility establishing
the Senior Credit Facility, which consists of (a) a $55.0 million term loan
acquisition facility and (b) a $25.0 million revolving loan facility (which
includes a $5.0 million letter of credit facility). 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 varies from 0.75%
to 2.25%, depending on the Company's Total Debt to EBITDA Ratio (as defined in
the Senior Credit Facility); or (ii) the LIBO Rate (as defined in the Senior
Credit Facility) plus a margin that varies from 2.0% to 3.5%, depending on the
Company's Total Debt to EBITDA Ratio. The Senior Credit Facility requires the
Company to make quarterly payments of principal amounts due under the term
loan facility in the amounts set forth below on the dates indicated:
<TABLE>
<CAPTION>
QUARTERLY DOLLAR
PAYMENT DATE REPAYMENT
------------ ----------
<S> <C>
September 30, 1998 $2,750,000
December 31, 1998 2,750,000
March 31, 1999 2,406,250
June 30, 1999 2,406,250
September 30, 1999 2,406,250
December 31, 1999 2,406,250
March 31, 2000 3,093,750
June 30, 2000 3,093,750
September 30, 2000 3,093,750
December 31, 2000 3,093,750
March 31, 2001 3,437,500
June 30, 2001 3,437,500
September 30, 2001 3,437,500
December 31, 2001 3,437,500
March 31, 2002 3,437,500
June 30, 2002 3,437,500
September 30, 2002 3,437,500
December 31, 2002 3,437,500
</TABLE>
The Senior Credit Facility requires quarterly interest-only payments to be
made on the Base Rate loans and periodic interest-only payments based on the
applicable interest period on LIBO Rate loans, at least quarterly, in each
case until maturity. In addition, the Senior Credit Facility requires
mandatory prepayments out of the proceeds of certain equity or debt offerings,
asset dispositions, receipt of insurance proceeds not applied as provided in
the Senior Credit Facility, and receipts of funds from certain escrow
accounts. All outstanding principal and interest under the Senior Credit
Facility is due December 31, 2002. The Senior Credit Facility is secured by
substantially all the assets of the Company and the Subsidiary Guarantors. See
"Description of Other Indebtedness--Senior Credit 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 have been 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
$27.8 million for the nine months ended September 30, 1997. The Company
expects to spend approximately $4.5 million in capital expenditures in the
remainder of 1997 for new installations and equipment purchases for its
billing and inquiry center. 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. On October 6, 1997, the Company completed the Invision
Acquisition for a purchase price of $40.0 million in cash and approximately
$2.0 million
52
<PAGE>
in assumption of liabilities, subject to adjustment and subject to a provision
for working capital of approximately $1.2 million provided to the Company
pursuant to the purchase agreement. The Company financed these acquisitions
through proceeds from the Offering. On December 19, 1997, the Company
consummated the Peoples Telephone acquisition and on December 29, 1997, the
Company consummated the NAI acquisition for the purchase price of $10.625
million and $6.5 million, respectively, subject in each case to future
contingencies. Each of these acquisitions was funded by loans under the Senior
Credit Facility. In addition, the Company used approximately $53.2 of the
proceeds of the Offering to repay all outstanding principal and interest under
the Existing Credit Facility. The Company currently anticipates that interest
payments of approximately $17.9 million per year through December 31, 2000
will be required under the terms of the Senior Notes and the Senior Credit
Facility. As of the date of this Prospectus, the Company has approximately
$25.0 million of unused borrowing capacity under the Senior Credit Facility.
The Company believes that this currently available borrowing capacity together
with its cash flows will be adequate to support its current operations through
December 31, 1998.
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 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.
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. See
"Description of the Other Indebtedness--Senior Credit Facility"; and
"Description of Senior Notes."
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 Company's Subsidiaries are
distinct legal entities, and the rights of holders of the Senior Notes against
the Subsidiary Guarantors will be subject to the rights of the Subsidiary
Guarantors' creditors, to the extent senior to the obligations of the
Subsidiary Guarantors. 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's
Subsidiaries are parties to no contractual agreements that would restrict
their ability to pay dividends or advance funds to the Company. As of the date
of this Prospectus there is aggregate indebtedness of $600,000 of the
Company's Subsidiaries that is effectively senior to the Senior Notes because
the Company is a holding company. See "Risk Factors--Holding Company
Structure." 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 operating expenses and debt service obligations.
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
53
<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.
REVENUES AND COST SYNERGIES
The combined historical results of operations of the Company do not give
effect to the historical operating results of the acquisitions of Tataka, STC,
CCC, and Invision, prior to their respective acquisition dates. While the pro
forma financial data included in this Prospectus does give effect to these
acquisitions as if they were consummated on January 1, 1996, the pro forma
financial data do not give effect to any events occurring after consummation
of the acquisitions, other than as specified. See "Pro Forma Financial Data."
During 1996, regulatory authorities approved certain increases and decreases
in tariff rates the Company is allowed to charge its customers, which had the
net effect of increasing the Company's revenues for the periods during 1996
after such rates became effective. As a result of these tariff rate increases
and decreases during 1996, the Company believes that it is probable that its
future operating results will reflect higher net revenues than those reflected
on both a historical and pro forma basis for the year ended December 31, 1996.
As part of the Company's business and operating strategy, it has developed a
billing and bad-debt management system that management believes will
significantly reduce operating costs in the future. This billing and bad-debt
management system includes pre-established call blocking limits, validation
and credit checks on all call attempts, and the generation of timely call
reporting information, which enable the Company to identify customers of
marginal credit quality more quickly. After the completion of each of the
Company's acquisitions, the Company has begun the implementation of this
billing and bad-debt management system at each acquired business. While this
implementation process takes time to complete, the implementation of this
billing and bad-debt management system generally results in some reduction in
revenues as pre-established call blocking limits are established, which is
generally more than offset by favorable cost savings, especially in the area
of lower bad-debt expense. In the case of the Invision Acquisition, however,
the implementation of the pre-established call blocking limits has resulted in
increased 1997 revenues because the Company increased Invision's call blocking
limits from unusually low limits established by Invision in late 1996.
Set forth below is a summary of the effect of these revenue and cost
synergies on pro forma EBITDA for the year ended December 31, 1996 and the
nine months ended September 30, 1997, had these revenue and cost synergies
been fully implemented as of January 1, 1996. The effect of net tariff rate
increases is shown net of related increases in operating expenses such as
commissions and the billing and collections and bad-debt expense components of
telecommunications costs. The effect of implementation of the billing and bad-
debt management system results in higher revenues at Invision for 1997 and
lower bad-debt expense for all the acquired businesses for 1996 and 1997,
partially offset by related changes in revenues, facility commissions, long
distance charges, and validation and other costs. The effect of these changes
is 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 material assumptions on which the information in the
following table is based are as follows:
(1) the Company would have immediately increased their rates charged to
customers in conjunction with tariff rate changes in 1996 upon the
effective date of such changes in the applicable jurisdictions. The
adjustment is calculated as if such changes were effective as of January 1,
1996. The effect of such rate increases, based on these assumptions, would
have increased the Company's pro forma 1996 operating revenue by
approximately 1.7% with a corresponding increase in commissions, billing
and collection fees,
54
<PAGE>
and bad debt expense. Such incremental expenses are assumed to approximate
the Company's pro forma ratios of such costs to pro forma revenues.
(2) the Company would realize savings on a pro forma basis in both 1996
and 1997 from the full implementation of the Company's billing and bad debt
management system. The savings from such implementation are estimated on a
pro forma basis by assuming the Company's Subsidiaries that had not already
implemented the billing and bad debt management system could reduce their
bad debt by implementing Talton Telecommunications's billing and bad debt
management system. This estimate is based on historical bad debt
percentages experienced by Talton Telecommunications. Finally, the Company
would successfully increase revenue in 1997 at its Invision Subsidiary by
relaxing this Subsidiary's very restrictive call blocking program, which
was implemented in late 1996. The increases in revenue from such policy
changes is assumed to have increased 1997 Invision revenues by
approximately 15% with a corresponding increase in commission expense,
billing and collection fees, and bad debt expense, estimated upon pro forma
Invision direct cost ratios to pro forma Invision revenues.
The following table should not be viewed as indicative of actual historical 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 NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1996 1997
------------ -------------------
<S> <C> <C>
Pro forma EBITDA.......................... $24,907 $15,033
Effect of net tariff rate increases....... 1,342
Effect of full implementation of the
Company's billing and bad-debt management
systems.................................. 3,927 6,655
------- -------
EBITDA (as adjusted)...................... $30,176 $21,688
======= =======
</TABLE>
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.
55
<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 September 30,
1997, the Company owned and operated inmate telephones located in 1,781
correctional facilities in 43 states. Management believes that the Company
provides inmate telecommunications services to over 75% of the county
correctional facilities in the states of Alabama, Illinois, Iowa, Kansas,
Missouri, Nebraska, and Utah and to over 50% of the county correctional
facilities in the states of Colorado, Idaho, Indiana, Kentucky, Minnesota,
Mississippi, Montana, Ohio, Oklahoma, South Dakota, and Tennessee. For the
year ended December 31, 1996 and the nine months ended September 30, 1997, the
Company generated pro forma revenues of $139.4 million and $102.5 million,
respectively, and pro forma EBITDA (as defined) of $24.9 million and $15.0
million, respectively. Management estimates that the market for local and
county correctional facilities exceeds $700,000,000 in gross revenues
annually. Management estimates that approximately 55% of this market is
controlled by RBOCs or other LECs and by IXCs. The remainder of this market is
served by independent service providers such as the Company, with the Company
accounting for approximately 50% of the market served by independent service
providers. Management believes that no other independent provider accounts for
more than 5% of the revenue derived from inmate telephone operations at local
and county correctional facilities.
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 negotiated commission to the correctional facility based
upon actual inmate telephone use. The Company installs and generally retains
ownership of the telephones and related equipment. Under the terms of the
Company's agreements with correctional facilities, these commissions are a
function of revenues generated from inmate telephone use. For the nine months
ended September 30, 1997 pro forma facility commissions were approximately 28%
of pro forma operating revenues. 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 recognized 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.
On July 31, 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. On October 6 , 1997,
the Company consummated the Invision Acquisition. Invision generated revenues
of approximately $48.9 million in 1996.
56
<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 29 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 (CCC)
October 1997 Communications Central, Inc. (Invision) 595 California, Illinois,
Indiana, Kentucky,
Massachusetts, Tennessee
December 1997 Peoples Telephone 84 Texas, Georgia
NAI 27 Texas, Mississippi,
Florida, Georgia,
Pennsylvania
</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
57
<PAGE>
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.
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.
58
<PAGE>
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 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
September 1997, the Company signed 72 new contracts for facilities,
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.
59
<PAGE>
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, 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 29 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; on July 31,
1997, the Company acquired substantially all of the assets of CCC; and on
October 6, 1997, the Company consummated the Invision Acquisition.
. 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
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<PAGE>
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 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. The average remaining term of the Company's contracts with
facilities is approximately 3 years. The Company's contracts generally provide
for automatic renewal unless terminated by written notice a specified period
of time before the end of a calendar year. The Company believes that its
customer retention rate for 1997 will be at least as favorable as its
historical rate for the last three years.
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. The Company offers LEMS to
correctional facilities at
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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 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.
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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) 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 September 30, 1997, the
Company had 1,779 public pay telephones installed in 29 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.
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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 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
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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 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.
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 may be 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. While
this issue may be raised in a currently pending court challenge by the inmate
telecommunications industry of the FCC's decision, the prospects are uncertain
since the court has already ruled in the FCC's favor on this issue in an
interpretation of Section 276 that is the same as the one the FCC adopted
regarding inmate telephone operations.
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.
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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
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
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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." 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. This issue is also the subject of a
currently pending court challenge by the inmate telecommunications industry.
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.
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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
four additional facilities from which it conducts its operations located in
Selma, Alabama; Dublin, California; Louisville, Kentucky; and Lee's Summit,
Missouri, all of which are leased.
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 September 30, 1997, the Company had approximately 228 employees of
which approximately 43 were executive and administrative personnel, and
approximately 185 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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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages (as of December 1, 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).................... 69 Chairman of the Board
John A. Crooks, Jr...... 50 President and Chief Operating Officer
Jeffrey D. Cushman...... 36 Chief Financial Officer
John R. Summers......... 41 Vice President, Secretary, and Treasurer
Julius E. Talton, Jr.... 37 Vice President
James E. Lumpkin........ 53 Vice President
Todd W. Follmer (1)..... 38 Vice President, Assistant Secretary, Assistant Treasurer, and Director
Gregg L. Engles......... 40 Director
Richard H. Hochman (1),
(3).................... 52 Director
Jay R. Levine (2)....... 41 Director
Nina E. McLemore (2).... 52 Director
Bruce I. Raben (l),
(3).................... 44 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.
Jeffrey D. Cushman. Mr. Cushman became Chief Financial Officer of the
Company in November 1997. From 1985 until October 1997, Mr. Cushman served in
various capacities with Electronic Data Systems Corporation, most recently as
director of Business Development for EDS's Customer Solutions Unit.
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, 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.
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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 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
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Directors depends on the aggregate percentage ownership of all outstanding
Common Stock held by Gregg L. 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, and John R. Summers, each of whom was a
former stockholder of AmeriTel or Talton Telecommunications. See "Certain
Relationships and Related Transactions--Consulting and Employment Agreements."
In addition, the Company is a party to an employment agreements with each of
John A. Crooks and Jeffrey D. Cushman, which are described below.
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 that 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 non-competition
provisions that cover 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.
Jeffrey D. Cushman joined the Company as Chief Financial Officer in November
1997. The Company entered into a written employment agreement with Mr. Cushman
that has an initial term expiring on December 31, 1999, with successive one-
year renewals thereafter unless notice is given by either party not later than
90 days immediately preceding the commencement of the renewal period. Mr.
Cushman receives an annual base salary of $140,000 and a one-time guaranteed
bonus of $70,000, $35,000 of which is payable on or before January 30, 1998,
and the remaining $35,000 of which is payable on or before December 31, 1998.
In addition, Mr. Cushman is eligible to receive options to purchase 100 shares
of the Company's 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. Cushman is terminated by the Company without cause. The
employment agreement also contains non-competition provisions that cover the
Company's existing markets and expansion markets that apply during the term of
the agreement and for a period of one year after the expiration or earlier
termination of the agreement, provided that the one year period shall be
extended for an additional year in the event that Mr. Cushman, rather than the
Company, terminates the employment 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
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 September 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. .... -- -- -- -- -- -- --
Jeffrey D. Cushman...... -- -- -- -- -- -- --
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 (15 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
73
<PAGE>
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 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.
74
<PAGE>
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.
Consulting and Employment Agreements
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company entered into the agreements described below.
Each of the named persons 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.
75
<PAGE>
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 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.
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,
76
<PAGE>
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 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
77
<PAGE>
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 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 was 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 was
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.
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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 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
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<PAGE>
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 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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<PAGE>
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 September 30, 1997, (i) 15,800 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) 7,414.8514 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.
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<PAGE>
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
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
On December 19, 1997, the Company amended and restated its Existing Credit
Facility with CIBC and First Source Financial LLP (collectively, the
"Lenders"). This amendment and restatement established (a) a term loan
acquisition facility of $55.0 million and (b) a revolving loan facility of
$25.0 million (which includes a $5.0 million letter of credit facility) (the
"Senior Credit Facility"). The following summary is a description of the terms
of the Senior Credit Facility, as amended.
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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 $1.2 million 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.
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 0.75% to 2.25%, depending on the Company's Total Debt to
EBITDA Ratio (as defined in the Senior Credit Facility) or (ii) the LIBO Rate
(as defined in the Senior Credit Facility) plus a margin that varies from 2.0%
to 3.5%, depending on the Company's Total Debt to EBITDA Ratio. The Senior
Credit Facility requires the Company to make quarterly payments of principal
amounts due under the term loan facility in the amounts set forth below on the
dates indicated:
<TABLE>
<CAPTION>
QUARTERLY DOLLAR
PAYMENT DATE REPAYMENT
------------ ----------
<S> <C>
September 30, 1998 $2,750,000
December 31, 1998 2,750,000
March 31, 1999 2,406,250
June 30, 1999 2,406,250
September 30, 1999 2,406,250
December 31, 1999 2,406,250
March 31, 2000 3,093,750
June 30, 2000 3,093,750
September 30, 2000 3,093,750
December 31, 2000 3,093,750
March 31, 2001 3,437,500
June 30, 2001 3,437,500
September 30, 2001 3,437,500
December 31, 2001 3,437,500
March 31, 2002 3,437,500
June 30, 2002 3,437,500
September 30, 2002 3,437,500
December 31, 2002 3,437,500
</TABLE>
The Senior Credit Facility requires quarterly interest-only payments to be
made on the Base Rate loans and periodic interest-only payments based on the
applicable interest period on LIBO Rate loans, at least quarterly, in each
case until maturity. In addition, the Senior Credit Facility requires
mandatory prepayments out of the proceeds of certain equity debt offerings,
asset dispositions, receipt of insurance proceeds not applied as provided in
the Senior Credit Facility, and receipts of funds from certain escrow
accounts. All outstanding principal and interest under the Senior Credit
Facility is due December 31, 2002. The Senior Credit Facility is secured by
substantially all the assets of the Company and the Subsidiary Guarantors. 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 (i) prohibitions on the incurrence of certain liens, the incurrence
of certain additional indebtedness, the repurchase of equity, the
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<PAGE>
redemption of other indebtedness, the consummation of certain mergers and
other fundamental changes (including change in control of the Company), the
consummation of certain purchases and sales of assets or stock, take or pay
contracts, and negative pledges and restrictive agreements; (ii) limitations
on capital expenditures, leases, transactions with affiliates, use of
proceeds, business activities, investments, the payment of dividends, and
management and advisory fees; (iii) requirements to furnish certain financial
reports, statements, notices, and information; (iv) requirements relating to
the maintenance of separate existence, authorizations, insurance, books and
records, and properties; (v) requirements relating to the conduct of business,
additional collateral, and future subsidiaries; and (vi) environmental
compliance requirements.
The Senior Credit Facility requires the Company to comply with certain
financial covenants and ratios. The Company is currently in compliance with
all material covenants and ratios in the Senior Credit Facility. These
financial covenants and ratios include, without limitation, that the Company
will not permit;
(i) the Total Debt to EBITDA Ratio (as defined in the Senior Credit
Facility) at any time during any period set forth below to be greater than
the ratio set forth opposite such period:
<TABLE>
<CAPTION>
TOTAL DEBT
TO
PERIOD EBITDA RATIO
------ ------------
<S> <C>
12/19/97 to (and including) 12/30/98 6.0:1
12/31/98 to (and including) 12/30/99 5.5:1
12/31/99 to (and including) 12/30/00 5.0:1
12/31/00 to (and including) 12/30/01 4.5:1
12/31/01 and thereafter 4.0:1;
</TABLE>
(ii) the Senior Secured Debt to EBITDA Ratio (as defined in the Senior
Credit Facility) at any time during any period set forth below to be
greater than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
SENIOR DEBT
TO
PERIOD EBITDA RATIO
------ ------------
<S> <C>
12/19/97 to (and including) 12/30/99 3.5:1
12/31/99 and thereafter 3.0:1;
</TABLE>
(iii) the EBITDA to Cash Interest Expense Ratio (as defined in the Senior
Credit Facility) as at the last day of any quarter ending on a date set
forth below to be less than the ratio set forth opposite such date:
<TABLE>
<CAPTION>
EBITDA TO
CASH INTEREST
PERIOD EXPENSE RATIO
------ -------------
<S> <C>
12/19/97 to (and including) 12/31/98 1.5:1
01/01/99 and thereafter 1.75:1;
</TABLE>
(iv) the EBITDA to Fixed Charges Ratio (as defined in the Senior Credit
Facility) as at the last day of any quarter beginning on March 31, 1998 for
the period comprising such quarter and the immediately preceding three
quarters to be less than 1.10:1.
The Senior Credit Facility also contains customary representations,
warranties, and events of default for a facility of this type.
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."
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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 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.
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Subsidiary
Guarantors. The Subsidiary Guarantors are each of the direct and indirect
subsidiaries of the Company as of the date of this Prospectus: AmeriTel Pay
Phones, Inc., Talton Telecommunications Corporation, Talton Telecommunications
of Carolina, Inc., Talton STC, Inc., Talton Invision, Inc., and One Source
Telecommunications, Inc. 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
Indebtedness of such Subsidiary Guarantor. The obligations of each Subsidiary
Guarantor under its Subsidiary Guarantee will be limited so as not to
constitute a fraudulent conveyance under applicable law. As of the date of
this Prospectus, all subsidiaries of the Company are, directly or indirectly,
wholly owned by the Company. As of the date of this Prospectus there is
aggregate indebtedness of $600,000 of the Company's Subsidiaries that is
effectively senior to the Senior Notes because the Company is a holding
company. See "Risk Factors--Holding Company Structure" and "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; and (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
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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
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.
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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 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.
A "Change of Control" is defined by the Indenture to include certain
dispositions of all or substantially all the assets of the Company; adoption
of a plan of dissolution or liquidation by the Company; consummation of
certain transactions that result in certain third parties acquiring beneficial
ownership of more than 50% of the Voting Stock (as defined) of the Company; or
a change in the membership of the Board of Directors of the Company resulting
in a majority of the directors of the Company not being Continuing Directors
(as defined). For a detailed description of "Change of Control" see
"Description of Senior Notes--Certain Definitions." 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 Other Indebtedness--
Senior Credit Facility." Under New York law, which governs the Indenture, it
is not clear which transactions would constitute a sale of "all or
substantially all of the assets" of the Company. See "Risk Factors--Repurchase
of Senior Notes Upon a Change of Control." 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.
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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 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;
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(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:
(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 Company intends, as soon as practicable, to enter into a supplemental
indenture for the purpose of clarifying, and resolving an ambiguity with
respect to, clause (vi) above to make it clear that, to the extent that the
Board of Directors declares dividends as provided in the Certificate of
Designation for the Senior Preferred Stock, such dividends will be "required
to be paid" for the purposes of clause (vi). For a description of the Senior
Preferred Stock and its dividend rights, see "Description of Capital Stock--
Preferred Stock--Senior Preferred Stock."
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
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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"):
(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
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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.
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
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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 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.
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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."
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
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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."
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
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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."
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.
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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;
(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
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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 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
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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.
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
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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; (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.
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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.
"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
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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 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
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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 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.
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"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.
"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
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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.
"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
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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 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.
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"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 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
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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,
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.
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"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.,
Talton STC, Inc., and Talton Invision, 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 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).
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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 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
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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 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 a restrictive legend 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 provided in the Indenture.
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.
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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 "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 will not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss will 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 will 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.
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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.
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
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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 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.
114
<PAGE>
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; the consolidated financial statements of Talton Telecommunications
Corporation as of November 30, 1996 and for the eleven months ended November
30, 1996; the consolidated financial statements of Security Telecom
Corporation as of June 30, 1997 and for the six months ended June 30, 1997;
and the financial statements of InVision Telecom, Inc. as of December 31, 1996
and September 30, 1997 and for each of the two years ended December 31, 1995
and 1996, and for the nine months ended September 30, 1997 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.
The financial statements of Correctional Communications 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 Ginsberg,
Weiss & Company, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
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, which 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.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TALTON HOLDINGS, INC.
Independent Auditors' Report--Deloitte & Touche LLP...................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
AMERITEL PAY PHONES, INC.
Independent Auditors' Report--Deloitte & Touche LLP...................... F-18
Independent Auditors' Report--Arthur Andersen LLP........................ F-19
Balance Sheets........................................................... F-20
Statements of Income..................................................... F-21
Statements of Stockholders' Equity....................................... F-22
Statements of Cash Flows................................................. F-23
Notes to Financial Statements............................................ F-24
TALTON TELECOMMUNICATIONS CORPORATION
Report of Independent Auditors--Deloitte & Touche LLP.................... F-34
Report of Independent Auditors--Borland, Benefield, Crawford & Webster,
P.C. ................................................................... F-35
Consolidated Balance Sheets.............................................. F-36
Consolidated Statements of Operations.................................... F-37
Consolidated Statements of Stockholders' Equity.......................... F-38
Consolidated Statements of Cash Flows.................................... F-39
Notes to Consolidated Financial Statements............................... F-40
SECURITY TELECOM CORPORATION
Report of Independent Auditors--Deloitte & Touche LLP.................... F-46
Report of Independent Auditors--Davis, Clark and Company, P.C. .......... F-47
Consolidated Balance Sheets.............................................. F-48
Consolidated Statements of Income........................................ F-49
Consolidated Statements of Stockholders' Equity.......................... F-50
Consolidated Statements of Cash Flows.................................... F-51
Notes to Consolidated Financial Statements............................... F-52
CORRECTIONAL COMMUNICATIONS CORPORATION
Report of Independent Auditors--Ginsberg, Weiss & Company................ F-58
Balance Sheets........................................................... F-59
Statements of Income..................................................... F-60
Statements of Stockholders' Equity....................................... F-61
Statements of Cash Flows................................................. F-62
Notes to Financial Statements............................................ F-63
INVISION TELECOM, INC.
Report of Independent Auditors--Deloitte & Touche LLP.................... F-68
Balance Sheets........................................................... F-69
Statements of Operations................................................. F-70
Statements of Stockholder's Equity (Deficit)............................. F-71
Statements of Cash Flows................................................. F-72
Notes to Financial Statements............................................ F-73
</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
(deficit) 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
(December 29, 1997 as to Note 13)
F-2
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 294,494 $ 16,587,601
Accounts receivable.............................. 7,346,270 12,683,005
Refundable income taxes.......................... 601,842 612,136
Inventories...................................... 941,819 1,010,951
Prepaid expenses................................. 259,984 676,243
Deferred income tax asset........................ 673,259 447,135
------------ ------------
Total current assets........................... 10,117,668 32,017,071
PROPERTY AND EQUIPMENT............................. 7,969,134 13,728,265
INTANGIBLE AND OTHER ASSETS........................ 62,046,732 83,435,701
------------ ------------
TOTAL.......................................... $ 80,133,534 $129,181,037
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................. $ 1,369,697 $ 3,173,299
Accrued expenses................................. 6,021,241 12,147,922
Income taxes payable............................. 978,000
Current portion of long-term debt................ 3,150,000 38,047
------------ ------------
Total current liabilities...................... 11,518,938 15,359,268
LONG-TERM DEBT..................................... 60,164,500 115,559,851
DEFERRED INCOME TAXES.............................. 1,968,767 447,135
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
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 and 16,200 shares
issued and outstanding as of December 31, 1996
and September 30, 1997, respectively............ 153 162
Additional paid-in capital....................... 21,610,972 22,155,463
Retained earnings (deficit)...................... (15,129,855) (24,340,901)
------------ ------------
Total stockholders' equity (deficit)........... 6,481,329 (2,185,217)
------------ ------------
TOTAL.......................................... $ 80,133,534 $129,181,037
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUE................................... $5,506,110 $53,406,700
OPERATING EXPENSES:
Telecommunication costs........................... 2,298,712 21,570,606
Facility commissions.............................. 1,455,375 14,419,123
Field operations and maintenance.................. 218,895 2,373,432
Selling, general and administrative............... 372,341 4,462,349
Depreciation...................................... 110,803 1,071,827
Amortization of intangibles....................... 741,032 7,787,607
---------- -----------
Total operating expense......................... 5,197,158 51,684,944
---------- -----------
OPERATING INCOME.................................... 308,952 1,721,756
OTHER (INCOME) EXPENSE:
Interest expense, net............................. 612,071 7,320,330
Other, net........................................ (20,490) (126,082)
---------- -----------
Total other (income) expense.................... 591,581 7,194,248
---------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY LOSS .... (282,629) (5,472,492)
INCOME TAX EXPENSE (BENEFIT)........................ (22,502) (657,127)
---------- -----------
LOSS BEFORE EXTRAORDINARY ITEM...................... $ (260,127) $(4,815,365)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT........... -- 4,395,681
---------- -----------
NET LOSS............................................ $ (260,127) $(9,211,046)
Preferred Stock Dividends........................... -- (355,500)
---------- -----------
NET LOSS APPLICABLE TO COMMON STOCK................. $ (260,127) $(9,566,546)
========== ===========
Primary Loss per Common Share:
Net Loss before extraordinary loss.................. (14.38) (281.01)
Extraordinary loss.................................. -- (238.88)
---------- -----------
Net Loss per common share........................... (14.38) (519.89)
========== ===========
Weighted average shares outstanding................. 18,089 18,401
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS 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)............ (355,500) (355,500)
ISSUANCE OF COMMON
STOCK(UNAUDITED)....... 900 9 899,991 900,000
NET LOSS (UNAUDITED).... (9,211,046) (9,211,046)
-------- ------ ------ ---- ----------- ------------ ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... 5,925 $ 59 16,200 $162 $22,155,463 $(24,340,901) $ (2,185,217)
======== ====== ====== ==== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (260,127) $ (9,211,046)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation..................................... 110,803 1,071,827
Amortization of intangible assets, including
deferred financing costs and bond discount...... 803,023 8,292,220
Extraordinary loss on debt extinguishment........ -- 4,395,681
Deferred income taxes............................ 160,512 (1,295,508)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable............................. 44,823 (3,414,072)
Inventories..................................... 12,013 (43,034)
Prepaid expenses and other assets............... (166,096) (256,669)
Accounts payable................................ (1,010,795) (402,748)
Accrued expenses................................ (718,313) 2,900,035
Income taxes.................................... (394,963) (988,294)
------------ ------------
Net cash (used in) provided by operating
activities.................................... (1,419,120) 1,048,392
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash....................... -- (1,693,000)
Capital expenditures.............................. (268,801) (4,456,785)
Cash outflows for acquisitions.................... (46,983,442) (21,576,079)
------------ ------------
Net cash used in investing activities.......... (47,252,243) (27,725,864)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt................ 59,200,000 118,200,000
Repayment of advances............................. -- (850,400)
Repayment of debt................................. (15,912,706) (67,422,318)
Payments of deferred financing costs.............. (3,804,121) (6,956,703)
Proceeds from the issuance of common and preferred
stock, net of expenses........................... 9,482,684 --
------------ ------------
Net cash provided by financing activities...... 48,965,857 42,970,579
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS.............. 294,494 16,293,107
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... -- 294,494
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 294,494 $ 16,587,601
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 640,035 $ 3,764,113
============ ============
Cash paid for income taxes........................ $ 211,950 $ 1,495,902
============ ============
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................................. $ -- $ 355,500
============ ============
Issuance of stock for acquisition of assets....... $ -- $ 900,000
============ ============
Issuance of debt for acquisition of assets........ $ -- $ 300,000
============ ============
Amounts payable for acquisition costs............. $ -- $ 3,386,919
============ ============
</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
September 30, 1997 and the statements of operations and cash flows for the
nine months ended September 30, 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
September 30, 1997 and for the nine months ended September 30, 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."
Please refer to footnote 13 for a discussion of the Company's acquisitions
which were consummated subsequent to December 31, 1996.
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, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable, net of advance payments
received of $1,188,671 and $338,271 at December 31,
1996 and September 30, 1997, respectively.......... $ 7,975,016 $12,637,119
Advance commissions receivable...................... 349,094 380,971
Amounts receivable from stockholders................ 135,627 154,635
Employees and other................................. 11,556 221,977
----------- -----------
8,471,293 13,394,702
Less allowance for unbillable and uncollectible
chargebacks........................................ (1,125,023) (711,697)
----------- -----------
$ 7,346,270 $12,683,005
=========== ===========
</TABLE>
At December 31, 1996 and September 30, 1997, the Company had advanced
commissions to certain facilities of $835,641 and $771,322 (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, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements............................... $ 432,036 $ 472,079
Telephone system equipment........................... 7,259,333 13,187,984
Vehicles............................................. 123,977 236,377
Office equipment..................................... 264,591 1,014,455
---------- -----------
8,079,937 14,910,895
Less accumulated depreciation........................ (110,803) (1,182,630)
---------- -----------
$7,969,134 $13,728,265
========== ===========
</TABLE>
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts.................... $18,440,124 $30,696,912
Noncompete agreements........................... 303,611 403,611
Deferred loan costs............................. 3,804,121 5,839,642
Goodwill........................................ 39,759,416 53,040,078
Other intangibles............................... 55,936 467,350
----------- -----------
62,363,208 90,447,593
Less accumulated amortization.................... (803,023) (9,095,243)
----------- -----------
Total intangible assets........................... 61,560,185 81,352,350
Other assets--noncurrent portion of commission
advances to facilities........................... 486,547 390,351
Restricted cash................................... -- 1,693,000
----------- -----------
$62,046,732 $83,435,701
=========== ===========
</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, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Facility commissions............................ $2,034,070 $ 2,880,829
Billing and collection fees..................... 455,517 471,697
Uncollectible call chargebacks.................. 840,000 1,091,233
Long-distance charges........................... 1,428,148 1,000,314
Accrued acquisition costs....................... 1,068,124 2,959,829
Accrued interest................................ 9,946 3,265,914
Other........................................... 185,436 478,106
---------- -----------
$6,021,241 $12,147,922
========== ===========
</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, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Senior Notes.................................. $ -- $115,000,000
Senior Credit Agreement:
Revolving loan facility..................... 5,700,000
Term loan facility.......................... 45,000,000
Senior subordinated notes..................... 8,500,000
Subordinated notes............................ 5,000,000
Other......................................... 200,000 597,898
----------- ------------
64,400,000 115,597,898
Less unamortized discount..................... (1,085,500)
Less current portion of long-term debt........ (3,150,000) (38,047)
----------- ------------
$60,164,500 $115,559,851
=========== ============
</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
F-11
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
Amounts outstanding under the Senior Credit Agreement, Senior Subordinated
Notes, and Subordinated Notes were repaid on June 27, 1997. Please refer to
footnote 13 for a discussion of the Company's financing transactions
subsequent to December 31, 1996.
F-12
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
The Company has provided for income taxes during the nine months ended
September 30, 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.
F-13
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Issued and outstanding shares of common stock as of December 31, 1996
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 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, as of December 31, 1996
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 three stockholders who were formerly
F-14
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 $225,000 during the
nine months ended September 30, 1997, of which $75,000 was recorded as a
prepaid expense at September 30, 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 nine months ended
September 30, 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 $198,841, respectively, during the
one-month period ended December 31, 1996 and the unaudited nine-month period
ended September 30, 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>
F-15
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER--In connection with the acquisitions, the Company entered into
consulting agreements with certain shareholders, which are discussed in Note
10. Additionally, the Company entered into an employment agreement with one
stockholder who was formerly an employee of one of the acquired companies. The
employment agreement has an initial term of one year and requires payment of
an annual base salary of $100,000 along with a $25,000 payment to be paid in
equal monthly installments over the first twelve months of the agreement.
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 April 4, 1997, the Company acquired substantially all of the net assets
of Tri-T, Inc. (d/b/a "Tataka") for cash of $0.6 million and a contingent
payment of $0.3 million, subject to certain performance related benchmarks to
be evaluated in the future.
On June 27, 1997, the Company acquired substantially all of the net assets
of Security Telecom Corporation for cash of $9.9 million and issuance of 900
shares of the Company's Common Stock. Approximately $2.5 million of additional
purchase price was withheld at closing, pending certain regulatory approvals
and final adjustments. On June 27, 1997, in conjunction with the acquisition
of Security Telecom Corporation, the Company entered into an agreement with an
employee of Security Telecom Corporation giving the employee the right to
purchase 100 shares of the Company's Class A common stock for $2,000 per
share. The employee may elect to exercise the options after December 31, 1997
or may elect to receive a $200,000 payment in cash. The options must be
exercised by June 30, 1999. The Company has recorded this liability in the
June 30, 1997 financial statements with a corresponding increase in goodwill
resulting from the Security Telecom Acquisition.
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 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. All of the Company's subsidiaries
(the "Subsidiary Guarantors") are fully, unconditionally, and jointly and
severally liable for the Notes. The Subsidiary Guarantors are wholly owned and
constitute all of the Company's direct and indirect subsidiaries. The Company
has not included separate financial statements of its subsidiaries because (a)
the aggregate assets, liabilities, earnings and equity of such subsidiaries
are substantially equivalent to the assets, liabilities, earnings and equity
of the Company on a consolidated basis, and (b) the Company believes that
separate financial statements and other disclosures concerning such
subsidiaries are not material to investors.
On July 31, 1997, the Company acquired 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
F-16
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
On October 6, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of
Communications Central Inc. for $42 million subject to various adjustments as
defined in the agreement and subject to a provision for working capital of
approximately $1.2 million provided to the Company pursuant to the purchase
agreement.
