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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number ______
TALTON HOLDINGS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-2680266
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1209 W. North Carrier Parkway, Suite 300
Grand Prairie, TX 75050
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code -- 972/988-3737
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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11 % Series B Senior Notes Not Applicable
Due June 30, 2007
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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As of December 31, 1997, the market value for the voting and non-
voting common equity held by non-affiliates of the registrant was $0.
As of December 31, 1997, 15,800 shares of Class A common stock, par
value $0.01 per share, were issued and outstanding, and 400 shares of Class B
common stock, par value $0.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to the registrant's 1998 Registration Statement filed with
the Securities and Exchange Commission (file no. 333-33639) have been
incorporated by reference in Part IV of this Annual Report on Form 10-K.
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TALTON HOLDINGS, INC.
Table of Contents
Form 10-K Report
December 31, 1997
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Part I Page
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Item 1. Business............................................................. 4
Item 2. Properties........................................................... 11
Item 3. Legal Proceedings.................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.................. 12
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
Item 6. Selected Financial Data.............................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........... 23
Item 8. Financial Statements and Supplementary Data.......................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................. 73
Part III
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Item 10. Directors and Executive Officers of the Registrant................... 73
Item 11. Executive Compensation............................................... 76
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 79
Item 13. Certain Relationships and Related Transactions....................... 80
Part IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 86
Signatures....................................................................... 91
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PART I
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ITEM 1. BUSINESS
GENERAL
Talton Holdings, Inc. (together with its subsidiaries, unless the context
requires otherwise, 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. 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, the commissions the Company receives are a
function of revenues generated from inmate telephone use. 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 ("LEMS"), 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 December 1996 to consummate the acquisitions of
AmeriTel Pay Phones, Inc. ("AmeriTel") and Talton Telecommunications Corporation
("Talton Telecommunications"). The Company was formed by Engles Urso Follmer
("EUF") Talton, an affiliate of Engles Urso Follmer Capital Corporation
("EUFCC"), a private investment banking and consulting firm. In addition to the
acquisitions of its predecessors, AmeriTel and Talton Telecommunications, the
Company also acquired the operations of Tri-T, Inc. ("Tataka") on April 4, 1997,
Security Telecom Corporation ("STC") on June 27, 1997, Correctional
Communications Corporation ("CCC") on July 31, 1997, the inmate payphone
division of Communications Central Inc. ("InVision") on October 6, 1997, the
inmate payphone division of North American InTeleCom ("NAI") on December 1,
1997, and the inmate payphone division of Peoples Telephone Corporation ("PTC")
on December 19, 1997 (collectively the "1997 Acquisitions").
The Company and its predecessors have pursued a strategy of increasing its
installed base of inmate telephones through selective acquisitions of other
inmate telecommunications operators and have successfully completed 29
acquisitions in the industry since 1993.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION; RISK FACTORS
Certain statements in this Annual Report on Form 10-K constitute forward-
looking statements. These forward looking statements are all statements that
are not statements of historical fact or that might otherwise be considered an
opinion, belief, or projection. These forward-looking statements involve known
and unknown risks, uncertainties, and other factors, which may cause the actual
results, levels of activity, performance or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business and acquisition strategy, including the ability to integrate recently
acquired businesses into the Company; the ability of the Company to meet its
debt service obligations and to obtain additional financing for general
corporate and other purposes; changes in the telecommunications industry;
competition; availability of key personnel; and changes in, or the failure to
comply with governmental regulations. For more detailed discussions of such
risk factors, see "Risk Factors" in the Company's Registration Statement filed
with the Securities and Exchange Commission (File No. 333-33639) a copy of which
may be obtained from the Company, from the Securities and Exchange Commission at
prescribed rates, and at the website www.sec.gov. As a result of the
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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.
Industry Overview
Corrections Industry
The corrections industry has grown over the last decade as a result of
societal and political trends. 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.
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 Regional Bell Operating Companies ("RBOCs"), other
local exchange carriers ("LECs"), interstate exchange carriers ("IXCs"), such as
AT&T, MCI, Sprint, and 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.
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. 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.
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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 per 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 manage facility operations and track
operating information, including, among other data, inmate profiles, payroll,
and inventory. The Company generally offers LEMS to correctional facilities at
no up-front cost in exchange for lower commission rates and longer contract
terms. 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. The Company believes that these specialized
products and services afford the Company a competitive advantage in some
circumstances 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 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 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
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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.
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 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.
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. 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
The Company maintains relationships with long-distance carriers, including
Worldcom, Sprint, 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 December 31, 1997, the Company
had approximately 2,200 public pay telephones installed in 5 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
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usually provide for the payment of a commission by the Company to the location
owner based on revenues generated by the telephones.
COMPETITION
In the inmate telecommunications business, the Company competes with numerous
independent providers of inmate telephone systems, LECs, and IXCs such as AT&T
and MCI. Many of the Company's competitors are larger and better capitalized
with significantly greater financial resources than the Company. The Company
believes that the principal competitive factors in the inmate telecommunications
industry are (i) system features and functionality; (ii) system reliability and
service; (iii) the ability to customize inmate call processing systems to the
specific needs of the particular correctional facility; (iv) relationships with
correctional facilities; and (v) rates of commissions paid to the correctional
facilities. The Company competes for business on local, county, and state
levels, and in privately managed correctional facilities, and intends to compete
for business at the federal level on a selective basis.
Historically, federal and state correctional facilities, which are generally
bid on a system-wide basis, have been served by RBOCs, large LECs, and major
long distance companies, which are able to leverage their existing systems and
infrastructure to serve these large, high-volume customers without significant
additional capital expenditures. See "Regulation." 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 per facility,
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 Federal
Communications Commission (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 Telecommunications Act of
1996 (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
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telephone industry than in other segments of the telecommunications industry.
The LECs' practice of pooling bad debt shifts the high costs of bad debt from
inmate telephone operations to the expense accounts of other LEC operations,
presenting a vehicle for the cross-subsidization of the LECs' inmate operations,
which, in turn, has allowed the LECs to offer commissions to correctional
facilities that are significantly higher than those that independent inmate
telephone providers can offer.
Section 276 directed the FCC to adopt regulations to end the LECs'
subsidization of their inmate telephone operations from regulated revenues.
Congress also directed the FCC to ensure that the LECs could not discriminate in
favor of their own operations to the competitive detriment of independent inmate
telephone providers. Finally, Congress required the FCC to ensure that all
inmate telephone providers were fairly compensated for "each and every" call
made from their telephones.
To carry out its Congressional mandate, the FCC adopted regulations requiring
all LECs to transfer their inmate telephone operations from their regulated
accounts to the LECs' unregulated accounts no later than April 15, 1997. While
the FCC's rules implementing Section 276 are designed to eliminate cross-
subsidization and cost-shifting, there are significant questions regarding their
ultimate effect. For example, it is unclear whether the FCC's rules will fully
prevent the shifting of bad debt from inmate operations to the LECs' regulated
accounts. Since the bad debt arises from the charges for collect calls, which
have traditionally been regulated 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
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services, as they are with telephone lines; independent inmate telephone
providers can provide services like repair and installation with their own staff
or contractors.
To ensure "fair compensation" for inmate telephone providers, the FCC held
that it was not required to prescribe compensation for collect calls because
inmate providers act as their own carriers and collect the revenue from those
calls directly from end users. The inmate telephone industry had argued to the
FCC, however, that because of state-mandated ceilings on the rates for
intrastate collect calls, inmate telephone providers could not recover adequate
revenue for those calls, and accordingly, had sought an "inmate system
compensation charge" in addition to the charges collected for carrying the call.
See "--State Regulation."
Because of continuing restrictions stemming from the 1984 divestiture of the
RBOCs by AT&T, the RBOCs are not able to carry long distance traffic. Prior to
the Telecom Act, the RBOCs were also precluded from choosing a long distance
carrier for calls originating from facilities where the RBOCs provided the
inmate telephone service and receiving commission revenue from that carrier.
Instead, carriers were selected by, and paid commissions directly to, the
individual correctional facilities being served by RBOCs.
Pursuant to the Telecom Act, the FCC decided that the RBOCs would be allowed
to choose their own carrier for their traffic from a given correctional
facility. As a result, the RBOCs may gain the ability to negotiate higher
commission rates to be paid to them from their contracted carrier by aggregating
traffic from several facilities into a single contract with the carrier.
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.
Under a proposed plan, known as Billed Party Preference ("BPP"), calls would
be sent to the pre-subscribed carrier of the called-party, thereby bypassing the
opportunity for the inmate telephone provider to carry, and receive revenues
from all calls. The FCC's BPP has been rejected. The FCC is requiring carriers
to disclose their rates to called parties before completing inmate collect
calls.
The Inmate Task Force ("ITF") sued the FCC in Federal District Court over two
key issues: (i) many local collect calling rates do not provide a fair rate of
return as required by the 1996 Telecom Legislation; and (ii) the LEC inmate
phone divisions are cross-subsidizing the commingling inmate bad debt with the
utility bad debt. The FCC requested a remand of the case and the request was
granted by the Court. A new position by the FCC is expected in the second
quarter of 1998.
State Regulation
The inmate telecommunications industry is also subject to extensive state
regulations. 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
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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 certified and to file tariffs with the appropriate state regulatory
authority.
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.
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 December 31, 1997, the Company had approximately 278 employees of which
approximately 82 were executive and administrative personnel, and approximately
196 were sales, marketing, technical, and other operations personnel.
ITEM 2. PROPERTIES
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.
ITEM 3. 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 effect on the Company.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year
covered by this report.
12
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public trading market for the Registrant's issued and
outstanding capital stock.
As of December 31, 1997, there were forty-five holders of the Company's Class
A common stock and four holders of the Company's Class B common stock.
There have been no cash dividends declared on the Company's common stock from
the period January 1, 1996 through December 31, 1997. The Indenture (the
"Indenture") governing the Company's Series A and Series B Senior Notes Due 2007
and the amended and restated Senior Credit Facility (the "Senior Credit
Facility") contain certain restrictive covenants that are likely to materially
limit the future payment of dividends on the Company's common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table sets forth information with respect to all securities sold
by the Company for the last three years that were not registered under the
Securities Act of 1933, as amended, (the "Securities Act"). All securities sold
and not registered were sold in transactions not involving a public offering
under (S) 4(2) of the Securities Act. Additionally, the sale of the Series A
11% Senior Notes referred to below was effected in transactions exempt from the
registration requirement of the Securities Act under Regulation S and Rule 144A
under the Securities Act.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD DATE PERSON ACQUIRING AMOUNT CONSIDERATION USE OF PROCEEDS TERMS OF
SECURITIES CONVERSION OR
EXERCISE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 12/27/96 investor group 9805 shares $9,805,000.00 cash Working Capital N/A
Common Stock
- -----------------------------------------------------------------------------------------------------------------------------
Class A 12/27/96 former shareholders 970 shares contribution of stock Acquisition of N/A
Common Stock of AmeriTel Pay valued at $970,000.00 Business
Phones, Inc.
- -----------------------------------------------------------------------------------------------------------------------------
Class A 12/27/96 former shareholders 4125 shares contribution of stock Acquisition of N/A
Common Stock of Talton valued at $4,125,000.00 Business
Telecommunications
- -----------------------------------------------------------------------------------------------------------------------------
Class A 06/27/97 Security Telecom 900 shares acquisition of asset Acquisition of N/A
Common Stock Corporation valued at $900,000.00 Business
- -----------------------------------------------------------------------------------------------------------------------------
Class B 12/27/96 Class B Investor 400 shares $400,000.00 cash /2/ Working Capital Each shares is
Common Stock Group/1/ convertible into 4
shares of Class A
Common Stock
- -----------------------------------------------------------------------------------------------------------------------------
Warrants 12/27/96 Class B Investor 1736.8421 /2/ N/A $1000.00 strike
Group shares price per share
- -----------------------------------------------------------------------------------------------------------------------------
Warrants 12/27/96 Class B Investor 1302.6316 /2/ N/A $2000.00 strike
Group shares price per share
- -----------------------------------------------------------------------------------------------------------------------------
Warrants 12/27/96 Class B Investor 1269.9751 /2/ N/A $3000.000 strike
Group shares price per share
- -----------------------------------------------------------------------------------------------------------------------------
Senior 12/27/96 former shareholders 925 shares contribution of stock Acquisition of Each share is
Preferred Stock of AmeriTel Pay valued at $925,000.00 Business convertible into
Phones, Inc. 0.08505 shares of
Class A Common
Stock
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
/1/ Class B Investor Group consists of Gregg L. Engles, Todd W. Follmer, Joseph
P. Urso and Onyx Talton Partners, L.P.
/2/ Consideration for Class B Shares and associated warrants
13
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD DATE PERSON ACQUIRING AMOUNT CONSIDERATION USE OF PROCEEDS TERMS OF
SECURITIES CONVERSION OF
EXERCISE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Senior 12/27/96 former shareholders 5000 shares contribution of stock Acquisition of Each share is
Preferred Stock of Talton valued at $5,000,000.00 Business convertible into
Telecommunications 0.08505 shares of
Class A Common
Stock
- -----------------------------------------------------------------------------------------------------------------------------
Subordinated 12/27/96 former shareholders $5,000,000.00 $5,000,000.00 cash Acquisition N/A
Note of Talton financing
Telecommunications
- -----------------------------------------------------------------------------------------------------------------------------
Subordinated 12/27/96 CIBC WG Argosy $7,500,000.00 $7,500,000.00 cash Acquisition N/A
Note Merchant Fund 2, financing
L.L.C.
- -----------------------------------------------------------------------------------------------------------------------------
Subordinated 12/27/96 Regent Capital $1,000,000.00 $1,000,000 cash Acquisition
Note Partners, L.P. financing
- -----------------------------------------------------------------------------------------------------------------------------
Warrants 12/27/96 CIBC Wood Gundy 1085.5263 Additional consideration $0.01 strike price
Ventures, Inc. shares for financing per share
- -----------------------------------------------------------------------------------------------------------------------------
Contingent 12/27/96 Regent Capital 141.1674 Additional consideration $1000.00 strike
Warrants/3/ Partners, L.P. shares for financing price per share
- -----------------------------------------------------------------------------------------------------------------------------
Contingent 12/27/96 CIBC Wood Gundy 1058.7553 Additional consideration $1000.00 strike
Warrants/3/ Ventures, Inc. shares for financing price per share
- -----------------------------------------------------------------------------------------------------------------------------
Contingent 12/27/96 former shareholders 719.9536 Additional consideration $1000.00 strike
Warrants/3/ of Talton shares for financing price per share
Telecommunications
- -----------------------------------------------------------------------------------------------------------------------------
Options 06/27/97 former officer of 100 shares Additional consideration $2000.00 strike
Security Telecom for asset acquisition price per share
Corporation
- -----------------------------------------------------------------------------------------------------------------------------
Options 06/27/97 officer of Talton 165 shares Additional consideration $2000.00 strike
Holdings, Inc. for employment price per share
- -----------------------------------------------------------------------------------------------------------------------------
Options/3/ 07/31/97 former shareholders 166.666 Additional consideration $3000.00 strike
of Correctional shares for asset acquisition price per share
Communications
Corporation
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------
/3/ Lapsed or expired
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD DATE PERSON ACQUIRING AMOUNT CONSIDERATION USE OF PROCEEDS TERMS OF
SECURITIES CONVERSION OF
EXERCISE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Series A 11% 06/24/97 CIBC Wood Gundy $115 million $115 million gross (1) To repay debt; N/A
Senior Notes Securities Corp. as principal proceeds (2) to consummate
Due 2007 Initial Purchaser amount the STC Acquisition;
(3) to fund future
acquisitions; (4) for
general corporate
purposes. See
"Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations."
- -----------------------------------------------------------------------------------------------------------------------------
Convertible 02/18/98 former shareholders 158-1/3 additional consideration Acquistion $6000.00 strike
Note of MOG shares for asset acquisition of Business price per share
Communications, Inc.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA - (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 selected consolidated financial data of the Company for the
year ended December 31, 1997 and 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 year ended December 31, 1993, is 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 report.