On December 19, 1997, the Company's Senior Credit Agreement was amended and
restated to provide the Company a term loan acquisition agreement of $55.0
million and a revolving loan agreement of $25.0 million with a maturity date
of December 31, 2002. The revolving loan agreement includes up to a $5.0
million letter of credit. The amended and restated Senior Credit Agreement
contains interest rates similar to the prior revolving loan commitment. The
Senior Credit Agreement requires the Company to make quarterly interest-only
payments on the revolving loan and term loan. In addition, the Company is
required to make quarterly payments of principal amounts for the term loan
beginning at September 1998.
On December 19, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of
Peoples Telephone Company, Inc. for $10.6 million with the assumption of
certain liabilities. The acquisition agreement also provides for payment of
certain deferred compensation if certain financial results are obtained in the
future.
On December 29, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of North
American InTeleCom, Inc. from TSC Communications Corporation for a cash
purchase price of $6.5 million with the assumption of certain liabilities
approximating $650,000. The acquisition agreement also provides for a
contingent payment of up to $1.0 million if certain inmate agreements and
financial results are obtained in the future.
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 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-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
AmeriTel Pay Phones, Inc.:
We have audited the accompanying balance sheet of AmeriTel Pay Phones, Inc.
(a Missouri Corporation), 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, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriTel Pay Phones, Inc.
as of 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-19
<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-20
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------- NOVEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 11,698,641 $ 20,371,388 $29,305,641 $23,330,540
OPERATING EXPENSES:
Telecommunication
costs................ 5,346,949 9,747,326 13,728,316 11,098,532
Facility commissions.. 1,861,154 3,497,488 6,086,469 4,736,823
Field operations and
maintenance.......... 507,460 863,901 1,166,063 898,505
Selling, general and
administrative....... 927,441 1,758,744 2,281,177 1,727,302
Depreciation.......... 194,413 384,277 536,264 431,486
Amortization of
intangibles.......... 595,268 1,224,071 1,624,017 1,312,238
Nonrecurring
expenses............. 684,320
------------ ------------ ----------- -----------
Total operating
expenses........... 9,432,685 17,475,807 26,106,626 20,204,886
------------ ------------ ----------- -----------
OPERATING INCOME........ 2,265,956 2,895,581 3,199,015 3,125,654
OTHER (INCOME) EXPENSE:
Interest income....... (8,637) (32,165) (20,816) (20,705)
Interest expense...... 572,618 1,059,860 1,375,701 1,114,318
Other, net............ 66,139 38,881 247,882
------------ ------------ ----------- -----------
Total other (income)
expense............ 563,981 1,093,834 1,393,766 1,341,495
------------ ------------ ----------- -----------
INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY
LOSS................... 1,701,975 1,801,747 1,805,249 1,784,159
INCOME TAXES............ 734,363 693,001 713,663
------------ ------------ ----------- -----------
INCOME BEFORE
EXTRAORDINARY LOSS..... 1,701,975 1,067,384 1,112,248 1,070,496
EXTRAORDINARY LOSS FROM
EARLY EXTINGUISHMENT OF
DEBT................... 52,353
------------ ------------ ----------- -----------
NET INCOME.............. $ 1,701,975 $ 1,067,384 $ 1,059,895 $ 1,070,496
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
F-21
<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-22
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------ NOVEMBER 30, SEPTEMBER 30,
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 $ 1,070,496
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 1,743,724
Deferred income
taxes................ 64,461 (35,524)
Changes in operating
assets and
liabilities:
Accounts receivable.. (605,975) (992,079) (3,803,925) (3,594,096)
Inventory............ (604,411) (299,555) 271,286 154,205
Prepaid expenses..... (30,619) (44,017) 44,880 (33,003)
Accounts payable..... (189,185) (135,633) 1,092,431 1,284,378
Accrued expenses..... 366,783 1,288,008 1,460,005 687,701
Income taxes......... (242,277) 266,149 242,277
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 1,428,249 2,314,640 2,567,831 1,555,682
------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (1,779,468) (2,051,111) (1,516,236) (1,286,778)
Cash outflows for
acquisition of
facility contracts... (6,770,292) (3,613,662) (4,698,468) (4,568,603)
Payments under
noncompete
agreements........... (55,000)
------------ ------------ ----------- -----------
Net cash used in
investing
activities......... (8,604,760) (5,664,773) (6,214,704) (5,855,381)
------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-
term debt
borrowings........... 12,305,000 11,890,000 5,600,000 4,300,000
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) (857,715)
Dividends paid on
common and preferred
stock................ (256,735) (507,840) (137,708)
------------ ------------ ----------- -----------
Net cash provided by
financing
activities......... 7,216,575 4,012,239 2,836,511 3,442,285
------------ ------------ ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 40,064 662,106 (810,362) (857,414)
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 $ 33,612
============ ============ =========== ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for
interest............. $ 516,732 $ 930,906 $ 1,489,076 $ 846,646
============ ============ =========== ===========
Cash paid for income
tax.................. $ -- $ 912,479 $ 462,380 $ 451,500
============ ============ =========== ===========
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-23
<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-24
<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-25
<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 nine months ended September 30, 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
nine months ended September 30, 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-26
<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-27
<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-28
<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 nine months ended
September 30, 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-29
<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-30
<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-31
<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 $69,083 during
the fiscal years 1994, 1995, 1996, and the unaudited nine months ended
September 30, 1996,
F-32
<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-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 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-34
<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-35
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 401,737 $ 449,904
Accounts receivable................................ 2,054,141 2,388,958
Refundable income taxes............................ 489,652
Inventories........................................ 310,628 168,395
Prepaid expenses................................... 55,788
Deferred income tax asset.......................... 220,653 54,400
---------- ----------
Total current assets............................. 3,476,811 3,117,445
PROPERTY AND EQUIPMENT............................... 3,833,426 4,119,147
INTANGIBLE AND OTHER ASSETS.......................... 695,861 586,656
---------- ----------
TOTAL............................................ $8,006,098 $7,823,248
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 936,569 $ 950,576
Accrued expenses.................................... 3,148,445 3,205,027
Income taxes payable................................ 892,000
Current portion of debt............................. 1,848,716
---------- ----------
Total current liabilities........................ 5,933,730 5,047,603
LONG-TERM DEBT....................................... 1,535,078
DEFERRED INCOME TAXES................................ 223,869 308,605
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 5,000 shares
authorized, issued and outstanding................ 5,000 5,000
Retained earnings.................................. 308,421 2,462,040
---------- ----------
Total stockholders' equity....................... 313,421 2,467,040
---------- ----------
TOTAL............................................ $8,006,098 $7,823,248
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, ELEVEN MONTHS NINE MONTHS
-------------------------- ENDED ENDED
1994 1995 NOVEMBER 30, 1996 SEPTEMBER 30, 1996
------------ ------------ ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 12,192,640 $ 19,955,019 $24,357,473 $19,559,229
OPERATING EXPENSES:
Telecommunication
costs................ 6,413,500 8,926,090 9,588,482 8,056,547
Facility commissions.. 2,040,281 6,097,790 7,875,455 6,460,136
Field operations and
maintenance.......... 535,971 602,429 649,739 453,972
Selling, general and
administrative....... 1,642,976 2,329,970 1,639,827 1,274,638
Depreciation.......... 771,419 975,350 1,001,982 713,522
Amortization of
intangibles.......... 796,548 380,895 122,180 100,069
------------ ------------ ----------- -----------
Total operating
expense............ 12,200,695 19,312,524 20,877,665 17,058,884
------------ ------------ ----------- -----------
OPERATING INCOME
(LOSS)................. (8,055) 642,495 3,479,808 2,500,345
OTHER (INCOME) EXPENSE:
Interest income....... (111) (9,625) (55,268) (50,886)
Interest expense...... 181,521 341,461 169,789 167,076
Other, net............ (134,548) (118,095) (12,321) (12,320)
------------ ------------ ----------- -----------
Total other (income)
expense............ 46,862 213,741 102,200 103,870
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (54,917) 428,754 3,377,608 2,396,475
INCOME TAXES (BENEFIT).. (10,716) 157,339 1,223,989 858,656
------------ ------------ ----------- -----------
NET INCOME (LOSS)....... $ (44,201) $ 271,415 $ 2,153,619 $ 1,537,819
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-37
<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-38
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------- NOVEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (44,201) $ 271,415 $ 2,153,619 $ 1,537,819
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,567,967 1,356,245 1,124,162 813,591
Deferred income
taxes................ (101,180) 354,884 250,989 126,645
Changes in operating
assets and
liabilities:
Accounts receivable... 608,077 (1,077,696) (180,563) (128,850)
Inventories........... (62,254) (174,715) 142,233 220,925
Prepaid expenses...... (7,217) 7,536 (55,788) (53,779)
Accounts payable...... 9,663 302,838 14,007 1,029,179
Accrued expenses...... 157,638 1,236,118 (97,672) (901,945)
Income taxes payable.. (111,272) (523,114) 1,381,652 489,652
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 2,017,221 1,753,511 4,732,639 3,133,237
------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (1,443,911) (2,617,816) (1,287,703) (437,285)
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) (437,285)
------------ ------------ ----------- -----------
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) (2,987,330)
------------ ------------ ----------- -----------
Net cash provided by
(used in) financing
activities......... (549,488) 815,057 (3,383,794) (2,987,330)
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ 96,001 211,519 48,167 (291,378)
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 $ 110,359
============ ============ =========== ===========
SUPPLEMENTAL
INFORMATION:
Interest paid.......... $ 181,521 $ 338,672 $ 172,578 167,076
============ ============ =========== ===========
Income taxes paid
(refunded)............ $ 201,736 $ 89,500 $ (408,652) $ --
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-39
<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-40
<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 nine months ended September 30, 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
nine months ended September 30, 1996, have been
F-41
<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-42
<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-43
<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 nine months ended
September 30, 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-44
<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 nine months
ended September 30, 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 $71,925 for the unaudited nine
months ended September 30, 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.
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.
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 and Stockholders of Security Telecom Corporation:
We have audited the accompanying consolidated balance sheet of Security
Telecom Corporation and subsidiary (the "Company") as of June 30, 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the six-month period ended June 30, 1997. 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 Security Telecom
Corporation and subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the six-month period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 10, 1997
F-46
<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-47
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 11,601 $ 15,391 $ 14,381
Accounts receivable......................... 257,847 788,070 1,072,263
Prepaid expenses............................ 27,191 69,817 104,590
---------- ---------- ----------
Total current assets...................... 296,639 873,278 1,191,234
PROPERTY AND EQUIPMENT........................ 3,275,040 4,213,412 5,017,469
OTHER ASSETS.................................. 79,192 44,473 588,863
---------- ---------- ----------
TOTAL..................................... $3,650,871 $5,131,163 $6,797,566
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $1,139,488 $1,633,773 $2,572,702
Accrued expenses............................ 383,387 523,517 690,439
Current portion of long-term debt........... 963,069 1,692,647 2,615,419
---------- ---------- ----------
Total current liabilities................. 2,485,944 3,849,937 5,878,560
LONG-TERM DEBT................................ 567,538 758,513 560,782
DEFERRED INCOME TAXES......................... 87,125 106,915 113,396
MINORITY INTEREST............................. 156,546 175,352 163,818
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 79,105
---------- ---------- ----------
Total stockholders' equity................ 353,718 240,446 81,010
---------- ---------- ----------
TOTAL..................................... $3,650,871 $5,131,163 $6,797,566
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30,
------------------------------------ ------------- ------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....... $8,091,728 $11,892,919 $15,281,621 $ 10,912,589 $ 10,576,209
OPERATING EXPENSES:
Telecommunication
costs................ 4,176,907 6,134,823 8,265,116 5,940,196 5,527,903
Facility commissions.. 1,814,997 2,590,813 3,246,247 2,413,334 2,690,984
Field operations and
maintenance.......... 483,012 632,178 1,055,506 989,721 805,400
Selling, general and
administrative....... 866,762 1,201,567 1,373,701 1,182,556 985,536
Depreciation and
amortization......... 255,324 442,952 868,265 581,937 513,695
---------- ----------- ----------- ------------ ------------
Total operating
expense............ 7,597,002 11,002,333 14,808,835 11,107,744 10,523,518
---------- ----------- ----------- ------------ ------------
OPERATING INCOME
(LOSS)................. 494,726 890,586 472,786 (195,155) 52,691
OTHER (INCOME) EXPENSE:
Interest income....... (29,040) (24,204) (13,643) (7,161)
Interest expense...... 252,904 314,110 460,880 273,626 281,980
Minority interest..... 117,478 19,724 18,806 (12,606) (11,534)
Other, net............ (21,667) 20,544 (84,970) (2,207) (64,800)
---------- ----------- ----------- ------------ ------------
Total other (income)
expense............ 319,675 330,174 381,073 251,652 205,646
---------- ----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES........... 175,051 560,412 91,713 (446,807) (152,955)
INCOME TAXES............ 66,730 13,548 21,609 3,371 6,481
---------- ----------- ----------- ------------ ------------
NET INCOME (LOSS)....... $ 108,321 $ 546,864 $ 70,104 $ (450,178) $ (159,436)
========== =========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-49
<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 loss for the six months ended June
30, 1997............................... (159,436) (159,436)
--- ------ --------- ---------
BALANCE, JUNE 30, 1997.................... 70 $1,905 $ 79,105 $ 81,010
=== ====== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED JUNE
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 30,
------------------------------------- ------------- -----------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income..... $ 108,321 $ 546,864 $ 70,104 $ (450,178) $(159,436)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 255,324 442,952 868,265 581,937 513,695
Minority interest.... 117,478 19,724 18,806 27,519 (11,534)
Deferred income
taxes............... 78,472 13,548 19,790 3,371 6,481
Changes in operating
assets and
liabilities:
Accounts receivable.. (283,405) (319,099) (1,096,079) (228,575) (699,870)
Prepaid expenses..... (27,191) (42,626) (32,751) (34,773)
Accounts payable..... 275,536 419,939 494,285 111,333 915,037
Accrued expenses..... 97,332 137,486 140,130 127,642 166,922
Other assets......... (18,251) 4,160 34,719 26,429 (44,731)
----------- ----------- ----------- ---------- ---------
Net cash provided by
(used in) operating
activities......... 630,807 1,238,383 507,394 166,727 651,791
----------- ----------- ----------- ---------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (1,522,914) (1,085,286) (1,687,649) (959,320) (749,791)
Cash outflows for
acquisitions......... (237,111)
Increase in
investments.......... (21,154)
----------- ----------- ----------- ---------- ---------
Net cash used in
investing
activities......... (1,544,068) (1,085,286) (1,687,649) (959,320) (986,902)
----------- ----------- ----------- ---------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Dividends paid........ (43,376)
Net proceeds from
advances on accounts
receivable........... 201,789 294,273 565,856 215,179 415,677
Proceeds from issuance
of long-term debt.... 1,065,723 158,763 1,006,955 1,143,495 825,487
Payments of long-term
debt................. (317,823) (634,769) (345,390) (557,325) (907,063)
----------- ----------- ----------- ---------- ---------
Net cash provided by
(used in) financing
activities......... 949,689 (181,733) 1,184,045 801,349 334,101
----------- ----------- ----------- ---------- ---------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 36,428 (28,636) 3,790 8,756 (1,010)
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 $ 20,357 $ 14,381
=========== =========== =========== ========== =========
SUPPLEMENTAL
INFORMATION:
Interest paid......... $ 214,090 $ 295,204 $ 429,365 $ 87,839 $ 313,495
=========== =========== =========== ========== =========
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 $ -- $ --
=========== =========== =========== ========== =========
Amounts payable for
acquisitions......... $ -- $ -- $ -- $ -- $ 430,000
=========== =========== =========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-51
<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. In May 1997,
one of the Company's affiliates acquired the remaining outstanding Common
Stock of LETI.
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-52
<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, cost incurred after technological feasibility
has been established for a product are capitalized. Costs capitalized in 1994,
1995 and 1996 were $30,870, $103,863 and $119,826, respectively, and cost
capitalized during the nine month period ended September 30, 1996 and the six
month period ended June 30, 1997 were $29,957 and $53,146, 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 nine month period ended September 30, 1996 and the six month period
ended June 30, 1997 were $29,197 and $25,456, 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 statement of income
and cash flows for the nine months ended September 30, 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 nine months
ended September 30, 1996 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-53
<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 September
30, 1996 and the six month period ended June 30, 1997, the outstanding
balances of these related party notes payable were $534,848, $655,451,
$515,451 and $1,384,243, 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, $41,701 in the nine months ended September
30, 1996 and $7,790 in the six month period ended June 30, 1997.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Trade accounts receivable.............. $ 1,530,663 $ 2,686,172 $ 3,287,247
Employee receivables................... 21,153 42,274 7,553
Other.................................. 73,632
----------- ----------- -----------
1,551,816 2,728,446 3,368,432
Less advances on receivables........... (1,159,969) (1,725,825) (1,950,705)
Less allowance for unbillable and
uncollectible chargebacks............. (134,000) (214,551) (345,464)
----------- ----------- -----------
$ 257,847 $ 788,070 $ 1,072,263
=========== =========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements................. $ 2,000 $ 2,900 $ 50,194
Telephone systems equipment............ 3,789,729 5,429,727 6,567,000
Furniture and fixtures................. 292,005 449,175 542,676
----------- ----------- -----------
4,083,734 5,881,802 7,159,870
Less accumulated depreciation and
amortization.......................... (808,694) (1,668,390) (2,142,401)
----------- ----------- -----------
$ 3,275,040 $ 4,213,412 $ 5,017,469
=========== =========== ===========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Billing and collection fees............ $ 89,410 $ 66,240 $ 64,506
Facility commissions................... 227,730 323,889 527,870
Other.................................. 66,247 133,388 98,063
----------- ----------- -----------
$ 383,387 $ 523,517 $ 690,439
=========== =========== ===========
</TABLE>
F-54
<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:
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1996 1997
----------- -----------
<S> <C> <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 $ 414,273
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...................................... 826,377 705,581
Note payable to LDDS with interest at 9.5%, payable
in monthly installments of $21,538 through its
maturity on December 8, 1997....................... 245,630 105,177
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........................................... 177,341 125,018
Note payable to North American Intelecom, Inc. with
interest at 8%, payable in monthly installments of
$25,430 through its maturity on August 1, 1998..... 340,770
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 1,265,451
Note payable with interest at 7.5%, payable in
monthly principal installments of $3,602, plus
interest, through December 6, 1999............... 140,000 118,792
Capital lease obligations and other................. 163,933 101,139
Less current portion of long-term debt.............. (1,692,647) (2,615,419)
----------- -----------
$ 758,513 $ 560,782
=========== ===========
</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 as of June 30, 1997, including capital
lease obligations, for the six months ending December 31, 1997 and the years
ending December 31, 1998 and 1999 are as follows:
<TABLE>
<S> <C>
1997 (six months)............................................... $2,063,226
1998............................................................ 834,413
1999............................................................ 278,562
----------
Total......................................................... $3,176,201
==========
</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 nine month period ended
September 30, 1996 and the audited six month period ended June 30, 1997 was
$43,299 and $24,387, respectively.
F-55
<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 as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year Ending
1997 (six months)....................................... $34,263 $ 23,113
1998.................................................... 50,629 50,455
1999.................................................... 37,309 56,377
2000.................................................... 30,303
------- --------
Total minimum future rental payments.................... 122,201 $160,248
========
Less amounts representing imputed interest.............. (21,062)
-------
Total capital lease obligations......................... 101,139
Less current portion.................................... (49,514)
-------
Long-term portion....................................... $51,625
=======
</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 Company has
provided income tax expense during the nine months ended September 30, 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 composition of deferred
income tax liabilities as of December 31, 1995 and 1996, and June 30, 1997,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Capital leases................................ $ 68,617 $ 50,616 36,444
Capitalized software.......................... 39,129 66,634 84,704
Other......................................... (20,621) (10,335) (7,752)
-------- -------- --------
Total....................................... $ 87,125 $106,915 $113,396
======== ======== ========
</TABLE>
F-56
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
On June 27, 1997 substantially all of the net assets of the Company were
sold to Talton Holdings, Inc. for cash of $11.2 million and 900 shares of
Talton Holdings, Inc. common stock.
* * * * * *
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors of
Correctional Communications Corporation
We have audited the accompanying balance sheets of Correctional
Communications Corporation (the "Company") as of December 31, 1995 and 1996,
and the related statements of income, stockholders' equity and cash flows for
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Correctional
Communications Corporation at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ginsberg, Weiss & Company
Pearl River, New York
June 27, 1997
(October 6, 1997 as to Note 10)
F-58
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JULY 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 693,918 $ 643,742 $ 304,529
Accounts receivable, net................... 648,519 924,249 1,109,019
Inventories................................ 10,148 15,075 16,038
Other assets............................... 14,378 32,067
---------- ---------- ----------
Total current assets..................... 1,366,963 1,615,133 1,429,586
PROPERTY AND EQUIPMENT....................... 491,100 550,263 569,497
LOANS RECEIVABLE--STOCKHOLDER................ 95,289 96,569
OTHER ASSETS................................. 150,067 274,584 741,523
---------- ---------- ----------
TOTAL........................................ $2,008,130 $2,535,269 $2,837,175
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $ 684,915 $ 783,794 $1,561,712
Accrued expenses........................... 441,738 787,883 182,659
Current portion of long-term debt.......... 24,504 5,602
---------- ---------- ----------
Total current liabilities................ 1,126,653 1,596,181 1,749,973
LONG-TERM DEBT-- STOCKHOLDERS................ 442,880 442,880 442,880
LONG-TERM DEBT-- OTHER....................... 19,343 3,273
MINORITY INTEREST............................ 93,033 58,701 75,675
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000
shares authorized, 18,750 shares issued
and outstanding........................... 138,333 138,333 138,333
Retained earnings.......................... 207,231 279,831 427,041
---------- ---------- ----------
Total stockholders' equity............... 345,564 418,164 565,374
---------- ---------- ----------
TOTAL.................................... $2,008,130 $2,535,269 $2,837,175
========== ========== ==========
</TABLE>
See notes to financial statements.
F-59
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JULY 31,
-------------------------------- ------------- ------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....... $4,190,994 $7,372,233 $9,563,648 $6,788,841 $6,339,001
OPERATING EXPENSES:
Telecommunication
costs................ 1,575,480 2,429,046 2,921,990 2,142,036 1,761,493
Facility commissions.. 1,533,120 2,761,862 3,668,035 2,563,565 2,579,699
Field operations and
maintenance.......... 171,460 174,676 289,173 227,328 222,455
Selling, general and
administrative....... 651,780 1,292,219 1,972,112 1,359,288 1,197,993
Depreciation and
amortization......... 156,704 242,500 332,938 254,333 243,815
---------- ---------- ---------- ---------- ----------
Total operating
expense............ 4,088,544 6,900,303 9,184,248 6,546,550 6,005,455
---------- ---------- ---------- ---------- ----------
OPERATING INCOME........ 102,450 471,930 379,400 242,291 333,546
OTHER (INCOME) EXPENSE:
Interest expense,
net.................. 74,940 51,631 39,564 32,500 21,946
Minority interest..... 23 73,298 117,236 69,079 64,390
---------- ---------- ---------- ---------- ----------
Total other (income)
expense............ 74,963 124,929 156,800 101,579 86,336
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 27,487 $ 347,001 $ 222,600 $ 140,712 $ 247,210
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-60
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ -------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................. 15,000 $ 38,333 $(167,257) $(128,924)
Net income............................. 27,487 27,487
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1994............... 15,000 38,333 (139,770) (101,437)
Issuance of common stock............... 3,750 100,000 100,000
Net income............................. 347,001 347,001
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1995............... 18,750 138,333 207,231 345,564
Net income............................. 222,600 222,600
Dividends.............................. (150,000) (150,000)
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1996............... 18,750 $138,333 $ 279,831 $ 418,164
Net income (unaudited)................. 247,210 247,210
Dividends (unaudited).................. (100,000) (100,000)
------ -------- --------- ---------
BALANCE, JULY 31, 1997 (UNAUDITED)....... 18,750 $138,333 $ 427,041 $ 565,374
====== ======== ========= =========
</TABLE>
See notes to financial statements.
F-61
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JULY 31,
------------------------------- ------------- ------------
1994 1995 1996 1996 1997
--------- --------- --------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income........... $ 27,487 $ 347,001 $ 222,600 $140,712 $247,210
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization...... 156,704 242,500 332,938 254,333 243,815
Minority interest.. 23 73,298 117,236 69,078 64,391
Changes in operating
assets and
liabilities:
Accounts
receivable........ (262,027) (126,460) (275,730) (388,153) (184,770)
Accounts payable... 146,981 91,097 98,879 218,803 777,918
Accrued expenses... 78,597 336,997 346,145 104,253 (605,224)
Other assets....... (10,857) (26,500) (26,143) 7,869 31,104
--------- --------- --------- -------- --------
Net cash provided
by operating
activities...... 136,908 937,933 815,925 406,895 574,444
--------- --------- --------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment....... (335,899) (170,705) (267,555) (224,951) (149,887)
Increase in
investments......... 75,000
Increase in note
receivable.......... (95,289) (49,739) (1,280)
Additions to
intangibles......... (133,568) (55,321) (244,470) (280,170) (479,758)
Increase in
restricted cash..... (20,789) (1,066) (389) (100,343)
--------- --------- --------- -------- --------
Net cash used in
investing
activities...... (394,467) (246,815) (608,380) (555,249) (731,268)
--------- --------- --------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Dividends paid....... (150,000) (150,000) (100,000)
Investments of
(distributions to)
limited partners.... (22,609) (96,146) (151,568) (95,482) (47,417)
Issuance of common
stock............... 100,000
Proceeds from
issuance of long-
term debt........... 408,000 61,654 19,642
Payments of long-term
debt................ (145,500) (17,807) (34,972)
--------- --------- --------- -------- --------
Net cash provided
by (used in)
financing
activities...... 385,391 (141,646) (257,721) (225,840) (182,389)
--------- --------- --------- -------- --------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 127,832 549,472 (50,176) (374,194) (339,213)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 16,614 144,446 693,918 693,918 643,742
--------- --------- --------- -------- --------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 144,446 $ 693,918 $ 643,742 $319,724 $304,529
========= ========= ========= ======== ========
SUPPLEMENTAL
INFORMATION:
Cash paid for
interest............ $ 75,284 $ 68,082 $ 67,427 $ 40,251 $ 36,218
========= ========= ========= ======== ========
Cash paid for income
taxes............... $ 2,475 $ 7,600 $ 5,560 $ -- $ --
========= ========= ========= ======== ========
</TABLE>
See notes to financial statements.
F-62
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Correctional Communications Corporation and Subsidiaries (the
"Company") was incorporated on February 11, 1991, in the State of California.
The Company provides fully automated pay telephone services to jail inmates in
correctional facilities located in the western United States.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management of the Company to make estimates and assumptions that affect the
amount reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The Company owns 50%, and is the general
partner, of MCJ Telephone Partners LP ("MCJ") and KCJ Telephone Partners LP
("KCJ") Each partnership was formed to own, in conjunction with third party
investors, and operate contracts providing telephone service. The financial
statements presented reflect 100% of the assets, liabilities, revenue and
expenses of MCJ and KCJ. The limited partners' interests are reflected as
minority interests in the joint venture. All significant intercompany balances
and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to a concentration of credit risk consist of accounts
receivable. These receivables are generated by collect calls made by inmates
at the correctional facilities which have contracted with the Company. The
credit risk relates to funds not being collected from the third party
recipients. The credit risk is mitigated by the large number of customers and
the limit on the amount of credit extended to any billing number.
The Company also has concentration of credit risk involving cash. The
Company maintains multiple cash account s with one bank. The uninsured amount
at December 31, 1996, is due to cash balances in excess of FDIC insurance
limits in the amount of $819,521.
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--Accounts receivable at July 31, 1997 and December 31,
1996 and 1995, consists primarily of amounts due from billing and collection
clearing houses for non-coin calls placed through the Company's inmate pay
telephone systems. The amounts due are net of an allowance for uncollectible
accounts which is determined based upon rates established from historical
experience. The allowance for doubtful accounts was $806,425 as of July 31,
1997 and $246,940 and $144,438 as of December 31, 1996 and 1995. The balance
due from one billing and collection clearing house was $832,983, $515,555 and
$416,269 at July 31, 1997 December 31, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT--The Company's property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Expenditures for major renewals and betterments that extend the useful lives
of assets are capitalized. Expenditures for repairs and maintenance are
charged to operations in the period incurred. Depreciation expense at July 31,
1997, September 30, 1996, December 31, 1996, 1995 and 1994, is $130,653,
$164,885, $208,393, $181,214 and $122,524, respectively.
INTANGIBLE ASSETS--Intangible assets consist of signing bonuses paid to
correctional facilities at the inception of the contract term. These signing
bonuses have been capitalized and are being amortized over the life of the
contracts which range from three to five years. Amortization expense at
December 31, 1996, 1995 and
F-63
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1994 is $124,115, $60,498 and $32,052, respectively and $113,162 and $89,448
for the seven months ended July 31, 1997 and 1996 and the nine months ended
September 30, 1996.
Organization expense has been capitalized and is being amortized over five
years using the straight-line method. Amortization expense at December 31,
1996, 1995 and 1994 is $430, $264 and $266, respectively.
INCOME TAXES--On February 11, 1991, the Company filed an election to be
taxed as an S Corporation under section 1361 of the Internal Revenue Code.
Taxes on income are payable by the individual stockholders. Accordingly, no
provision for federal corporation taxes based on income is recorded. The
Company, MCJ and KCJ file separate income tax returns and are all subject to
taxes in the State of California. Additionally, the Company is subject to tax
on income in the States of California and Arizona.
REVENUE RECOGNITION--Revenue is recognized when earned. Coin call and non-
coin call revenue is recognized at the time the call is made.
The Company occasionally requires certain customers to remit funds in
advance in order to guarantee payment of telephone service. Unearned advances
are recorded as a current liability in customer deposits. As calls are made by
these customers, the customer deposit account is reduced and revenue is
recognized.
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 Statement
of Financial Accounting Standards 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.
RESEARCH AND DEVELOPMENT--Costs related to research, design and development
of computer software are charged to operations as incurred, in accordance with
Statement of Financial Standards No. 86. For the seven months ended July 31,
1997 and for the year ended December 31, 1996, $0 and $193,339 was charged to
current operations as research and development.
RECLASSIFICATION--Certain amounts for the prior years have been reclassified
to conform with the current year presentation.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of
July 31, 1997 and statements of income and cash flows for the six months ended
September 30, 1996 and the seven months ended July 31, 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 balance sheet of the Company as of July 31, 1997 and the results of
operations and cash flows of the Company for the nine months ended September
30, 1996 and the seven months ended July 31, 1997, have been made. The results
of operation for the interim period are not necessarily indicative of the
results to be expected for the full year.
2. RELATED PARTIES
Loans from stockholder of $95,289 and $96,569 as of December 31, 1996 and
July 31, 1997 reflects amounts advance at various times during 1996. These
notes are unsecured and non-interest bearing. Interest has been imputed at the
rate of prime plus 1% and totals $4,709 for the year ended December 31, 1996.
F-64
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
JULY 31,
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telephone systems equipment............. $ 796,926 $ 995,320 $1,165,778
Furniture and fixtures.................. 95,347 103,623 117,016
Vehicles................................ 61,655 26,190
--------- ---------- ----------
892,273 1,160,598 1,308,984
Less accumulated depreciation........... (401,173) (610,335) (739,487)
--------- ---------- ----------
$ 491,100 $ 550,263 $ 569,497
========= ========== ==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JULY 31,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Signing bonus............................ $218,891 $ 465,513 $ 858,081
Organization costs....................... 3,712 3,712 3,712
Restricted cash.......................... 20,789 21,855 122,198
Other.................................... 5,310 9,110 97,502
-------- --------- ---------
248,702 500,190 1,081,493
Less accumulation amortization........... (98,635) (225,606) (339,970)
-------- --------- ---------
$150,067 $ 274,584 $ 741,523
======== ========= =========
</TABLE>
Restricted cash consists of a certificate of deposit for $20,000 plus
accrued interest income of $343, $1,855 and $789 as of July 31, 1997, December
31, 1996 and December 31, 1995, respectively. By agreement with one of its
county facilities, the Company is obligated to maintain this certificate of
deposit in a segregated account for the duration of the contract period which
expires June 30, 1998.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JULY 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Billing and collection fees................. $ 17,932 $ 43,702 $ 94,811
Facility commissions........................ 267,154 343,756 15,050
Profit sharing plan......................... 110,000 0
Telephone charges........................... 109,663 101,419 9,881
Other....................................... 46,989 189,006 62,917
-------- -------- --------
$441,738 $787,883 $182,659
======== ======== ========
</TABLE>
F-65
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
The Company's long-term debt is composed of the following as of December 31,
1996 and July 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
8.75% note payable to Union Bank of California, due in
24 monthly installments of $1,091 including interest,
due March 15, 1998 secured by a vehicle.............. $15,466 $ 8,875
10.25% note payable to Patelco Credit Union, due in 36
monthly installments of $1,219 including interest,
due February 5, 1999, secured by a vehicle........... 28,381
------- -------
43,847 8,875
Less current portion of long-term debt................ 24,504 5,602
------- -------
$19,343 $ 3,273
======= =======
</TABLE>
Principal payments on long-term liabilities as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Years Ended December 31:
1997............................................................ $24,504
1998............................................................ 16,848
1999............................................................ 2,495
-------
$43,847
=======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain personal property under non-cancelable
operating leases. In addition, the Company has guaranteed certain monthly
commission payments to one of the counties that they contract with, which is
paid in addition to the contracted commission rate. The following is a
schedule by years of future minimum lease and contract payments at December
31, 1996.
<TABLE>
<S> <C>
Year Ending December 31,
1997.......................................................... $ 65,347
1998.......................................................... 68,101
1999.......................................................... 49,858
2000.......................................................... 22,619
--------
Total minimum future rental payments........................ $205,925
========
</TABLE>
RENT--The Company rents space for its administrative activities under a
lease which was signed effective June 1, 1995, for a two-year period. It calls
for monthly rent of $2,310. Effective October 1, 1996, the lease was extended
to September 30, 1999, at a monthly rent of $4,309. The future minimum rental
payments at December 31 are $51,705 for 1997, $51,705 for 1998 and $38,779 for
1999.
8. TRANSACTION WITH RELATED PARTY
The Company is indebted to its stockholders for loans aggregating $442,880.
The loans bear interest at rates that vary from 8% to 14%. Payments of
principal are determined as between the related parties. The loans are not
currently scheduled for repayment.
F-66
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLAN
The Company has adopted a qualified profit sharing plan covering all its
employees. The eligibility requirements for employees are as follows: They
must attain the age of 21, have 12 month of service and perform at least 1,000
hours of work within a plan year. Contributions are made at the discretion of
the Board of Directors. For the years ended December 31, 1996 and 1995, the
Company has made contributions of $110,000 and $100,000, respectively.
10. SUBSEQUENT EVENT
Subsequent to the balance sheet date, the Board of Directors declared a
dividend of $5.33 per share, payable on April 1, 1997.
On July 31, 1997, the Company signed an agreement with Talton Holdings, Inc.
to sell substantially all of the assets of the Company for cash of $10.5
million, subject to certain adjustments to be determined based on future
results of operations of the Company. No effect of this transaction has been
reflected in the accompanying financial statements.
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of
Directors of InVision Telecom, Inc.:
We have audited the accompanying balance sheets of InVision Telecom, Inc.
(the "Company") as of December 31, 1996 and September 30, 1997, and the
related statements of operations, stockholder's equity (deficit) and cash
flows for each of the two years ended December 31, 1996 and 1995 and for the
nine months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December
31, 1996 and September 30, 1997, and the results of their operations and their
cash flows for each of the two years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 12, 1997
F-68
<PAGE>
INVISION TELECOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 48,450 $ 11,710
Accounts receivable............................... 4,841,516 5,648,797
Prepaid expenses and other assets................. 325,175 359,609
Refundable income taxes........................... 418,310 420,366
----------- ------------
Total current assets............................ 5,633,451 6,440,482
PROPERTY AND EQUIPMENT.............................. 9,235,782 9,126,405
INTANGIBLE AND OTHER ASSETS......................... 29,337,909 27,193,875
----------- ------------
TOTAL........................................... $44,207,142 $ 42,760,762
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................. $ 514,978 $ 3,358,643
Bank Overdraft.................................... 1,562,272 1,388,915
Accrued expenses.................................. 3,076,092 3,415,337
Current portion of long term debt................. 176,550
----------- ------------
Total current liabilities....................... 5,329,892 8,162,895
DEBT OWED TO RELATED PARTY.......................... 40,775,115 42,819,792
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $0.01 par value; 75,500 shares
authorized,
no shares issued and outstanding.................