14
<PAGE>
<TABLE>
<CAPTION>
COMBINED PREDECESSORS THE COMPANY
-----------------------------------------------------------------------
ELEVEN MONTHS | ONE MONTH
YEARS ENDED DECEMBER 31, ENDED | ENDED YEAR ENDED
--------------------------- NOVEMBER 30, | DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 | 1996 1997
------- ------- ------- ----------- | ------------ ------------
(Unaudited) |
--------- |
<S> <C> <C> <C> <C> | <C> <C>
Operating Data: |
Operating revenues..................................... $13,593 $23,892 $40,326 $53,663 | $ 5,506 $ 91,773
Operating expenses: |
Telecommunication costs............................... 7,025 11,761 18,673 23,317 | 2,299 37,871
Facility commissions.................................. 2,225 3,901 9,595 13,962 | 1,455 25,724
Field operations and maintenance...................... 538 1,044 1,467 1,816 | 219 4,543
Selling, general, and administrative.................. 1,566 2,571 4,089 3,921 | 372 8,540
Depreciation.......................................... 780 965 1,359 1,538 | 111 2,219
Amortization of intangibles........................... 684 1,392 1,605 1,746 | 741 14,243
Federal bid costs..................................... -- -- -- -- | -- 400
Non-recurring expenses................................ -- -- -- 684 | -- --
------- ------- ------- ------- | -------- --------
Total operating expenses............................... 12,818 21,634 36,788 46,984 | 5,197 93,540
------- ------- ------- ------- | -------- --------
Operating income (loss)................................ 775 2,258 3,538 6,679 | 309 (1,767)
Other (income) expense: |
Interest expense, net................................. 331 745 1,360 1,469 | 612 11,138
Other, net............................................ (153) (134) (52) 27 | (20) (76)
------- ------- ------- ------- | -------- --------
Total other expense.................................... 178 611 1,308 1,496 | 592 11,062
------- ------- ------- ------- | -------- --------
|
Income (loss) before income taxes and |
extraordinary loss.................................... 597 1,647 2,230 5,183 | (283) (12,829)
Income tax expense (benefit)........................... -- (11) 891 1,917 | (23) (642)
------- ------- ------- ------- | -------- --------
Income (loss) before extraordinary loss................ 597 1,658 1,339 3,266 | (260) (12,187)
Extraordinary loss..................................... -- -- -- 52 | -- 4,740
------- ------- ------- ------- | -------- --------
Net income (loss)...................................... $ 597 $ 1,658 $ 1,339 $ 3,214 | $ (260) $(16,927)
======= ======= ======= ======= | ======== ========
|
OTHER DATA: |
EBITDA (1)............................................. $ 2,392 $ 4,749 $ 6,554 $ 9,936 | $ 1,181 $ 14,771
Net cash provided (used) by operating |
activities............................................ 1,317 3,445 4,069 7,300 | (1,419) 6,048
Net cash provided (used) by investing |
activities............................................ (1,494) (9,976) (8,022) (7,515) | (47,252) (90,757)
Net cash provided (used) by financing |
activities............................................ (36) 6,668 4,827 (547) | 48,966 92,193
Capital expenditures (2)............................... 1,978 3,223 4,669 2,804 | 269 8,063
Ratio of earnings to fixed charges (3)................. 2.8 3.0 2.5 4.2 | -- --
Deficiency of earnings to fixed charges................ -- -- -- -- | $ 283 $ 12,829
|
BALANCE SHEET DATA (AT END OF PERIOD): |
Cash and cash equivalents.............................. $ 283 $ 419 $ 1293 $ 531 | $ 294 $ 7,778
Total assets........................................... 8,528 17,639 26,592 34,708 | 80,134 189,388
Total debt (including current maturities).............. 4,854 10,750 15,074 14,845 | 63,315 166,736
Total stockholders' equity (deficit)................... 556 2,027 4,850 9,361 | 6,481 (10,020)
</TABLE>
(1) For the purposes of this Form 10-K, 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 Form 10-K because it is commonly used by certain investors
and analysts as a measure of a company's ability to service its debt
obligations and is a component of the Company's debt compliance
ratios. 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 and
excludes cash outflows for acquisitions.
(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.
15
<PAGE>
ITEM 7. 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
approximately 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 Tataka on April
4, 1997, STC on June 27, 1997, CCC on July 31, 1997, InVision on October 6,
1997, the inmate payphone division of NAI on December 1, 1997, and the inmate
payphone division of PTC on December 19, 1997. Because the 1997 Acquisitions
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.
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 pro forma adjustments to historical results to reflect changes in
depreciation and amortization resulting from purchase accounting revaluations as
follows:
16
<PAGE>
Year ended December 31, 1995 Combined results of operations of the
predecessors, AmeriTel and Talton
Telecommunications, for the year
Year ended December 31, 1996 Combined results of operations of the
predecessors, AmeriTel and Talton
Telecommunications, for the eleven months
ended November 30, 1996 and of the Company
for the one month ended December 31, 1996
Year ended December 31, 1997 Consolidated results of operations of the
Company for the year
These above described combined results of operations include the results of
operations of the 1997 Acquisitions 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,
--------------------------------------------------------
1995 1996 1997
----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Operating revenues....................................... $40,326 100.0% $59,169 100.0% $ 91,773 100.0%
Operating expenses:
Telecommunication costs ............................... 18,673 46.3 25,616 43.3 37,871 41.3
Facility commissions .................................. 9,595 23.8 15,417 26.1 25,724 28.0
Field operations and maintenance ...................... 1,467 3.6 2,035 3.4 4,543 5.0
Selling, general, and administrative .................. 4,089 10.1 4,293 7.3 8,540 9.3
Depreciation .......................................... 1,359 3.4 1,649 2.8 2,219 2.4
Amortization of intangibles ........................... 1,605 4.0 2,487 4.2 14,243 15.5
Federal bid costs....................................... -- -- -- -- 400 .4
Non-recurring expenses ................................ -- -- 684 1.2 -- --
------- ----- ------- ----- -------- ------
Total operating expenses ............................... 36,788 91.2 52,181 88.3 93,540 101.9
------- ----- ------- ----- -------- ------
Operating income (loss) ................................ 3,538 8.8 6,988 11.7 (1,767) (1.9)
Other (income) expense:
Interest expense, net ................................. 1,360 3.4 2,081 3.5 11,138 12.1
Other, net ............................................ (52) (0.1) 7 0.0 (76) (.0)
------- ----- ------- ----- -------- ------
Total other expense .................................... 1,308 3.3 2,088 3.5 11,062 12.1
------- ----- ------- ----- -------- ------
Income (loss) before income taxes and
extraordinary loss .................................... 2,230 5.5 4,900 8.2 (12,829) (14.0)
Income tax expense (benefit) ........................... 891 2.2 1,894 3.2 (642) (0.7)
------- ----- ------- ----- -------- ------
Income (loss) before extraordinary loss ................ 1,339 3.3 3,006 5.0 (12,187) (13.3)
Extraordinary loss ..................................... -- -- 52 0.1 4,740 5.1
------- ----- ------- ----- -------- ------
Net income (loss) ...................................... $ 1,339 3.3% $ 2,954 4.9% $(16,927) (18.4)%
======= ===== ======= ===== -------- ------
EBITDA ................................................. $ 6,554 16.3% $11,117 18.8% $ 14,771 16.1%
======= ===== ======= ===== ======== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 (CONSOLIDATED RESULTS OF OPERATIONS OF THE
COMPANY) COMPARED TO 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)
Operating Revenues. The Company's operating revenues increased by $32.6
million, or 55.1%, from $59.2 million for the year ended December 31, 1996 to
$91.8 million for the year ended December 31, 1997. The increase in operating
revenues was primarily due to acquisitions of the Company of STC, CCC, InVision,
NAI, and PTC during 1997, and new contract installations. Specifically, the
Company acquired inmate telephone contracts at 128 facilities in 14 states from
STC; 23 facilities in 3 states from CCC; 568 facilities in 37 states from
InVision; 57 facilities in 5 states from NAI's inmate telecommunications unit;
and 82 facilities in 10 states from PTC's inmate telecommunications unit.
Operating Expenses. Total operating expenses increased $41.3 million, from
$52.2 million in 1996 to $93.5 million in 1997. Operating expenses as a
percentage of operating revenues increased 13.6% from 88.3% for the year ended
December 31, 1996 to 101.9% for the year ended December 31, 1997. The increase
in operating expenses as a percentage of revenues is primarily due to the
factors discussed below.
17
<PAGE>
Telecommunication costs increased by $12.3 million, from $25.6 million in 1996
to $37.9 million in 1997. Telecommunication costs represented 43.3% of operating
revenues in 1996 and 41.3% of operating revenues in 1997, a decrease of 2.0%.