Common stock, $0.01 par value; 124,500 shares
authorized,
124,500 shares issued and outstanding............ 1,254 1,254
Additional paid-in capital........................ 1,688,031 1,688,031
Retained earnings (deficit)....................... (3,587,150) (9,911,210)
----------- ------------
Total stockholder's equity (deficit)............ (1,897,865) (8,221,925)
----------- ------------
TOTAL........................................... $44,207,142 $ 42,760,762
=========== ============
</TABLE>
See notes to financial statements.
F-69
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING REVENUE....................... $39,730,868 $48,892,806 $31,623,804
OPERATING EXPENSES:
Telecommunication costs............... 19,364,419 27,242,987 19,080,847
Facility commissions.................. 9,291,116 12,557,577 8,787,712
Field operations and maintenance...... 1,443,633 1,870,146 1,744,635
Selling, general and administrative... 2,610,347 4,504,908 2,994,535
Depreciation.......................... 956,703 1,336,017 1,123,162
Amortization of intangibles........... 2,398,024 3,499,344 2,594,801
----------- ----------- -----------
Total operating expense............. 36,064,242 51,010,979 36,325,692
----------- ----------- -----------
OPERATING INCOME (LOSS)................. 3,666,626 (2,118,173) (4,701,888)
OTHER (INCOME) EXPENSE:
Interest expense, related party....... 2,975,320 3,401,834 2,483,358
Other interest expense, net........... 8,950 13,965
Other, net............................ (3,933) (154,953) (859,130)
----------- ----------- -----------
Total other expense................. 2,980,337 3,260,846 1,624,228
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... 686,289 (5,379,019) (6,326,116)
INCOME TAX EXPENSE (BENEFIT)............ 260,789 (284,841) (2,056)
----------- ----------- -----------
NET INCOME (LOSS)....................... $ 425,500 $(5,094,178) $(6,324,060)
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-70
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------- PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.. 125,400 $1,254 $1,688,031 $ 1,081,528 $ 2,770,813
Net income................ 425,500 425,500
------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1995..................... 125,400 1,254 1,688,031 1,507,028 3,196,313
Net loss.................. (5,094,178) (5,094,178)
------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1996..................... 125,400 1,254 1,688,031 (3,587,150) (1,897,865)
Net loss.................. (6,324,060) (6,324,060)
------- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997..................... 125,400 $1,254 $1,688,031 $(9,911,210) $(8,221,925)
======= ====== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-71
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 425,500 $(5,094,178) $(6,324,060)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 3,354,727 4,835,361 3,717,963
Changes in operating assets and
liabilities:
Accounts receivable.................. (2,875,674) 1,257,696 (807,281)
Accounts payable..................... 132,922 344,506 2,843,665
Accrued expenses..................... (607,310) 917,845 339,245
Income taxes......................... (577,758) (284,881) (2,056)
Other assets......................... 4,805 (8,894) (34,434)
----------- ----------- -----------
Net cash (used in) provided by
operating activities.............. (142,788) 1,967,455 (266,958)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (5,657,389) (2,458,893) (1,464,552)
Cash Outflows for Acquisitions........ (18,776,716) -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (24,434,105) (2,458,893) (1,464,552)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft........................ 500,822 368,915 (173,357)
Proceeds from issuance of debt-related
party................................ 24,418,403 74,873 2,044,677
Proceeds from issuance of other debt.. -- 450,000 --
Payments of long-term debt............ (256,200) (443,700) (176,550)
----------- ----------- -----------
Net cash provided by financing
activities........................ 24,663,025 450,088 1,694,770
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
EQUIVALENTS........................... 86,132 (41,350) (36,740)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 3,668 89,800 48,450
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 89,800 $ 48,450 $ 11,710
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid......................... $ 8,950 $ 13,965 $ --
=========== =========== ===========
Taxes paid............................ $ -- $ -- $ --
=========== =========== ===========
NON-CASH TRANSACTIONS:
Note payable issued for acquisition of
assets............................... $ 212,400 $ -- $ --
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-72
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--InVision Telecom, Inc. (the "Company") was a wholly owned
subsidiary of Communications Central, Inc. (the "Parent Company"). The Company
provides fully automated pay telephone services to jail inmates in
correctional facilities located throughout the United States. The Company
accumulates call activity from its various installations and bills its
revenues related to this call activity through third-party billing services
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 of the Company to make estimates and assumptions, such as estimate
of allowances and reserves for unbillable and uncollectible chargebacks, that
affect the amount reported in the financial statements and accompanying notes.
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 and an allowance for unbillable and uncollectible
calls, based upon historical experience, for estimated chargebacks to be made
by the LECs.
PROPERTY AND EQUIPMENT--The Company's property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. The following is a summary of
useful lives for the major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- ------------
<S> <C>
Telephone system............................................. 10 years
Vehicles..................................................... 3 years
Office equipment............................................. 3 to 5 years
Leasehold improvements....................................... 5 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, 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. 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 the major categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
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.
F-73
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
REVENUE RECOGNITION--Revenues are recognized during the periods the calls
are made. In addition, during the same period, the Company accrues the related
telecommunications costs for validating, transmitting, billing and collection,
and line and long distance, along with commissions payable to the facilities.
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.
INCOME TAXES--The Company accounts for income tax 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 differences between
financial statement and tax bases of assets and liabilities using current tax
rates.
FINANCIAL INSTRUMENTS--The Company's financial instruments under Statement
of Financial Accounting Standards 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
debt owed to related parties, because such debt does not have repayment terms.
2. ACQUISITIONS
During the year ended December 31, 1995, the Company acquired facility
contracts and the related facility equipment from various other independent
inmate phone operators for purchase prices aggregating $18,989,116.
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>
DECEMBER 31,
1995
------------
<S> <C>
Purchase prices:
Net cash paid............................................. $ 18,776,716
Amounts payable to sellers................................ 212,400
------------
Total purchase prices.................................... 18,989,116
Estimated fair value of tangible and identifiable intangi-
ble assets acquired....................................... (10,133,834)
------------
Goodwill................................................... $ 8,855,282
============
</TABLE>
F-74
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table presents unaudited pro forma results of operations of
the Company for the year ended December 31, 1995, as if the acquisitions had
occurred at the beginning of 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Net sales.................................................... $47,651,868
===========
Net loss..................................................... $ (448,500)
===========
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Trade accounts receivable, net of advance
payments at December 31, 1996 and September 30,
1997 of $0 and $1,250,000, respectively......... $8,433,152 $8,862,649
Other receivables................................ $ 404,887
---------- ----------
8,433,152 9,267,536
Less allowance for unbillable and uncollectible
chargebacks..................................... (3,591,636) (3,618,739)
---------- ----------
$4,841,516 $5,648,797
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Telephone systems equipment...................... $11,133,706 $11,954,363
Furniture and fixtures........................... 101,544 102,344
Computer system.................................. 620,505 778,459
Vehicles......................................... 7,500 41,875
Leasehold improvements........................... 672 672
----------- -----------
11,863,927 12,877,713
Less accumulated depreciation.................... (2,628,145) (3,751,308)
----------- -----------
$ 9,235,782 $ 9,126,405
=========== ===========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Intangible assets:
Acquired telephone contracts................... $10,803,166 $11,247,265
Noncompete agreements.......................... 163,600 163,600
Goodwill....................................... 24,512,287 24,512,287
----------- -----------
35,479,053 35,923,152
Less accumulation amortization................. (6,141,144) (8,729,277)
----------- -----------
Total intangible assets.......................... $29,337,909 $27,193,875
=========== ===========
</TABLE>
F-75
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Billing and collection fees....................... $ 683,980 $ 805,479
Facility commissions.............................. 960,514 1,419,679
Telephone charges................................. 944,923 745,729
Other............................................. 486,675 444,450
----------- -----------
$ 3,076,092 $ 3,415,337
=========== ===========
</TABLE>
7. LONG-TERM DEBT
The Company's long-term debt as of December 31, 1996 and September 30, 1997
is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Debt owed to related party....................... $40,775,115 $42,819,792
Other............................................ 176,550 --
----------- -----------
40,951,665 42,819,792
Less current portion of long-term debt........... (176,550) --
----------- -----------
40,775,115 42,819,792
=========== ===========
</TABLE>
DEBT OWED TO RELATED PARTY--The Company has borrowed from its Parent Company
to provide the necessary capital to fund acquisitions and to provide for its
working capital needs. The related party debt does not have repayment terms or
specific interest terms. The Company was charged an effective rate of interest
of approximately 8% for each of the two years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1997.
OTHER DEBT--Other debt at December 31, 1996 consists of two notes payable
issued in conjunction with acquisitions of telephone contracts in 1994 and
1995. This debt was paid off in 1997.
Because the Company's outstanding debt as of September 30, 1997 does not
have repayment terms and consists solely of debt owed to its Parent Company,
the debt is classified as long-term.
PARENT COMPANY DEBT--All of the Company's assets and stock serve as
collateral for long-term debt of the Parent Company.
8. STOCKHOLDER'S EQUITY
COMMON STOCK--The Company has 124,500 shares of common stock issued and
outstanding.
PREFERRED STOCK--The Company has authorized 75,500 shares of preferred stock
which may have voting rights as authorized by the Company's board of
directors. The preferred stock does not have any rights to cumulative
dividends and does not have any liquidation preferences. No preferred stock
has been issued as of September 30, 1997.
F-76
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The operating results of the Company are included in the consolidated income
tax return of its Parent Company. In the Company's financial statements,
income taxes have been calculated as if the Company was a stand-alone entity.
The provision for income taxes (benefit) for the years ended December 31,
1995, 1996, and the nine months ended September 30, 1997, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current taxes payable (refund):
Federal.......................... $1,542,207 $(1,803,136) $(2,326,333)
State............................ 181,436 (212,134) (273,686)
Deferred income taxes.............. (1,462,854) (28,757) 196,095
Deferred income tax asset valuation
allowance......................... 1,759,186 2,401,868
---------- ----------- -----------
$260,789 $(284,841) $ (2,056)
========== =========== ===========
</TABLE>
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, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Tax at statutory rates.......... $233,338 $(1,828,866) $(2,150,879)
Effect of state income taxes.... 27,451 (215,161) (253,045)
Deferred income tax asset valua-
tion allowance................. 1,759,186 2,401,868
-------- ----------- -----------
$260,789 $(284,841) $ (2,056)
======== =========== ===========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible
revenues................................... $1,364,822 $1,375,121
Depreciation and amortization............... 394,364 187,969
Net operating loss carryforward............. 2,597,963
Deferred tax asset valuation allowance...... (1,759,186) (4,161,053)
---------- ----------
-- --
========== ==========
</TABLE>
F-77
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain personal property under non-cancelable
operating leases.
Future minimum lease payments under operating leases with terms greater than
one year are as follows:
<TABLE>
<S> <C>
Year Ending September 30,
1997 (three months)........... $ 92,000
1998.......................... 309,000
1999.......................... 152,000
2000.......................... 42,000
--------
Total minimum future rental
payments....................... $595,000
========
</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.
11. SUBSEQUENT EVENTS
On October 6, 1997, the Company was sold to Talton Holdings, Inc. for a
purchase price of $42.0 million, subject to adjustment as provided in the
acquisition agreement and subject to a provision for working capital of
approximately $1.2 million provided to the purchaser pursuant to the purchase
agreement.
F-78
<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
Corporate Structure.................................................................... 3
Prospectus Summary..................................................................... 4
Risk Factors........................................................................... 17
The Exchange Offer..................................................................... 24
Use of Proceeds........................................................................ 31
Capitalization......................................................................... 32
Pro Forma Financial Data............................................................... 33
Selected Financial Data................................................................ 40
Selected Historical Predecessor Financial Data......................................... 42
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 45
Business............................................................................... 56
Management............................................................................. 69
Principal Stockholders................................................................. 73
Certain Relationships and Related Transactions......................................... 75
Description of Capital Stock........................................................... 81
Description of Other Indebtedness...................................................... 82
Description of Senior Notes............................................................ 85
Certain Federal Income Tax Considerations.............................................. 112
Plan of Distribution................................................................... 114
Legal Matters.......................................................................... 114
Experts................................................................................ 115
Special Note Regarding Forward-Looking Information..................................... 115
Index to Financial Statements.......................................................... F-1
Independent Auditors' Report........................................................... F-2
</TABLE>
---------------
UNTIL , 1998 (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
GUARANTEED BY;
AMERITEL PAY PHONES, INC.
TALTON TELECOMMUNICATIONS CORPORATION
TALTON TELECOMMUNICATIONS OF CAROLINA, INC.
TALTON STC, INC.
TALTON INVISION, INC.
ONE SOURCE TELECOMMUNICATIONS, INC.
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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>
2.1 + Asset Purchase Agreement, dated as of August 21, 1997, among
the Company, Invision Telecom, Inc., and Communications
Central, Inc.
2.2 + Contribution Agreement, dated as of December 20, 1996, among
the Company, Richard C. Green, Jr., Robert K. Green, T.R.
Thompson, Roger K. Sallee, and certain other stockholders,
and AmeriTel Pay Phones, Inc.
2.3 + Contribution Agreement, dated as of December 20, 1996, among
the Company, Julius E. Talton, Julius E. Talton, Jr., and
James E. Lumpkin.
2.4 + Stock Acquisition Agreement, dated as of December 20, 1996,
among the Company, Richard C. Green, Jr., Robert K. Green,
T.R. Thompson, Roger K. Sallee, and certain other
stockholders, and AmeriTel Pay Phones, Inc.
2.5 + Stock Acquisition Agreement, dated as of December 20, 1996,
among the Company, Julius E. Talton, Julius E. Talton, Jr.,
James E. Lumpkin, Carrie T. Glover, Talton
Telecommunications Corporation, and Talton
Telecommunications of Carolina, Inc.
3.1 + Certificate of Incorporation of Talton Holdings, Inc.
3.2 + Bylaws of Talton Holdings, Inc.
3.3 + Articles of Incorporation of AmeriTel Pay Phones, Inc., as
amended.
3.4 + Amended and Restated Bylaws of AmeriTel Pay Phones, Inc.
3.5 + Articles of Incorporation of Talton Telecommunications
Corporation, as amended.
3.6 + Amended and Restated Bylaws of Talton Telecommunications
Corporation.
3.7 + Articles of Incorporation of Talton Telecommunications of
Carolina, Inc., as amended.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
3.8 + Amended and Restated Bylaws of Talton Telecommunications of
Carolina, Inc.
3.9 + Certificate of Incorporation of Talton STC, Inc.
3.10 + Bylaws of Talton STC, Inc.
3.11 + Certificate of Incorporation of Talton Invision, Inc.
3.12 + Bylaws of Talton Invision, Inc.
3.13** Certificate of Incorporation of One Source
Telecommunications, Inc.
3.14** Bylaws of One Source Telecommunications, 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.
4.5 + Registration Rights Agreement, dated as of December 27,
1996, by and among the Company and certain Holders named
therein.
4.6 + Shareholders Agreement, dated as of December 27, 1996, by
and among the Company and certain Persons named therein.
4.7 + Warrant Agreement, dated as of December 27, 1996, between
the Company and CIBC Wood Gundy Ventures, Inc.
4.8 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Gregg L. Engles.
4.9 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Gregg L. Engles.
4.10 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Gregg L. Engles.
4.11 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Onyx Talton Partners, L.P.
4.12 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Onyx Talton Partners, L.P.
4.13 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Onyx Talton Partners, L.P.
4.14 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Joseph P. Urso.
4.15 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Joseph P. Urso.
4.16 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Joseph P. Urso.
4.17 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Todd W. Follmer.
4.18 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Todd W. Follmer.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.19 + Warrant Agreement, dated as of December 27, 1996, between
the Company and Todd W. Follmer.
4.20** Supplemental Indenture, dated as of October 1, 1997, between
Talton Invision, Inc. and U.S. Trust Company of Texas, N.A.
4.21** Form of Supplemental Indenture between One Source
Telecommunications, Inc. and U.S. Trust Company of Texas,
N.A.
5.1 + Opinion of Hughes & Luce, L.L.P.
10.1 + Purchase Agreement dated as of June 27, 1997, between the
Company and the Initial Purchaser.
10.2 [Intentionally Omitted.]
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.
10.5 + Employment Agreement, dated as of June 2, 1997, between the
Company and John A. Crooks, Jr.
10.6 + Consulting Agreement, dated as of December 27, 1996, between
the Company and
James E. Lumpkin.
10.7 + Consulting Agreement, dated as of December 27, 1996, between
the Company and
Julius E. Talton.
10.8 + Consulting and Strategic Services Agreement, dated as of
December 27, 1996, between
the Company and EUF Talton, L.P.
10.9 + Employment Agreement, dated as of December 27, 1996, between
the Company and
Julius E. Talton, Jr.
10.10 + Employment Agreement, dated as of December 27, 1996, between
the Company and
John R. Summers.
10.11 + Stock Option Letter, dated as of June 2, 1997, from the
Company to John A. Crooks, Jr.
10.12 + Employment Agreement, dated as of November 17, 1997, between
the Company and Jeffrey D. Cushman.
10.13** Second Amended and Restated Credit Agreement, dated as of
December 19, 1997, among the Company, the Lenders named
therein, Canadian Imperial Bank of Commerce, and First
Source Financial, LLP.
10.14** Asset Purchase Agreement, dated as of July 31, 1997, among
AmeriTel Pay Phones, Inc., Correctional Communications
Corporation, Edward Whitman, Richard Whitman, and John
O'Keefe.
11.1 + Statement re computation of per share earnings.
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 to Pre-Effective Amendment No. 2 to
Registration Statement on Form S-4 filed December 17, 1997,
Registration No. 333-33639).
23.2** Consent of Deloitte & Touche LLP.
23.3** Consent of Arthur Andersen LLP.
23.4** Consent of Borland, Benefield, Crawford & Webster, P.C.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.5** Consent of Davis, Clark and Company, P.C.
23.6** Consent of Ginsberg, Weiss & Company
24.1 +** Power of Attorney (appearing on Signature Page of Registration
Statement on Form S-4 filed August 14, 1997, Registration No.
333-33639, except for Power of Attorney with respect to Talton
Invision, Inc., appearing on Signature Pages of Pre-Effective
Amendment No. 1 to Registration Statement on Form S-4 filed
November 7, 1997, Registration No. 333-33639 and Power of
Attorney with respect to One Source Telecommunications, Inc.,
appearing on page II-12 hereto).
25.1 + Form T-1 Statement of Eligibility of Trustee.
27.1** Financial Data Schedule.
99.1** Form of Letter of Transmittal.
99.2 + Form of Broker, Dealer Letter.
99.3 + Form of Clients' Letter.
99.4 + Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
The following are included in Part II of this Registration Statement:
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
Registrants have 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 Registrants of expenses incurred or paid by a
director, officer or controlling person of the Registrants 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 Registrants 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 Registrants hereby undertake 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 Registrants hereby undertake 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 Registrants hereby undertake 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 Registrants undertake 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.
II-4
<PAGE>
The Registrants undertake 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 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 Registrants hereby undertake 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; and
(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-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 9TH DAY OF JANUARY, 1998.
Talton Holdings, Inc.
By: /s/ John R. Summers
----------------------------------
JOHN R. SUMMERS
VICE PRESIDENT
AND ASSISTANT SECRETARY OF THE
COMPANY
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director of Talton January 9, 1998
- ------------------------------------ Holdings, Inc.
GREGG L. ENGLES
* Director of Talton January 9, 1998
- ------------------------------------ Holdings, Inc.
RICHARD H. HOCHMAN
* Director of Talton January 9, 1998
- ------------------------------------ Holdings, Inc.
JAY R. LEVINE
* Director of Talton January 9, 1998
- ------------------------------------ Holdings, Inc.
ROGER K. SALLEE
* Director of Talton January 9, 1998
- ------------------------------------ Holdings, Inc.
DAVID A. SACHS
* Vice President, January 9, 1998
- ------------------------------------ Assistant
TODD W. FOLLMER Secretary,
Assistant
Treasurer, and
Director of Talton
Holdings, Inc.
*By: /s/ John R. Summers Vice President and January 9, 1998
------------------------------- Assistant
JOHN R. SUMMERS Secretary of the
Attorney-in-fact Company
* President and Chief January 9, 1998
- ------------------------------------ Operating Officer
JOHN A. CROOKS, JR. of the Company
/s/ Jeffrey D. Cushman
- ------------------------------------ Chief Financial January 9, 1998
JEFFREY D. CUSHMAN Officer, Vice
President,
Treasurer, and
Secretary of the
Company
</TABLE>
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 9TH DAY OF JANUARY, 1998.
Ameritel Pay Phones, Inc.
By: /s/ John R. Summers
---------------------------------
JOHN R. SUMMERS VICE-PRESIDENT AND
CHIEF FINANCIAL OFFICER
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director of AmeriTel January 9, 1998
- ------------------------------------- Pay Phones, Inc.
RICHARD H. HOCHMAN
* Director of AmeriTel January 9, 1998
- ------------------------------------- Pay Phones, Inc.
NINA E. MCLEMORE
* Director of AmeriTel January 9, 1998
- ------------------------------------- Pay Phones, Inc.
JULIUS E. TALTON, SR.
* Director of AmeriTel January 9, 1998
- ------------------------------------- Pay Phones, Inc.
DAVID A. SACHS
* Vice President and January 9, 1998
- ------------------------------------- Director of
TODD W. FOLLMER AmeriTel Pay
Phones, Inc.
*By: /s/ John R. Summers Vice President and January 9, 1998
-------------------------------- Chief Financial
JOHN R. SUMMERS Officer of AmeriTel
Attorney-in-fact Pay Phones, Inc.
(principal
executive officer,
principal financial
officer, and
principal
accounting officer)
</TABLE>
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 9TH DAY OF JANUARY, 1998.
Talton Telecommunications of
Carolina, Inc.
By: /s/ Julius E. Talton, Sr.
---------------------------------
JULIUS E. TALTON, SR. CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director of January 9, 1998
- ------------------------------------- TaltonTelecommunications
RICHARD H. HOCHMAN of Carolina, Inc.
* Director of Talton January 9, 1998
- ------------------------------------- Telecommunications
NINA E. MCLEMORE of Carolina, Inc.
* Director of Talton January 9, 1998
- ------------------------------------- Telecommunications
DAVID A. SACHS of Carolina, Inc.
* Vice President and January 9, 1998
- ------------------------------------- Director of Talton
TODD W. FOLLMER Telecommunications
of Carolina, Inc.
* Chairman, Chief January 9, 1998
- ------------------------------------- Executive Officer
JULIUS E. TALTON, SR. and Director of
Talton Telecommunications
of Carolina, Inc.
(principal
executive officer)
* Secretary of Talton January 9, 1998
- ------------------------------------- Telecommunications
TOM GLOVER of Carolina, Inc.
(principal
financial officer
and principal
accounting
officer).
*By: /s/ John R. Summers January 9, 1998
--------------------------------
JOHN R. SUMMERS
Attorney-in-fact
</TABLE>
II-8
<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 9TH DAY OF JANUARY, 1998.
Talton Telecommunications Corporation
/s/ Julius E. Talton, Sr.
By: __________________________________
JULIUS E. TALTON, SR. CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
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
* Director of Talton
- ------------------------------------ Telecommunications January 9, 1998
RICHARD H. HOCHMAN Corporation
* Director of Talton
- ------------------------------------ Telecommunications January 9, 1998
NINA E. MCLEMORE Corporation
* Director of Talton
- ------------------------------------ Telecommunications January 9, 1998
DAVID A. SACHS
* Vice President and
- ------------------------------------ Director of Talton January 9, 1998
TODD W. FOLLMER Telecommunications
Corporation
* Chairman, Chief
- ------------------------------------ Executive Officer January 9, 1998
JULIUS E. TALTON, SR. and Director of
Talton
Telecommunications
Corporation
(principal
executive officer)
* Secretary of Talton
- ------------------------------------ Telecommunications January 9, 1998
TOM GLOVER Corporation
(principal
financial officer,
principal
accounting
officer)
/s/ John R. Summers
*By: _______________________________
JOHN R. SUMMERS January 9, 1998
Attorney-in-fact
II-9
<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 9TH DAY OF JANUARY, 1998.
Talton STC, Inc.
/s/ John R. Summers
By: _________________________________
JOHN R. SUMMERS
VICE PRESIDENT
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
* President and
- ------------------------------------- Director of Talton January 9, 1998
TODD W. FOLLMER STC, Inc.
(principal
executive officer)
/s/ John R. Summers
*By: ________________________________ Vice President of
JOHN R. SUMMERS Talton STC, Inc. January 9, 1998
Attorney-in-fact (principal
financial officer
and principal
accounting officer)
II-10
<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 9TH DAY OF JANUARY, 1998.
Talton Invision, Inc.
By: /s/ John R. Summers
-------------------------------
JOHN R. SUMMERS
VICE PRESIDENT, SECRETARY, AND
TREASURER
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* President, January 9, 1998
- ----------------------------------- Assistant
TODD W. FOLLMER Secretary, and
Director
of Talton
Invision, Inc.
(principal
executive
officer)
*By: /s/ John R. Summers Vice President, January 9, 1998
------------------------------ Secretary, and
JOHN R. SUMMERS Treasurer of
Attorney-in-fact Talton Invision,
Inc. (principal
financial officer
and principal
accounting
officer)
* Vice President and January 9, 1998
- ----------------------------------- Assistant
JOHN A. CROOKS, JR. Secretary
of Talton
Invision, Inc.
* Assistant Secretary January 9, 1998
- ----------------------------------- of Talton
BRENDA KING Invision, Inc.
</TABLE>
II-11
<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 9TH DAY OF JANUARY, 1998.
One Source Telecommunications, Inc.
By: /s/ Todd W. Follmer
---------------------------------
TODD W. FOLLMER PRESIDENT AND
ASSISTANT SECRETARY
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 or 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 IN THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Todd W. Follmer President, Assistant January 9, 1998
- ------------------------------------- Secretary, and Director
TODD W. FOLLMER of One Source
Telecommunications,
Inc. (principal
executive officer)
/s/ John R. Summers Vice President, January 9, 1998
- ------------------------------------- Secretary, and
JOHN R. SUMMERS Treasurer of One Source
Telecommunications,
Inc. (principal
financial officer and
principal accounting
officer)
/s/ John O'Keefe Vice President and January 9, 1998
- ------------------------------------- Assistant Secretary of
JOHN O'KEEFE One Source
Telecommunications,
Inc.
/s/ Brenda King Assistant Secretary of January 9, 1998
- ------------------------------------- One Source
BRENDA KING Telecommunications,
Inc.
/s/ Diana Haines Assistant Secretary of January 9, 1998
- ------------------------------------- One Source
DIANA HAINES Telecommunications,
Inc.
</TABLE>
II-12
<PAGE>
TALTON HOLDINGS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE MONTH ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
DESCRIPTION BALANCE EXPENSE DEDUCTIONS BALANCE
- ----------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts........ 1,195 654 724 1,125
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 + Asset Purchase Agreement, dated as of August 21, 1997, among the
Company, Invision Telecom, Inc., and Communications Central, Inc.
2.2 + Contribution Agreement, dated as of December 20, 1996, among the
Company, Richard C. Green, Jr., Robert K. Green, T.R. Thompson,
Roger K. Sallee, and certain other stockholders, and AmeriTel Pay
Phones, Inc.
2.3 + Contribution Agreement, dated as of December 20, 1996, among the
Company, Julius E. Talton, Julius E. Talton, Jr., and James E.
Lumpkin.
2.4 + Stock Acquisition Agreement, dated as of December 20, 1996, among
the Company, Richard C. Green, Jr., Robert K. Green, T.R.
Thompson, Roger K. Sallee, and certain other stockholders, and
AmeriTel Pay Phones, Inc.
2.5 + Stock Acquisition Agreement, dated as of December 20, 1996, among
the Company, Julius E. Talton, Julius E. Talton, Jr., James E.
Lumpkin, Carrie T. Glover, Talton Telecommunications Corporation,
and Talton Telecommunications of Carolina, Inc.
3.1 + Certificate of Incorporation of Talton Holdings, Inc.
3.2 + Bylaws of Talton Holdings, Inc.
3.3 + Articles of Incorporation of AmeriTel Pay Phones, Inc., as
amended.
3.4 + Amended and Restated Bylaws of AmeriTel Pay Phones, Inc.
3.5 + Articles of Incorporation of Talton Telecommunications
Corporation, as amended.
3.6 + Amended and Restated Bylaws of Talton Telecommunications
Corporation.
3.7 + Articles of Incorporation of Talton Telecommunications of
Carolina, Inc., as amended.
3.8 + Amended and Restated Bylaws of Talton Telecommunications of
Carolina, Inc.
3.9 + Certificate of Incorporation of Talton STC, Inc.
3.10 + Bylaws of Talton STC, Inc.
3.11 + Certificate of Incorporation of Talton Invision, Inc.
3.12 + Bylaws of Talton Invision, Inc.
3.13** Certificate of Incorporation of One Source Telecommunications,
Inc.
3.14** Bylaws of One Source Telecommunications, 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.
4.5 + Registration Rights Agreement, dated as of December 27, 1996, by
and among the Company and certain Holders named therein.
4.6 + Shareholders Agreement, dated as of December 27, 1996, by and
among the Company and certain Persons named therein.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.7 + Warrant Agreement, dated as of December 27, 1996, between the
Company and CIBC Wood Gundy Ventures, Inc.
4.8 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles.
4.9 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles.
4.10 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles.
4.11 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton Partners, L.P.
4.12 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton Partners, L.P.
4.13 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton Partners, L.P.
4.14 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso.
4.15 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso.
4.16 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso.
4.17 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer.
4.18 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer.
4.19 + Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer.
4.20** Supplemental Indenture, dated as of October 1, 1997, between
Talton Invision, Inc. and U.S. Trust Company of Texas, N.A.
4.21** Form of Supplemental Indenture between One Source
Telecommunications, Inc. and U.S. Trust Company of Texas, N.A.
5.1 + Opinion of Hughes & Luce, L.L.P.
10.1 + Purchase Agreement dated as of June 27, 1997, between the Company
and the Initial Purchaser.
10.2 [Intentionally Omitted.]
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.
10.5 + Employment Agreement, dated as of June 2, 1997, between the
Company and John A. Crooks, Jr.
10.6 + Consulting Agreement, dated as of December 27, 1996, between the
Company and
James E. Lumpkin.
10.7 + Consulting Agreement, dated as of December 27, 1996, between the
Company and
Julius E. Talton.
10.8 + Consulting and Strategic Services Agreement, dated as of December
27, 1996, between
the Company and EUF Talton, L.P.
10.9 + Employment Agreement, dated as of December 27, 1996, between the
Company and
Julius E. Talton, Jr.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.10 + Employment Agreement, dated as of December 27, 1996, between the
Company and
John R. Summers.
10.11 + Stock Option Letter, dated as of June 2, 1997, from the Company to
John A. Crooks, Jr.
10.12 + Employment Agreement, dated as of November 17, 1997, between the
Company and Jeffrey D. Cushman.
10.13** Second Amended and Restated Credit Agreement, dated as of December
19, 1997, among the Company, the Lenders named therein, Canadian
Imperial Bank of Commerce, and First Source Financial, LLP.
10.14** Asset Purchase Agreement, dated as of July 31, 1997, among
AmeriTel Pay Phones, Inc., Correctional Communications
Corporation, Edward Whitman, Richard Whitman, and John O'Keefe.
11.1 + Statement re computation of per share earnings.
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 to Pre-Effective Amendment No. 2 to Registration
Statement on Form S-4 filed December 17, 1997, Registration No.
333-33639).
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.
23.6** Consent of Ginsberg, Weiss & Company
24.1 +** Power of Attorney (appearing on Signature Page of Registration
Statement on Form S-4 filed August 14, 1997, Registration No. 333-
33639, except for Power of Attorney with respect to Talton
Invision, Inc., appearing on Signature Pages of Pre-Effective
Amendment No. 1 to Registration Statement on Form S-4 filed
November 7, 1997, Registration No. 333-33639 and Power of Attorney
with respect to One Source Telecommunications, Inc., appearing on
page II-12 hereto).
25.1 + Form T-1 Statement of Eligibility of Trustee.
27.1** Financial Data Schedule.
99.1** Form of Letter of Transmittal.
99.2 + Form of Broker, Dealer Letter.
99.3 + Form of Clients' Letter.
99.4 + Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
+ Previously filed.
<PAGE>
EXHIBIT 3.13
CERTIFICATE OF INCORPORATION
FOR
ONE SOURCE TELECOMMUNICATIONS, INC.
THE UNDERSIGNED, in order to form a corporation for the purposes hereinafter
stated under and pursuant of the provisions of the General Corporation Law of
the State of Delaware, does hereby certify as follows:
ARTICLE I
---------
The name of the corporation is ONE SOURCE TELECOMMUNICATIONS, INC.
ARTICLE II
----------
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such registered office is
CORPORATION SERVICE COMPANY.
ARTICLE III
-----------
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware. The Corporation is to have a perpetual existence.
ARTICLE IV
----------
The total number of shares of stock which the Corporation shall have
authority to issue is 1000 shares of Common Stock, $1.00 par value per share.
<PAGE>
ARTICLE V
---------
The following provisions are inserted for the management of the business and
the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
B. The Board of Directors shall have concurrent power with the
stockholders to make, alter, amend, change, add to or repeal the Bylaws of
the Corporation.
C. The number of directors of the Corporation shall be as from time to
time fixed by, or in the manner provided in, the Bylaws of the Corporation.
Election of directors need not be by written ballot unless the Bylaws so
provide.
D. In addition to the powers and authority expressly conferred upon
them herein or by statute, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done
by the Corporation, subject, nevertheless, to the provisions of the Delaware
General Corporation Law, this Certificate of Incorporation, and any Bylaws
adopted by the stockholders; provided, however, that no Bylaws hereafter
adopted by the stockholders shall invalidate any prior act of the
<PAGE>
directors which would have been valid if such Bylaws had not been adopted.
E. No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director
shall be liable to the extent provided by applicable law (i) for breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. No amendment to or
repeal of this Subsection (E) to Article V shall apply to or have any effect
on the liability or alleged liability of any director of the Corporation for
or with respect to any acts or omissions of such director occurring prior to
such amendment.
ARTICLE VI
----------
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the Delaware General Corporation Law)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the Corporation.
<PAGE>
ARTICLE VII
-----------
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of the Delaware General Corporation Law or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of the Delaware General
Corporation Law, order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
<PAGE>
ARTICLE VIII
------------
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE IX
----------
The amount of the authorized stock of the Corporation of any class or
classes may be increased or decreased by the affirmative vote of the holders of
a majority of the stock of the Corporation entitled to vote.
ARTICLE X
---------
Elections of directors need not be by ballot unless the By-Laws of the
Corporation shall so provide.
ARTICLE XI
----------
A. The incorporator of the Corporation is Sherry K. Nicholson, whose
mailing address is 2323 Bryan Street, Suite 2200, Dallas, Texas 75201.
B. The names and mailing addresses of the persons who are to serve as
directors of the Corporation until the first annual meeting of stockholders
and until their successors are elected and qualified are as follows:
Name Address
---- -------
Todd W. Follmer 3811 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this 8th day of September,
1997.
/s/ SHERRY K. NICHOLSON
------------------------------------
Sherry K. Nicholson
Incorporator
In the Presence of:
/s/ J. CAROL SMITH
- ---------------------------
J. Carol Smith
<PAGE>
EXHIBIT 3.14
BYLAWS
OF
ONE SOURCE TELECOMMUNICATIONS, INC.
ARTICLE I
Offices
-------
Section 1. Principal Office. The principal office of the Corporation shall
--------- ----------------
be in the County of Dallas, State of Texas.
Section 2. Other Offices. The Corporation also may have offices at such
--------- -------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
Shareholders
------------
Section 1. Time and Place of Meeting. Meetings of the shareholders shall
--------- -------------------------
be held at such times and at such places, within or without the State of
Delaware, as shall be determined by the Board of Directors.
Section 2. Annual Meetings. Annual meetings of shareholders shall be held
--------- ---------------
on the second Friday of the first month of each fiscal year if not a legal
holiday, and if a legal holiday, then on the next secular day following at 10:00
A.M., at which they shall elect a Board of Directors, and transact such other
business as may properly be brought before the meeting. The date of the annual
meeting of the shareholders may be held on a date different than that given
above if the Board so determines, and so states in the notice of the meeting or
in a duly executed waiver thereof.