The dollar increase is primarily due to the acquisitions by the Company of STC,
CCC, InVision, NAI's inmate telecommunications unit, and PTC's inmate
telecommunications unit during 1997, and new contract installations. 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 LEC's and lower relative costs for long distance as a result
of new long distance agreements.
Facility commissions increased by $10.3 million, from $15.4 million in 1996 to
$25.7 million in 1997. Facility commissions represented 26.1% of operating
revenues in 1996 and 28.0% of operating revenues in 1997, an increase of 1.9%.
The increase is primarily due to higher commission rates for certain contracts
associated with the 1997 Acquisitions, as well as higher commission percentages
paid as a result of periodic increases in percentages paid to existing customers
as contracts are renewed.
Field operation and maintenance costs increased by $2.5 million, from $2.0
million in 1996 to $4.5 million in 1996. Field operation and maintenance costs
represented 3.4% of operating revenues in 1996 and 5.0% of operating revenues in
1997, an increase of 1.6%. The dollar increase is primarily due to an increase
in the costs associated with servicing acquired facilities.
Selling, general and administrative costs ("SG&A") increased by $4.2 million,
from $4.3 million in 1996 to $8.5 million in 1997. SG&A represented 7.3% of
operating revenues in 1996 and 9.3% of operating revenues in 1997, an increase
of 2.0%. The increase in SG&A 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. The Company's
SG&A for 1997 was affected by the significant acquisition activity during the
period.
Total depreciation and amortization costs increased by $12.3 million, from
$4.1 million in 1996 to $16.5 million in 1997. Depreciation and amortization
costs represented 7.0% of operating revenues in 1996 and 17.9% of operating
revenues in 1997, an increase of 10.9%. The dollar increase is primarily due to
additional amortization expense associated with the acquisitions by the Company
of inmate facility contracts, and the 1997 Acquisitions.
The Company incurred an expense of $400,000 in 1997 related to external costs
associated with the Company's application for the Federal Board of Prisons
contract. The Company was unsuccessful in obtaining the contract. The contract
award has been appealed, however, the Company has expensed all costs associated
with the bid.
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 (Loss). The Company's operating income decreased by $8.8
million, from $7.0 million in 1996 to an operating loss of $1.8 million in 1997
primarily as a result of increases in depreciation and amortization due to the
1997 Acquisitions. Also, as a result of the depreciation and amortization, the
Company's operating income margin decreased from 11.7% in 1996 to an operating
loss of 1.9% in 1997.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $9.0 million from $2.1 million in 1996 to $11.1
million in 1997. The increase was primarily due to interest expense associated
with indebtedness incurred by the Company in connection with acquisitions and
completion of Offering June 1997.
Extraordinary Loss. The Company incurred an extraordinary loss of $4.7 million
in 1997 due to the write-off of the unamortized deferred loan costs and the
unamortized discount related to the senior subordinated notes originally issued
by Canadian Imperial Bank of Commerce ("CIBC"), which were repaid in connection
with the acquisitions of AmeriTel and Talton Telecommunications (the "Senior
Subordinated Notes") with the net proceeds of the June 1997 offering (the
"Offering") of $115,000,000 principal amount 11% Senior Notes due 2007 (the
"Senior Notes"). In 1996, one of
18
<PAGE>
the Company's predecessors incurred an extraordinary loss of approximately
$52,000 in conjunction with the extinguishment of debt.
Net Income (Loss). The Company's net income decreased by $20.0 million, from
$3.0 million in 1996 to a net loss of $17.0 million in 1997 as a result of the
factors described above.
EBITDA. EBITDA increased by $3.7 million from $11.1 million in 1996 to $14.8
million in 1997. EBITDA as a percentage of operating revenues decreased from
18.8% in 1996 to 16.1% in 1997 due to the factors described 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 approximately 76 inmate facilities
during 1995 (the results of which were reflected for the full year in 1996) and
contracts covering approximately 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 second half of 1995; and (iii)
increases in operating revenues from the Company's addition of new contracts
covering approximately 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, 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
19
<PAGE>
SG&A as a percentage of operating revenues is primarily due to the effect of
spreading fixed costs over a larger revenue base.
Depreciation and amortization costs increased by $1.1 million, from $3.0
million in 1995 to $4.1 million in 1996. Depreciation and amortization costs
represented 7.4% of operating revenues in 1995 and 7.0% of operating revenues in
1996, a decrease of 0.4%. The dollar increase is primarily due to $600,000 in
additional depreciation and amortization expense resulting from the Company's
acquisitions of AmeriTel and Talton Telecommunications in December 1996.
The Company incurred a non-recurring expense of $684,000 in 1996 related to
$434,000 in bonuses paid by AmeriTel prior to its acquisition by the Company and
$250,000 paid by AmeriTel to settle a lawsuit. Such expense represented 1.2% of
operating revenues in 1996.
Operating Income. The Company's operating income increased by $3.5 million,
from $3.5 million in 1995 to $7.0 million in 1996, as a result of the
significant increase in operating revenues offset in part by the increase 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.
Extraordinary Loss. In 1996, one of the Company's predecessors incurred an
extraordinary loss of approximately $52,000 in conjunction with the
extinguishment of debt.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.0 million for the year ended
December 31, 1997, as compared to net cash provided by operating activities of
$5.9 million for the aggregate of the Company's One Month Period Ended December
31, 1996 and the Combined Predecessors Eleven Months Ended November 30, 1996.
Net cash provided by operating activities was $4.1 million for the year ended
December 31, 1995. Net cash provided by operating activities in 1997 increased
primarily due to the operations of the 1997 Acquisitions.
Cash used in investing activities was $90.8 million for the year ended
December 31, 1997, consisting primarily of cash outflows for the 1997
Acquisitions, as compared to $54.8 million for the aggregate of the Company's
One Month Period Ended December 31, 1996 and the Combined Predecessors Eleven
Months Ended November 30, 1996. The cash used in investing activities in 1996
consisted 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.
Net cash provided by financing activities was $92.2 million for the year ended
December 31, 1997 consisting primarily of the issuance of the $115.0 million
Senior Notes, the borrowing of $50.5 million under the amended Senior Credit
Facility and offset by the repayment of the previous credit facility, Senior
Subordinated Notes, and subordinated notes issued in connection with the
acquisition of Talton Telecommunications (the "Talton Notes"), as compared to
$48.5 million for the aggregate of the Company's One Month Period Ended December
31, 1996 and the Combined Predecessors Eleven Months Ended November 30, 1996.
Net cash provided by financing activities was $4.8 million in 1995. Net cash
provided by financing activities in 1996 and 1995 consisted primarily of
proceeds from borrowings under credit facilities and in 1995 also included the
issuance of equity by the Company's predecessors to finance revenue
20
<PAGE>
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 gross proceeds in connection with the offering of the
Senior Notes in June 1997, of which $67.2 million was used to repay amounts
outstanding under the Company's former credit facility, Senior Subordinated
Notes, and Talton Notes; $9.9 million (subject to adjustment) was used to
acquire STC and 100% of its affiliate, Law Enforcement Technology, Inc.
("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 December 31, 1997, the Company had approximately $166.7 million of long-
term indebtedness outstanding, a stockholders' equity deficit of $10.0 million,
and $7.8 million of cash.
The Company expects that its principal sources of liquidity will be cash flow
from operations, and borrowings under the Senior Credit Facility. 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 will
be 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 December 19, 1997 the Company and its Lenders (as defined) entered into
an amendment and restatement of a previous credit facility to establish 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, assuming the
maximum borrowing of $55.0 million:
QUARTERLY Dollar
Payment Date Repayment
- -------------- -------------
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
21
<PAGE>
The Senior Credit Facility requires quarterly interest 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 its subsidiaries.
Concurrently with the consummation of an offering on June 27, 1997, of $115.0
million aggregate principal amount of the Senior Notes, establishment and
amendments of the Senior Credit Facility, the Company expensed approximately
$4.7 million to write off previously incurred deferred financing costs related
to the previous credit facility, the Senior Subordinated Notes, and the 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.
As of December 31, 1997, the Company had approximately $166.7 million of long-
term indebtedness outstanding, including (i) $115.0 million of Senior Notes
outstanding at an interest rate of 11.0%, (ii) $50.5 million of indebtedness
from the Senior Credit Facility, and (iii) $1.2 million of other indebtedness
consisting primarily of deferred acquisitions costs and capital leases. As of
March 31, 1998, the Company had available borrowing capacity under the revolving
credit portion of its Senior Credit Facility of approximately $19.75 million.
The Company intends to pursue additional acquisitions to expand its base of
installed inmate telephones 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 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 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 subsidiaries of the Company that have guaranteed the Senior Notes (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 December 31, 1997, there is
aggregate indebtedness of approximately $286,000 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 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.
22
<PAGE>
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 acquired. As a result, the
Company will not be entitled to a tax deduction for the amortization of goodwill
or the depreciation and amortization of certain other tangible and intangible
assets related to these acquisitions. The Company has provided deferred income
tax liabilities for differences in the financial accounting and tax bases of its
tangible and identifiable intangible assets. However, in accordance with the
requirements of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," future amortization of non-deductible goodwill will be
treated as a permanent difference in the Company's financial statements.
ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997, and
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 is effective for the Company's year ending December
31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997, and establishes new standards for
reporting information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. SFAS No. 131 is
effective for the Company's year ending December 31, 1998.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company believes that it has identified all significant applications that
will require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
Compliance. The Company plans on completing the testing process of all
significant applications by February 1, 1999.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans,
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This item is not applicable to the Registrant.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Talton Holdings, Inc.
Report of Independent Certified Public Accountants................. 25
Consolidated Balance Sheets for December 31, 1997 and 1996......... 26
Consolidated Statements of Operations for the year ended
December 31, 1997 and for the one month ended December 31, 1996,.. 27
Consolidated Statements of Stockholders' Equity (Deficit) for the
year ended December 31, 1997 and for the one month period
ended December 31, 1996........................................... 28
Consolidated Statements of Cash Flows for the
year ended December 31, 1997 and for the one month period
ended December 31, 1996............................................ 29
Notes to the Consolidated Financial Statements..................... 30
Predecessors' Financial Statements
AmeriTel Pay Phones, Inc.
Report of Independent Certified Public Accountants................. 44
Balance Sheets for November 30, 1996 and December 31, 1995......... 46
Statements of Income for the eleven months ended November 30, 1996
and for the year ended December 31, 1995.......................... 47
Statements of Stockholders' Equity for the eleven months ended
November 30, 1996 and for the year ended December 31, 1995........ 48
Statements of Cash Flows for the eleven months ended November 30,
1996 and for the year ended December 31, 1995..................... 49
Notes to the Financial Statements.................................. 50
Talton Telecommunications Corporation
Report of Independent Certified Public Accountants................. 61
Consolidated Balance Sheets for November 30,1996 and
December 31, 1995................................................. 62
Consolidated Statements of Operations for the eleven months ended
November 30, 1996 and the year ended December 31, 1995............ 63
Consolidated Statements of Stockholders' Equity for the eleven
November 30, 1996 and the year ended December 31, 1995............ 64
Consolidated Statements of Cash Flows for the eleven months ended
months ended November 30, 1996 and the year ended
December 31, 1995................................................. 65
Notes to the Consolidated Financial Statements..................... 66
</TABLE>
SCHEDULES:
- ---------
Valuation and Qualifying Accounts and Reserves..................... 72
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Talton Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Talton
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the year ended December 31, 1997 and for the
one-month period from December 1, 1996 (date of acquisition) to 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the year ended December 31, 1997, and the one month ended December 31,
1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 18, 1998
25
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1997
------------------ --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 294,494 $ 7,777,996
Accounts receivable ................................................... 7,346,270 17,401,907
Refundable income taxes ............................................... 601,842 600,388
Inventories ........................................................... 941,819 1,690,930
Prepaid expenses and other current assets ............................. 259,984 2,309,661
Deferred income tax asset ............................................. 673,259 1,059,752
------------------ --------------------
Total current assets ............................................... 10,117,668 30,840,634
PROPERTY AND EQUIPMENT .................................................. 7,969,134 24,007,039
INTANGIBLE AND OTHER ASSETS ............................................. 62,046,732 134,540,767
------------------ --------------------
TOTAL .............................................................. $ 80,133,534 $189,388,440
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ...................................................... $ 2,797,845 $ 6,933,874
Accrued expenses ...................................................... 4,593,093 24,678,158
Income taxes payable .................................................. 978,000 --
Current portion of long-term debt ..................................... 3,150,000 5,545,363
------------------ --------------------
Total current liabilities .......................................... 11,518,938 37,157,395
LONG-TERM DEBT .......................................................... 59,964,500 160,040,938
OTHER LONG TERM LIABILITIES............................................... 200,000 1,150,000
DEFERRED INCOME TAXES ................................................... 1,968,767 1,059,752
COMMITMENTS AND CONTINGENCIES (See Notes)
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 December 31, 1997, respectively ............... 153 162
Additional paid-in capital ............................................ 21,610,972 22,036,963
Accumulated deficit ................................................... (15,129,855) (32,056,829)
------------------ --------------------
Total stockholders' equity (deficit) ............................... 6,481,329 (10,019,645)
------------------ --------------------
TOTAL .............................................................. $ 80,133,534 $189,388,440
================== ====================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH YEAR
PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------------ -------------------
<S> <C> <C>
OPERATING REVENUE .......................................... $5,506,110 $ 91,773,041
OPERATING EXPENSES:
Telecommunication costs .................................. 2,298,712 37,871,217
Facility commissions ..................................... 1,455,375 25,723,997
Field operations and maintenance ......................... 218,895 4,542,757
Selling, general and administrative ...................... 372,341 8,540,629
Depreciation ............................................. 110,803 2,218,694
Amortization of intangibles .............................. 741,032 14,243,332
Federal bid costs ........................................ -- 399,817
------------------ -------------------
Total operating expense ............................... 5,197,158 93,540,443
------------------ -------------------
OPERATING INCOME (LOSS) .................................... 308,952 (1,767,402)
OTHER (INCOME) EXPENSE:
Interest expense, net .................................... 612,071 11,137,877
Other (income), net ...................................... (20,490) (76,392)
------------------ -------------------
Total other (income) expense .......................... 591,581 11,061,485
------------------ -------------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY LOSS ........... (282,629) (12,828,887)
INCOME TAX BENEFIT ......................................... (22,502) (641,670)
------------------ -------------------
LOSS BEFORE EXTRAORDINARY ITEM ............................. $ (260,127) $(12,187,217)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT .................. -- 4,739,757
------------------ -------------------
NET LOSS....................................................... $ (260,127) $(16,926,974)
Preferred Stock Dividends .................................. -- 474,000
------------------ -------------------
NET LOSS APPLICABLE TO COMMON STOCK ........................ $ (260,127) $(17,400,974)
================== ===================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- -------------- PAID-IN ACCUMULATED
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....................... (474,000) (474,000)
ISSUANCE OF COMMON STOCK ................ 900 9 899,991 900,000
NET LOSS ............................... (16,926,974) (16,926,974)
----- --- ------ ---- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997................ 5,925 $59 16,200 $162 $22,036,963 $(32,056,829) $(10,019,645)
===== === ====== ==== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE-MONTH FOR THE YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, 1997
1996
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss............................................................................ $ (260,127) $(16,926,974)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation ..................................................................... 110,803 2,218,694
Amortization of intangible assets, including deferred financing costs and
bond discount .................................................................. 803,023 14,804,641
Extraordinary loss on debt extinguishment ........................................ -- 4,739,757
Deferred income taxes ............................................................ 160,512 (1,295,508)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ............................................................ 44,823 (6,974,425)
Inventories .................................................................... 12,013 (723,013)
Prepaid expenses and other assets .............................................. (166,096) (87,536)
Accounts payable ............................................................... (1,010,795) 1,574,179
Accrued expenses ............................................................... (718,313) 9,694,953
Income taxes ................................................................... (394,963) (976,546)
--------------------------------------
Net cash (used in) provided by operating activities ........................... (1,419,120) 6,048,222
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash......................................................... -- (1,919,312)
Capital expenditures .............................................................. (268,801) (8,062,724)
Cash outflows for acquisitions .................................................... (46,983,442) (80,775,395)
--------------------------------------
Net cash used in investing activities ......................................... (47,252,243) (90,757,431)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt ................................................ 59,200,000 168,709,966
Repayment of advances ............................................................. -- (1,001,024)
Repayment of debt ................................................................. (15,912,706) (67,630,581)
Payments of deferred financing costs .............................................. (3,804,121) (7,885,650)
Proceeds from the issuance of common and preferred stock, net of expenses ......... 9,482,684 --
--------------------------------------
Net cash provided by financing activities ..................................... 48,965,857 92,192,711
--------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS .............................................. 294,494 7,483,502
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... -- 294,494
--------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 294,494 $ 7,777,996
======================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................ $ 640,035 $ 4,202,059
======================================
Cash paid for income taxes ........................................................ $ 211,950 $ 1,552,973
======================================
NONCASH TRANSACTIONS:
Issuance of subordinate notes, preferred stock and common stock for acquisitions .. $ 16,043,000 $ 900,000
======================================
Reduction of stockholders' equity to reflect continuing shareholder interests ..... $(14,869,728) $ --
======================================
Dividends payable ................................................................. $ -- $ 474,000
======================================
Amounts payable for acquisition costs ............................................. $ -- $ 8,369,421
======================================
Amounts payable for deferred financing costs........................................ $ -- $ 757,493
======================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Talton Holdings, Inc. owns, operates, and maintains telephone
systems under contracts with correctional facilities in 43 states throughout the
United States. 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.