Section 3. Special Meetings. Special meetings of the shareholders may be
--------- ----------------
called at any time by the President or the Board of Directors, and shall be
called by the President or the Secretary at the request in writing of a majority
of the Board of Directors, or at the request in writing of the holders of not
less than 40% of all the shares issued, outstanding and entitled to vote at the
meeting. Such request shall state the purpose or purposes of the proposed
meeting. Business transacted at special meetings shall be confined to the
purposes stated in the notice of the meeting.
BYLAWS OF ONE SOURCE TELECOMMUNICATIONS, INC.
Page 1 of 16
<PAGE>
Section 4. Notice. Written or printed notice stating the place, day and
--------- ------
hour of any shareholders' meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than 10 nor more than 50 days before the date of the meeting, either personally
or by mail, by or at the direction of the President, the Secretary or the
officer or person calling the meeting, to each shareholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, postage prepaid, to the shareholder at
his address as it appears on the stock transfer books of the Corporation.
Section 5. Closing of Stock Transfer Books and Fixing Record Date. For the
--------- ------------------------------------------------------
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make a determination of shareholders for
any other proper purpose, the Board of Directors of the Corporation may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, 50 days. If the stock transfer books shall be closed for
the purpose of determining shareholders, such books shall be closed for at least
10 days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than 50 days and, in case of a meeting of stockholders, not less than 10
days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this Section, such determination shall apply to any adjournment thereof except
where the determination has been made through the closing of stock transfer
books and the stated period of closing has expired.
Section 6. List of Shareholders. The officer or agent of the Corporation
--------- --------------------
having charge of the stock transfer books for shares of the Corporation shall
make, at least 10 days before each meeting of the shareholders, a complete list
of the shareholders entitled to vote at such meeting or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of voting
shares held by each, which list, for a period of 10 days prior to such meeting,
shall be kept on file at the registered office of the Corporation and shall be
subject to
BYLAWS OF ONE SOURCE TELECOMMUNICATIONS, INC.
Page 2 of 16
<PAGE>
inspection by any shareholder at any time during the usual business hours. Such
list shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any shareholder during the whole time
of the meeting. The original stock transfer books shall be prima facie evidence
as to who are the shareholders entitled to examine such list of transfer books
or to vote at any meetings of shareholders.
Section 7. Quorum. The holders of a majority of the issued and outstanding
--------- ------
shares and entitled to vote thereat, present in person or represented by proxy,
shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by the Articles of
Incorporation or by the General Corporation Law of the State of Delaware (herein
called the "Act"). If, however, such quorum shall not be present or represented
at any meeting of the shareholders, the shareholders entitled to vote, present
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. Once a quorum
is constituted, the shareholders present or represented by proxy at a meeting
may continue to transact business until adjournment, notwithstanding the
subsequent withdrawal therefrom of such number of shareholders as to leave less
than a quorum.
Section 8. Voting. When a quorum is present at any meeting, the vote of
--------- ------
the holders of a majority of the shares present or represented by proxy at such
meeting and entitled to vote shall be the act of the shareholders.
Each shareholder shall at every meeting of the shareholders be entitled to
one vote in person or by proxy for each share having voting power held by such
shareholder, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation. At
each election for directors every shareholder shall be entitled to vote, in
person or by proxy, the number of shares owned by him for as many persons as
there are directors to be elected and for whose election he has a right to vote.
Cumulative voting is prohibited by the Articles of Incorporation. Every proxy
must be executed in writing by the shareholder or by his duly authorized
attorney-in-fact. No proxy shall be valid after eleven months from the date of
its execution unless otherwise provided therein. Each proxy shall be revocable
unless expressly provided therein to be irrevocable or unless otherwise made
irrevocable by law.
Shares registered in the name of another corporation may be voted by such
officer, agent, or proxy as the Bylaws of such
BYLAWS OF ONE SOURCE TELECOMMUNICATIONS, INC.
Page 3 of 16
<PAGE>
corporation may prescribe or, in the absence of such provisions, as the Board of
Directors of such corporation may determine.
Shares held by an administrator, executor, guardian, or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name as trustee.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without being transferred into his name, if such authority is contained in an
appropriate order of the court that appointed the receiver.
A shareholder whose shares are pledged shall be entitled to vote such shares
until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting,
and shall not be counted in determining the total number of outstanding shares
at any given time.
Section 9. Action by Unanimous Consent. Any action required to be taken at
--------- ---------------------------
a meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
shareholders entitled to vote with respect to the subject matter thereof. Any
and all parties dealing with the Corporation shall be entitled to rely on a copy
or facsimile of any such written consent rather than an original thereof.
Section 10. Presence at Meetings by Means of Communication Equipment.
---------- --------------------------------------------------------
Shareholders may participate in and hold a meeting of such shareholders by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section shall constitute presence in person at
such meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
BYLAWS OF ONE SOURCE TELECOMMUNICATIONS, INC.
Page 4 of 16
<PAGE>
ARTICLE III
Directors
---------
Section 1. Number of Directors. The number of directors of the Corporation
--------- -------------------
shall be fixed from time to time by resolution of the Board of Directors, but in
no case shall the number of directors be less than 1 or more than 9. Until
otherwise fixed by resolution of the Board of Directors, the number of directors
shall be as stated in the Articles of Incorporation of the Corporation. No
decrease in the number of directors shall have the effect of reducing the term
of any incumbent director. Directors shall be elected at the annual meeting of
the shareholders, except as provided in Section 2 of this Article III, and each
director shall hold office until (i) his successor is elected and qualified,
(ii) he dies, (iii) he resigns, or (iv) he is removed. Directors need not be
residents of the State of Delaware or shareholders of the Corporation.
Section 2. Vacancies. Subject to other provisions of this Section, any
--------- ---------
vacancy occurring in the Board of Directors may be fixed by the affirmative vote
of a majority of the remaining directors, though the remaining directors may
constitute less than a quorum of the Board of Directors as fixed by Section 10
of this Article III. A director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office. Any directorship to be filled
by reason of an increase in the number of directors shall be filled by unanimous
vote of the existing directors. Shareholders holding a majority of the issued
and outstanding shares entitled to vote may, at any time, terminate the term of
office of all or any of the directors, with or without cause, by a vote at any
annual or special meeting, or by written statement, signed by the holders of all
of such shares, and filed with the Secretary or, in his absence, with any other
officer. Such removal shall be effective immediately upon such shareholder
action even if successors are not elected simultaneously, and the vacancies on
the Board of Directors caused by such action shall be filled only by election by
the shareholders.
Section 3. General Powers. The business of the Corporation shall be
--------- --------------
managed by its Board of Directors, which may exercise all powers of the
Corporation and do all such lawful acts and things, as are not by the Act, the
Articles of Incorporation or these Bylaws directed or required to be exercised
or done by the shareholders.
Section 4. Place of Meetings. The Board of Directors of the Corporation
--------- -----------------
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 5. Annual Meetings. The first meeting of each newly elected Board
--------- ---------------
of Directors shall be held, without further notice,
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<PAGE>
immediately following the annual meeting of shareholders at which such directors
were elected, provided a quorum shall be present. In the event such meeting is
not held immediately following the annual meeting, the meeting may be held at
such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the Board of Directors, or as shall be
specified in a written waiver of notice signed by all of the directors.
Section 6. Regular Meetings. Regular meetings of the Board of Directors
--------- ----------------
shall be held without special notice at such time and at such place as shall
from time to time be determined by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of Directors
--------- ----------------
may be called by or at the request of the Chairman of the Board of Directors or
the President, and shall be called by the Secretary on the written request of a
majority of the incumbent directors. The person or persons authorized to call
special meetings of the Board of Directors may fix the place for holding any
special meeting of the Board of Directors called by them.
Section 8. Notice of Special Meetings. Notice of any special meetings
--------- --------------------------
shall be given at least 48 hours previous thereto if given either personally
(including written notice delivered personally or telephone notice) or by
telegram, and at least 120 hours previous thereto if given by written notice
mailed to each director at the address of his business or residence. If mailed,
the notice shall be deemed to be delivered when deposited in the United States
mail addressed in the above-specified manner, with postage thereon prepaid. If
notice be given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph company. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 9. Waiver of Notice. Any director may waive notice of any meeting,
--------- ----------------
as provided in Article IV, Section 2, of these Bylaws. The attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened.
Section 10. Quorum and Voting. At all meetings of the Board of Directors,
---------- -----------------
the presence of a majority of the number of directors fixed by Article III,
Section 1, of these Bylaws shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the affirmative vote of at least a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as
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may be otherwise specifically provided by the Act, the Articles of Incorporation
or these Bylaws. If a quorum shall not be present at any meeting of directors,
a majority of the directors present thereat may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
Section 11. Chairman of the Board. The Board of Directors may elect a
---------- ---------------------
Chairman of the Board at each annual meeting of the Board of Directors. The
Chairman of the Board shall be a director of the Corporation and shall hold
office until the annual meeting of the Board of Directors following his election
or until his successor is elected and qualified. The Chairman of the Board
shall preside at all meetings of the Board of Directors, and, in the absence of
the President, at all meetings of the shareholders.
Section 12. Committees. The Board of Directors by resolution passed by a
---------- ----------
majority of the whole Board may designate an Executive Committee, to consist of
two or more directors, one of whom shall be designated as Chairman, who shall
preside at all meetings of such Committee. At any meeting of the Committee a
majority of the members of the Committee shall constitute a quorum for the
transaction of business, and the act of a majority of the members present at any
meeting at which a quorum is present shall be the act of the Committee. To the
extent provided in the resolution of the Board of Directors, the Executive
Committee shall have and may exercise all of the authority of the Board of
Directors, and shall have power to authorize the seal of the Corporation to be
affixed to all papers which may require it. The designation of such Executive
Committee and the delegation thereto of authority shall not operate to relieve
the Board of Directors, or any member thereof, of any responsibility imposed
upon it or him by law. Meetings of the Executive Committee may be called and
notices given in the same manner as calling and giving notice of special
meetings of the Board of Directors. Any member of the Executive Committee may
be removed, for or without cause, by the affirmative vote of a majority of the
whole Board of Directors. If any vacancy or vacancies occur in the Executive
Committee, such vacancy or vacancies shall be filled by the affirmative vote of
a majority of the whole Board of Directors.
The Board of Directors by resolution passed by a majority of the whole Board
may designate other committees, each committee to consist of two or more
directors, one of whom shall be designated as Chairman and shall preside at all
meetings of such committee, which committees shall have such power and authority
and shall perform such functions as may be provided in such resolution. At any
meeting of the committee a majority of the members of the committee shall
constitute a quorum for the transaction of business, and the act of a majority
of the members present at any meeting at which a quorum is present shall be the
act of the
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<PAGE>
committee. Such committee or committees shall have such name or names as may be
designated by the Board of Directors.
The Executive Committee and all other such committees shall keep regular
minutes of their proceedings and report the same to the Board of Directors when
required.
Section 13. Compensation of Directors. Directors, as such, shall not
---------- -------------------------
receive any stated salary for their services, but by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors.
Nothing herein contained shall be construed to preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of any committee may, by resolution of the Board of
Directors, be allowed like compensation for attending meetings.
Section 14. Action by Unanimous Consent. Any action required or permitted
---------- ---------------------------
to be taken at any meeting of the Board of Directors or of a committee
designated by the Board of Directors may be taken without a meeting if a written
consent, setting forth the action so taken, is signed by all the members of the
Board of Directors or the committee, as the case may be, and such consent shall
have the same force and effect as a unanimous vote at a meeting. Any and all
parties dealing with the Corporation shall be entitled to rely on a copy or
facsimile of any such written consent rather than an original thereof.
Section 15. Presence at Meetings by means of Communication Equipment.
---------- --------------------------------------------------------
Members of the Board of Directors of the Corporation or any committee designated
by the Board of Directors may participate in and hold a meeting of such board or
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section shall constitute
presence in person at such meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
ARTICLE IV
Notices
-------
Section 1. Form of Notice. Whenever, under the provisions of the Act, the
--------- --------------
Articles of Incorporation or these Bylaws, notice is required to be given to any
director or shareholder, and no provision is made as to how such notice shall be
given, such notice shall be given in writing, by mail, postage prepaid,
addressed to such director or shareholder at such address as appears on the
books of the Corporation, provided, that such
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<PAGE>
notice as is required to be given to any director also may be given either
personally (including written notice delivered personally or telephone notice)
or by telegram. Any notice required or permitted to be given by mail shall be
deemed to be given at the time when the same be thus deposited in the United
States mail addressed in the above-specified manner, with postage thereon
prepaid.
Section 2. Waiver. Whenever any notice is required to be given to any
--------- ------
director or shareholder of the Corporation under the provisions of the Act, the
Articles of Incorporation or these Bylaws, a waiver thereof in writing signed by
the person or persons entitled to such notice, whether before or after the time
stated in such notice, shall be equivalent to the giving of such notice.
ARTICLE V
Officers
--------
Section 1. General. The elected officers of the Corporation shall be a
--------- -------
President, one or more Vice Presidents, with or without such descriptive titles
as the Board of Directors shall deem appropriate, a Secretary and a Treasurer.
The Board of Directors by resolution may also appoint one or more Assistant
Secretaries, Assistant Treasurers and such other officers and assistant officers
and agents as from time to time may appear to be necessary or advisable in the
conduct of the affairs of the Corporation. Any two or more offices may be held
by the same person, and the offices of President and Secretary may be held by
the same person.
Section 2. Election. The Board of Directors at its first meeting after
--------- --------
each annual meeting of the shareholders shall elect and appoint the officers to
fill the positions designated in Section 1 of this Article V. The Board of
Directors may appoint such other officers and agents as it shall deem necessary
and may determine the salaries of all officers and agents from time to time.
The officers shall hold office until their successors are chosen and qualified.
Any officer elected or appointed by the Board of Directors may be removed, for
or without cause, at any time by a majority vote of the whole Board when in its
judgment the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointments of an officer or agent shall not of itself
create contract rights. Any vacancy occurring in any office of the Corporation
by death, resignation, removal or otherwise shall be filled by the Board of
Directors.
Section 3. President. The President shall have the powers of chief
--------- ---------
executive officer of the Corporation, and as chief
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<PAGE>
executive officer shall have general supervision of the affairs of the
Corporation and shall have general and active control of all of its business.
The President shall preside at all meetings of the shareholders and Board of
Directors. He shall have authority to execute bonds, deeds, contracts in the
name of the Corporation and to affix the corporate seal thereto; to sign stock
certificates; to cause the employment or appointment of such employees and
agents of the Corporation as the proper conduct of operations may require, and
to fix their compensation, subject to the provisions of these Bylaws; to remove
or suspend any employee or agent who shall have been employed or appointed under
his authority or under authority of an officer subordinate to him; to suspend
for cause, pending final action by the authority which shall have supervisory
power over him, any officer subordinate to the President, and, in general, to
exercise all the powers usually appertaining to the office of President of a
corporation, except as otherwise provided in these Bylaws.
Section 4. Vice Presidents. The Vice President or, if there be more than
--------- ---------------
one, the Vice Presidents, shall perform all such duties and services as shall be
assigned to or required of them from time to time by the Board of Directors, the
Executive Committee, and the President.
Section 5. Secretary and Assistant Secretaries. The Secretary shall attend
--------- -----------------------------------
all meetings of the Board of Directors and all meetings of the shareholders and
record all proceedings of the meetings of the shareholders of the Corporation
and of the Board of Directors in a book to be kept for that purpose, and shall
perform like duties for the Executive Committee when required. The Secretary
shall give, or cause to be given, notice of all meetings of the shareholders and
meetings of the Board of Directors. The Secretary shall have charge of the seal
of the Corporation and have authority to affix the same to any instrument
requiring it, and when so affixed, it shall be attested by the Secretary's
signature or by the signature of the Treasurer or an Assistant Secretary or
Assistant Treasurer, which may be in facsimile. The Secretary shall keep and
account for all books, documents, papers and records of the Corporation except
those for which some other officer or agent is properly accountable. He shall
have authority to sign stock certificates, and shall generally perform all the
duties usually appertaining to the office of the Secretary of a corporation.
Assistant Secretaries, in the order of their seniority, unless otherwise
determined by the Board of Directors, shall assist the Secretary, and in the
absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary. They shall perform such other duties and have such
other powers as the Board of Directors may prescribe from time to time.
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Section 6. Treasurer and Assistant Treasurers. The Treasurer shall be the
--------- ----------------------------------
chief financial officer of the Corporation and shall have active control of and
shall be responsible for all matters pertaining to the finances of the
Corporation. The Treasurer shall have the care and custody of all moneys, funds
and securities of the Corporation and shall deposit all moneys and other
valuable effects in the name of and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer
shall cause to be recorded a statement of all receipts and disbursements of the
Corporation in order that proper entries may be made in the books of account.
The Treasurer shall have the power to sign stock certificates, to endorse for
deposit or collection, or otherwise, all checks, drafts, notes, bills of
exchange or other commercial paper payable to the Corporation, and to give
proper receipts or discharges for all payments to the Corporation. He shall be
responsible for all terms of credit granted by the Corporation and for the
collection of all its accounts. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property or whatever
kind in his possession or under his control belonging to the Corporation.
Assistant Treasurers, in the order of their seniority, unless otherwise
determined by the Board of Directors, shall assist the Treasurer, and in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer. They shall perform such other duties and have such
other powers deemed necessary in order to assist the Treasurer, and in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer. They shall perform such other duties and have such
other powers as the Board of Directors may prescribed from time to time.
Section 7. Bonding. If required by the Board of Directors, all or certain
--------- -------
of the officers shall give the Corporation a bond in such form, in such sum and
with such surety or sureties as shall be satisfactory to the Board of Directors,
for the faithful performance of the duties of their office and for the
restoration to the Corporation, in case of their death, resignation, retirement
or removal from office, of all books, papers, vouchers, money and other property
of whatever kind in their possession or under their control belonging to the
Corporation.
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ARTICLE VI
Certificates Representing Shares
--------------------------------
Section 1. Form of Certificates. The Corporation shall deliver
--------- --------------------
certificates representing all shares to which shareholders are entitled.
Certificates representing shares of the Corporation shall be in such form as
shall be determined by the Board of Directors and shall be numbered
consecutively and entered in the books of the Corporation as they are issued.
Each certificate shall state on the face thereof that the Corporation is
organized under the laws of the State of Delaware; the name of the registered
holder; the number, class of shares and the designation of the series, if any,
which said certificate represents; and either the par value of the shares or a
statement that the shares are without par value. Each certificate shall also
set forth on the back thereof, a full or summary statement of matters required
by the Act or the Articles of Incorporation to be described on certificates
representing shares, and shall contain a statement on the face thereof referring
to the matters set forth on the back thereof. Certificates shall be signed by
the President or any Vice President and the Secretary or any Assistant
Secretary, and may be sealed with the seal of the Corporation or a facsimile
thereof. If any certificate is countersigned by a transfer agent or registered
by a registrar, either of which is other than the Corporation or an employee of
the Corporation, the signatures of the Corporation's officers may be facsimiles.
In case any officer or officers who have signed, or whose facsimile signature or
signatures have been used on such certificate or certificates, shall cease to be
such officer or officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates have been
delivered by the Corporation or its agents, such certificate or certificates may
be adopted, nevertheless, by the Corporation and be issued and delivered as
though the person or persons who signed the certificate or certificates or whose
facsimile signature or signatures have been used thereon had not ceased to be
such officer or officers of the Corporation.
Section 2. Restrictions on Transferability of Shares. In the event any
--------- -----------------------------------------
restriction on the transfer, or registration of the transfer of shares, shall be
imposed or agreed to, by the Corporation, as permitted by law, each certificate
representing shares so restricted shall conspicuously set forth a full or
summary statement of the restriction on the face of the certificate, or shall
set forth such statement on the back of the certificate and conspicuously state
on the face or back of the certificate that such restriction exists pursuant to
a specified document and that the Corporation will furnish to the holder of the
certificate without charge upon written request to the Corporation at its
principal place of business or registered office a copy of the specified
document.
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Section 3. Lost Certificates. The Corporation may direct that a new
--------- -----------------
certificate or certificates be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost or destroyed. When authorizing the issuance of a new
certificate or certificates, the Board of Directors, in its discretion and as a
condition precedent to the issuance thereof, may require the owner of the lost
or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and give the Corporation a
bond in such form, in such sum, and with such surety or sureties as the
Corporation may direct as indemnity against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost or
destroyed.
Section 4. Transfer of Shares. Shares of stock shall be transferable on
--------- ------------------
the books of the Corporation by the holder thereof in person or by his duly
authorized attorney. Subject to any restrictions on transfer set forth in the
Articles of Incorporation of the Corporation, these Bylaws or any agreement
among shareholders to which the Corporation is a party or has notice, upon
surrender to the Corporation or to the transfer agent of the Corporation of a
certificate representing shares duly endorsed or accompanied by proper evidence
of succession, assignment or authority to transfer, it shall be the duty of the
Corporation or the transfer agent of the Corporation to issue a new certificate
to the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 5. Registered Shareholders. The Corporation shall be entitled to
--------- -----------------------
recognize the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by law.
ARTICLE VII
Indemnification
---------------
The Corporation shall indemnify any person (and the heirs, executors and
administrators of such person) who is or was a director or officer of the
Corporation, or of any other corporation and of which the Corporation directly
or indirectly is a shareholder or creditor or in which it is in any way
interested, against any and all liability and all expenses that may be incurred
by him in connection with or resulting from any claim, action, suit or
proceeding (whether brought by or in the right of the Corporation or otherwise),
civil or criminal, or in connection with an appeal relating thereto, in which he
may
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<PAGE>
become involved as a party or otherwise by reason of being or having been such a
director or officer (whether or not a director or officer at the time such
liability and expense may be incurred) provided such person acted, in good
faith, in what he reasonably believed to be the best interests of the
Corporation or such other corporation, as the case may be, and in addition, in
any criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. The termination of any claim, action, suit or proceeding,
civil or criminal, by judgment, settlement (whether with or without court
approval) or conviction or upon a plea of guilty or nolo contendere, or its
equivalent, shall not create a presumption that a director, officer or employee
did not meet the standards of conduct set forth in this Article VII.
The terms "liability" and "all expenses" shall include, but shall not be
limited to, legal fees and disbursements and amounts of judgments, fines or
penalties against, and amounts paid in settlement by, a director, officer or
employee. Any expenses incurred by a director, officer or employee with respect
to any claim, action, suit or proceeding of the character described above may be
advanced prior to the final disposition thereof upon receipt of an agreement by
or on behalf of the recipient to repay such amount unless it shall ultimately be
determined that he is entitled to indemnification under the provisions of this
Article VII.
Any director or officer (and the heirs, executors and administrators of such
director or officer) who has been wholly successful, on the merits or otherwise,
with respect to any claim, action, suit or proceeding of the character described
above shall be entitled to indemnification as a matter of right. Except as
provided in the preceding sentence, any indemnification under the provisions of
this Article VII shall be made upon the receipt from the person seeking
indemnification of (i) his written affirmation that he has met the requisite
standard of conduct necessary for indemnification and (ii) his written
understanding that he will repay such advanced sums if it is ultimately
determined that he has not met those requirements.
The Corporation shall have the power to purchase and maintain insurance on
behalf of any director, officer, employee or agent against all liability and
expense that may be incurred by him in such capacity and in any other capacity
in which he served at the request of the Corporation, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article VII.
The rights of indemnification provided for in this Article VII shall be in
addition to any rights to which any such director or officer may be entitled
under the General Corporation Law of the State of Delaware, including any
agreement, vote of shareholders and the Articles of Incorporation.
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ARTICLE VIII
General Provisions
------------------
Section 1. Dividends. Dividends upon the outstanding shares of the
--------- ---------
Corporation, subject to the provisions of the Act, the Articles of Incorporation
and any agreements or obligations of the Corporation, if any, may be declared by
the Board of Directors at any regular or special meeting. Dividends may be
declared and paid in cash, in property, or in shares of the Corporation,
provided that all such declarations and payments of dividends shall be in strict
compliance with all applicable laws and the Articles of Incorporation. The Board
of Directors may fix in advance a record date for the purpose of determining
shareholders entitled to receive payment of any dividend, such record date to be
not more than 50 days prior to the payment of such dividend. In the absence of
any action by the Board of Directors, the date upon which the Board of Directors
adopts the resolution declaring such dividend shall be the record date.
Section 2. Reserves. There may be created by a resolution of the Board of
--------- --------
Directors out of the earned surplus of the Corporation such reserve or reserves
as the Board of Directors from time to time, in its absolute discretion, deems
proper to provide for contingencies, or to equalize dividends, or to repair or
maintain any property of the Corporation, or for such other proper purposes as
the Board of Directors shall deem beneficial to the Corporation, and the Board
of Directors may modify or abolish any reserve in the same manner in which it
was created.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
--------- -----------
by resolution of the Board of Directors.
Section 4. Seal. The Corporation shall have a seal which may be used by
--------- ----
causing it or a facsimile thereof to be impressed on, affixed to, or in any
manner reproduced upon, instruments of any nature required to be executed by its
proper officers.
Section 5. Annual Statement. The Board of Directors shall present at each
--------- ----------------
annual meeting and when called for by vote of the shareholders at any special
meeting of the shareholders, a full and clear statement of the business and
condition of the Corporation.
Section 6. Checks. All checks or demands for money and notes of the
--------- ------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may designate from time to time.
Section 7. Voting Securities Owned by Corporation. Voting securities in
--------- --------------------------------------
any other corporation held by this Corporation
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shall be voted by the President or any Vice President, unless the Board of
Directors confers authority to vote with respect thereto, which may be general
or confined to specific investments, upon some other person or officer. Any
person authorized to vote securities shall have the power to appoint proxies
with the general power of substitution.
Section 8. Resignation. Any director, officer, employee or agent of the
--------- -----------
Corporation may resign by giving written notice to the President or the
Secretary. The resignation shall take effect at the time specified therein, or
immediately if no time is specified therein. Unless specified in such notice,
the acceptance of such resignation shall not be necessary to make it effective.
ARTICLE IX
Amendments To Bylaws
--------------------
These Bylaws may be altered, amended, modified or repealed, or new Bylaws
may be adopted at any meeting of the Board of Directors at which a quorum is
present by the affirmative vote of a majority of the Directors present at such
meeting.
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<PAGE>
EXHIBIT 4.20
------------
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of October
1, 1997 between Talton Invision, Inc., a Delaware corporation (the "New
Subsidiary Guarantor"), a subsidiary of Talton Holdings, Inc., a Delaware
corporation (the "Company"), and U.S. Trust Company of Texas, N.A., as trustee
under the indenture referred to below (the "Trustee"). Capitalized terms used
herein and not defined herein shall have the meaning ascribed to them in the
Indenture (as defined below).
WITNESSETH
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (as amended or supplemented from time to time, the
"Indenture"), dated as of June 27, 1997, providing for the issuance of an
aggregate principal amount of $115,000,000 of 11% Senior Notes due 2007 (the
"Senior Notes");
WHEREAS, Section 10.05 of the Indenture provides that under certain
circumstances the Company may cause, and Sections 4.17, 5.01 and 10.03 of the
Indenture provide that under certain circumstances the Company must cause,
certain of its subsidiaries to execute and deliver to the Trustee a supplemental
indenture pursuant to which such subsidiaries shall unconditionally guarantee
all of the Company's Obligations under the Senior Notes pursuant to a Subsidiary
Guarantee on the terms and conditions set forth herein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the New
Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal
and ratable benefit of the Holders of the Senior Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. Agreement to Guarantee. The New Subsidiary Guarantor hereby
guarantees, jointly and severally with all other Subsidiary Guarantors, the
Company's Obligations under the Senior Notes and the Indenture on the terms and
subject to the conditions set forth in Article 10 of the Indenture and agrees to
be bound by all other applicable provisions of the Indenture.
3. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator, shareholder or agent of any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the Company
or any Subsidiary Guarantor under the Senior Notes, any Subsidiary Guarantees,
the Indenture or this Supplemental Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder by
<PAGE>
accepting a Senior Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Notes.
4. New York Law To Govern. The internal law of the State of New York
shall govern and be used to construe this Supplemental Indenture.
5. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section headings herein are for
convenience only and shall not affect the construction hereof.
7. The Trustee. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the correctness of the recitals of fact
contained herein, all of which recitals are made solely by the New Subsidiary
Guarantor.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: October 1, 1997 TALTON INVISION, INC.
By: /s/ Todd W. Follmer
------------------------------
Name: Todd W. Follmer
---------------------------
Title: President
---------------------------
Dated: October 1, 1997 U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By: /s/ Bill Barber
------------------------------
Name: Bill Barber
----------------------------
Title: Vice President
---------------------------
<PAGE>
EXHIBIT 4.21
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
________ between One Source Telecommunications, Inc., a Delaware corporation
(the "New Subsidiary Guarantor"), a subsidiary of Talton Holdings, Inc., a
Delaware corporation (the "Company"), and U.S. Trust Company of Texas, N.A., as
trustee under the indenture referred to below (the "Trustee"). Capitalized terms
used herein and not defined herein shall have the meaning ascribed to them in
the Indenture (as defined below).
WITNESSETH
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture (as amended or supplemented from time to time, the
"Indenture"), dated as of June 27, 1997, providing for the issuance of an
aggregate principal amount of $115,000,000 of 11% Senior Notes due 2007 (the
"Senior Notes");
WHEREAS, Section 10.05 of the Indenture provides that under certain
circumstances the Company may cause, and Sections 4.17, 5.01 and 10.03 of the
Indenture provide that under certain circumstances the Company must cause,
certain of its subsidiaries to execute and deliver to the Trustee a supplemental
indenture pursuant to which such subsidiaries shall unconditionally guarantee
all of the Company's Obligations under the Senior Notes pursuant to a Subsidiary
Guarantee on the terms and conditions set forth herein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the New
Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal
and ratable benefit of the Holders of the Senior Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without
definition shall have the meanings assigned to them in the Indenture.
2. Agreement to Guarantee. The New Subsidiary Guarantor hereby
guarantees, jointly and severally with all other Subsidiary Guarantors, the
Company's Obligations under the Senior Notes and the Indenture on the terms and
subject to the conditions set forth in Article 10 of the Indenture and agrees to
be bound by all other applicable provisions of the Indenture.
3. No Recourse Against Others. No past, present or future director,
officer, employee, incorporator, shareholder or agent of any Subsidiary
Guarantor, as such, shall have any liability for any obligations of the Company
or any Subsidiary Guarantor under the Senior Notes, any Subsidiary Guarantees,
the Indenture or this Supplemental Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder by
<PAGE>
accepting a Senior Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Notes.
4. New York Law To Govern. The internal law of the State of New York
shall govern and be used to construe this Supplemental Indenture.
5. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section headings herein are for
convenience only and shall not affect the construction hereof.
7. The Trustee. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this Supplemental
Indenture or for or in respect of the correctness of the recitals of fact
contained herein, all of which recitals are made solely by the New Subsidiary
Guarantor.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: ONE SOURCE TELECOMMUNICATIONS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Dated: U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
<PAGE>
EXHIBIT 10.13
================================================================================
U.S. $80,000,000
Second Amended and Restated
Credit Agreement,
dated as of
December 19, 1997
(amending and restating the Amended and Restated
Credit Agreement, dated as of July 30, 1997),
among
Talton Holdings, Inc.,
as the Borrower,
Various Financial Institutions,
as the Lenders,
Canadian Imperial Bank of Commerce,
as Administrative Agent, Documentation Agent
and Syndication Agent
and
First Source Financial LLP,
as Co-Agent.
- --------------------------------------------------------------------------------
Arranged by
Canadian Imperial Bank of Commerce
================================================================================
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I DEFINITIONS AND ACCOUNTING TERMS
1.1. Defined Terms.................................................
1.2. Use of Defined Terms..........................................
1.3. Cross-References..............................................
1.4. Accounting and Financial Determinations.......................
ARTICLE II COMMITMENTS, LOANS, BORROWING PROCEDURES AND NOTES
2.1. Commitments...................................................
2.1.1. Term Loan Commitment..................................
2.1.2. Revolving Loan Commitment.............................
2.1.3. Letter of Credit Commitment...........................
2.1.4. Lenders Not Required to Make the Loans................
2.1.5. Issuer Not Required to Issue Letters of Credit........
2.2. Reduction of Revolving Loan Commitment Amount.................
2.3. Borrowing Procedure...........................................
2.4. Continuation and Conversion Elections.........................
2.5. Funding.......................................................
2.6. Issuance Procedures...........................................
2.6.1. Other Lenders' Participation..........................
2.6.2. Disbursements.........................................
2.6.3. Reimbursement.........................................
2.6.4. Deemed Disbursements..................................
2.6.5. Nature of Reimbursement Obligations...................
2.7. Notes
ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES
3.1. Repayments and Prepayments; Application.......................
3.1.1. Repayments and Prepayments............................
3.1.2. Application...........................................
3.2. Interest Provisions...........................................
3.2.1. Rates.................................................
3.2.2. Post-Maturity Rates...................................
3.2.3. Payment Dates.........................................
3.3. Fees..........................................................
3.3.1. Commitment Fee........................................
3.3.2. Administrative Agent's Fee............................
3.3.3. Letter of Credit Fee..................................
3.3.4. No Other Fees.........................................
i
<PAGE>
ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS
4.1. LIBO Rate Lending Unlawful....................................
4.2. Deposits Unavailable..........................................
4.3. Increased LIBO Rate Loan Costs, etc. .........................
4.4. Funding Losses................................................
4.5. Increased Capital Costs.......................................
4.6. Taxes.........................................................
4.7. Payments, Computations, etc. .................................
4.8. Sharing of Payments...........................................
4.9. Setoff........................................................
4.10. Defaulting Lenders............................................
ARTICLE V CONDITIONS TO BORROWING
5.1. Initial Borrowing.............................................
5.1.1. Resolutions, etc. ....................................
5.1.2. Delivery of Notes.....................................
5.1.3. Delivery of Certain Documents.........................
5.1.4. Refinancing or Payment of Outstanding Indebtedness,
etc. .................................................
5.1.5. Pro Forma Balance Sheet and Business Plan.............
5.1.6. Security Agreement Amendments.........................
5.1.7. Affirmation and Consent...............................
5.1.8. Pro Forma Compliance Certificate......................
5.1.9. Solvency Certificate..................................
5.1.10. Closing Date Certificate..............................
5.1.11. Opinions of Counsel...................................
5.1.12. Insurance.............................................
5.1.13. Closing Fees, Expenses, etc. .........................
5.1.14. Operating Contracts...................................
5.2. All Borrowings................................................
5.2.1. Compliance with Warranties, No Default, etc. .........
5.2.2. Credit Extension Requests.............................
5.2.3. Satisfactory Legal Form...............................
5.3. Borrowings for Related Acquisitions...........................
5.3.1. Related Acquisitions Consummated......................
5.3.2. Approvals.............................................
5.3.3. Collateral; Filings...................................
ARTICLE VI REPRESENTATIONS AND WARRANTIES
6.1. Organization, etc. ...........................................
6.2. Due Authorization, Non-Contravention, etc. ...................
6.3. Government Approval, Regulation, etc. ........................
6.4. Validity, etc. ...............................................
6.5. Financial Information.........................................
6.6. No Material Adverse Change....................................
6.7. Litigation, Labor Controversies, etc. ........................
ii
<PAGE>
6.8. Compliance With Laws; Authorizations..........................
6.9. Subsidiaries..................................................
6.10. Ownership of Properties.......................................
6.11. Taxes.........................................................
6.12. Pension and Welfare Plans.....................................
6.13. Environmental Warranties......................................
6.14. Regulations G, U and X........................................
6.15. Accuracy of Information.......................................
6.16. Operating Contracts...........................................
6.17. Solvency......................................................
6.18. Senior Unsecured Note Instruments.............................
6.19. No Contractual or Other Restrictions..........................
6.20. True Copies of Documents......................................
6.21. Absence of any Undisclosed Liabilities........................
ARTICLE VII COVENANTS
7.1. Affirmative Covenants.........................................
7.1.1. Financial Information, Reports, Notices, etc. ........
7.1.2. Compliance with Laws, etc. ...........................
7.1.3. Maintenance of Operating Contracts....................
7.1.4. Conduct of Business; Separate Existence; Maintenance
of Authorizations.....................................
7.1.5. Maintenance of Properties.............................
7.1.6. Insurance.............................................
7.1.7. Books and Records.....................................
7.1.8. Environmental Covenant................................
7.1.9. Additional Collateral.................................
7.1.10. Future Subsidiaries...................................
7.1.11. Use of Proceeds.......................................
7.1.12. Interest Rate Protection..............................
7.2. Negative Covenants............................................
7.2.1. Business Activities...................................
7.2.2. Indebtedness..........................................
7.2.3. Liens.................................................
7.2.4. Financial Condition...................................
7.2.5. Investments...........................................
7.2.6. Restricted Payments, etc. ............................
7.2.7. Limitation on Management and Advisory Fees............
7.2.8. Take or Pay Contracts.................................
7.2.9. Consolidation, Merger, etc. ..........................
7.2.10. Asset Dispositions, etc. .............................
7.2.11. Modification of Certain Agreements....................
7.2.12. Transactions with Affiliates..........................
7.2.13. Negative Pledges, Restrictive Agreements, etc. .......
7.2.14. Changes to Fiscal Year
iii
<PAGE>
7.2.15. Rental Obligations.................................
ARTICLE VIII EVENTS OF DEFAULT
8.1. Listing of Events of Default.................................
8.1.1. Non-Payment of Obligations.........................
8.1.2. Breach of Warranty.................................
8.1.3. Non-Performance of Certain Covenants and
Obligations........................................
8.1.4. Non-Performance of Other Covenants and Obligations.
8.1.5. Default on Other Indebtedness......................
8.1.6. Judgments..........................................
8.1.7. Pension Plans......................................
8.1.8. Control of the Borrower............................
8.1.9. Bankruptcy, Insolvency, etc. ......................
8.1.10. Impairment of Security, etc. ......................
8.1.11. Impairment of Operating Contracts, etc. ...........
8.2. Action if Bankruptcy.........................................
8.3. Action if Other Event of Default.............................
ARTICLE IX THE AGENTS AND AGENT-RELATED PERSONS
9.1. Actions and Indemnity........................................
9.2. Funding Reliance, etc. ......................................
9.3. Exculpation..................................................
9.4. Successor....................................................
9.5. Loans by CIBC................................................
9.6. Credit Decisions.............................................
9.7. Copies, etc. ................................................
ARTICLE X MISCELLANEOUS PROVISIONS
10.1. Waivers, Amendments, etc. ...................................
10.2. Notices......................................................
10.3. Payment of Costs and Expenses ...............................
10.4. Indemnification..............................................
10.5. Survival.....................................................
10.6. Severability.................................................
10.7. Headings.....................................................
10.8. Execution in Counterparts, Effectiveness, etc. ..............
10.9. Governing Law; Entire Agreement..............................
10.10. Successors and Assigns.......................................
10.11. Sale and Transfer of Loans and Notes; Participations in
Loans and Notes..............................................
10.11.1. Assignments........................................
10.11.2. Participations.....................................
10.12. Other Transactions...........................................
10.13. Certain Collateral and Other Matters; Hedging Obligation
Information..................................................
10.14. Forum Selection and Consent to Jurisdiction..................
10.15. Waiver of Jury Trial.........................................
iv
<PAGE>
SCHEDULE I Disclosure Schedule
EXHIBIT A-1 - Form of Revolving Note
EXHIBIT A-2 - Form of Term Note
EXHIBIT B-1 - Form of Borrowing Request
EXHIBIT B-2 - Form of Issuance Request
EXHIBIT C - Form of Continuation/Conversion Notice
EXHIBIT D - Form of Lender Assignment Agreement
EXHIBIT E - Form of Compliance Certificate
EXHIBIT F - Form of Closing Date Certificate
EXHIBIT G - Form of Officer's Solvency Certificate
EXHIBIT H - Form of Security Agreement Amendment
v
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December 19,
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"), as documentation agent (in such capacity, the "Documentation Agent")
- ----- -------------------
for the Lenders and as syndication agent (in such capacity, the "Syndication
-----------
Agent").
- -----
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
(the "Original Credit Agreement"), among the Borrower, certain financial
-------------------------
institutions from time to time party thereto (the "Original Lenders") and CIBC,
----------------
as administrative agent and documentation agent thereunder, the Original Lenders
made and were committed to make extensions of credit to the Borrower on the
terms and conditions set forth therein;
WHEREAS, pursuant to the Amended and Restated Credit Agreement, dated as of
July 30, 1997 (as amended by Amendment No. 1 thereto, dated as of November 26,
1997, and as further 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
parties thereto amended and restated the Original Credit Agreement in its
entirety;
WHEREAS, the Borrower has requested that the Existing Credit Agreement be
further 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
1
<PAGE>
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 so amending and restating the Existing Credit
Agreement and at the time of the effectiveness of such amendment and
restatement, the Borrower desires to obtain pursuant to this Agreement from the
Lenders
(a) a Term Loan Commitment pursuant to which Borrowings of Term Loans
may be made, in a maximum aggregate principal amount not to exceed
$55,000,000, to the Borrower in multiple Borrowings occurring on and
subsequent to the Closing Date but prior to the Term Loan Commitment
Termination Date; and
(b) a Revolving Loan Commitment pursuant to which (i) Borrowings of
Revolving Loans, in a maximum aggregate outstanding principal amount not to
exceed $25,000,000, may be made to the Borrower from time to time and (ii)
Letters of Credit, in a maximum Stated Amount not to exceed $5,000,000, may
be issued for the account of the Borrower from time to time, in each case
from and subsequent to the Closing Date but prior to the Revolving Loan
Commitment Termination Date; provided that in no event shall the aggregate
--------
principal amount of all Revolving Loans and all Letter of Credit
Outstandings exceed $25,000,000 at any time,
with the proceeds of the Credit Extensions 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 Talton Invision 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:
2
<PAGE>
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.
"Affirmation and Consent" means the Affirmation and Consent to be executed
-----------------------
and delivered by each of Talton, AmeriTel, Talton STC, Talton Invision and
Talton Carolina 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.
"Agent" means, as the context may require, the Administrative Agent, the
-----
Documentation Agent or the Syndication 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 CIBC,
-----------
in its role as
3
<PAGE>
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 the Original Credit Agreement, 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 5.1.8, 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 5.0:1 2.00%
greater than or equal to 4.0:1 but 1.75%
less than 5.0:1
greater than or equal to 3.0:1 but 1.25%
less than 4.0:1
less than 3.0:1 0.75%
</TABLE>
provided that the Applicable Base Rate Margin for the period from the Effective
- --------
Date through (and including) the completion of the General Syndication, in any
event, shall be 2.25% per annum; provided further that there shall be no
-------- -------
downward adjustment of the Applicable Base Rate
4
<PAGE>
Margin below 2.00% until, in any event, December 31, 1998; provided further
-------- -------
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 2.00% 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 5.1.8, 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 5.0:1 3.25%
greater than or equal to 4.0:1 but 3.00%
less than 5.0:1
greater than or equal to 3.0:1 but 2.50%
less than 4.0:1
less than 3.0:1 2.00%
</TABLE>
provided that the Applicable LIBO Rate Margin for the period from the Effective
- --------
Date through (and including) the completion of the General Syndication, in any
event, shall be 3.50% per annum; provided further 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 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 3.25% 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.
"Arranger" means CIBC.
--------
5
<PAGE>
"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 the Original Credit Agreement, 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 the Original Credit Agreement, 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 B-1
-----------
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.
"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.
6
<PAGE>
"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.
"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.
7
<PAGE>
"Casualty Event" means the damage, destruction or condemnation, as the case
--------------
may be, of property of the Borrower or any of its Subsidiaries.
"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, (iii) the Borrower to own and
control 100% of the outstanding shares of voting and non-voting stock of each of
AmeriTel, Talton, Talton STC and Talton Invision, 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 Unsecured Note Instrument.
"CIBC" is defined in the preamble.
---- --------
"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, but in no event later than December 31, 1997.
"Closing Date Certificate" means a certificate of a duly Authorized Officer
------------------------
of the Borrower executed and delivered pursuant to Section 5.1.10, 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, as the context may require, a Lender's Revolving Loan
----------
Commitment, Term Loan Commitment or Letter of Credit Commitment.
8
<PAGE>
"Commitment Amount" means, as the context may require, the Revolving Loan
-----------------
Commitment Amount, the Term Loan Commitment Amount or the Letter of Credit
Commitment Amount.
"Commitment Termination Date" means, as the context may require, the
---------------------------
Revolving Loan Commitment Termination Date or the Term Loan Commitment
Termination Date.
"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
9
<PAGE>
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.
"Credit Extension" means, as the context may require,
----------------
(a) the making of a Loan by a Lender; or
(b) the issuance of any Letter of Credit, or the extension of any Stated
Expiry Date of any Existing Letter of Credit, by the Issuer and
participation in such Letter of Credit by the Lenders pursuant to the terms
of this Agreement.
"Credit Extension Request" means, as the context may require, any Borrowing
------------------------
Request or Issuance Request.
"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.
"Disbursement" is defined in Section 2.6.2.
------------ -------------
"Disbursement Date" is defined in Section 2.6.2.
----------------- -------------
"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.
------ -
"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
10
<PAGE>
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 (unless otherwise specified),
(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 and/or Related 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 period ended December 31, 1997, EBITDA shall include the sum of
EBITDA for the Rolling Period ended December 31, 1997, adjusted by the
Acquisition Adjustment (excluding any adjustment for any Related Acquisition);
(iii) for the period ended March 31, 1998, EBITDA shall include the sum of
EBITDA for the Fiscal Quarter ended March 31, 1998, multiplied by four, adjusted
by the Acquisition Adjustment; (iv) for the period ended June 30, 1998, EBITDA
shall include the sum of EBITDA for the two Fiscal Quarters ended June 30, 1998,
multiplied by two, adjusted by the Acquisition Adjustment; (v) for the period
ended September 30, 1998, EBITDA shall include the sum of EBITDA for the three
Fiscal Quarters ended September 30, 1998, multiplied by 1.333, adjusted by the
Acquisition Adjustment; (vi) for the period ended December 31, 1998 and for each
Rolling Period thereafter, EBITDA shall include the sum of EBITDA for such
period, adjusted by the Acquisition Adjustment; 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.
"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 ended March 31, 1998, EBITDA shall include EBITDA for
the Fiscal Quarter ended March 31, 1998, multiplied by four, and the amount
computed in accordance with clause (b) above shall include the sum of the amount
----------
provided for in clause (b) above (excluding the purchase price of any
----------
acquisitions made during such period) for the Fiscal Quarter ended March 31,
1998, multiplied by four; (B) for the period ended June 30, 1998, the amount
computed in accordance with clause (b) above shall include the sum of the amount
----------
provided for in clause (b) above for the two Fiscal Quarters ended June 30,
----------
1998, multiplied by two; (C) for the period ended September 30, 1998, the amount
computed in accordance with clause (b) above shall include the sum of the amount
----------
11
<PAGE>
provided for in clause (b) above for the three Fiscal Quarters ended September
----------
30, 1998, multiplied by 1.33; and (D) for the period ended December 31, 1998 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.
"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.
"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 third recital.
------------------------- ----- -------
"Existing Lenders" is defined in the third 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 December 12,
----------
1997, between the Borrower, CIBC and First Source Financial LLP.
"Fiscal Quarter" means any quarter of a Fiscal Year.
--------------
12
<PAGE>
"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 Unsecured
Notes.
"GAAP" is defined in Section 1.4.
---- -----------
"General Syndication" means the syndication of the Commitments to a group
-------------------
of Lenders acceptable to the Borrower and the Administrative Agent.
"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;
(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.
"ILD" means Intelicall Long Distance, Inc., a Delaware corporation.
---
13
<PAGE>
"ILD Acquisition" means the acquisition of ILD (or of certain of its
---------------
assets) by the Borrower and/or any of its Subsidiaries.
"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;
(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
14
<PAGE>
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", in the case
------------------------------------------
of Interest Periods for Revolving Loans, or the date set forth in clause (a) of
the definition of "Term Loan Commitment Termination Date", in the case of
Interest Periods for Term Loans.
15
<PAGE>
"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
(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 WG
--------
Argosy Merchant Fund II 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 the Original Credit
Agreement or Section 7.1.10, substantially in the form of Exhibit H-3 to the
--------------
Original Credit Agreement, as amended, supplemented, amended and restated or
otherwise modified from time to time.
"Issuance Request" means a Letter of Credit request and certificate duly
----------------
executed by an Authorized Officer of the Borrower, substantially in the form of
Exhibit B-2 hereto, and any additional forms that may be requested by the
- -----------
Issuer.
"Issuer" means CIBC in its capacity as issuer of the Letters of Credit or
------
any replacement therefor mutually agreed upon by the Borrower and the
Administrative Agent.
"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.
------- --------
"Letter of Credit" is defined in Section 2.1.3.
---------------- -------------
"Letter of Credit Commitment" means, with respect to the Issuer, the
---------------------------
Issuer's obligation to issue Letters of Credit pursuant to Section 2.1.3 and,
-------------
with respect to each Lender, the obligations of such Lender to participate in
such Letters of Credit pursuant to Section 2.6.1.
-------------
"Letter of Credit Commitment Amount" means, on any date, a maximum amount
----------------------------------
of $5,000,000, as such amount may be reduced from time to time pursuant to the
terms hereof (or, if less, the then existing Revolving Loan Commitment Amount).
16
<PAGE>
"Letter of Credit Outstandings" means, on any date, an amount equal to the
-----------------------------
sum of
(a) the then aggregate amount which is undrawn and available under all
issued and outstanding Letters of Credit,
plus
----
(b) the then aggregate amount of all unpaid and outstanding Reimbursement
Obligations.
"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
17
<PAGE>
office of a 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, as the context may require, either a Revolving Loan or a Term
----
Loan of any type.
"Loan Document" means this Agreement, the Notes, Letters of Credit, the Fee
-------------
Letter, each Security Agreement, each Pledge Agreement, the Subsidiary Guaranty,
the Affirmation and Consent, each supplement and amendment to any of the
foregoing 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.
"MOG" means M.O.G. Communications, Inc., an Alabama corporation.
---
"MOG Acquisition" means the acquisition of MOG (or of certain of its
---------------
assets) by the Borrower and/or any of its Subsidiaries.
"NAI" means North American InTeleCom, Inc., a Delaware corporation.
---
"NAI Acquisition" means the acquisition of NAI (or of certain of its
---------------
assets) by the Borrower and/or any of its Subsidiaries.
18
<PAGE>
"Net Casualty Proceeds" means, with respect to any Casualty Event, the
---------------------
amount of any insurance proceeds or condemnation awards (including over-funding
of any ERISA plan) received by the Borrower or any of its Subsidiaries in
connection with such Casualty Event, but excluding any proceeds or awards
required to be paid to a creditor (other than the Lenders) which holds a first
priority Lien permitted by Section 7.2.3 on the property which is the subject of
-------------
such Casualty Event.
"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 WG Argosy Merchant Fund II, 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,
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 WG Argosy Merchant Fund II, 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;
19
<PAGE>
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 WG Argosy Merchant Fund II, 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, as the context may require, either a Revolving Note or a Term
----
Note; "Notes" shall be the collective reference to all Revolving Notes and Term
-----
Notes, as the case may be.
"Obligations" means all obligations (monetary or otherwise) of the Borrower
-----------
and each other Obligor arising under or in connection with this Agreement, the
Notes, each Letter of Credit and each other Loan Document.
"Obligor" means the Borrower, AmeriTel, Talton, Talton Invision, Talton
-------
STC, Talton Carolina and/or any other Person (other than the Administrative
Agent, the Documentation Agent, the Syndication Agent, any Agent-Related Person
or any Lender) obligated under any Loan Document.
20
<PAGE>
"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.
"Original Credit Agreement" is defined in the second recital.
------------------------- ------ -------
"Original Lenders" is defined in the second recital.
---------------- ------ -------
"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.
"Peoples Telephone" means Peoples Telephone Company, Inc., a New York
-----------------
corporation.
"Peoples Telephone Acquisition" means the acquisition of Peoples Telephone
-----------------------------
(or of certain of its assets) by the Borrower and/or any of its Subsidiaries.
"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, any
---------------------
Acquisition (other than a Related Acquisition) by the Borrower or any of its
Subsidiaries with respect to which each of the following requirements are met:
21
<PAGE>
(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;
(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 business of the Person to be acquired is the provision of
telecommunications services in a similar manner to the Borrower's existing
business;
(g) the total consideration payable in respect of any one Acquisition does
not exceed $10,000,000; and
(h) the total consideration payable in respect of all Acquisitions
constituting Permitted Acquisitions in any Fiscal Year does not exceed
$25,000,000; provided, however, that to the extent the amount of all Permitted
-------- -------
Acquisitions permitted to be made in any Fiscal Year pursuant to this clause (h)
----------
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 (h) without giving effect to any carryforward amount.
----------
"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.
----
22
<PAGE>
"Pledge Agreement" means, as the context may require, the Borrower Pledge
----------------
Agreement, the Talton Pledge Agreement, each Investor Pledge Agreement and/or
any other Subsidiary 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 Unsecured
Notes, the repayment of the Senior Subordinated Notes and the Talton Seller
Subordinated Note referred to in the Original Credit Agreement, the repayment of
any outstanding 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.
"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.
"Reimbursement Obligation" is defined in Section 2.6.3.
------------------------ -------------
"Related Acquisitions" means, collectively, the ILD Acquisition, the MOG
--------------------
Acquisition, the NAI Acquisition and the Peoples Telephone Acquisition, provided
--------
that with respect to each such acquisition, the requirements set forth in
clauses (a) through (f) of the definition of Permitted Acquisition are met, and
- ----------- ---
such acquisitions shall be on terms and conditions (including without limitation
as to price) reasonable to the Required Lenders.
"Release" means a "release", as such term is defined in CERCLA.
-------
"Required Lenders" means, (a) at any time prior to the completion of the
----------------
General Syndication, Lenders holding 100% 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 and 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.
-------------- -------------
23
<PAGE>
"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, $25,000,000, 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, 2002;
(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-1 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, the Talton STC Security
Agreement, the Talton Invision Security Agreement and/or any other Subsidiary
Security Agreement; collectively, the "Security Agreements".
-------------------
"Security Agreement Amendment" means an amendment to a Security Agreement
----------------------------
executed and delivered pursuant to Section 5.1.6, substantially in the form of
-------------
Exhibit H hereto.
- ---------
"Senior Secured Debt" means, at any time, all outstanding Total Debt which
-------------------
is not Subordinated Debt or Indebtedness of the Borrower evidenced by the Senior
Unsecured Notes as of such time.
"Senior Secured Debt to EBITDA Ratio" means, as of the last day of any
-----------------------------------
Fiscal Quarter, the ratio of (a) Senior Secured Debt outstanding on such date to
--
(b) EBITDA for the Rolling Period ending on such date: provided, however, that
-------- -------
for the period ended December 31, 1997, Senior Secured Debt shall not include
any Loans made to finance a Related Acquisition.
24
<PAGE>
"Senior Unsecured Noteholders" means any and all holders of Senior
----------------------------
Unsecured Notes.
"Senior Unsecured Note Instruments" means the Senior Unsecured 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 Unsecured Notes" means the Senior Notes issued by the Borrower in
----------------------
accordance with (and as defined in) the Existing Credit Agreement, 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 5.1.9, substantially in the form of Exhibit G hereto.
- ------------- ---------
"Stated Amount" of each Letter of Credit means the total amount available
-------------
to be drawn under such Letter of Credit upon the issuance thereof.
"Stated Expiry Date" is defined in Section 2.6.
------------------
"Stated Maturity Date" means December 31, 2002.
--------------------
"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, Talton Carolina, Talton STC and Talton Invision, or by any
future Subsidiary pursuant to clause (a) of Section 7.1.10, substantially in the
---------- --------------
form of Exhibit F to the Original Credit Agreement, 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 the Original Credit Agreement, the
Existing Credit Agreement or Section 7.1.10, substantially in the form of
--------------
Exhibit H-2 to the Original Credit Agreement, as amended, supplemented, amended
and restated or otherwise modified from time to time.
25
<PAGE>
"Subsidiary Security Agreement" means a Security Agreement executed and
-----------------------------
delivered by a Subsidiary pursuant to the Original Credit Agreement, the
Existing Credit Agreement or Section 7.1.10, substantially in the form of
--------------
Exhibit G-2 to the Original Credit Agreement, as amended, supplemented, amended
and restated or otherwise modified from time to time.
"Syndication Agent" is defined in the preamble.
----------------- --------
"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 the Original Credit Agreement, as
amended, supplemented, amended and restated or otherwise modified from time to
time.
"Talton Invision" means Talton Invision, Inc., a Delaware corporation.
---------------
"Talton Invision Security Agreement" means the Security Agreement executed
----------------------------------
and delivered by Talton Invision pursuant to the Existing Credit Agreement, 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 the Original Credit Agreement, 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 the Original Credit Agreement, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Talton STC" means Talton STC, Inc., a Delaware corporation.
----------
"Talton STC Security Agreement" means the Security Agreement executed and
-----------------------------
delivered by Talton STC pursuant to the Existing Credit Agreement, as amended,
supplemented, amended and restated or otherwise modified from time to time.
"Taxes" is defined in Section 4.6.
----- -----------
"Term Loan" is defined in Section 2.1.1.
--------- -------------
"Term Loan Commitment" means, relative to any Lender, such Lender's
--------------------
obligation to make Term Loans pursuant to Section 2.1.1.
-------------
"Term Loan Commitment Amount" means, on any date, $55,000,000, as such
---------------------------
amount may be reduced from time to time pursuant to Section 2.2.
-----------
26
<PAGE>
"Term Loan Commitment Termination Date" means the earliest of:
-------------------------------------
(a) March 31, 1998 (only to the extent of the unused amount of the Term
Loan Commitment Amount as of such date);
(b) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described in clause (b), the Term Loan
----------
Commitments shall terminate automatically and without any further action.
"Term Note" means a promissory note of the Borrower payable to any Lender,
---------
substantially in the form of Exhibit A-2 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
Term Loans, and also means all other promissory notes accepted from time to time
in substitution therefor or renewal thereof.
"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 Unsecured 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 for the period
-------- -------
ended December 31, 1997, Total Debt shall not include any Loans made to finance
a Related Acquisition.
"type" means, relative to any Loan, the portion thereof, if any, being
----
maintained as a Base Rate Loan or a LIBO Rate Loan.
"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
27
<PAGE>
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),
---------
(a) each Lender severally agrees to make Loans pursuant to the Commitments
described in Sections 2.1.1 and Section 2.1.2, and
-------------- -------------
(b) the Issuer agrees that it will issue Letters of Credit pursuant to
Section 2.1.3 and each Lender severally agrees that it will participate in such
- -------------
Letters of Credit in accordance with Section 2.6.1.
-------------
SECTION 2.1.1. Term Loan Commitment. From time to time on any Business
--------------------
Day occurring on and after the Closing Date and prior to the Term Loan
Commitment Termination Date, each Lender agrees to make Loans (relative to such
Lender, its "Term Loans") to the Borrower equal to such Lender's Percentage of
----------
the aggregate amount of the Borrowing of Term Loans requested by the Borrower to
be made on such day; provided, however, that (a) Term Loans may only be made in
-------- -------
an aggregate principal amount up to $42,000,000 on the Closing Date in order to
refinance outstandings under the Existing Credit Agreement, provide financing
for the Peoples Telephone Acquisition and pay fees and expenses directly related
to the Peoples Telephone Acquisition and in connection with this Agreement, (b)
Term Loans may only be made in an additional aggregate principal amount up to
$6,500,000 on and after December 29, 1997 in order to provide financing for the
NAI Acquisition and pay fees and expenses directly related thereto, and (c) the
remaining Term Loan Commitment Amount will be available on and
28
<PAGE>
after the earlier of the completion of the General Syndication and January 31,
1998. The Commitment of each Lender described in this Section 2.1.1 is herein
-------------
referred to as its "Term Loan Commitment". No amounts paid or prepaid with
--------------------
respect to Term Loans may be reborrowed.
SECTION 2.1.2. Revolving Loan Commitment. From time to time on any
-------------------------
Business Day occurring on and 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; provided, however, that
-------- -------
Revolving Loans may only be made in an aggregate principal amount (together with
any Letter of Credit Outstandings) up to $3,000,000 until the earlier of the
completion of the General Syndication and February 14, 1998. The Commitment of
each Lender described in this Section 2.1.2 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 2.1.3. Letter of Credit Commitment. From time to time on any
---------------------------
Business Day occurring on and after the Closing Date and prior to the Revolving
Loan Commitment Termination Date, the Issuer will
(a) issue one or more letters of credit in a form satisfactory to the
Issuer (a "Letter of Credit") for the account of the Borrower in the Stated
----------------
Amount requested by the Borrower on such day; or
(b) extend the Stated Expiry Date of an existing Letter of Credit
previously issued hereunder to a date not later than the earlier of (i)
Revolving Loan the Commitment Termination Date and (ii) one year from the date
of such extension;
provided, however, that Letters of Credit will be made available to the Borrower
- -------- -------
in an aggregate Stated Amount (together with the aggregate outstanding principal
amount of Revolving Loans) up to $3,000,000 until the earlier of the completion
of the General Syndication and February 14, 1998.
SECTION 2.1.4. Lenders Not Required to Make the Loans. No Lender shall be
--------------------------------------
required to
(a) make any Term Loan if, after giving effect thereto, the aggregate
outstanding principal amount of all the Term Loans
(b) of all Lenders with Term Loan Commitments would exceed the Term Loan
Commitment Amount; or
(c) of such Lender with a Term Loan Commitment would exceed such Lender's
Percentage of the Term Loan Commitment Amount;
29
<PAGE>
(d) make any Revolving Loan if, after giving effect thereto, the aggregate
outstanding principal amount of all Revolving Loans
(e) of all the Lenders with Revolving Loan Commitments, together with the
aggregate amount of all Letter of Credit Outstandings, would exceed the
Revolving Loan Commitment Amount; or
(f) of such Lender with a Revolving Loan Commitment, together with such
Lender's Percentage of the aggregate amount of all Letter of Credit
Outstandings, would exceed such Lender's Percentage of the Revolving Loan
Commitment Amount; or
(g) participate in any Letter of Credit if, after giving effect
thereto,
(h) all Letter of Credit Outstandings, together with the aggregate
outstanding principal amount of all Revolving Loans of all Lenders, would exceed
the Revolving Loan Commitment Amount; or
(i) such Lender's Percentage of all Letter of Credit Outstandings, together
with the aggregate outstanding principal amount of all Revolving Loans of such
Lender, would exceed such Lender's Percentage of the Revolving Loan Commitment
Amount.
SECTION 2.1.5. Issuer Not Required to Issue Letters of Credit. The
----------------------------------------------
Issuer shall not be required to issue any Letter of Credit if, after giving
effect thereto, (a) the aggregate amount of all Letter of Credit Outstandings
would exceed the Letter of Credit Commitment Amount or (b) the aggregate amount
of all Letter of Credit Outstandings, together with the aggregate outstanding
principal amount of all Revolving Loans, would exceed 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 or Letter of Credit 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 $3,000,000 and
in an integral multiple of $500,000. On the date upon which all Term Loans are
or are required to be paid or prepaid in full, the Revolving Loan Commitment
Amount shall automatically immediately be reduced to zero.
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
30
<PAGE>
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 applicable 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.
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.
31
<PAGE>
SECTION 2.6 Issuance Procedures. By delivering to the Administrative
-------------------
Agent an Issuance Request 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
five nor more than ten Business Days' notice, in the case of an initial issuance
of a Letter of Credit, and not less than five Business Days' notice prior to the
existing Stated Expiry Date (or, if a Letter of Credit has an automatic
extension provision, at least five Business Days' notice prior to the date that
such Letter of Credit will, by its terms, be extended or, if earlier, the date
on which a notice from the Issuer is required to be delivered to the beneficiary
of the Letter of Credit informing the beneficiary that the Letter of Credit will
not be extended), in the case of a request for the extension of the Stated
Expiry Date of a Letter of Credit, that the Issuer issue, or extend the Stated
Expiry Date of, as the case may be, a Letter of Credit in such form as may be
requested by the Borrower and approved by the Issuer. Each Letter of Credit
shall by its terms be stated to expire on a date (its "Stated Expiry Date") no
------------------
later than the earlier to occur of (a) the Commitment Termination Date or (b)
one year from the date of its issuance. The Issuer will make available to the
beneficiary thereof the original of each Letter of Credit which it issues
hereunder.
SECTION 2.6.1. Other Lenders' Participation. Upon the issuance of each
----------------------------
Letter of Credit issued by the Issuer pursuant hereto, and without further
action, each Lender shall be deemed to have irrevocably purchased, to the extent
of its Percentage to make Loans, a participation interest in such Letter of
Credit (including the Contingent Liability and any Reimbursement Obligation with
respect thereto), and such Lender shall, to the extent of its Percentage, be
responsible for reimbursing promptly (and in any event within one Business Day)
the Issuer for Reimbursement Obligations arising under the Letter of Credit
issued by the Issuer which have not been reimbursed by the Borrower (or which
have been reimbursed but disgorged) in accordance with Section 2.6.3. In
-------------
addition, such Lender shall, to the extent of its Percentage, be entitled to
receive a ratable portion of the Letter of Credit fees payable pursuant to the
first sentence of Section 3.3.4 with respect to each Letter of Credit, the
-------------
interest payable pursuant to Section 2.6.2 and, if applicable, of interest
-------------
payable pursuant to Section 3.2.2 with respect to any Reimbursement Obligation
-------------
not paid when due. To the extent that any Lender has reimbursed the Issuer for
a Disbursement as required by this Section, such Lender shall be entitled to
receive its ratable portion of any amounts subsequently received (from the
Borrower or otherwise) in respect of such Disbursement.
SECTION 2.6.2. Disbursements. The Issuer will notify the Borrower and
-------------
the Administrative Agent promptly of the presentment for payment of any Letter
of Credit issued by the Issuer, together with notice of the date (the
"Disbursement Date") such payment shall be made (each such payment, a
- -------------------
"Disbursement"). Subject to the terms and provisions of such Letter of Credit
- --------------
and this Agreement, the Issuer shall make such payment to the beneficiary (or
its designee) of such Letter of Credit. Prior to 11:00 a.m., New York time, on
the first Business Day following the Disbursement Date, the Borrower will
reimburse the Administrative Agent, for the account of the Issuer, for all
amounts which the Issuer has disbursed under such Letter of Credit, together
with interest thereon at a rate per annum equal to the Alternate Base Rate
plus the Applicable Base Rate Margin plus a margin of 2.0% for the period from
- ---- ----
the Disbursement Date through the date of such reimbursement.
32
<PAGE>
SECTION 2.6.3. Reimbursement. The obligation (a "Reimbursement
------------- -------------
Obligation") of the Borrower under Section 2.6.2 to reimburse the Issuer with
- ---------- -------------
respect to each Disbursement (including interest thereon), and, upon the failure
of the Borrower to reimburse (or the disgorgement of any reimbursement made by
the Borrower to) the Issuer, each Lender's obligation under Section 2.6.1 to
-------------
reimburse the Issuer, shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
which the Borrower or such Lender, as the case may be, may have or have had
against the Issuer or any such Lender, including any defense based upon the
failure of any Disbursement to conform to the terms of the applicable Letter of
Credit (if, in the Issuer's good faith opinion, such Disbursement is determined
to be appropriate) or any non-application or misapplication by the beneficiary
of the proceeds of such Letter of Credit; provided, however, that after paying
-------- -------
in full its Reimbursement Obligation hereunder, nothing herein shall adversely
affect the right of the Borrower or such Lender, as the case may be, to commence
any proceeding against the Issuer for any wrongful Disbursement made by the
Issuer under a Letter of Credit as a result of acts or omissions constituting
gross negligence or wilful misconduct on the part of the Issuer.
SECTION 2.6.4. Deemed Disbursements. Upon the occurrence and during the
--------------------
continuation of any Default of the type described in Section 8.1.9 or, with
-------------
notice from the Administrative Agent, upon the occurrence and during the
continuation of any other Event of Default,
(a) an amount equal to that portion of all Letter of Credit Outstandings
attributable to the then aggregate amount which is undrawn and available under
all Letters of Credit issued and outstanding hereunder shall, without demand
upon or notice to the Borrower, be deemed to have been paid or disbursed by the
Issuer under such Letters of Credit (notwithstanding that such amount may not in
fact have been so paid or disbursed); and
(b) upon notification by the Administrative Agent to the Borrower of its
obligations under this Section, the Borrower shall be immediately obligated to
reimburse the Issuer for the amount deemed to have been so paid or disbursed by
the Issuer.
Any amounts so payable by the Borrower pursuant to this Section shall be
deposited in cash with the Administrative Agent and held as collateral security
for the Obligations in connection with the Letters of Credit issued by the
Issuer. At such time when the Defaults or Events of Default giving rise to the
deemed disbursements hereunder shall have been cured or waived, the
Administrative Agent shall return to the Borrower all amounts then on deposit
with the Administrative Agent pursuant to this Section which have not been
applied to the partial satisfaction of such Obligations.
SECTION 2.6.5. Nature of Reimbursement Obligations. The Borrower and, to
-----------------------------------
the extent set forth in Section 2.6.1, each Lender shall assume all risks of the
-------------
acts, omissions or misuse of any Letter of Credit by the beneficiary thereof.
The Issuer (except to the extent of its own gross negligence or wilful
misconduct) shall not be responsible for:
33
<PAGE>
(a) the form, validity, sufficiency, accuracy, genuineness or legal effect
of any Letter of Credit or any document submitted by any party in connection
with the application for and issuance of a Letter of Credit, even if it should
in fact prove to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged;
(b) the form, validity, sufficiency, accuracy, genuineness or legal effect
of any instrument transferring or assigning or purporting to transfer or assign
a Letter of Credit or the rights or benefits thereunder or the proceeds thereof
in whole or in part, which may prove to be invalid or ineffective for any
reason;
(c) the failure of the beneficiary of a Letter of Credit to comply fully
with conditions required in order to demand payment under a Letter of Credit;
(d) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise; or
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under a Letter
of Credit.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted to the Issuer or any Lender. In furtherance and
extension and not in limitation or derogation of any of the foregoing, any
action taken or omitted to be taken by the Issuer in good faith shall be binding
upon the Borrower and each such Lender, and shall not put the Issuer under any
resulting liability to the Borrower or any such Lender, as the case may be.
SECTION 2.7 Notes. Each Lender's Loans under a 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 applicable 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.