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, Talton Telecommunications
of Carolina, Inc., AmeriTel Pay Phones, Inc., Talton STC Inc., Talton InVision
and One Source Telecommunications, Inc. All significant intercompany balances
and transactions are eliminated in consolidation. Certain amounts have been
reclassified to conform with the current year presentation.
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.
30
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 ................................ Lesser of life
or lease term
Telephone system equipment ............................ 3.5 to 7.5 years
Vehicles .............................................. 3 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, 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 costs incurred to obtain direct billing agreements
with local exchange carriers, 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 long term 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.
31
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--SFAS No. 130, "Reporting
Comprehensive Income," was issued in June 1997, and establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective
for the Company's year ending December 31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also issued in June 1997, and establishes new standards for
reporting information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. SFAS No. 131 is
effective for the Company's year ending December 31, 1998.
The Company expects that the adoption of these pronouncements will have no
material effect on the financial position, results of operations or cash flows
of the Company.
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.
Since certain of the stockholders of the Company held ownership interests in
Talton Telecommunication Corporation and AmeriTel Pay Phones, Inc., their
continuing ownership interest in the Company has been accounted for at their
prior historical basis, which has resulted in a reduction in stockholders'
deficit 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."
Effective April 4, 1997, the Company acquired substantially all of the net
assets of Tri-T, Inc. (d/b/a "Tataka") for cash of $0.8 million, which was
funded primarily by borrowings under the Senior Credit Agreement.
Effective 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 Common Stock. Approximately $2.5 million of the
purchase price was withheld at closing, pending certain regulatory approvals and
final adjustments. In conjunction with the acquisition of Security Telecom
Corporation, the Company entered into an
32
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreement with an employee of Security Telecom Corporation giving the employee
the right to purchase up to 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 with a
corresponding increase in goodwill resulting from the Security Telecom
acquisition. The Company financed the acquisition with a portion of the proceeds
from the Senior Notes.
Effective July 31, 1997, the Company acquired all of the net assets of
Correctional Communications Corporation for cash purchase price of $10.3
million. Approximately $5.5 million of the purchase price is held in an escrow
account pending certain regulatory approvals. The acquisition agreement also
provides for contingent payment of up to $1.5 million if certain financial
performance benchmarks are achieved in the future. The $1.5 million contingency
will be accounted for as an adjustment to the purchase price when the
contingency is resolved. The Company financed the acquisition with a portion of
the proceeds from the Senior Notes.
Effective 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 $40 million in cash and assumption of $2.0
million in liabilities 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. The Company
financed the acquisition with the remaining proceeds from the Senior Notes and
borrowings under the Senior Credit Agreement.
Effective December 1, 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 for a cash purchase price of
$6.5 million in cash, a deferred payment of $1.7 million, and the assumption of
certain liabilities approximating $663,000. The company funded the acquisition
with borrowings under the Senior Credit Agreement.
Effective 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 additional contingent
payments if certain financial results are obtained in the future. The
additional payments will be accounted for as an adjustment to the purchase price
when the contingency is resolved. The Company funded the acquisition with
borrowings under the Senior Credit Agreement.
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.
33
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the acquisitions, assets were acquired and liabilities were
assumed as follows:
<TABLE>
<CAPTION>
Purchase Prices 1996 1997
------------------ -----------------
<S> <C> <C>
Net cash paid ............................................... $ 46,983,442 $80,775,395
Amounts payable for acquisition costs......................... -- 8,369,421
Subordinated notes, preferred stock and common stock
issued to sellers, net of expenses ......................... 15,768,624 900,000
Portion of purchase price for continuing stockholders,
treated as a dividend ...................................... (14,869,728) --
------------------ -----------------
Total net purchase prices, including professional fees ..... 47,882,338 90,044,816
Fair values of net assets acquired:
Fair values of assets acquired .............................. 35,987,320 53,131,563
Liabilities assumed ......................................... (27,864,398) (3,297,973)
------------------ -----------------
Total net assets acquired .................................. 8,122,922 49,833,590
------------------ -----------------
Goodwill ...................................................... $ 39,759,416 $40,211,226
================== =================
</TABLE>
The following table presents unaudited pro forma results of operations of the
Company for the one month period ended December 31, 1996 and the year ended
December 31, 1997, as if the 1997 acquisitions had occurred at the beginning of
each respective period:
<TABLE>
<CAPTION>
ONE-MONTH FOR THE YEAR
PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------------- ------------------
<S> <C> <C>
Net sales....................................... $14,894,179 $172,567,348
Loss before extraordinary loss.................. 1,981,056 26,001,087
Net Loss........................................ 1,981,056 30,740,844
</TABLE>
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
acquisition occurred at the beginning of the periods presented, nor do they
purport to be indicative of the future results of operations of the Company.
Please refer to footnote 15 for a discussion of the Company's acquisitions
which were consummated subsequent to December 31, 1997.
34
<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,
---------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Trade accounts receivable, net of advance payments received of
$1,188,671 and $187,647 at December 31, 1996 and
December 31, 1997, respectively ............................... $ 7,975,016 $21,809,811
Advance commissions receivable .................................... 349,094 272,921
Amounts receivable from stockholders .............................. 135,627 --
Receivables related to acquisitions................................. -- 456,875
Employees and other ............................................... 11,556 178,989
----------------- -----------------
8,471,293 22,718,596
Less allowance for unbillable and uncollectible chargebacks ....... (1,125,023) (5,316,689)
----------------- -----------------
$ 7,346,270 $17,401,907
================= =================
</TABLE>
At December 31, 1996 and December 31, 1997, the Company had advanced
commissions to certain facilities of $835,641 and $1,290,732 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,
---------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Leasehold improvements ............................................ $ 432,036 $ 493,836
Telephone system equipment ........................................ 7,259,333 24,480,777
Vehicles .......................................................... 123,977 249,868
Office equipment .................................................. 264,591 1,075,751
----------------- -----------------
8,079,937 26,300,232
Less accumulated depreciation ..................................... (110,803) (2,293,193)
----------------- -----------------
$7,969,134 $24,007,039
================= =================
</TABLE>
35
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
Intangible assets:
Acquired telephone contracts ................................................ $18,440,124 $ 59,064,429
Noncompete agreements ....................................................... 303,611 403,611
Deferred loan costs ......................................................... 3,804,121 8,299,067
Goodwill .................................................................... 39,759,416 79,970,642
Other intangibles ........................................................... 55,936 526,385
------------------- -------------------
62,363,208 148,264,134
Less accumulated amortization ................................................ (803,023) (15,157,562)
------------------- -------------------
Total intangible assets ....................................................... 61,560,185 133,106,572
Deposits........................................................................ -- 416,384
Other assets--noncurrent portion of commission advances to facilities ......... 486,547 1,017,811
------------------- -------------------
$62,046,732 $134,540,767
=================== ===================
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
Facility commissions .................................................... $2,034,070 $ 5,456,245
Billing and collection fees ............................................. 455,517 1,148,171
Uncollectible call chargebacks .......................................... 840,000 990,135
Accrued acquisition and financing costs ................................. 1,068,124 8,599,778
Accrued interest ........................................................ 9,946 6,557,651
Accrued excise taxes payable ............................................ -- 1,166,003
Accrued dividends on preferred stock .................................... -- 474,000
Other ................................................................... 185,436 286,175
------------------- -------------------
$4,593,093 $24,678,158
=================== ===================
</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.