34
<PAGE>
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
-------- -------
(b) any such prepayment of the Term Loans shall be made pro rata
--- ----
among the remaining scheduled repayments of the Term Loans of the same type and,
if applicable, having the same Interest Period of all Lenders that have made
such Term Loans, and 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;
(c) 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;
(d) all such voluntary prepayments shall require at least three but no more
than five Business Days' prior written notice to the Administrative Agent; and
(e) 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;
(f) shall, on each date when (i) any reduction in the Revolving Loan
Commitment Amount shall become effective, including pursuant to Section 2.2,
-----------
or (ii) the sum of the aggregate outstanding principal amount of all Revolving
Loans and Letter of Credit Outstandings exceeds the Revolving Loan Commitment
Amount (as it may be reduced from time to time), make a mandatory prepayment of
all Revolving Loans in an aggregate amount equal to the excess, if any, of the
aggregate, outstanding principal amount of all Revolving Loans and Letter of
Credit Outstandings over the Revolving Loan Commitment Amount (as so reduced);
(g) shall, on each Quarterly Payment Date set forth below, make a scheduled
repayment of the aggregate outstanding principal amount, if any, of all Term
Loans in the amounts set forth under the column entitled "Dollar Repayment"
below, as such amounts may be reduced from time to time pursuant to prepayments
in accordance with the terms hereof:
35
<PAGE>
<TABLE>
<CAPTION>
Quarterly Dollar
Payment Date Repayment
------------ ---------
<S> <C>
September 30, 1998 $2,750,000
December 31, 1998 2,750,000
March 31, 1999 2,406,250
June 30, 1999 2,406,250
September 30, 1999 2,406,250
December 31, 1999 2,406,250
March 31, 2000 3,093,750
June 30, 2000 3,093,750
September 30, 2000 3,093,750
December 31, 2000 3,093,750
March 31, 2001 3,437,500
June 30, 2001 3,437,500
September 30, 2001 3,437,500
December 31, 2001 3,437,500
March 31, 2002 3,437,500
June 30, 2002 3,437,500
September 30, 2002 3,437,500
December 31, 2002 3,437,500
</TABLE>
(h) shall, immediately upon any acceleration of the Stated Maturity
Date of any Loans or Obligations pursuant to Section 8.2 or Section 8.3,
----------- -----------
repay all Loans and provide the Administrative Agent with cash collateral
in an amount equal to the Letter of Credit Outstandings, unless, pursuant
to Section 8.3, only a portion of all Loans and Obligations are so
-----------
accelerated (in which case the portion so accelerated shall be so prepaid
or cash collateralized with the Administrative Agent);
(i) shall, no later than 180 days following receipt of any Net
Disposition Proceeds, make a mandatory prepayment of the Term 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 Term Loans as set forth above;
(j) shall, concurrently with the creation of any Net Equity Proceeds,
make a mandatory prepayment of the Term 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
------
36
<PAGE>
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);
(k) shall, concurrently with the creation of any Net Debt Proceeds,
make a mandatory prepayment of the Term 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 Unsecured Notes (or notes issued in substitution
therefor pursuant to ordinary course assignments not constituting a
refinancing); and
(l) shall, concurrently with the receipt of any Net Casualty Proceeds
in excess of $100,000 (individually or in the aggregate over the course of
a Fiscal Year), make a mandatory prepayment of the Term Loans in an amount
equal to 100% of such Net Casualty Proceeds, to be applied as set forth in
Section 3.1.2; provided, however, that no mandatory prepayment of Casualty
------------- -------- -------
Proceeds shall be required under this clause if (i) the Borrower informs
the Administrative Agent no later than 60 days following the occurrence of
the Casualty Event resulting in such Net Casualty Proceeds of its or its
Subsidiary's good faith intention to apply such Net Casualty Proceeds to
the rebuilding or replacement of such damaged, destroyed or condemned
assets or property and in fact uses such Net Casualty Proceeds to rebuild
or replace the damaged, destroyed or condemned assets or property within
180 days following the receipt of such Net Casualty Proceeds, with the
amount of Net Casualty Proceeds unused after such 180 day period being
applied to the Term Loans as set forth in Section 3.1.2; provided, further,
------------- -------- -------
however, that at any time when any Default shall have occurred and be
-------
continuing or Net Casualty Proceeds shall exceed $500,000 (individually or
in the aggregate over the course of a Fiscal Year), such Net Casualty
Proceeds will be deposited in an account maintained with the Administrative
Agent for, at the Administrative Agent's discretion, prepayment of the Term
Loans or disbursement at the request of the Borrower to pay for such
rebuilding or replacement; and
(m) shall, concurrently with the receipt by the Borrower or any of
its Subsidiaries of any escrow monies in excess of $500,000, individually
or in the aggregate for any Fiscal Year, under the Talton Acquisition
Agreement or the AmeriTel Acquisition Agreement (each as defined in the
Original Credit Agreement) or any other acquisition agreement in respect of
a Permitted Acquisition or a Related Acquisition (other than monies in
respect of claims of third parties), make a mandatory prepayment of the
Term 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
37
<PAGE>
Revolving Loans shall cause a reduction in the Revolving Loan Commitment Amount.
Prepayments of Term Loans may not be reborrowed.
SECTION 3.1.2. Application. (a) Subject to clause (b), 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).
(b) Each voluntary prepayment of Term Loans made pursuant to Section
-------
3.1.1(a), and each mandatory prepayment of Term Loans, shall be applied, to the
- --------
extent of such prepayment, pro rata among the remaining scheduled repayments of
--- ----
Term Loans set forth in Section 3.1.1(c).
----------------
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;
38
<PAGE>
(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.
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 final 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 each 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 each Commitment Termination Date.
Letter of Credit Outstandings shall constitute usage under the Revolving Loan
Commitment Amount.
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. Letter of Credit Fee. The Borrower agrees to pay to the
--------------------
Administrative Agent, for the pro rata account of the Issuer and each other
--- ----
Lender, an annual Letter of Credit fee in an amount equal to the then Applicable
LIBO Rate Margin multiplied by the Stated Amount of each Letter of Credit issued
by the Issuer, with such fees being payable on the date of issuance of each
Letter of Credit (for the period from the date of issuance to the earlier of the
expiration date of the applicable Letter of Credit and the immediately
succeeding Quarterly Payment Date)
39
<PAGE>
and on each extension thereof, if applicable, and thereafter quarterly in
arrears on each Quarterly Payment Date and on the Revolving Loan Commitment
Termination Date. The Borrower further agrees to pay to the Issuer on the date
of issuance of each Letter of Credit by the Issuer (for the period from the date
of issuance to the earlier of the expiration date of the applicable Letter of
Credit and the immediately succeeding Quarterly Payment Date, and thereafter
quarterly in arrears on each Quarterly Payment Date and on the Revolving Loan
Commitment Termination Date) an issuance fee in an amount equal to the greater
of (i) $500 and (ii) 1/4 of 1% of the Stated Amount thereof (or increase in the
Stated Amount) and all costs and expenses incurred by the Issuer in connection
with such Letter of Credit.
SECTION 3.3.4. 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 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.
40
<PAGE>
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, issuance or participations in Letters of Credit
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
41
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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.
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.
42
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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,
each Letter of Credit 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 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) or Letter of Credit 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
and/or Letters of Credit 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
43
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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 other rights and remedies (including other rights of
setoff under applicable law or otherwise) which such Lender may have.
SECTION 4.10. Defaulting Lenders. Notwithstanding anything in this
------------------
Agreement to the contrary, as to any Lender which (a) has refused (which refusal
has not been retracted) to make available its portion of any Borrowing or to
fund its portion of any unreimbursed payment under Section 2.6.1 or (b) has
-------------
given notice to the Administrative Agent and/or the Borrower that it does not
intend to comply with its obligations under Section 2.1 or under Section 2.6.1,
----------- -------------
in the case of clause (a) or clause (b) above, as a result of the appointment of
---------- ----------
a receiver or conservator with respect to such Lender at the direction or
request of any regulatory agency or authority:
(a) such Lender shall not be deemed a Required Lender hereunder and such
Lender's (A) Term Notes, (B) Revolving Loan Commitments, (C) Loans and (D)
Letter of Credit Outstandings shall be excluded from the calculations set forth
in the definition of Required Lenders above;
(b) such Lender shall not be entitled to receive any portion of (A)
Letter of Credit fees, (B) interest payable with respect to any Disbursements or
(C) amounts received in respect of Disbursements; and
(c) such Lender shall not be entitled to receive any commitment fee
payable in respect of the Revolving Loan Commitment Amount.
In addition to the foregoing, and notwithstanding Section 2.1.5, if any Lender
-------------
shall fall within the description set forth in clause (a) or (b) above, the
---------- ---
Issuer shall not be required to issue any Letter of Credit, unless arrangements
reasonably satisfactory to the Issuer have been entered into to
44
<PAGE>
eliminate the Issuer's risk with respect to the participation in Letters of
Credit by such Lender, including cash collateralizing such Lender's Letter of
Credit Commitment.
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 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 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 the Borrower,
together with all amendments thereto, and a certificate of good standing for the
Borrower, 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 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
45
<PAGE>
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
satisfactory evidence of the payment in full of the revolving loans outstanding
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. Security Agreement Amendments. The Documentation Agent
-----------------------------
shall have received executed counterparts of each Security Agreement Amendment,
duly executed by Talton, AmeriTel, Talton STC and Talton Invision, as
applicable, together with
(a) duly executed appropriate Uniform Commercial Code financing
statements (Form UCC-1), naming the grantor thereunder 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 the applicable Security Agreement Amendment;
(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
Amendment previously granted by any Person, and
(ii) if applicable, 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 such grantor; 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
such grantor (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 Amendment).
46
<PAGE>
SECTION 5.1.7. Affirmation and Consent. The Documentation Agent shall have
-----------------------
received executed counterparts of the Affirmation and Consent duly executed by
each of Talton, AmeriTel, Talton STC, Talton Invision and Talton Carolina.
SECTION 5.1.8. 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 the
--- -----
Closing Date 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 5.1.9. Solvency Certificate. The Documentation Agent shall have
--------------------
received duly executed and delivered counterparts of the Solvency Certificate,
dated the Closing Date.
SECTION 5.1.10. 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 5.1.11. 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) Brydon, Swearengen & England, regulatory counsel to the Obligors,
satisfactory in form and substance to the Administrative Agent.
SECTION 5.1.12. 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 5.1.13. 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
47
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and expenses (including, without limitation, legal fees and expenses) due and
payable pursuant to Sections 3.3 and 10.3, if then invoiced.
------------ ----
SECTION 5.1.14. Operating Contracts. The Documentation Agent shall have
-------------------
received a satisfactory sampling of Operating Contracts executed subsequent to
June 30, 1997, and such Contracts shall be in form and substance satisfactory to
the Administrative Agent.
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,
-----------
(c) 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
(d) 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
(e) 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. Credit Extension Requests. The Administrative Agent shall
-------------------------
have received a Borrowing Request if Loans are being requested, or an Issuance
Request if a Letter of Credit is being issued or extended. Each of the delivery
of a Credit Extension Request and the acceptance by the Borrower of the proceeds
of such Credit Extensions shall constitute a
48
<PAGE>
representation and warranty by the Borrower that on the date of such Credit
Extensions (both immediately before and after giving effect to such Credit
Extensions 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.
SECTION 5.3. Borrowings for Related Acquisitions. The obligation of each
-----------------------------------
Lender to fund any Loan on the occasion of any Borrowing intended to fund a
Related Acquisition shall be subject to the satisfaction of each of the
additional conditions precedent set forth in this Section 5.3.
-----------
SECTION 5.3.1. Related Acquisitions Consummated. Concurrently with the
--------------------------------
funding of any such Borrowing, all conditions of the applicable Related
Acquisition shall have been satisfied in full, and the Related Acquisition shall
have been consummated in accordance with applicable law. The Documentation Agent
shall have received true, complete and accurate copies (certified as such as of
the date of Borrowing) of and be satisfied with all documents delivered in
connection with the applicable Related Acquisition (including that the
acquisition agreement for such Related Acquisition shall permit the
Administrative Agent to obtain a security interest therein). The Administrative
Agent shall be satisfied that the applicable Related Acquisition meets all of
the requirements set forth in the definition of Related Acquisitions.
SECTION 5.3.2. Approvals. All requisite approvals and consents of all
---------
Official Bodies with respect to the consummation of the applicable Related
Acquisition shall have been duly obtained (or will be filed for and obtained on
terms and within a time period satisfactory to the Administrative Agent), and
the Borrower shall have delivered certified true copies thereof to the
Documentation Agent.
SECTION 5.3.3. Collateral; Filings. The Documentation Agent shall have
-------------------
received (a) executed counterparts of all Security Agreements, Pledge
Agreements, the Subsidiary Guaranty and any amendments or supplements to any of
the foregoing, as applicable, pursuant to the terms of this Agreement or as the
Administrative Agent may otherwise require, and (b) all Uniform Commercial Code
financing statements required in connection with the foregoing or that the
Administrative Agent may otherwise require.
49
<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, 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.
50
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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 November 30, 1996, and the quarterly unaudited balance sheets
of Talton and AmeriTel as at March 31, 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 sheets and income statements and consolidated
statements of cash flow for the Borrower and its Subsidiaries as at March 31,
1997, June 30, 1997 and September 30, 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.
51
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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, Talton Invision 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.
--------------
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
52
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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;
(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
53
<PAGE>
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 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.
SECTION 6.16. Operating Contracts. Except as set forth in Item 6.16
------------------- ---------
("Operating Contracts") of the Disclosure Schedule, Talton, AmeriTel, Talton
Carolina, Talton Invision, and Talton STC are in compliance in all material
respects with each of their Operating Contracts and all related agreements.
54
<PAGE>
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 Unsecured Note Instruments. All of the
---------------------------------
representations and warranties contained in the Senior Unsecured 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, Talton Invision 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 each executed acquisition
agreement with
55
<PAGE>
respect to any Related Acquisition 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 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
56
<PAGE>
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; provided, however, that for the October 1997 calender month,
-------- -------
such statements may be furnished to the Administrative Agent on or prior to
December 31, 1997;
(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
57
<PAGE>
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 for the Term Loans 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;
(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 Unsecured Note Instruments; and
(m) 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
58
<PAGE>
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 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
59
<PAGE>
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, 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 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.
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),
60
<PAGE>
(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 Subsidiary Security Agreement 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 the Borrower Pledge Agreement or 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 the
Borrower Pledge Agreement or 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
---------------
Term Loans made from and after the Closing Date to (i) refinance outstandings
under the Existing Credit Agreement, (ii) fund the Related Acquisitions and
(iii) pay fees and expenses directly related to the Related Acquisitions and in
connection with this Agreement. The Borrower shall apply the proceeds of
Revolving Loans made from and after the Closing Date (i) to refinance
outstanding letters of credit under the Existing Credit Agreement and (ii) for
working capital, capital expenditures, general corporate purposes and Permitted
Acquisitions. 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.
SECTION 7.1.12. Interest Rate Protection. By no later than June 30, 1998,
------------------------
the Borrower shall forthwith subject at least 50% of the outstanding principal
amount of the Term Loans to Hedging Obligations until the Stated Maturity Date
of the Term Loans with counterparties and on terms and conditions satisfactory
to the Administrative Agent.
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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
Unsecured 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:
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(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;
-------------
(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:
63
<PAGE>
Total Debt
Period to EBITDA Ratio
------ ---------------
Closing Date to (and 6.0:1
including) 12/30/98
12/31/98 to (and 5.5:1
including) 12/30/99
12/31/99 to (and 5.0:1
including) 12/30/00
12/31/00 to (and 4.5:1
including) 12/30/01
12/31/01 and thereafter 4.0:1;
(b) the Senior Secured Debt to EBITDA Ratio at any time during any period
set forth below to be greater than the ratio set forth opposite such period:
Senior Secured Debt
Period to EBITDA Ratio
------ -------------------
Closing Date to (and 3.5:1
including) 12/30/99
12/31/99 and thereafter 3.0:1;
(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:
EBITDA to Cash
Period Interest Expense Ratio
------ ----------------------
Closing Date to (and 1.5:1
including) 12/31/98
01/01/99 and thereafter 1.75:1;
(d) the EBITDA to Fixed Charges Ratio as at the last day of any Fiscal
Quarter beginning on March 31, 1998 for the Rolling Period ending on such date
to be less than 1.10:1.
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;
-------------
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<PAGE>
(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.
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 Unsecured 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 Unsecured 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
65
<PAGE>
of $500,000 in any Fiscal Year other than, in connection with any acquisition, a
fee to EUFCC equal to 2.0% of that portion of the acquisition price of any
acquisition that does not exceed $15,000,000 and 1.5% of that portion of the
acquisition price of any 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
(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:
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<PAGE>
(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 Unsecured Note Instruments,
(c) the documents relating to the Preferred Stock, (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, or (e) any acquisition agreement relating to any
Permitted Acquisition or Related Acquisition.
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.
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
Unsecured 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
67
<PAGE>
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.
SECTION 7.2.15. Rental Obligations. The Borrower will not, and will not
------------------
permit any of its Subsidiaries to, enter into at any time any arrangement which
does not create a Capitalized Lease Liability and which involves the leasing by
the Borrower or any of its Subsidiaries from any lessor of any real or personal
property (or any interest therein), except arrangements which, together with all
other such arrangements which shall then be in effect, will not require the
payment of an aggregate amount of rentals by the Borrower and its Subsidiaries
in excess of (excluding escalations resulting from a rise in the consumer price
or similar index) $1,500,000 for any Fiscal Year; provided that such amount may
--------
be increased to $2,000,000 upon 60 days prior written notice from the Borrower
to the Administrative Agent that aggregate rental payments will exceed
$1,500,000 for such Fiscal Year.
ARTICLE VII
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 any
Reimbursement Obligation, 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
68
<PAGE>
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 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;
69
<PAGE>
(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 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
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<PAGE>
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 and the Borrower shall automatically and immediately be obligated to
deposit with the Administrative Agent cash collateral in an amount equal to all
Letter of Credit Outstandings.
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 and the Borrower shall automatically and immediately
be obligated to deposit with the Administrative Agent cash collateral in an
amount equal to all Letter of Credit Outstandings.
ARTICLE IX
THE AGENTS AND AGENT-RELATED PERSONS
SECTION 9.1. Actions and Indemnity. Each Lender hereby appoints CIBC as
---------------------
its Administrative Agent, Documentation Agent and Syndication Agent under and
for purposes of this Agreement, the Notes and each other Loan Document. Each
Lender authorizes the Administrative Agent, the Documentation Agent and the
Syndication 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, the Documentation Agent or the Syndication Agent, to
exercise such powers hereunder and thereunder as are specifically delegated to
or required of the Administrative Agent, the Documentation Agent or the
Syndication 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
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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, the Syndication 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 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
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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, (y) the Notes
held by it or any of its Affiliates, and (z) its participating in the Letters of
Credit 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, the
Syndication 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, the Syndication 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
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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
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 any 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 any 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 Reimbursement
Obligation (or reduce the principal amount of or rate of interest on any Loan or
Reimbursement Obligation) shall be made without the consent of the holder of the
Note evidencing such Loan;
(d) increase the Stated Amount of any Letter of Credit unless
consented to by any Issuer; or
(e) affect adversely the interests, rights or obligations of (i) the
Administrative Agent qua the Administrative Agent, unless consented to by the
---
Administrative Agent, (ii) the Documentation Agent qua the Documentation Agent,
---
unless consented to by the Documentation
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Agent, (iii) the Syndication Agent qua the Syndication Agent, unless consented
---
to by the Syndication Agent or (iv) the Issuer qua the Issuer, unless consented
---
to by the Issuer.
No failure or delay on the part of the Administrative Agent, the Documentation
Agent, the Syndication 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, the
Syndication 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 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, the Documentation Agent and
the Syndication Agent (including due diligence expenses, syndication expenses
and the fees and other charges of Mayer, Brown & Platt, counsel to the
Administrative Agent, the Documentation Agent and the Syndication Agent, and of
local counsel, if any, who may be retained by counsel to the Administrative
Agent, the Documentation Agent or the Syndication 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
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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, the Syndication Agent, the Issuer, 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 Credit
Extensions made hereunder, the issuance of the Letters of Credit or the issuance
of the Notes or any other Loan Documents. The Borrower also agrees to reimburse
the Administrative Agent, the Issuer and each Lender upon demand for all
reasonable out-of-pocket expenses (including attorneys' fees and legal expenses)
incurred by the Administrative Agent, the Issuer 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.
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, the Syndication Agent, the
Issuer 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 or the use of any Letter
of Credit;
(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;
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(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.
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
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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 AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR
SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE
STATE OF NEW YORK) WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. This
Agreement, the Notes and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersede any prior agreements, written or oral, with respect thereto.
SECTION 10.10. Successors and Assigns. This Agreement shall be binding
----------------------
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:
-------- -------
(a) the Borrower may not assign or transfer its rights or obligations
hereunder without the prior written consent of the Administrative Agent and all
Lenders; and
(b) the rights of sale, assignment and transfer of the Lenders are subject
to Section 10.11.
-------------
SECTION 10.11. Sale and Transfer of Loans and Notes; Participations in
-------------------------------------------------------
Loans and Notes. Each Lender may assign, or sell participations in, its Loans,
- ---------------
Letter of Credit participations and Commitments to one or more other Persons in
accordance with this Section 10.11.
-------------
SECTION 10.11.1. Assignments. The Administrative Agent and each Lender,
-----------
(a) with the written consents of (i) so long as no Default has occurred and
is continuing, the Borrower (which consent shall not be unreasonably delayed or
withheld and which shall be deemed to have been given in the absence of a
written notice delivered by the Borrower to the Administrative Agent, on or
before the fifth Business Day after receipt by the Borrower of such Lender's
request for consent, stating, in reasonable detail, the reasons why the Borrower
proposes to withhold such consent) and (ii) the Administrative Agent, may at any
time assign and delegate to one or more commercial banks or other financial
institutions or other Persons, and
(b) with notice to the Borrower and the Administrative Agent, but without
the consent of the Borrower or the Administrative Agent, may assign and delegate
to any of its Affiliates or to any other Lender
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(each Person described in either of the foregoing clauses as being the Person to
whom such assignment and delegation is to be made, being hereinafter referred to
as an "Assignee Lender"), all or any fraction of such Lender's total Loans,
---------------
Letter of Credit Outstandings and Commitments (which assignment and delegation
shall be of a constant, and not a varying, pro rata percentage of all the
--- ----
assigning Lender's Loans, Letter of Credit Outstandings and Commitments) in a
minimum aggregate amount equal to the lesser of $5,000,000 or all of such
Lender's remaining Loans and Commitments, and increments of $1,000,000;
provided, however, that any such Assignee Lender will comply, if applicable,
- -------- -------
with the provisions contained in the last sentence of Section 4.6 and further
----------- -------
provided, however, that, the Borrower, each other Obligor and the Administrative
- -------- -------
Agent shall be entitled to continue to deal solely and directly with such Lender
in connection with the interests so assigned and delegated to an Assignee Lender
until
(c) written notice of such assignment and delegation, together with payment
instructions, addresses and related information with respect to such Assignee
Lender, shall have been given to the Borrower and the Administrative Agent by
such Lender and such Assignee Lender;
(d) such Assignee Lender shall have executed and delivered to the Borrower
and the Administrative Agent a Lender Assignment Agreement, accepted by the
Administrative Agent; and
(e) the processing fees described below shall have been paid.
From and after the date that the Administrative Agent accepts such Lender
Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed
automatically to have become a party hereto and to the extent that rights and
obligations hereunder have been assigned and delegated to such Assignee Lender
in connection with such Lender Assignment Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (y)
the assignor Lender, to the extent that rights and obligations hereunder have
been assigned and delegated by it in connection with such Lender Assignment
Agreement, shall be released from its obligations hereunder (other than under
Section 9.1 for the period it was a party hereto) and under the other Loan
- -----------
Documents. Within five Business Days after its receipt of notice that the
Administrative Agent has received an executed Lender Assignment Agreement, the
Borrower shall execute and deliver to the Administrative Agent (for delivery to
the relevant Assignee Lender) new Notes evidencing such Assignee Lender's
assigned Loans and Commitments and, if the assignor Lender has retained Loans
and Commitments hereunder, replacement Notes in the principal amount of the
Loans and Commitments retained by the assignor Lender hereunder (such Notes to
be in exchange for, but not in payment of, those Notes then held by such
assignor Lender). Each such Note shall be dated the date of the predecessor
Notes. The assignor Lender shall mark the predecessor Notes "exchanged" and
deliver them to the Borrower. Accrued interest on that part of the predecessor
Notes evidenced by the new Notes, and accrued fees, shall be paid as provided in
the Lender Assignment Agreement. Accrued interest on that part of the
predecessor Notes evidenced by the replacement Notes shall be paid to the
assignor Lender. Accrued interest and accrued fees shall be paid at the same
time or times provided in the predecessor Notes and in this Agreement. Such
assignor Lender or such Assignee Lender must
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also pay a processing fee to the Administrative Agent upon delivery of any
Lender Assignment Agreement in the amount of $3,000. Any attempted assignment
and delegation not made in accordance with this Section 10.11.1 shall be null
---------------
and void.
SECTION 10.11.2. Participations. Any Lender may at any time sell to one or
--------------
more commercial banks or other Persons (each of such commercial banks and other
Persons being herein called a "Participant") participating interests in any of
-----------
the Loans, Letter of Credit Outstandings Commitments or other interests of such
Lender hereunder; provided, however, that
-------- -------
(a) no participation contemplated in this Section 10.11 shall relieve such
-------------
Lender from its Commitments or its other obligations hereunder or under any
other Loan Document;
(b) such Lender shall remain solely responsible for the performance of its
Commitments and such other obligations;
(c) the Borrower and each other Obligor and the Administrative Agent shall
continue to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement and each of the other Loan
Documents; and
(d) no Participant, unless such Participant is an Affiliate of such Lender,
or is itself a Lender, shall be entitled to require such Lender to take or
refrain from taking any action hereunder or under any other Loan Document,
except that such Lender may agree with any Participant that such Lender will
not, without such Participant's consent, take any actions of the type described
in clause (b) or (c) of Section 10.1.
---------- --- ------------
The Borrower acknowledges and agrees that each Participant, for purposes of
Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 10.3 and 10.4, shall be considered a
- ------------ --- --- --- --- --- ---- ----
Lender.
SECTION 10.12. Other Transactions. Nothing contained herein shall
------------------
preclude the Administrative Agent, any Agent-Related Person or any Lender from
engaging in any transaction, in addition to those contemplated by this Agreement
or any other Loan Document, with the Borrower or any of its Affiliates in which
the Borrower or such Affiliate is not restricted hereby from engaging with any
other Person.
SECTION 10.13. Certain Collateral and Other Matters; Hedging Obligation
--------------------------------------------------------
Information. () The Administrative Agent is authorized on behalf of all the
- -----------
Lenders, without the necessity of any notice to or further consent from the
Lenders, from time to time to take any action with respect to any collateral
security or the Loan Documents which may be necessary to perfect and maintain
perfected the security interest in and Liens upon the collateral security
granted pursuant to the Loan Documents.
(a) The Lenders irrevocably authorize the Administrative Agent, at its
option and in its discretion, to release any security interest or Lien granted
to or held by the Administrative Agent upon any collateral (i) upon termination
of the Commitments and payment in full in cash of all principal of and interest
on the Loans, all fees payable pursuant to Sections 3.3 and 10.3
------------ ----
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and all other fees, costs and expenses that are payable under this Agreement or
under any other Loan Document and have been invoiced (in which case the Lenders
hereby authorize the Administrative Agent to execute, and the Administrative
Agent agrees to execute, reasonable releases in connection with this Agreement);
(ii) constituting property sold or to be sold or disposed of as part of or in
connection with any disposition permitted hereunder; (iii) constituting property
in which the Borrower or any Subsidiary of the Borrower owned no interest at the
time the security interest and/or Lien was granted or at any time thereafter;
(iv) constituting property leased to the Borrower or any Subsidiary of the
Borrower under a lease which has expired or been terminated in a transaction
permitted under this Agreement or is about to expire and which has not been, and
is not intended by the Borrower or such Subsidiary to be, renewed or extended;
(v) consisting of an instrument evidencing Indebtedness or other debt
instrument, if the Indebtedness evidenced thereby has been paid in full; or (vi)
if approved, authorized or ratified in writing by the Required Lenders or, if
required by Section 10.1, each Lender. Upon request by the Administrative Agent
------------
at any time, the Lenders will confirm in writing the Administrative Agent's
authority to release particular types or items of collateral pursuant to this
Section 10.15.
- -------------
(b) Each Lender which enters into arrangements with the Borrower in
respect of Hedging Obligations hereby agrees to supply the Administrative Agent
in writing on or about each Quarterly Payment Date with the amount of any
termination obligations of the Borrower thereunder and any net payments owing by
the Borrower thereunder.
SECTION 10.14. Forum Selection and Consent to Jurisdiction. ANY
-------------------------------------------
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE ADMINISTRATIVE
AGENT, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY
IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN NEW YORK CITY OF THE STATE OF
NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
-------- -------
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE ADMINISTRATIVE AGENT'S
OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK LOCATED IN NEW YORK CITY OF
THE STATE OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE
AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH SUCH LITIGATION. THE BORROWER HEREBY IRREVOCABLY APPOINTS CT
CORPORATION SYSTEMS (THE "PROCESS AGENT"), WITH AN OFFICE ON THE DATE HEREOF AT
-------------
1633 BROADWAY, NEW YORK, NEW YORK 10019, UNITED STATES, AS ITS ADMINISTRATIVE
AGENT TO RECEIVE, ON THE BORROWER'S BEHALF AND ON BEHALF OF THE BORROWER'S
PROPERTY, SERVICE OF COPIES OF THE
81
<PAGE>
SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY SUCH
ACTION OR PROCEEDING. SUCH SERVICE MAY BE MADE BY MAILING OR DELIVERING A COPY
OF SUCH PROCESS TO THE BORROWER IN CARE OF THE PROCESS AGENT AT THE PROCESS
AGENT'S ABOVE ADDRESS, AND THE BORROWER HEREBY IRREVOCABLY AUTHORIZES AND
DIRECTS THE PROCESS AGENT TO ACCEPT SUCH SERVICE ON ITS BEHALF. AS AN
ALTERNATIVE METHOD OF SERVICE, THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE
WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION
BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH
LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE
BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY
COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT
PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO
ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN
RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
SECTION 10.15. Waiver of Jury Trial. THE ADMINISTRATIVE AGENT, THE
--------------------
LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE ADMINISTRATIVE AGENT, THE LENDERS OR
THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH
OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT AND THE LENDERS ENTERING INTO
THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT.
82
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
TALTON HOLDINGS, INC.
By: /s/ JOHN R. SUMMERS
-----------------------------------------
Title: Vice President
--------------------------------------
Address: 611 S W Third Street
Lee's Summit, MO 64063
Facsimile No.: (816) 525-3006
Attention: John R. Summers
CANADIAN IMPERIAL BANK OF
COMMERCE, as Administrative Agent,
Documentation Agent and Syndication Agent
By: /s/ CYNTHIA McCAHILL
-----------------------------------------
Title: Authorized Signatory
Address: 425 Lexington Avenue
New York, NY 10017
Facsimile No.: (212) 856-3558
Attention: Cynthia McCahill
83
<PAGE>
PERCENTAGE LENDERS
---------- -------
68.75% CIBC INC.
By: /s/ CYNTHIA McCAHILL
-----------------------------------------
Title: Executive Director, CIBC
Oppenheimer Corp., as Agent
Domestic Office: 425 Lexington Avenue
New York, NY 10017
Facsimile No.: (212) 856-3763
Attention: Christine Aharonian
LIBOR Office: 425 Lexington Avenue
New York, NY 10017
Facsimile No.: (212) 856-3763
Attention: Christine Aharonian
31.25% FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.,
its Agent/Manager
By: /s/ DAVID WAGNER
-----------------------------------------
Title:
Domestic Office: 2850 West Golf Road
5th Floor
Rolling Meadows, IL 60008
Facsimile No.: (847) 734-7910
Attention: Karen Posch
LIBOR Office: 2850 West Golf Road
5th Floor
Rolling Meadows, IL 60008
Facsimile No.: (847) 734-7910
Attention: Karen Posch
-------
100.00%
84
<PAGE>
SCHEDULE I
DISCLOSURE SCHEDULE
-------------------
ITEM 6.3. Approvals.
---------
Alabama Missouri
Arizona New Mexico
Florida New York
Georgia Nevada
Indiana Oregon
Kentucky Pennsylvania
Louisiana South Carolina
Minnesota Washington
Mississippi
ITEM 6.7. Litigation.
----------
None.
ITEM 6.12. Employee Benefit Plans.
----------------------
None.
ITEM 6.13. Environmental Matters.
---------------------
None.
ITEM 6.16. Operating Contracts.
-------------------
None.
ITEM 7.2.2(b). Indebtedness to be Paid.
-----------------------
None.
<PAGE>
ITEM 7.2.2(c). Ongoing Indebtedness.
--------------------
None.
ITEM 7.2.5(a). Ongoing Investments.
-------------------
The Company will own 100% of the stock of AmeriTel, 100% of the stock of
Talton STC, 100% of the stock of Talton Invision and 100% of the Stock of Talton
(which, in turn, will continue to own 100% of the stock of Talton of Carolina).
<PAGE>
EXHIBIT 10.14
-------------
ASSET PURCHASE AGREEMENT
by and among
AMERITEL PAY PHONES, INC.,
a Missouri corporation
and
CORRECTIONAL COMMUNICATIONS CORPORATION,
a California corporation,
EDWARD WHITMAN, RICHARD WHITMAN and
JOHN O'KEEFE
Dated as of: July 31, 1997
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of July 31,
1997, by and among AMERITEL PAY PHONES, INC., a Missouri corporation ("Buyer"),
on the one hand, and CORRECTIONAL COMMUNICATIONS CORPORATION, a California
corporation ("Seller"), EDWARD WHITMAN, an individual, RICHARD WHITMAN, an
individual, and JOHN O'KEEFE, an individual, on the other hand. Edward Whitman,
Richard Whitman and John O'Keefe are collectively referred to herein as the
"Principals."
RECITALS
WHEREAS, Seller is engaged primarily in the business of providing inmate
pay telephone service, and related and ancillary services or systems, to jails
and other inmate or correctional facilities in the United States; and
WHEREAS, for the consideration and on the terms set forth in this
Agreement, Seller desires to sell, and Buyer desires to purchase, the "Company
Assets" (as defined below), 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:
"Accounts Receivable" means all of Seller's accounts receivable determined in
-------------------
accordance with GAAP.
"Actual Bad Debt" means the bad debt realized or reserved (in accordance with
---------------
GAAP) attributable to the New Contracts for the Adjustment Period.
"Adjustment" has the meaning set forth in Section 2.3(a) hereof.
----------
"Adjustment Period" means the six month period commencing on August 1, 1998
-----------------
through and including January 31, 1999.
"Assumed Liabilities" has the meaning set forth in Section 2.4 hereof.
-------------------
-1-
<PAGE>
"Assumption Agreement" means the Assumption Agreement by Buyer in favor of
--------------------
Seller in the form attached hereto as Exhibit J.
"Bad Debt Reserve" means the (i) actual bad debt reserved (in accordance with
----------------
GAAP) attributable to the New Contracts for the period commencing on February 1,
1998 through and including July 31, 1998, annualized for any New Contract with
an actual history shorter than such six (6) month period, multiplied by (ii)
1.5.
"Balance Sheet Date" means January 1, 1997.
------------------
"Billing and Collection Agreement" means any billing and collecting agreement,
--------------------------------
local exchange company billing agreement or other Contract relating to the
provision of billing and collection services to Seller.
"Breach." A "Breach" by any Person of a representation, warranty, covenant,
------
obligation or other provision of this Agreement, or any instrument delivered
pursuant to or in connection with this Agreement, shall 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 in a timely manner, such representation, warranty,
covenant, obligation, or other provision by such Person.
"Buyer's Advisors" has the meaning set forth in Section 5.2(b) hereof.
----------------
"Buyer's Closing Certificate" has the meaning set forth in Section 2.9(b)
---------------------------
hereof.
"Buyer's Closing Documents" has the meaning set forth in Section 4.2(a).
-------------------------
"Buyer's Indemnified Persons" has the meaning set forth in Section 10.2
---------------------------
hereof.
"CCC EBITDA" means, for any fiscal period, (i) net income of Buyer
----------
attributable to the Company Assets for that period, plus (ii) interest expense
----
of Buyer attributable to the Company Assets for that period, plus (iii)
----
provision for income taxes of Buyer attributable to the Company Assets for that
period, plus (iv) depreciation expense of Buyer attributable to the Company
----
Assets for that period, plus (v) amortization expense of Buyer attributable to
----
the Company Assets for that period, minus (vi) gains (or plus losses) on sales
-----
of fixed assets which are part of the Company Assets during that period, minus
-----
(vii) extraordinary gains or non-operating income of Buyer attributable to the
Company Assets for that period. CCC EBITDA shall be calculated in accordance
with GAAP, provided that (a) the lesser of (x) all salaries, fringe benefits and
other expenses of Richard Whitman, John O'Keefe and Sam Ismail at the levels
currently earned or payable to them by Seller or (y) all salaries, fringe
benefits and other expenses of Messrs. Whitman, O'Keefe and Ismail as agreed to
in their respective Employment Agreements with Buyer, shall be
-2-
<PAGE>
included as an expense, and (b) general corporate overhead of Buyer shall not be
included as an expense except to the extent that such overhead was historically
included by Seller in the determination of its net income. Moreover, for
purposes of this definition only, Company Assets shall not include Schedule 1.1
Contracts.
"CLEC Business" means state authorized local competition by independent
-------------
companies within the local monopoly of a local exchange company.
"CLEC Management Agreement" has the meaning set forth in Section 2.11 hereof.
-------------------------
"Closing" has the meaning set forth in Section 2.8(b) hereof.
-------
"Closing Date" means the date of the Closing.
------------
"Company Assets" has the meaning set forth in Section 2.1(a) hereof.
--------------
"Consent" means any approval, consent, permit, ratification, entitlement,
-------
waiver or other authorization (including, without limitation, any Governmental
Authorization).
"Consents Escrow Agreement" has the meaning set forth in Section 2.8(c)
-------------------------
hereof.
"Contemplated Transactions" means all of the transactions contemplated by this
-------------------------
Agreement, including, without limitation: (a) the sale by Seller to Buyer and
the purchase (and payment therefor) by Buyer from Seller of the Company Assets;
(b) the execution, delivery and performance of the Non-Competition Agreements,
the Employment Agreements, the Escrow Agreements, the Intellectual Property
Assignment, the CLEC Management Agreement, the Contracts Management Agreement
and the Assumption Agreement; and (c) the performance by Buyer and Seller of
their respective covenants and obligations under this Agreement, including,
without limitation, their respective obligations under Section 2 hereof.
"Contract" means any agreement, contract, license, obligation,
--------
promise or undertaking: (a) under which Seller has acquired any rights, (b)
under which Seller has become subject to any obligation or liability, or (c) by
which Seller is a party or by which Seller or any of the assets or properties
owned or used by it are bound.
"Contracts Management Agreement" means the Contracts Management Agreement by
------------------------------
and between Buyer and Seller in the form attached hereto as Exhibit L.
"Damages" has the meaning set forth in Section 10.2 hereof.
-------
"Dispute Notice" has the meaning set forth in Section 2.3(c) hereof.
--------------
-3-
<PAGE>
"Employee Benefit Plan" means any "employee benefit plans" (as defined in
---------------------
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.
"Employment Agreement" means the Employment Agreements between Buyer and
--------------------
certain other Persons in the form attached hereto as Exhibit A.
"Encumbrance" means any charge, claim, community property interest, condition,
-----------
equitable interest, lien, mortgage, 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.
"Environmental Laws" means all Legal Requirements that relate or pertain to
------------------
environmental matters, pollution, the environment or public health, safety or
welfare, including, without limitation, the Resource Conservation and Recovery
Act, as amended (42 U.S.C. 6901 et seq.), the Comprehensive Environmental
Response; Compensation and Liability Act, as amended (42 U.S.C. 9601 et seq.),
the Federal Clean Water Act, as amended (33 U.S.C. 1251 et seq.), and all other
applicable federal, state and local environmental laws, rules, regulations,
ordinances and programs relating to environmental matters, pollution, the
environment and/or public health, safety or welfare.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
-----
or any successor law, and all regulations and rules issued pursuant to that Act
or any successor law.
"Escrow Agreements" means the Indemnity Escrow Agreement, the V2000 Escrow
-----------------
Agreement and the Consents Escrow Agreement, collectively.
"Excluded Assets" has the meaning set forth in Section 2.1(b).
---------------
"Final Adjustment Statement" has the meaning set forth in Section 2.3(c)
--------------------------
hereof.
"Financial Statements" has the meaning set forth in Section 3.4 hereof.
--------------------
"GAAP" means generally accepted accounting principles, applied on a consistent
----
basis in accordance with United States accounting practice.
-4-
<PAGE>
"Governmental Authorization" means any approval, consent, license, permit,
--------------------------
waiver, entitlement, 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" means (a) any nation, federal, state, county, city, town,
-----------------
village, municipal, district or other properly constituted government; (b) any
governmental authority of any nature (including any governmental agency, branch,
department, official, or entity and any court or other tribunal); and (c) 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 or elsewhere.
"Gross Margin" means the aggregate gross billable revenue attributable to the
------------
New Contracts during the Adjustment Period, minus the sum of the following
costs, charges and expenditures incurred by Buyer and attributable or allocable
to the New Contracts during the Adjustment Period: (i) telephone line access
charges, (ii) telephone transmission charges, (iii) location commissions, (iv)
bad debt (except that for purposes of the Interim Adjustment Statement, the Bad
Debt Reserve shall be used in lieu thereof), (v) billing, collection and
validation charges at cost, (vi) direct field service charges at cost, (vii)
amortization (on a straight line basis over the initial term of the New
Contracts) of any signing bonuses and other incentives payable in connection
with the New Contracts, and (viii) extraordinary gains or non-operating income
of Buyer attributable to the New Contracts.
"Hazardous Activities" has the meaning set forth in Section 3.17(b) hereof.
--------------------
"Hazardous Substances" has the meaning set forth in Section 3.17(b) hereof.
--------------------
"Indemnity Escrow Agreement" has the meaning set forth in Section 2.8(a)
--------------------------
hereof.
"Indemnity Escrow Fund" has the meaning set forth in Section 2.8(a) hereof.
---------------------
"Independent Accounting Firm" has the meaning set forth in Section 2.3(c)
---------------------------
hereof.
"Installed Line" means any telephone lines and related facilities providing
--------------
telephone service to Installed Telephones, including those Telephone lines
identified by installation, location and telephone number in Schedule
3.6(a)(ii).
"Installed Telephone" means a Telephone that is in good working order and
-------------------
operable, is subject to a Pay Telephone Location Agreement, and is installed at
the location provided
-5-
<PAGE>
for in its related Pay Telephone Location Agreement.
"Intellectual Property Assignment" means the Intellectual Property Assignment
--------------------------------
by and between Seller and Buyer in the form attached hereto as Exhibit C.
"Intellectual Property Assets" means, collectively, the "Intellectual
----------------------------
Property," the "Trademarks" and the "Computer Systems" (as such terms are
defined in the Intellectual Property Assignment).
"Interim Adjustment Statement" has the meaning set forth in Section 2.3(b)
----------------------------
hereof.
"IRC" means the Internal Revenue Code of 1986, as amended, or any successor
---
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"IRS" means the United States Internal Revenue Service or any successor
---
agency, and, to the extent relevant, the United States Department of the
Treasury.
"Knowledge" means, in the case of Seller, the actual knowledge of Seller's
---------
officers, directors and shareholders after due review and inquiry.
"Legal Requirement" means any federal, state, local, municipal, foreign,
-----------------
international, multinational or other administrative order, constitution, law,
ordinance, ruling, regulation or statute.
"Long Distance Service Agreements" means any long distance service provider
--------------------------------
agreement, telecommunications agreement or other Contract relating to the
provision of long distance service or other similar services to Seller.
"Major Transaction" has the meaning set forth in Section 5.5 hereof.
-----------------
"New Contracts" means, collectively, (i) the Schedule 1.1 Contracts (other
-------------
than the Non-Assumed Schedule 1.1 Contracts), and (ii) any contracts and
agreements entered into between Buyer and the Persons described on Schedule 1.2
attached hereto after the Closing Date, but on or before December 31, 1997 (or,
with respect to any such contract or agreement entered into with Los Angeles
County, on or before November 30, 1998), with respect to the provision by Buyer
of inmate pay telephone service, and related and ancillary services, to such
Person. Notwithstanding the foregoing, no Contract or other agreement shall be
deemed to be a New Contract unless such Contract or agreement shall have a term
of not less than three (3) years. The calculation of the term of any such
Contract or agreement shall be made as of January 31, 1999 and shall include (a)
the initial term of such Contract or agreement, and (b) all renewal or extension
terms provided for in such
-6-
<PAGE>
Contract or agreement but only to the extent that such renewal or extension has
been exercised or the right to extend the term of such Contract or agreement for
such renewal or extension terms is within the sole and absolute discretion of
Buyer; provided that if any Legal Requirement applicable to any such Contract or
agreement prohibits the initial term of such Contract or agreement from
exceeding one (1) year and requires that the other party to such Contract or
agreement consent to any renewal or extension of the term of such Contract or
agreement, such Contract or agreement shall nevertheless be deemed to have a
term of not less than three (3) years for purposes of this paragraph if the term
(including any renewal or extension terms) is in fact three (3) years or more
(such determination to be made as of the date the third year of the term of such
Contract or agreement indefeasibly vests) (and a payment, if applicable, shall
be paid as soon as practicable at such later time, but based on the amounts
applicable during the Adjustment Period).
"Non-Assumed Schedule 1.1 Contracts" means all of the Schedule 1.1 Contracts
----------------------------------
which Buyer has elected not to assume, all of which Contracts are so indicated
on Schedule 1.1.
"Non-Competition Agreement" means the Non-Competition Agreements by and
-------------------------
between Buyer, on the one hand, and the Seller and the Principals, on the other
hand, in the form attached hereto as Exhibit B.
"Operator Service Agreement" means any agreement or other Contract relating to
--------------------------
the provision of operator or other telephone services to Seller.
"Order" means any award, decision, injunction, judgment, order, ruling,
-----
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 to
---------------------------
have been taken in the "Ordinary Course of Business" of such Person 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; and (b)
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" means (a) the articles or certificate of
------------------------
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 any Person; and (e) any amendment to any
of the foregoing.
-7-
<PAGE>
"Parts and Supplies Agreement" means any Contract relating to the provision of
----------------------------
Telephone parts, inventory or equipment, or other parts, equipment or services
to Seller.
"Pay Telephone Location Agreements" means all written lease agreements,
---------------------------------
telephone location agreements, telephone service agreements, license agreements,
royalty agreements or other contracts relating to the Installed Telephones,
which agreements grant the right to Seller to install and operate the Installed
Telephones upon the premises set forth within any such document.
"Person" means any individual, corporation (including any non-
------
profit corporation), general or limited partnership, limited liability company,
limited liability partnership, joint venture, estate, trust, association,
organization, labor union or other entity or Governmental Body.
"Proceeding" means any action, arbitration, mediation, audit, hearing,
----------
investigation, 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.
"Purchase Price" has the meaning set forth in Section 2.2(a) hereof.
--------------
"Real Property" has the meaning set forth in Section 3.22 hereof.
-------------
"Representative" means, with respect to a particular Person, any director,
--------------
officer, partner, member, manager, employee, legal counsel, consultant, agent,
accountant or financial advisor of such Person.
"Retained Liabilities" has the meaning set forth in Section 2.4 hereof.
--------------------
"Schedule 1.1 Contracts" means the Contracts described on Schedule 1.1
----------------------
attached hereto.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Seller's Indemnified Persons" has the meaning set forth in Section 10.3
----------------------------
hereof.
"Service Agreements" means any Long Distance Service Agreement, Billing and
------------------
Collection Agreement, Parts and Supplies Agreement, Operator Service Agreement
or similar agreement or Contract relating to the provision of parts, equipment
or services to Seller.
-8-
<PAGE>
"Seller's Closing Certificate" has the meaning set forth in Section 2.9(a)
----------------------------
hereof.
"Seller's Closing Documents" has the meaning set forth in Section 3.2(a)
--------------------------
hereof.
"Subsidiary," with respect to a specified entity, means (i) in the case of a
----------
corporation, a majority of the capital stock, the holders of which are regularly
entitled to vote for the election of directors, is owned directly or indirectly
by such entity, or (ii) in the case of a trust, partnership, limited liability
company or other entity, a trust, partnership, limited liability company or
entity of which such specified entity owns directly or indirectly a majority of
the beneficial interest or equity.
"Taxes" means any tax, charge, fee, duty, levy or other assessment, including,
-----
without limitation, income, gross receipts, net proceeds, ad valorem, 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, and such term shall include any interest, penalties or additions
attributable to such Taxes.
"Tax Return" means any return (including any information return), report,
----------
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.
"Telephones" means any of the coin, credit card operated or collect call only
----------
telephones, owned or operated by Seller, including any hardware, enclosure,
pedestal or any other personal property installed with any Telephone.
"Threatened." A claim, Proceeding, dispute, action, or other matter will 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).
"V2000 Escrow Agreement" has the meaning set forth in Section 2.8(b) hereof.
----------------------
-9-
<PAGE>
2. PURCHASE AND SALE OF ASSETS, CLOSING AND OTHER AGREEMENTS
2.1 Assets.
------
2.(a) Company Assets. Subject to the terms and conditions
--------------
of this Agreement, at the Closing, Seller shall grant, sell, convey, assign,
transfer and deliver to Buyer (and/or, at Buyer's election, to an affiliate or
Subsidiary of Buyer), and Buyer shall purchase and acquire from Seller, the
"Company Assets." For purposes of this Agreement, the term "Company Assets"
means all assets, properties, rights, leases, fixtures, accessions, claims,
contracts and interests of Seller of every kind, type or description, real,
personal and mixed, tangible and intangible, wherever located and whether or not
specifically referred to in this Agreement, that are used in or pertain to the
business and operations of Seller other than the "Excluded Assets" (as such term
is defined in Section 2.1(b) below). Without limiting the generality of the
foregoing, the Company Assets shall include, without limitation, the assets,
properties, rights, leases, fixtures, accessions, claims, contracts and
interests referred to in Section 3.6 hereof.
(b) Excluded Assets. Notwithstanding anything to the contrary
---------------
provided in Section 2.1(a) hereof, the Company Assets shall exclude all of
Seller's right, title and interest in and to following assets, properties,
rights and interests of Seller (collectively, the "Excluded Assets"):
(i) All cash or cash equivalents on hand of Seller at the
Closing; all refunds of Seller for federal, state or local income,
franchise and other taxes; and all Accounts Receivable of Seller (but
all prepaid obligations of and deposits held by Seller at Closing
shall not be Excluded Assets);
(ii) Subject to Section 2.11 below, all right, title and
interest of Seller in and to the CLEC Business;
(iii) All right, title and interest of Seller in and to the
Non-Assumed Schedule 1.1 Contracts;
(iv) The Billing and Related Services Agreement by and between
OAN Services, Inc. and Seller, including all Accounts Receivable
arising under said agreement;
(v) All minute books, share books and registers, seals and
other similar documents of Seller pertaining to its corporate
organization, all federal, state and local income, franchise and other
tax returns of Seller;
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(vi) All Employee Benefit Plans of Seller; and
(vii) The assets, properties, rights and interests of Seller
described on Schedule 2.1(b) attached hereto.
2.2 Purchase Price.
--------------
(a) Consideration and Purchase Price. The consideration for the
--------------------------------
transfer of the Company Assets by Seller to Buyer shall be (i) payment by Buyer
to Seller of the Purchase Price, and (ii) assumption by Buyer of the Assumed
Liabilities. Subject to the terms of Sections 2.2(b), 2.3 and 2.8 below, the
purchase price (the "Purchase Price") for the transfer of the Company Assets
shall be Ten Million Five Hundred Thousand Dollars ($10,500,000.00), which shall
be payable by wire transfer or cashier's check at Closing (the "Purchase
Price").
(b) Reimbursement for Certain Signing Bonuses and Hardware Costs.
------------------------------------------------------------
After Closing, Buyer shall reimburse Seller for certain signing bonuses and
hardware costs paid by Seller prior to Closing in connection with the contracts
regarding Riverside and San Francisco counties, subject to Buyer's reasonable
verification.
2.3 Adjustment to Purchase Price.
----------------------------
(a) The Purchase Price shall be increased by an amount equal to the
amount by which (x) the sum of (i) the product of (A) the CCC EBITDA for the
Adjustment Period, multiplied by (B) two, plus (ii) the product of (A) the net
aggregate Gross Margin generated by the New Contracts during the Adjustment
Period, multiplied by (B) two, exceeds (y) One Million Five Hundred Thousand
Dollars ($1,500,000.00) (the "Adjustment"); provided, however, that in no event
shall the amount of the Adjustment exceed the aggregate amount of One Million
Five Hundred Thousand Dollars ($1,500,000.00).
(b) As soon as reasonably possible, but in any event within 45 days
after the end of the Adjustment Period, Buyer shall cause its accountants to
calculate the estimated amount of the Adjustment (if any) in accordance with
GAAP and prepare and deliver to Seller an interim statement showing said
calculation in reasonable detail (the "Interim Adjustment Statement"). For
purposes of the Interim Adjustment Statement, the Bad Debt Reserve shall be
included as an expense in lieu of Actual Bad Debt. Concurrently with the
delivery of the Interim Adjustment Statement, Buyer shall pay to Seller the
aggregate estimated amount of the Adjustment (as shown on the Interim Adjustment
Statement).
(c) As soon as reasonably possible, but in any event within 180 days
after the end of the Adjustment Period, Buyer shall cause its accountants (i) to
calculate the amount of the Adjustment (if any) in accordance with GAAP (using
Actual Bad Debt and not the Bad Debt Reserve) and prepare and deliver to Seller
a final
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statement showing said calculation in reasonable detail (the "Final Adjustment
Statement"), and (ii) to make available for inspection by and, if requested,
copy for Seller all of the material work papers used in the calculation of the
Adjustment and the preparation of the Final Adjustment Statement. In the event
that Seller in good faith disputes the calculation of the Adjustment, Seller
shall deliver written notice (the "Dispute Notice") to Buyer thereof, setting
forth in reasonable detail the basis for such dispute, within thirty (30) days
after Seller's receipt of the Final Adjustment Statement. In the event of any
such dispute, Buyer and Seller shall in good faith attempt to reconcile their
differences. In the event Buyer and Seller are unable to reconcile their
differences within thirty (30) days after Buyer's receipt of the Dispute Notice,
Buyer and Seller shall submit the items remaining in dispute for resolution to
the Orange County, California office of Coopers & Lybrand, LLP (the "Independent
Accounting Firm"), which shall, within thirty (30) days of such submission,
determine and report to Buyer and Seller upon such remaining disputed items.
Such report shall be final, binding and conclusive on Buyer and Seller. The fees
and disbursements of the Independent Accounting Firm shall be borne by Buyer and
Seller as follows: Seller shall pay the proportion that the aggregate amount of
the disputed items resolved in favor of Buyer (as finally determined by the
Independent Accounting Firm) bears to the total amount of the disputed items so
submitted, and Buyer shall pay the balance. Upon agreement by Buyer and Seller
or resolution of any dispute, Buyer shall pay to Seller the amount, if any, by
which (x) the Adjustment exceeds (y) the amount, if any, paid in conjunction
with the Interim Adjustment Statement or Seller shall pay to Buyer the amount by
which (y) exceeds (x).
2.4 Assumed Liabilities; Retained Liabilities.
-----------------------------------------
(a) Upon the terms and subject to the conditions set forth in this
Agreement, at Closing, Buyer shall assume only the liabilities and obligations
of Seller described on Schedule 2.4 attached hereto (collectively, the "Assumed
Liabilities"). Buyer shall assume the Assumed Liabilities pursuant to the terms
of the Assumption Agreement. It is expressly understood and agreed by the
parties that all debts, liabilities and obligations of Seller of any kind or
nature whatsoever, whether absolute, accrued, contingent or otherwise, whether
known or unknown, and whether due or to become due at any time, which are not
specifically included in the Assumed Liabilities (collectively, the "Retained
Liabilities") shall be retained by Seller, and that Buyer shall not assume and
shall have no liability or obligation whatsoever with respect to the Retained
Liabilities .
(b) Without limiting the generality of the foregoing, the Assumed
Liabilities shall not include any of the following Retained Liabilities:
(i) any amounts due to the California Public Utility
Commission arising out of or related to the activities and
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operations of Seller prior to the Closing, including, without limitation,
arising out of controversies with the California Public Utility Commission;
(ii) all liabilities and obligations of Seller arising out of or related
to the Excluded Assets, including, without limitation, the Non-Assumed Schedule
1.1 Contracts;
(iii) all liabilities and obligations of Seller for goods and services
furnished to Seller at any time prior to the Closing;
(iv) all liabilities and obligations arising out of or relating to events
occurring on or prior to the Closing Date, including, without limitation,
defaults or breaches by Seller under the Contracts assigned to Buyer pursuant to
this Agreement.
(v) all liabilities and obligations of Seller to or on behalf of any
Person employed by Seller at any time prior to or on the Closing Date for any
aspect of the employment relationship which relates to any time prior to and
including the Closing Date, including, without limitation, all liabilities or
obligations related to wages, benefits, payroll taxes and withholdings,
termination benefits, any Employee Benefit Plans maintained or formerly
maintained by Seller or any affiliate of Seller (including, without limitation,
any obligations or liabilities under any such plans), or related to any
violation of federal or state discrimination, safety or other law regarding
employees;
(vi) all liabilities and obligations of Seller not incurred in the
ordinary and lawful course of business; and
(vii) all liabilities and obligations of Seller of any kind, whether
absolute, contingent or otherwise, whether known or unknown, whether due or to
become due at any time, and whether or not arising from or related to any
Contract, Pay Telephone Location Agreement, Service Agreement or real or
personal property lease, or otherwise, that are based upon, arise from or relate
to any event which occurred at any time prior to the Closing, including, without
limitation, any liability or obligation (i) for violation of any Environmental
Laws, (ii) for any remedial, removal, response, abatement, monitoring, clean-up,
closure or maintenance actions with respect to any Hazardous Substances, (iii)
for any death, personal injury or property damage suffered or allegedly suffered
by any Person from any cause, (iv) for any act, event or omission of any kind,
whether arising from, related to or sounding in breach of contract or covenant,
commission of tort or violation of any Legal Requirement, and (vi) for any
actual or accrued liability for any Taxes, including, without limitation, any
income tax (whether arising out of the consummation of the Contemplated
Transactions or otherwise), withholding tax or similar payroll deduction, real
property tax or personal property tax,
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whether actual, accrued, contingent or otherwise, whether due or to become due
at any time, and whether or not disputed.
2.5 Allocation of Purchase Price. The Purchase Price shall be allocated
----------------------------
among the Company Assets as set forth on Schedule 2.5 attached hereto. Seller
and Buyer agree (i) to report the sale of the Transferred Assets for federal and
state income tax purposes in accordance with the allocations set forth on
Schedule 2.5 hereto; (ii) not to take any position inconsistent with such
allocations on any of their respective tax returns; and (iii) to sign and timely
file Internal Revenue Service Form 8594, in the form attached hereto as Schedule
2.5, with the applicable tax return for the year of this transaction.
2.6 Sales and Use Taxes. Notwithstanding the provisions of Section 2.4
-------------------
hereof to the contrary, Buyer and Seller shall each be responsible for one-half
of all sales and use taxes, if any, arising out of the sale of the Company
Assets to Buyer pursuant to this Agreement, and Buyer and Seller shall
reasonably cooperate in completing all tax filings related thereto.
2.7 Stock Purchase.
--------------
Within thirty (30) days after Closing, Buyer shall provide John
O'Keefe and Richard Whitman with the opportunity to purchase shares of Common
Stock in Talton Holdings, Inc. in the respective amounts up to $500,000 as to
O'Keefe and $300,000 as to Whitman, at a price equal to $3,000 per share.
2.8 Escrow Funds; Closing.
---------------------
(a) Indemnity Escrow Fund. At the Closing, Seller shall deliver Five
---------------------
Hundred Thousand Dollars ($500,000.00) of the Purchase Price to Texas Commerce
Bank as escrow agent for deposit in a fund (the "Indemnity Escrow Fund") created
pursuant to the Escrow Agreement attached hereto as Exhibit E (the "Indemnity
Escrow Agreement").
(b) V2000 Escrow Fund. At the Closing, Seller shall deliver Two
-----------------
Million Dollars ($2,000,000.00) of the Purchase Price to Texas Commerce Bank as
escrow agent for deposit in a fund created pursuant to the Escrow Agreement
attached hereto as Exhibit F (the "V2000 Escrow Agreement").
(c) Consents Escrow Fund. At the Closing, Seller shall deliver Three
--------------------
Million Dollars ($3,000,000.00) of the Purchase Price to Texas Commerce Bank as
escrow agent for deposit in a fund created pursuant to the Escrow Agreement
attached hereto as Exhibit G (the "Consents Escrow Agreement").
(d) Closing. The closing of the transactions contemplated by this
-------
Agreement (the "Closing") will take place at the offices of Buyer's counsel in
Beverly Hills, California (or such other location within the Los Angeles area as
Buyer shall
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designate) at 10:00 a.m. (local time) on July 31, 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.
2.9 Closing Obligations. At the Closing:
-------------------
(a) Seller shall deliver or cause to be delivered to Buyer:
(i) Such bills of sale, endorsements, consents, assignments,
and other good and sufficient instruments of conveyance and
assignment as shall be reasonably required by Buyer and its counsel
and as shall be effective to vest in Buyer (or at Buyer's election,
its affiliates or Subsidiaries) good and marketable title in and to
all the Company Assets, free and clear of all Encumbrances, 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 Employment Agreements for each of the employees listed
on Schedule 2.9(a), executed by each of such employees.
(iii) The Non-Competition Agreements, executed by Seller and the
Principals.
(iv) The Intellectual Property Assignment, executed by Seller.
(v) The Indemnity Escrow Agreement, executed by Seller.
(vi) The V2000 Escrow Agreement, executed by Seller.
(vii) The Consents Escrow Agreement, executed by Seller.
(viii) The CLEC Management Agreement, executed by Seller.
(ix) The Contracts Management Agreement, executed by Seller.
(x) A certificate executed by Seller and the Principals
representing and warranting to Buyer that each of the representations
and warranties of Sellers and the Principals 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
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Date as if made on the Closing Date (the "Seller's Closing
Certificate");
(xi) An opinion of counsel from Seller's counsel, dated the
Closing Date, in the form of Exhibit H.
(xii) 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
the representations and warranties of Seller and the Principals, (3)
evidencing the performance by Seller and the Principals of, or the
compliance by Seller and the Principals with, any covenant or
obligation required to be performed or complied with by Seller or the
Principals, or (4) otherwise facilitating the consummation or
performance of any of the Contemplated Transactions.
(b) Buyer shall deliver or cause to be delivered to Seller (or to
such other Persons designated below):
(i) The Purchase Price.
(ii) Any compensation required to be paid at Closing pursuant
to the terms of the Non-Competition Agreements or the Employment
Agreements.
(iii) The Assumption Agreement, executed by Buyer.
(iv) The Employment Agreements, executed by Buyer.
(v) The Non-Competition Agreements, executed by Buyer.
(vi) The Intellectual Property Assignment, executed by Buyer.
(vii) The Indemnity Escrow Agreement, executed by Buyer.
(viii) The V2000 Escrow Agreement, executed by Buyer.
(ix) The Consents Escrow Agreement, executed by Buyer.
(x) The CLEC Management Agreement, executed by Buyer.
(xi) The Contracts Management Agreement, executed by Buyer.
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(xii) A certificate executed by Buyer representing and
warranting to Seller and the Principals 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").
(xiii) An opinion of counsel, dated the Closing Date, in the form
of Exhibit I.
(xiv) 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.
2.10 Name Change. On the Closing Date, Seller will amend its Articles of
-----------
Incorporation to change its name to any name other than "Correctional
Communications Corporation" or any name similar thereto, shall otherwise cease
using the name "Correctional Communications Corporation" and/or any name similar
thereto in any capacity, and will assign to Buyer all rights in and to the name
"Correctional Communications Corporation". However, at Closing, Buyer shall
grant Seller a limited license to use such name to collect the Accounts
Receivable owing to it from OAN Services, Inc. and with respect to the operation
of the CLEC Business in accordance with Section 2.11 below.
2.11 CLEC Management Agreement. On the Closing Date, Seller and Buyer
-------------------------
hereby agree to execute and deliver to each other the CLEC Management Agreement
in the form attached hereto as Exhibit K (the "CLEC Management Agreement"). The
CLEC Management Agreement shall provide, inter alia, (i) that Buyer shall be
----- ----
appointed as the exclusive manager of CLEC Business for a period of ten (10)
years, with two (2) options of ten (10) years each to extend the term thereof;
(ii) Buyer shall have the right to manage and operate the CLEC Business in its
sole and absolute discretion; (iii) Seller shall pay to Buyer an annual
management fee equal to all net income of the CLEC Business less One Hundred
Dollars ($100.00); and (iv) Buyer shall have the right, at any time after
December 31, 1998 to terminate the CLEC Management Agreement and acquire (a) all
of Seller's right, title and interest in and to the CLEC Business, or (b) all of
the issued and outstanding shares of capital stock of Seller, in either event
for an acquisition price of One Hundred Dollars ($100.00), in which event Seller
will cooperate with Buyer in effectuating such transfer, including applying for
and obtaining all necessary or appropriate Governmental Authorizations.
Notwithstanding the foregoing, in the event that Buyer elects to
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acquire all of the issued and outstanding shares of capital stock of Seller
pursuant to this Section 2.11, Seller shall be permitted to transfer to another
Person all assets and rights then owned by Seller other than the CLEC Business.
2.12 Post-Closing Operations of Seller.
---------------------------------
(a) All debts, liabilities and obligations of Seller of any kind,
whether absolute, accrued, contingent or otherwise, whether known or unknown,
and whether due or to become due at any time, that are Retained Liabilities
shall be paid by Seller promptly when due, provided that nothing herein shall
prevent Seller from challenging the correctness or validity of any Retained
Liability in good faith and by appropriate proceedings.
(b) Seller shall collect all sums and amounts due Seller, whether
evidenced in writing, on account, designated as a receivable or otherwise, only
in its usual, regular and ordinary manner, on a basis consistent with past
practices and otherwise in the Ordinary Course of Business, and Seller shall not
accelerate collection of any Accounts Receivable.
2.13 Satisfaction of V2000 Conditions Precedent.
------------------------------------------
Notwithstanding that Buyer (through John O'Keefe) shall control the
process of satisfaction of the "V2000 Conditions Precedent" (as such term is
defined in the V2000 Escrow Agreement), all costs of satisfying the V2000
Conditions Precedent shall be at Seller's expense (and Seller shall reimburse
Buyer for all such costs within 30 days after request therefor).
Notwithstanding the foregoing, (i) Buyer shall engage a full-time employee at
Buyer's expense for the purpose of replacing Gabe Krupka, (ii) John O'Keefe
shall engage on behalf of Buyer a full-time consultant or employee at Seller's
expense to assist with code writing for this purpose, and (iii) if John O'Keefe
determines that Sam Ismail's time as an employee of Buyer is being diverted from
satisfaction of the V2000 Conditions Precedent, Mr. O'Keefe shall have the right
to cause Buyer to engage a full-time consultant or employee at Buyer's expense
to assist in the satisfaction of the V2000 Conditions Precedent (provided that
in the event such consultant's or employee's salary exceeds $95,000 per annum,
any excess shall be reimbursed to Buyer by Seller).
2.14 MCI Receivable.
--------------
Among the assets included in the Company Assets is an account
receivable due from MCI Communications Corporation pursuant to the MCI Master
Software License Agreement between MCI Communications Corporation and Seller in
the amount of $86,000. The parties agree that in the event Buyer collects all
or any part of said account receivable, Buyer shall, as soon as practicable
thereafter, pay to Seller the amount so collected, or in the event Buyer
terminates said Master Software License Agreement without collecting said
account receivable, Buyer shall as soon as
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practicable thereafter, pay to Seller the sum of $86,000; provided, however,
that in no event shall Seller receive more than $86,000 pursuant to the terms of
this paragraph.
2.15 Rate Increase, On or Before January 1, 1998.
-------------------------------------------
Buyer agrees to implement in the operation of the Company Assets
Seller's proposed $0.95 increase per call on Intra Lata toll calls (excluding
local calls). However, if Buyer shall reasonably determine that such increase
has a material adverse effect on Buyer's business, Buyer may reduce or rescind
such increases.
3. REPRESENTATIONS AND WARRANTIES OF SELLER AND THE PRINCIPALS
Seller and the Principals each, to the extent herein provided, represents
and warrants to Buyer as follows:
3.1 Organization and Good Standing. Seller is a corporation duly
------------------------------
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and corporate 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. Seller is duly qualified to do business as a
foreign corporation and is in good standing under the laws of all jurisdictions
in which the nature of the activities conducted by it requires such
qualification, except for any jurisdiction where the failure to so qualify would
not have a material adverse effect on the Company Assets. Seller does not have
and never has had any Subsidiaries. Seller'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 San Ramon and
Dublin, California and, except as set forth on Schedule 3.1, Seller has not had
any other offices, other corporate names or done business under 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 Seller and the Principals, enforceable against Seller and the
Principals in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws from time to time in effect which affect the enforcement of
creditor's rights generally or general principles of equity. Upon the execution
and delivery by Seller and the Principals, as applicable, of the Employment
Agreements, the Non-Competition Agreements, the Intellectual Property
Assignment, the Escrow Agreements, the CLEC Management Agreement, the Contracts
Management Agreement and Seller's Closing Certificate (collectively, "Seller's
Closing Documents"), Seller's Closing Documents will constitute the legal,
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valid, and binding obligations of all parties thereto (other than Buyer)
enforceable against each of them in accordance with their respective terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect which
affect the enforcement of creditor's rights generally or general principles of
equity. Seller and the Principals each have the absolute and unrestricted right,
power, authority, and capacity to execute and deliver this Agreement and
Seller's Closing Documents to which each is a party and to perform their
respective obligations under this Agreement and Seller's Closing Documents to
which each is a party.
(b) Except for any filings or approvals specifically listed on
Schedule 3.2(b), neither the execution, delivery or performance of this
Agreement, nor the consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice, or lapse of
time, or both):
3.(xli) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of Seller, (B) any
resolution adopted by the board of directors or the shareholders of
Seller, (C) any duty or obligation owed by Seller to any Person, or
(D) any Legal Requirement, any Governmental Authorization or any
Order to which Seller or any of the Principals, or any of the Company
Assets, may be subject; or
(ii) contravene, conflict with, or result in a violation or
breach of any provision of, or, to the Knowledge of Seller and the
Principals, 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, terminate, or modify, any Contract.
Except for any filings or approvals in order to comply with Legal Requirements,
including obtaining appropriate Governmental Authorizations (as contemplated in
Section 6.1), and except as disclosed on Schedule 3.2, Seller 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.
3.3 Options. There are no options, warrants, rights of first refusal,
-------
rights of first negotiation or rights of first offer, or other rights to acquire
all or any portion of the Company Assets.
3.4 Financial Statements. Seller has delivered to Buyer Seller's audited
--------------------
financial statements for the fiscal years ended December 31, 1994, 1995 and
1996, respectively (collectively, the "Financial Statements"). All Financial
Statements (including, without limitation, the notes thereto) fairly present the
financial condition, results of operations, assets, liabilities (whether
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absolute, accrued, contingent or otherwise) and cash flow of Seller as at the
respective dates of and for the periods referred to in such financial
statements, all in accordance with GAAP. The Financial Statements 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 Seller are required by GAAP to be
included in the Financial Statements.
3.5 Books and Records. The books of account, ledgers, financial data and
-----------------
other records of Seller, 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 Company Assets.
--------------
(a) Company Assets. On the Closing Date, Seller shall convey good
--------------
and marketable title, free and clear of any Encumbrances (other than
Encumbrances evidenced by Contracts which are assumed by Buyer under the
Assumption Agreement), to all of the Company Assets, including, without
limitation:
(i) all right, title and interest of Seller in and under the
Pay Telephone Location Agreements, including, without limitation, the
Pay Telephone Location Agreements listed on Schedule 3.15(a)(1)
(subject to obtaining any Consents required thereunder necessary to
effectuate an assignment thereof to Buyer, such Consents being
specifically listed on Schedule 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, including, without limitation, the
Installed Lines listed on Schedule 3.6(a)(ii);
(iii) all right, title and interest of Seller in and under the
Service Agreements, including, without limitation, the Service
Agreements listed on Schedule 3.15(a)(ii);
(iv) all right, title and interest of Seller in and under the
New Contracts;
(v) all uninstalled Telephones, parts, hardware, furniture,
fixtures and equipment, including, without limitation, each of those
Telephones, parts, hardware, furniture, fixtures and equipment having
a value as of the Closing Date in excess of $1,000.00 and which are
listed on Schedule 3.6(a)(v) (subject to turn
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over of inventory in the Ordinary Course of Business prior to
Closing);
(vi) all automobiles, trucks and other vehicles, if any,
including, without limitation, those automobiles, trucks and other
vehicles listed on Schedule 3.6(a)(vi);
(vii) all prepaid obligations and deposits, and all shares of
capital stock or other ownership interests in any entity owned by
Seller, including, without limitation, those items listed on Schedule
3.6(a)(vii);
(viii) the name "Correctional Communications Corporation" and all
trademarks, trade names, service marks and goodwill associated with
the Company Assets;
(ix) all right, title and interest of Seller in and under all
real and personal property leases, including, without limitation, the
real and personal property leases listed on Schedule 3.15(a)(iii)
(subject to obtaining any Consents required thereunder necessary to
effectuate an assignment thereof to Buyer, such Consents being
specifically listed on Schedule 3.15(b), and provided that Buyer may
waive the requirement that such Consents be obtained and may accept
an assignment without such Consents);
(x) all other personalty or Intellectual Property Assets of
any kind used by Seller in the operation of its business, including,
without limitation, each of those items having a value in excess of
$1,000 listed on Exhibit A to the Intellectual Property Assignment
(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 Schedule
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, including,
without limitation, those tariffs and Governmental Authorizations
listed on Schedule 3.12 (subject to obtaining any Consents required
thereunder necessary to effectuate an assignment thereof to Buyer,
such Consents being specifically listed on Schedule 3.15(b), and
provided that Buyer may waive the requirement that such Consents be
obtained and may accept an assignment without such Consents).
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3.7 Accounts Receivable.
-------------------
(a) All Accounts Receivable that are reflected in the Financial
Statements or in the books and records at the Closing Date 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 Financial Statements have been calculated consistent with past practices.
Except as set forth in Schedule 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.
(b) From and after the Balance Sheet Date through the Closing Date:
(i) Seller has collected, and shall collect, all sums and amounts due Seller,
whether evidenced in writing, on account, designated as a receivable or
otherwise, 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)
Seller has not accelerated, and will not accelerate, collection of any such
receivables.