The amount payable for acquisitions and financing costs includes a $2.5
million holdback of the purchase price of Security Telecom Corporation
acquisition (see footnote 2) which will be paid to the sellers after certain
regulatory approvals have been obtained and a $1.7 million deferred payment
relating to the North American InTeleCom acquisition.
36
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
Senior Notes ........................................................... $ -- $115,000,000
Senior Credit Agreement:
Revolving loan facility ............................................. 5,700,000 2,000,000
Term loan facility.................................................... 45,000,000 48,500,000
Senior subordinated notes .............................................. 8,500,000 --
Subordinated notes ..................................................... 5,000,000 --
Other.................................................................... -- 86,301
------------------- -------------------
64,200,000 165,586,301
Less unamortized discount .............................................. (1,085,500) --
Less current portion of long-term debt ................................. (3,150,000) (5,545,363)
------------------- -------------------
$59,964,500 $160,040,938
=================== ===================
</TABLE>
SENIOR NOTES--On June 27, 1997, the Company issued $115.0 million of 11%
Senior Notes due 2007. A portion of the proceeds of the issuance was used to
repay all of the previous debt outstanding under the Senior Credit Agreement,
the Senior Subordinated Notes, the Subordinated Notes, and to fund the purchase
of Security Telecom Corporation. As a result of the repayment of the
outstanding debt, and amendment of the Company's Senior Credit Agreement, the
Company incurred an extraordinary loss of $4.7 million resulting from the write-
off of the unamortized deferred loan costs and the unamortized discount of the
Senior Subordinated Notes.
Interest on the Senior Notes is payable semi-annually. 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 subsidiaries are not material to investors.
The Senior Notes are redeemable at the Company's option on or after June 30,
2002. The Senior Notes are redeemable at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2002 ..................................................... 105.500%
2003 ..................................................... 103.667%
2004 ..................................................... 101.833%
2005 and thereafter........................................ 100.000%
</TABLE>
At any time on or prior to June 30, 2000, the Company may redeem up to 30% of
the Senior Notes originally issued at a redemption price of 111% of the
principal amount, plus accrued and unpaid interest, with the proceeds of one or
more Equity Offerings, as defined.
37
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SENIOR CREDIT AGREEMENT--In July 1997 and again in December 1997, the Company
amended and restated its Senior Credit Agreement with a group of lenders. The
Senior Credit Agreement includes a $55.0 million term loan acquisition facility
and a $25.0 million revolving loan facility (which includes a $5.0 million
letter of credit facility). Under the terms of the Senior Credit Facility, the
term loan is amortized on a quarterly basis, over five years beginning September
30, 1998, and the revolving credit facility expires on December 31, 2002.
Amounts outstanding under the Senior Credit Agreement bear interest at a rate
per annum equal to one of the following rates, at the Company's option: (i) a
base rate equal to the higher of the Federal Funds rate plus 50 basis points or
the lead bank's reference rate, or (ii) the London Interbank Offering Rate
("LIBOR") plus a margin that varies from 200 to 350 basis points, based on the
Company's Total Debt to EBITDA Ratio, as defined. The Company pays a commitment
fee on unused amounts of the Senior Credit Agreement at the rate of 50 basis
points. The blended interest rate in effect at December 31, 1997, on the Senior
Credit Agreement was 9.47%.
Interest is payable quarterly, and scheduled principal installments on the
term loan facilities are due in quarterly installments of $2,750,000 beginning
September 30, 1998 through December 31, 1998, decreasing to $2,406,250 on March
31, 1999, and increasing to $3,093,750 on March 31, 2000, and $3,437,500 on
March 31, 2001, with the remaining unpaid balance due on December 31, 2002.
Both the revolving and the term loan facilities are collateralized by
substantially all of the assets of the Company.
SENIOR SUBORDINATED NOTES--In connection with the acquisitions of Talton
Telecommunications Corporation and AmeriTel Pay Phones, Inc., the Company issued
$8.5 million of senior subordinated notes which accrued 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 increased 0.5% on a
quarterly basis up to a maximum rate of 19%. 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.
On June 27, 1997, the Company used $8.5 million of the net proceeds from the
Senior Notes to pay off the outstanding Senior Subordinated Notes.
SUBORDINATED NOTES--In connection with the acquisitions of Talton
Telecommunications Corporation and AmeriTel Pay Phones, Inc., the Company issued
subordinated notes to three stockholders of the Company, which accrued interest,
payable quarterly, at an initial rate of 12.5% per annum. On June 27, 1997 the
Company used $5.0 million of the net proceeds from the Senior Notes to pay off
the outstanding Subordinated Notes
COVENANTS AND OTHER--The Senior Notes and the amended and restated Senior
Credit Agreement contain financial and operating covenants requiring, among
other items, the maintenance of certain financial ratios, as defined, including
total debt to free cash flow, senior secured debt to free cash flow and various
other ratios of free cash flow to specified minimums. In addition, the amended
and restated 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. In the event the Company fails to
comply with the covenants and other restrictions, as specified, it could be in
default under the Senior Notes and the Senior Credit Agreement and substantially
all of the Company's long-term maturities could be accelerated.
38
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, the scheduled maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
1998 .......................................... $ 5,545,363
1999 .......................................... 9,665,938
2000 .......................................... 12,375,000
2001 .......................................... 13,750,000
2002 .......................................... 9,250,000
Thereafter .................................... 115,000,000
------------
$165,586,301
============
</TABLE>
8. INCOME TAXES
A summary of the income tax benefit is as follows:
<TABLE>
<CAPTION>
ONE MONTH YEAR
PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------------- -------------------
<S> <C> <C>
Current income tax provision:
Federal ........................................... $(73,837) $ 228,461
State ............................................. (10,260) 425,377
Deferred income taxes ................................ 61,595 (1,295,508)
-------------------- -------------------
$(22,502) $ (641,670)
==================== ===================
</TABLE>
The income tax benefit differs from statutory rates primarily because of
permanent differences related to a valuation allowance on deferred tax asset,
nondeductible write off of debt discount and nondeductible goodwill
amortization. The following is a reconciliation of the income tax benefit
reported in the statement of operations:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1997
-------------------- -------------------
<S> <C> <C>
Tax benefit at statutory rates ........................ $(96,094) $(5,973,339)
Effect of state income taxes .......................... (13,284) (301,595)
Effect of nondeductible goodwill amortization ......... 86,876 675,910
Non-deductible write-off of debt discount ............. -- 332,163
Valuation allowance on deferred tax assets ............ -- 4,674,920
Other ................................................. -- (49,729)
-------------------- -------------------
$(22,502) $ (641,670)
==================== ===================
</TABLE>
39
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997
-------------------- ---------------------
<S> <C> <C>
Deferred income tax assets:
Allowance for unbillable and uncollectible chargebacks................. $ 440,547 $ 1,486,129
Reserves............................................................... 232,712 166,368
Amortization of intangibles............................................ -- 2,210,171
Net operating loss carryforward........................................ -- 1,872,004
Valuation allowance.................................................... -- (4,674,920)
-------------------- ---------------------
673,259 1,059,752
Deferred income tax liabilities:
Depreciation and amortization.......................................... (1,944,922) (1,059,752)
Other.................................................................. (23,845) --
-------------------- ---------------------
(1,968,767) (1,059,752)
-------------------- ---------------------
Net deferred income tax asset (liability)................................. $(1,295,508) $ --
==================== =====================
</TABLE>
This net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C>
Current asset .................................. $ 673,259 $ 1,059,752
Noncurrent liability ........................... (1,968,767) (1,059,752)
-------------------- ---------------------
$(1,295,508) $ --
==================== ====================
</TABLE>
The Company has established a valuation allowance for deferred tax assets
primarily as a result of operating and extraordinary losses. The Company was
unable to determine that it is more likely than not that the deferred tax assets
will be realized. The Company generated a federal income tax net operating loss
carryforward of approximately $4.8 million and $301,000 for the year ended 1997
and the one month ended December 31, 1996, respectively, which will expire in
the year 2017 and 2011, respectively.
9. STOCKHOLDERS' EQUITY
COMMON STOCK--The authorized common stock of the Company includes 49,600
shares of Class A common stock and 400 shares of Class B common stock. Holders
of the shares of Class A and Class B common stock have identical rights and
privileges except that holders of Class B common stock are entitled to four
votes per share as compared to one vote per share for holders of Class A common
stock.