3.8 Relationships with Related Persons. Except as set forth in Schedule
----------------------------------
3.8 hereof, neither the Principals nor any Person related or affiliated with any
of the Principals or Seller is a party to any Contract with, or has any claim or
right against, Seller. Except as set forth in Schedule 3.8 hereof, neither the
Principals nor any Person related or affiliated with any of the Principals owns,
directly or indirectly, any direct or indirect beneficial interest in any Person
that is a competitor, customer or supplier of Seller, that otherwise has any
business dealing with Seller or that is engages the same or similar business as
Seller.
3.9 Taxes.
-----
(a) Seller 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 all applicable Legal Requirements. Seller has
delivered to Buyer copies of all Tax Returns, filed by or with respect to Seller
since 1994. Seller has paid, or has made adequate provision for the payment of,
all Taxes that have or may have become due pursuant to such Tax Returns or
otherwise, or pursuant to any assessment received by Seller, except such Taxes,
if any, as are listed in Schedule 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 Financial Statements. To the Knowledge of Seller and
the Principals, all Tax Returns filed by (or that include on a consolidated
basis) Seller are true, correct and complete in all material respects.
(b) To the Knowledge of Seller and the Principals, there exists no
proposed tax assessment against Seller or the
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Company Assets except as disclosed in the Financial Statements or in Schedule
3.9 hereof. All Taxes that Seller is or 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 Schedule 3.10,
--------------------------
since the Balance Sheet Date there has not been any material adverse change in
the business, client relations, operations or assets of Seller, and, to the
Knowledge of Seller and the Principals, 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, to the best
knowledge of Seller and the Principals, threatened terminations, cancellations
or limitations of, or any modification or change in (i) the current business
relationship of Seller with any customer or group of customers whose business is
material to the operation of Seller's business; or (ii) the current business
relationship of Seller with any supplier, and Seller and the Principals have no
reason to believe that all 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; and, to the Knowledge of
Seller and the Principals, there exists no other condition or state of facts or
circumstances which would materially adversely affect Seller's business or
operations or prevent Buyer from conducting such business and operations after
the Closing on a basis not materially adversely less favorable to Buyer than
that of which it has heretofore been conducted by Seller.
3.11 Employee Benefits. Except as set forth on Schedule 3.11, Seller
-----------------
maintains no Employee Benefit Plans. Each Employee Benefit Plan set forth on
Schedule 3.11 has been operated in compliance with ERISA, applicable tax
qualification requirements and all other applicable Legal Requirements.
3.12 Compliance with Legal Requirements; Governmental Authorizations and
-------------------------------------------------------------------
and Orders.
- ----------
(a) (i) To the Knowledge of Sellers and the Principals, Seller 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, or both) may constitute or result in a
material violation by Seller of, or a failure on the part of Seller to comply
with, any Legal Requirement, Governmental Authorization or Order.
(b) Schedule 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 operations of, Seller. Each Governmental Authorization of
Seller is valid and in full force and
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effect. The Governmental Authorizations listed in Schedule 3.12 collectively
constitute all of the Governmental Authorizations necessary to permit Seller (i)
to lawfully conduct and operate the business of Seller in the manner such
business is currently conducted and operated, and (ii) to own and use the assets
used in the operation of Seller's business in the manner in which the same are
used. A true and complete copy of each Governmental Authorization listed in
Schedule 3.12 has been delivered to Buyer.
3.13 Legal Proceedings.
-----------------
(a) Except as set forth in Schedule 3.13(a) hereof, Seller has not
received notice of any pending Proceeding (i) that has been commenced by or
against Seller or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, Seller; 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
Knowledge of Seller and the Principals, no such Proceeding has been Threatened
and, to the Knowledge of Seller and the Principals, 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
Schedule 3.13(a) hereof, either individually or in the aggregate, will not have
a material adverse effect on the business, operations or assets of Seller.
(b) All Proceedings in which Seller has been named or otherwise
involved since 1993 are listed on Schedule 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 Schedule 3.13(b).
3.14 Absence of Certain Changes and Events. Except as set forth in
-------------------------------------
Schedule 3.14 hereof, since the Balance Sheet Date, Seller 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
Seller, whether or not covered by insurance, materially and adversely affecting
the properties, assets, business or financial condition of Seller 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
Seller of at least $10,000;
(c) sale (other than sales in the Ordinary Course of Business),
lease, or other disposition of any material asset or property of Seller or
mortgage, pledge, or imposition of any lien or other encumbrance on any material
asset or property of Seller;
(d) material change in the accounting methods used by Seller;
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(e) material adverse change in the financial condition, assets,
liabilities or business of Seller;
(f) change in the method of collecting Accounts Receivable or
acceleration in the collection of Accounts Receivable; or
(g) failure to pay obligations, liabilities or expenses incurred in
connection with the operations and business of Seller on a basis consistent with
past practices (and otherwise in the Ordinary Course of Business).
3.15 Contracts; No Defaults.
----------------------
(a) Seller has delivered to Buyer true and complete copies, and
Schedules 3.15(a)(i) - (v) hereof contain a complete and accurate list, of the
following: (i) each Pay Telephone Location Agreement; (ii) each Service
Agreement; (iii) each real or personal property 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; (iv) each license
agreement or other Contract with respect to any Intellectual Property Assets;
(v) each Contract not otherwise listed in Schedules 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, (2) involves
performance of services or delivery of goods or materials by Seller of an amount
or value in excess of $1,000, (3) involves expenditures or receipts by Seller in
excess of $1,000, or (4) governs the employment relationship between Seller and
any Person. Additionally, Schedule 3.15(a)(ii) separately classifies the Service
Agreements under the sub-categories Long Distance Service Agreements, Billing
and Collection Agreements, Parts and Supplies Agreements and Operator Service
Agreements.
(b) Except as set forth in Schedule 3.15(b) hereof, with respect to
each Contract identified or required to be identified in Schedule 3.15(a) hereof
(and/or any other material Contract by which Seller is bound even if not so
identified):
(i) such Contract is in full force and effect against all
parties thereto, is valid and enforceable in accordance with its
terms against all parties thereto, and is fully transferable and/or
assignable to Buyer without the Consent of any Person;
(ii) Seller is, and at all times since the later of 1993 or the
effective date of such Contract, has been, in compliance with all
material terms and requirements of such Contract;
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(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 effective date of such Contract, has been, in compliance
with all material terms and requirements of such Contract;
(iv) the Contemplated Transactions will not and, to the
Knowledge of the Principals and Seller, no other event has occurred
or circumstance exists that (with or without notice, or lapse of
time, or both) may, contravene, conflict with, or result in a
violation, or breach of, or give Seller or any 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;
(v) neither Seller nor the Principals have given to or
received from any other Person, at any time since the later of 1993
or the effective date of such Contract, any notice or other
communication (whether oral or written) regarding any actual,
alleged, possible, or potential material violation or breach by
Seller of, or default by Seller under, such Contract;
(vi) there are no renegotiations of, attempts to renegotiate,
or outstanding rights to renegotiate any material amounts paid or
payable to Seller under such Contracts with any Person (and no such
Person has made written demand for such renegotiation);
(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 any other Person, or any
consideration having been paid or promised, that is or would be in
violation of any Legal Requirement; and
(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 or the
terms thereof.
3.16 Insurance. Seller has delivered or made available to Buyer true and
---------
complete copies of all policies of insurance to which Seller is a party or under
which Seller is covered. All such policies: (i) are listed on Schedule 3.16;
(ii) are valid, outstanding and enforceable against both Seller and the insurer;
(iii) taken together, provide in the judgment of Seller and the Principals
adequate insurance coverage for the assets and the operations of Seller; (iv) to
the Knowledge of Seller and the Principals, are sufficient for compliance with
all Legal Requirements and Contracts to which Seller is a party or by which
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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 Knowledge of Seller and the Principals, Seller and the
Company Assets are, and at all 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 Knowledge of Seller and the Principals, Seller 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, pollutants,
and/or toxic substances, including, without limitation, asbestos and
polychlorinated biphenyls as those terms are defined pursuant to Environmental
Laws (collectively, "Hazardous Substances"), except in full compliance with all
applicable Environmental Laws.
(c) To the Knowledge of Seller and the Principals, neither the
Principals nor Seller has any basis to expect, nor have any 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 Seller
has or had any interest.
3.18 Employees.
---------
(a) Schedule 3.18 hereof contains a complete and accurate list of
the following information for each employee of Seller as of the date hereof and
the Closing Date: name; job title or functional position; current compensation
paid or payable and any change in compensation since January 1, 1997 (including,
without limitation, base salary and all bonuses, commissions and other
contingent compensation); accrued vacation time and vacation pay; service
credited for purposes of vesting and eligibility to participate under any
Employee Benefit Plan; severance pay; and any other material benefit.
(b) To the Knowledge of the Principals and Seller, no employee,
consultant or independent contractor of Seller 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 that in any way adversely affects or will adversely affect the
conduct of
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Seller's business (either before or after the consummation of the Contemplated
Transactions).
3.19 Labor Relations; Compliance.
---------------------------
Since formation, Seller has not been nor is it currently a party to
any collective bargaining or other labor Contract. Except as disclosed in
Schedule 3.19, since formation, there has not been, there is not presently
pending or existing, and to the best knowledge of Seller and the Principals,
there is not Threatened, (a) any strike, slowdown, picketing, work stoppage or
employee grievance process; (b) any Proceeding against or affecting Seller
relating to the alleged violation of any Legal Requirement pertaining to labor
relations or employment matters, including, without limitation, 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 Seller or its premises; or (c) any application for certification of a
collective bargaining agent.
3.20 Intellectual Property. The representations and warranties contained
---------------------
in Section 3 of the Intellectual Property Assignment are hereby incorporated
herein and made a part hereof by this reference and are hereby deemed made by
the Principals.
3.21 Certain Payments. Neither Seller, nor either Principal nor any
----------------
Representative of Seller 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
Seller; (ii) to pay for favorable treatment for business secured on behalf of
Seller; (iii) to obtain special concessions or for special concessions already
obtained, for or in respect of Seller; (iv) in violation of any Legal
Requirement; or (b) established or maintained any fund or asset that has not
been recorded in the books and records of Seller.
3.22 Real Property. Seller has good and indefeasible leasehold title to
-------------
the real properties leased by Seller, free and clear of any Encumbrance
(including, without limitation, mechanic's, materialman's or other statutory
liens). Seller owns no real property. There are no parties in possession of any
portion of any real property leased by Seller (each a "Real Property"), as
sublessees, trespassers or otherwise, other than Seller. All equipment used in
connection with Seller's business and operations, and which is material to the
business or operations of Seller, is in good operational condition and repair,
subject only to normal wear and tear, free of any latent or patent structural
defects. To the Knowledge of Seller and the Principals, all of the buildings,
fixtures and other improvements on each Real Property are structurally sound, in
good operating condition and
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repair, free of any latent or patent defects, and have been maintained in
accordance with industry practices.
3.23 Banks. Schedule 3.23 sets forth (i) the name of each bank, trust
-----
company, stock and other broker with which Seller has an account, credit line,
or safe deposit box or vault or maintains any relations; (ii) the names of all
persons authorized to draw thereon or to have access to any safe deposit box or
vault; (iii) the purpose of each such account, safe deposit box or vault; and
(iv) the names of all persons authorized by proxies, powers of attorney or like
instruments, to act on behalf of Seller in matters concerning any of its
business or affairs.
3.24 Disclosure. To the Knowledge of Seller and the Principals, no
----------
representation or warranty of Seller or the Principals 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.
3.25 Brokers or Finders. Seller, the Principals and their respective
------------------
Representatives 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 or the Contemplated
Transactions.
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 foreign
corporation and is in good standing under the laws of all jurisdictions 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,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws from time to time in effect which
affect the enforcement of creditor's rights generally or general principles of
equity. Upon the execution and delivery by Buyer of the Employment Agreements,
the Non-Competition Agreements, the Assumption Agreement, the Escrow Agreements,
the Intellectual Property Assignment, the CLEC Management Agreement, the
Contracts Management Agreement and Buyer's Closing Certificate (collectively,
the "Buyer's Closing Documents"), Buyers Closing Documents will constitute the
legal, valid, and binding obligations of Buyer, enforceable against Buyer in
accordance with their respective terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws
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<PAGE>
from time to time in effect which affect the enforcement of creditor's rights
generally or general principles of equity. Buyer has the absolute and
unrestricted right, power, and authority to execute and deliver this Agreement
and Buyer's Closing Documents, and to perform its obligations under this
Agreement and 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, delivery or performance
of this Agreement, nor the consummation or performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice,
or lapse of time, or both) contravene, conflict with, or result in a violation
of (A) any provision of the Organizational Documents of Buyer, (B) any
resolution adopted by the board of directors or the stockholders of Buyer, (C)
any duty or obligation owed by Buyer to any Person, or (D) any Legal
Requirement, any Governmental Authorization or any Order to which Buyer may be
subject. 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.
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. Buyer and its Representatives 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 the Contemplated Transactions.
5. COVENANTS OF SELLER PRIOR TO THE CLOSING DATE
5.1 Required Consents. As promptly as practicable after the date of this
-----------------
Agreement, Seller will use its good faith efforts to make all filings and
Consents required by Legal Requirements to be made by it 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
Consents 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).
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5.2 Current Information and Access.
------------------------------
(a) During the period from the date of this Agreement to the
Closing Date, Seller 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 and business of Seller. Seller shall
promptly notify Buyer of any material change in the normal course of its
business or in the operation of its properties (including, without limitation,
the Company Assets) and of any governmental complaints, investigations, or
hearings (or communications indicating that the same may be contemplated), or
the institution or the threat of any Proceeding involving Seller or any of the
Company Assets, and will keep Buyer fully informed with respect to such events.
(b) Between the date of this Agreement and the Closing Date, Seller
will, and will cause its Representatives during normal business hours, (a) to
afford Buyer and its Representatives and advisors (collectively, "Buyer's
Advisors") full and free access to all of Seller's employees and personnel and
to all Contracts, books and records, and other documents and data, (b) to
furnish Buyer and Buyer's Advisors with copies of all such Contracts, books and
records, and other existing documents and data as Buyer or any of Buyer's
Advisors may reasonably request, and (c) to furnish Buyer and Buyer's Advisors
with such additional financial, operating, and other data and information as
Buyer or any of Buyer's Advisors may reasonably request.
(c) Prior to the Closing, Seller shall cause audited financial
statements to be prepared for each of the last three completed fiscal years of
Seller. Said financial statements shall be a certified public accountant
reasonably acceptable to Buyer. Buyer agrees to reimburse Seller for Seller's
reasonable expenses incurred in complying with the terms of this paragraph.
(d) In the event the Agreement is terminated as provided in Section
9.1, Buyer agrees to return to Seller all Contracts, books, records, documents,
data and other information which were provided to Buyer by Seller pursuant to
this Section 5.2, including all copies thereof and extracts therefrom.
5.3 Operations Prior to Closing Date.
--------------------------------
(a) In addition to Seller's other obligations under this Agreement,
between the date of this Agreement and the Closing Date, Seller will do each of
the following, and Seller also represents that from the Balance Sheet Date to
the date of this Agreement Seller has done each of the following:
(i) conduct the business of Seller only in the usual, regular
and ordinary manner, on a basis consistent with past practice;
maintain Seller's books, accounts and records in the usual, regular
and ordinary manner, on a basis consistent with past practices;
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maintain and comply with the terms of all licenses, permits and other
Legal Requirements; and otherwise conduct the business of Seller only
in the Ordinary Course of Business and in compliance with all Legal
Requirements;
(ii) use its best efforts to preserve intact the current
organization of Seller, keep available the services of the current
officers, employees, and agents of the current organization of
Seller, and maintain the relations and good will with all suppliers,
customers, landlords, creditors, employees, agents, and others having
business relationships with Seller;
(iii) conduct the business and affairs of Seller 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 in a timely manner all of
Seller's obligations under the Contracts;
(v) pay all expenses and accounts payable incurred in
connection with the operation of Seller's business in the usual,
regular and ordinary manner on a basis consistent with past practice;
(vi) maintain in full force and effect all policies of
insurance now in effect or renewals or appropriate replacements
thereof, and give all notices and present all claims under all
policies of insurance in due and timely fashion; and
(vii) duly and timely file all Tax Returns required to be filed
by it and promptly pay all Taxes which shall be due and payable;
Seller shall not enter into any agreement, waiver or arrangement
providing for an extension of time with respect to the filing of any
Tax Return or the payment or assessment of any Tax; and Seller shall
withhold from each payment to each of its employees the amount of all
taxes or other sums (including, but not limited to, United States
federal income taxes and any applicable state or local income taxes
or Federal Insurance Contribution Act taxes) required to be withheld
therefrom and will pay the same to the proper tax-receiving officers
prior to their respective due dates.
(b) Except as set forth in Schedule 3.14, Seller 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 Seller also
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represents that, from the Balance Sheet Date to the date of this Agreement,
Seller has not done any of the following:
(i) (a) increase the compensation payable or to become
payable by Seller to any officer or employee thereof, or increase any
the benefits under any Employee Benefit Plan, or increase any payment
plan, payment or arrangement made to, for or with any employees; or
(b) commit itself (1) to any additional Employee Benefit Plans, or to
any employment or consulting agreement with or for the benefit of any
Person, or (2) to amend any of such plans or any of such agreements
in existence on the date hereof;
(ii) except in the Ordinary Course of Business, permit any of
the Company Assets to be subjected to any Encumbrance;
(iii) sell, transfer or otherwise dispose of any Company Assets
except in the Ordinary Course of Business;
(iv) write off as uncollectible any note or any of the
Accounts Receivable, except write-offs in the Ordinary Course of
Business charged to applicable reserves, which individually and in
the aggregate are not material to Seller;
(v) accelerate the collection of any Accounts Receivable or
other amounts payable to Seller;
(vi) cancel or waive any claims or rights of substantial
value, or settle or compromise any claim or Proceeding existing on or
commenced after the date hereof; or
(vii) 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 Principals and Seller will promptly notify Buyer in writing if the
Principals or Seller becomes aware of any fact or condition that causes or
constitutes a Breach of any of representations and warranties of the Principals
or Seller as of the date of this Agreement and before Closing, or if the
Principals or Seller 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,
Seller will promptly notify Buyer of the occurrence of any Breach of any
covenant of Seller in this Section 5 or of the occurrence of any event that may
make the satisfaction of the conditions in Section 7 impossible or unlikely.
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5.5 No Negotiation. Until such time, if ever, as this Agreement is
--------------
terminated pursuant to Section 9, the Principals and Seller 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 of
Seller other than in the Ordinary Course of Business, or any of the capital
stock of Seller, or any merger, consolidation, business combination, or similar
transaction involving Seller (each, a "Major Transaction"). Notwithstanding the
foregoing, Seller shall be permitted to receive unsolicited offers from any
Person regarding a proposed Major Transaction provided that (i) neither the
Principals, Seller nor any of their respective Representatives shall have,
directly or indirectly, solicited, initiated or encouraged such offer, and (ii)
Seller shall have notified Buyer in writing of the receipt of such offer
promptly, but in any event within two days, after the receipt thereof.
5.6 Confidentiality. None of Seller, the Principals nor any
---------------
Representative of Seller or the Principals will disclose or use any information
obtained in the course of the negotiation of this Agreement, except (i) in
connection with the consummation of the Contemplated Transactions; (ii) as
required by any Legal Requirement; (iii) as may be necessary to the prosecution
or defense of any claim or suit brought to enforce rights under this Agreement;
or (iv) to the extent that the same may become public other than through the
action of Seller, the Principals or any of their respective Representatives. If
the Contemplated Transactions are not consummated and this Agreement terminates,
Seller, the Principals and their respective Representatives promptly will return
all copies of documents, contracts or records and other properties furnished
pursuant to this Agreement.
5.51 Treatment of Certain Matters and Adjustments.
--------------------------------------------
(a) Seller shall discharge on or prior to Closing, and Buyer will
acquire the Company Assets free and clear of, all loans, lines of credit,
installment and 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 Taxes related to the Company Assets for the
period up to the Closing Date.
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5.8 Seller's Employees.
------------------
(a) Seller shall use reasonable efforts to keep available to Buyer
the services of Seller's employees (although nothing herein shall be deemed to
require or obligate Buyer to employ or retain any such employees), and to
preserve for Buyer the goodwill of customers, clients and all others having
business relations with Seller.
(b) Seller shall make available to Buyer true and complete copies
of (i) all of Seller's employee books and records (subject to the prior written
consent of the affected employee) as soon as practical after Buyer's reasonable
request therefor, and (ii) all of Seller's books and records relevant to any
claim or Proceeding against Buyer Threatened by any third party in connection
with or arising out of the operation of the Seller's business or the Company
Assets as soon as practicable after Buyer's request therefor.
(c) Seller shall not enter into any union, labor or collective
bargaining agreement or contract or employment contract pertaining to or
affecting any of the Company Assets or the conduct of business of Seller as
presently being conducted, whether or not with a union or other bargaining agent
representing employees of Seller or with an employee directly. Seller shall be
solely responsible for and shall pay to its employees prior to Closing all
accrued salaries, severance pay, vacation pay, sick pay, back pay and other
benefits accrued through or owing as of the Closing. Seller shall also remain
responsible for and shall discharge on or prior to Closing, all bonuses and
other such compensation to its employees or others which may vest or become
payable on the sale of or change of ownership or control of the Company Assets,
including, without limitation, any such compensation arising out of or triggered
by the Contemplated Transactions.
6. COVENANTS OF BUYER PRIOR TO THE CLOSING DATE
6.1 Required Consents. As promptly as practicable after the date of this
-----------------
Agreement, Buyer will use its good faith effort to make all filings and seek all
Consents 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 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 Seller 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
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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 same period, Buyer will promptly notify
Seller of the occurrence of any Breach of any covenant of Buyer in this 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 Confidentiality. Neither Buyer nor any Representative of Buyer will
---------------
disclose or use any information obtained in the course of the negotiation of
this Agreement or otherwise or set forth in any Exhibit or Schedule hereto,
except (i) in connection with the consummation of the Contemplated Transactions;
(ii) as required by any Legal Requirement; (iii) as may be necessary to the
prosecution or defense of any claim or suit brought to enforce rights under this
Agreement; or (iv) to the extent that the same may become public other than
through the action of Buyer or any of its Representatives. If Contemplated
Transactions are not consummated and this Agreement terminates, Buyer and its
Representatives promptly will return all copies of documents, contracts or
records and other properties furnished pursuant to this Agreement.
7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Company Assets, consummate the
Contemplated Transactions 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 Principals or Seller in this Agreement 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 Principals or
Seller are required to perform or to comply with pursuant to this Agreement at
or prior to the Closing 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.
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
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Transactions must have been obtained and must be in full force and effect. 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 of, 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, or both), 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
-----------------------
Seller's financial condition, business, property or prospects, nor shall have
there occurred any change in the business condition of Seller's customers or
suppliers, nor any change in the regulatory or competitive environment, which in
the reasonable judgment of Buyer materially adversely affects Seller, the
Company Assets, the business of Seller or the condition (financial or otherwise)
of Seller.
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 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, consummate the Contemplated
Transactions 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 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 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
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
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payments required to be made by Buyer pursuant to Section 2.4 must have been
made.
In the event that each and every one of these conditions precedent to the
obligations of Seller shall not have been satisfied prior to or at the Closing,
then Seller may (but shall not be obligated to) waive such unsatisfied condition
or extend the Closing Date to allow additional time for such condition to be
satisfied. Any such waiver or extension shall be without prejudice to any other
rights and remedies Seller may have hereunder or at law or in equity.
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 or any of the Principals, 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.
(iii) by Buyer, if any of the conditions in Section 7 have not
been satisfied on or before September 1, 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 September 1,
1997;
(iv) by Seller: if any of the conditions in Section 8 have not
been satisfied on or before September 1, 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
September 1, 1997; and
(v) by mutual written 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 shall survive and nothing herein shall
relieve any party from liability for any Breach 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.
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10. INDEMNIFICATION; REMEDIES
10.1 Survival. All representations, warranties, covenants, and obligations
--------
in this Agreement, the documents, instruments, agreements and certificates
delivered pursuant to Section 2.9(a) and (b), and any other document,
instrument, agreement or certificate delivered pursuant to this Agreement
(including, without limitation, Buyer's Closing Documents and Seller's Closing
Documents), shall survive the Closing for the following periods after the
Closing Date:
(a) The representations and warranties set forth in Sections 3.9,
3.11 and 3.17 shall survive until one day after the expiration of the applicable
statute of limitations (including all extensions); and
(b) All other representations and warranties of Buyer, Seller or the
Principals shall survive for a period of fifteen (15) months after the Closing
Date.
10.2 Indemnification and Payment of Damages by Seller and the Principals.
-------------------------------------------------------------------
(a) Seller and the Principals will each, jointly and severally
(subject to the terms of subparagraph (i) below), indemnify, defend and hold
harmless Buyer and its Representatives, stockholders, controlling persons and
affiliates (collectively, "Buyer's Indemnified Persons") for, and will pay to
Buyer's Indemnified Persons the amount of, any loss, liability, claim, damage,
obligation or expense (including, without limitation, costs of investigation and
defense and reasonable attorneys' fees), whether or not involving a third-party
claim (collectively, "Damages"), arising or resulting, directly or indirectly,
from or in connection with:
(i) any Breach of any representation or warranty made by Seller
or any of the Principals in this Agreement or any document,
instrument, agreement or certificate delivered by Seller or any of the
Principals pursuant to this Agreement (including, without limitation,
Seller's Closing Documents); provided that the Principals' respective
indemnification obligations under this subclause (i) shall be joint
and several only until Buyer has recovered $1,000,000 in aggregate
Damages and, thereafter, the Principals' respective obligations under
this subclause (i) shall be several only;
(ii) any Breach by Seller or any of the Principals of any
covenant or obligation of Seller or any of the Principals in this
Agreement or in any Seller's Closing Documents or any other document
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delivered by Seller or the Principals pursuant to this Agreement;
(iii) regardless of whether it may also constitute a Breach under
Section 10.2 (a)(i) or (ii) above, with respect to or arising out of
the Retained Liabilities or the operation, management or ownership of
the Company Assets on or prior to the Closing Date (whether known or
unknown on the Closing Date), but excluding the Assumed Liabilities;
and
(iv) any noncompliance with any bulk transfer or bulk sales laws
applicable to the Contemplated Transactions.
(b) With respect to the aforesaid indemnification obligation, the
parties agree as follows:
(i) The Indemnity Escrow Fund has been established to provide
a source of funds to satisfy the aforesaid indemnification obligation, but the
liability of Sellers and the Principals for Damages is not limited to the
Indemnity Escrow Fund.
(ii) The aggregate amount of Damages that Buyer may recover from
Seller and the Principals with respect to indemnification under Section 10(a)(i)
above shall not exceed the aggregate sum of One Million Dollars ($1,000,000.00),
provided that the aggregate amount of Damages that Buyer may recover from Seller
and the Principals (a) with respect to indemnification under any of Sections
10(a)(ii), (iii) or (iv) above, or (b) in connection with any fraudulent
misrepresentation by Seller or the Principals, shall be unlimited.
(iii) Buyer shall not be entitled to assert any right to
indemnification hereunder against Seller or the Principals until Buyer's good
faith estimate of all Damages for which Seller and/or the Principals would
otherwise be required to indemnify Buyer hereunder exceeds the aggregate amount
of $200,000.00, whereupon Seller and the Principals shall thereafter pay to
Buyer all further Damages (subject to the limitation described in subpart (ii)
above).
10.3 Indemnification and Payment of Damages by Buyer. Buyer will
-----------------------------------------------
indemnify, defend and hold harmless Seller, the Principals and their respective
Representatives, stockholders, controlling persons and affiliates (collectively,
"Seller's Indemnified Persons") for, 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 document, instrument, agreement or certificate delivered by
Buyer pursuant to this
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Agreement (including, without limitation, Buyer's Closing Documents);
(b) any Breach by Buyer of any covenant or obligation of Buyer in
this Agreement; or
(c) all liabilities and obligations arising out of or relating to
events occurring after the Closing Date with respect to the Company Assets.
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
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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 commencement of any
Proceeding and the indemnifying party does not, within ten (10) 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 or delayed).
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 shall bear its respective expenses incurred in
connection with the preparation, execution, and performance of this Agreement
and the Contemplated Transactions, including, without limitation, all fees and
expenses of Representatives.
11.2 No Disclosure. Prior to Closing, no party or affiliate of a party
-------------
hereto shall issue or cause publication of any press release or other
announcement or public communications with respect to the Contemplated
Transactions, including, without limitation, a general announcement to such
party's employees, without the prior consent of the other parties hereto, which
consent shall 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 any Legal Requirement, 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
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disclosure necessary to obtain any consents required or deemed appropriate by
Buyer.
11.3 INTENTIONALLY OMITTED.
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 certified or 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:
Ameritel Pay Phones, Inc.
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:
Weissmann, Wolff, Bergman,
Coleman & Silverman, LLP
9665 Wilshire Boulevard
Suite 900
Beverly Hills, California 90212
Telephone: (310) 858-7888
Facsimile: (310) 550-7191
Attention: Daniel H. Wolff
and to:
Stutzman & Bromberg,
A Professional Corporation
Suite 2200
2323 Bryan Street
Dallas, Texas 75201
Telephone: (214) 969-4900
Facsimile: (214) 969-4999
Attention: Carl C. Christoff
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If to Company:
Correctional Communications Corporation
7567 Amador Valley Boulevard
Suite 210
Dublin, California 94568
Telephone: (510) 828-1206
Facsimile: (510) 828-5174
Attention: John O'Keefe
With a copy to:
Brobeck Phleger & Harrison LLP
550 South Hope Street
Los Angeles, California 90071-2604
Telephone: (213) 489-4060
Facsimile: (213) 239-1324
Attention: V. Joseph Stubbs
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
California, County of Los Angeles, or, if it has or may acquire jurisdiction, in
the United States District Court for the Central District of California, 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 each 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 applicable except in the specific instance for which it
is given; and (c) no notice to
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or demand on one party will be deemed to be a waiver of any obligation of such
party or of the 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, along with other
---------------------------------
documents, instruments and agreements to be entered into in connection with the
Contemplated Transactions, supersede all prior agreements and understandings
between the parties with respect to its subject matter, and constitute 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 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 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
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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, the respective rights, obligations and
-------------
remedies of the parties hereunder, the interpretation hereof and all disputes,
controversies and claims arising out of or related to this Agreement shall be
governed by and construed in accordance with the internal laws of the State of
California, without reference to its principles of conflicts of laws.
11.14 Recovery of Costs. In the event that any Proceeding is brought for
-----------------
the enforcement of this Agreement, or because of an alleged dispute, breach,
default, misrepresentation, termination or invalidity in connection with any
provision of this Agreement, the successful or prevailing party shall be
entitled to recover reasonable attorneys' fees and costs incurred in such
proceeding, in addition to any other relief to which such party may be entitled.
11.15 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.
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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.
AMERITEL PAY PHONES, INC.,
a Missouri corporation
By: /s/ JOHN R. SUMMERS
------------------------------------
Name: John R. Summers
Title: Vice President
CORRECTIONAL COMMUNICATIONS CORPORATION,
a California corporation
By: /s/ RICHARD WHITMAN
------------------------------------
Name: Richard Whitman
Title: Chairman of the Board
/s/ EDWARD WHITMAN
-----------------------------------------
EDWARD WHITMAN
/s/ RICHARD WHITMAN
-----------------------------------------
RICHARD WHITMAN
/s/ JOHN O'KEEFE
-----------------------------------------
JOHN O'KEEFE
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EXHIBITS AND SCHEDULES
Exhibits
- --------
Exhibit A - Form of Employment Agreement
Exhibit B - Form of Non-Competition Agreement
Exhibit C - Intellectual Property Assignment
Exhibit D - Intentionally Omitted
Exhibit E - Indemnity Escrow Agreement
Exhibit F - V2000 Escrow Agreement
Exhibit G - Consents Escrow Agreement
Exhibit H - Seller's Counsel Legal Opinion
Exhibit I - Buyer's Counsel Legal Opinion
Exhibit J - Assumption Agreement
Exhibit K - CLEC Management Agreement
Exhibit L - Contracts Management Agreement
Schedules
- ---------
Schedule 1.1 Contracts & Non-Assumed Schedule 1.1 Contracts
Schedule 2.1 Contracts entered into after closing date
Schedule 2.1(b) Excluded Assets
Schedule 2.4 Assumed Liabilities
Schedule 2.5 Allocation of Purchase Price
Schedule 2.9(a) Employees with employment agreements
Schedule 3.1 Seller's additional offices
Schedule 3.2(b) Filings or approvals
Schedule 3.2 Governmental Authorizations
Schedule 3.6(a)(ii) Installed Lines
Schedule 3.6(a)(v) Uninstalled equipment
Schedule 3.6(a)(vi) Automobiles
Schedule 3.6(a)(vii) Prepaid obligations
Schedule 3.7 Accounts Receivable
Schedule 3.8 Relationships with Related Persons
Schedule 3.9 Taxes
Schedule 3.10 No Material Adverse Change
Schedule 3.11 Employee Benefits
Schedule 3.12 Governmental Authorizations
Schedule 3.13(a) Legal Proceedings
Schedule 3.13(b) Proceedings since 1993
Schedule 3.14 Absence of Certain Changes and Events
Schedule 3.15(a)(1) Pay Telephone Location Agreements
Schedule 3.15(a)(ii) Service Agreements
Schedule 3.15(a)(iii) Real and personal property leases
Schedule 3.15(b) Consents required
Schedule 3.16 Insurance
Schedule 3.18 Employees
Schedule 3.19 Labor Relations; Compliance
Schedule 3.23 Banks
-49-
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 3 to the
Registration Statement of Talton Holdings, Inc. on Form S-4 of our report
dated April 4, 1997 (December 29, 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; 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; our report dated October 10, 1997 with respect
to the consolidated financial statements of Security Telecom Corporation and
subsidiary as of June 30, 1997 and for the six months ended June 30, 1997; and
our report dated December 12, 1997 with respect to the financial statements of
InVision Telecom, Inc. as of December 31, 1996 and September 30, 1997 and for
each of the two years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997; 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
January 7, 1998
<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.
Arthur Andersen LLP
Kansas City, Missouri,
January 7, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 3 to the
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 prospectus,
which is part of this registration statement. We also consent to the reference
to us under the heading "experts" in such prospectus.
Borland, Benefield, Crawford &
Webster, P.C.
Birmingham, Alabama
January 7, 1998
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this pre-effective amendment No. 3 to the
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
January 7, 1998
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-effective Amendment No. 3 to the
registration statement of Talton Holdings, Inc. on Form S-4 of our report
dated June 27, 1997 (October 6, 1997 as to Note 10) with respect to the
financial statements of Correctional Communications Corporation as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 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.
Ginsberg, Weiss & Company
Pearl River, New York
January 7, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
TALTON HOLDINGS, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001030965
<NAME> TALTON HOLDINGS, INC.
<S> <C> <C>
<PERIOD-TYPE> 1-MO 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> DEC-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 294,494 16,587,601
<SECURITIES> 0 0
<RECEIVABLES> 8,471,293 13,394,702
<ALLOWANCES> (1,125,023) (711,697)
<INVENTORY> 941,819 1,010,951
<CURRENT-ASSETS> 10,117,668 32,017,071
<PP&E> 8,079,937 14,910,895
<DEPRECIATION> (110,803) (1,182,630)
<TOTAL-ASSETS> 80,133,534 129,181,037
<CURRENT-LIABILITIES> 11,518,938 15,359,268
<BONDS> 60,164,500 115,559,851
0 0
59 59
<COMMON> 153 162
<OTHER-SE> 6,481,117 (2,185,438)
<TOTAL-LIABILITY-AND-EQUITY> 80,133,534 129,181,037
<SALES> 5,506,110 53,406,700
<TOTAL-REVENUES> 5,506,110 53,406,700
<CGS> 5,197,158 51,684,944
<TOTAL-COSTS> 5,197,158 51,684,944
<OTHER-EXPENSES> 591,581 7,194,248
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 612,071 7,320,330
<INCOME-PRETAX> (282,629) (5,472,492)
<INCOME-TAX> (22,502) (657,127)
<INCOME-CONTINUING> (260,127) (4,815,365)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 4,395,681
<CHANGES> 0 0
<NET-INCOME> (260,127) (9,211,046)
<EPS-PRIMARY> (14.38) (519.89)
<EPS-DILUTED> (14.38) (519.89)
</TABLE>
<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 holding Old Notes acquired for its own account as a result of
market making or other trading activities, it acknowledges that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such New Notes. The undersigned will not by so acknowledging 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.
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
9
<PAGE>
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
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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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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.
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