Issued and outstanding shares of common stock as of December 31, 1997 include
15,800 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 of Talton
Telecommunications Corporation and AmeriTel Pay Phones, Inc. 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
40
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1997.
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 was allocated to these warrants and was recorded as additional paid-
in capital. The $1,085,500, net of accumulated amortization, was written off as
part of the extraordinary loss on debt extinguishment upon the issuance of the
Senior Notes and the related repayment of the outstanding balances under the
previous Senior Credit Agreement.
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. In conjunction with the issuance of the Senior Notes, 1,059 of these
warrants were terminated. The remaining 5,171 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.
10. RELATED-PARTY TRANSACTIONS
Two stockholders of the Company have personally guaranteed three of the
Company's operating leases, which have expiration dates ranging from September
1998 to April 2000. 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.
In conjunction with the formation of the Company in 1996 and the consummation
and original financing of the acquisitions of Talton Telecommunications
Corporation and AmeriTel Pay Phones, Inc., 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.
The Company entered into a management services and consulting agreement with a
company affiliated with certain stockholders, along with separate consulting
agreements with four stockholders who are former employees of the acquired
companies. These agreements require the payment of aggregate minimum annual
consulting fees over the next five years in the following amounts:
<TABLE>
<S> <C>
1998 .................................. $668,000
1999 .................................. $500,000
2000 .................................. $200,000
2001 .................................. $200,000
2002 .................................. $100,000
</TABLE>
41
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In 1997, the Company paid $187,000 under the terms of this
agreement and $591,250 was recorded as a liability at December 31, 1997. This
agreement also provides for an additional amount upon the refinancing of certain
Senior Subordinated Notes outstanding. In conjunction with the Senior Notes
offering, the Company paid $200,000 under the terms of this 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- to five-year terms. In connection with these
agreements, the Company paid $478,000 during the year ended December 31, 1997.
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 expenses were $3,517 for the one month ended December
31, 1996 and $5,115 for the year ended December 31, 1997.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases office furniture, office space and
vehicles under various operating lease agreements. Rent expense under these
operating lease agreements was $19,900 and $496,967, respectively, during the
one-month period ended December 31, 1996 and the year ended December 31, 1997.
Minimum future rental payments under noncancelable operating leases for each of
the next five years and thereafter and in the aggregate are:
<TABLE>
<CAPTION>
December 31:
<S> <C>
1998 ........................................ $ 824,952
1999 ........................................ 700,164
2000 ........................................ 498,135
2001 ........................................ 459,776
2002 ........................................ 352,238
Thereafter .................................. 1,484,900
------------------
Total minimum future rental payments ........ $4,320,165
==================
</TABLE>
MINIMUM COMMISSIONS--The Company has entered into contracts with customers
obligating the Company to pay future minimum commissions of approximately $9.9
million per year over the next three years.
EMPLOYMENT AGREEMENTS--As of December 31, 1997, the Company had entered into
employment agreements with certain key management personnel which provided for
minimum compensation levels and incentive bonuses along with provisions for
termination of benefits in certain circumstances and for certain severance
payments in the event of a change in control (as defined).
42
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
LITIGATION--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 statements of the Company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Pursuant to SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," the Company is required to disclose an estimate of the fair value
of the Company's financial instruments. The Company believes that the carrying
amounts of cash and cash equivalents, accounts receivable, and accounts payable
are a reasonable estimate of their fair value because of the short-term
maturities of such instruments. In addition, because the interest rates on the
amounts borrowed under the Senior Credit Agreement are variable, their fair
values approximate their carrying values.
The fair value of the Company's Senior Notes is based on their quoted market
value. The following is a summary of the carrying value of the Company's debt
instruments:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
HISTORICAL
CARRYING VALUE FAIR VALUE
-------------------- ------------------
<S> <C> <C>
Senior Notes................................................ $115,000,000 $123,912,500
Senior Credit Agreement..................................... $ 50,500,000 $ 50,500,000
</TABLE>
14. FEDERAL BID AND OTHER COSTS
FEDERAL BID COSTS--During 1997, the Company incurred $399,817 of external
costs associated with a bid for the Federal Bureau of Prisons contract. Initial
indications are the Company was unsuccessful in obtaining the contract. The
contract award has been appealed, however, the Company has expensed all costs
associated with the bid.
EXTRAORDINARY LOSS--During 1997, as a result of the repayment of outstanding
indebtedness and amendments of the Senior Credit Agreement, the Company expensed
approximately $4.7 million of debt issuance, legal, and other costs associated
with the extinguishment of the prior credit facilities. These amounts have been
classified as an extraordinary loss in accordance with the provisions of SFAS
No. 4, "Reporting Gains and Losses From the Extinguishment of Debt."
15. SUBSEQUENT EVENTS
Effective February 1, 1998, the Company entered into an agreement to purchase
substantially all of the net assets of MOG Communications, Inc. for a cash
purchase price of $1,925,000 with a note of $950,000 or a stock equivalent at
$6,000 per share. The acquisition was funded with borrowings under the Senior
Credit Agreement.
Effective March 9, 1998, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of ILD
Teleservices, Inc. for a cash purchase price of $2.6 million. The acquisition
was funded with borrowings under the Senior Credit Agreement.
43
<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 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 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
44
<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 the year 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 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, 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 the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
March 22, 1996
45
<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.
46
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF INCOME
YEAR ELEVEN
ENDED MONTHS ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
OPERATING REVENUE....... $ 20,371,388 $29,305,641
OPERATING EXPENSES:
Telecommunication
costs................ 9,747,326 13,728,316
Facility commissions.. 3,497,488 6,086,469
Field operations and
maintenance.......... 863,901 1,166,063
Selling, general and
administrative....... 1,758,744 2,281,177
Depreciation.......... 384,277 536,264
Amortization of
intangibles.......... 1,224,071 1,624,017
Nonrecurring
expenses............. 684,320
------------ -----------
Total operating
expenses........... 17,475,807 26,106,626
------------ -----------
OPERATING INCOME........ 2,895,581 3,199,015
OTHER (INCOME) EXPENSE:
Interest income....... (32,165) (20,816)
Interest expense...... 1,059,860 1,375,701
Other, net............ 66,139 38,881
------------ -----------
Total other (income)
expense............ 1,093,834 1,393,766
------------ -----------
INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY
LOSS................... 1,801,747 1,805,249
INCOME TAXES............ 734,363 693,001
------------ -----------
INCOME BEFORE
EXTRAORDINARY LOSS..... 1,067,384 1,112,248
EXTRAORDINARY LOSS FROM
EARLY EXTINGUISHMENT OF
DEBT................... 52,353
------------ -----------
NET INCOME.............. $ 1,067,384 $ 1,059,895
============ ===========
See notes to financial statements.
47
<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,
1995................... $ 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.
48
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF CASH FLOWS
YEAR ELEVEN MONTHS
ENDED ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 1,067,384 $ 1,059,895
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Extraordinary loss.... 52,353
Depreciation and
amortization......... 1,608,348 2,160,281
Deferred income
taxes................ 64,461 (35,524)
Changes in operating
assets and
liabilities:
Accounts receivable.. (992,079) (3,803,925)
Inventory............ (299,555) 271,286
Prepaid expenses..... (44,017) 44,880
Accounts payable..... (135,633) 1,092,431
Accrued expenses..... 1,288,008 1,460,005
Income taxes......... (242,277) 266,149
------------ -----------
Net cash provided by
operating
activities......... 2,314,640 2,567,831
------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (2,051,111) (1,516,236)
Cash outflows for
acquisition of
facility contracts... (3,613,662) (4,698,468)
------------ -----------
Net cash used in
investing
activities......... (5,664,773) (6,214,704)
------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-
term debt
borrowings........... 11,890,000 5,600,000
Proceeds from
(payments on) advance
from related
parties.............. (571,653)
Proceeds from issuance
of common stock...... 19,501
Proceeds from issuance
of preferred stock... 1,417,242
Purchase of treasury
stock................ (15,000)
Payments of long-term
debt................. (8,200,510) (2,645,282)
Dividends paid on
common and preferred
stock................ (507,840) (137,708)
------------ -----------
Net cash provided by
financing
activities......... 4,012,239 2,836,511
------------ -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 662,106 (810,362)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 228,920 891,026
------------ -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 891,026 $ 80,664
============ ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for
interest............. $ 930,906 $ 1,489,076
============ ===========
Cash paid for income
tax.................. $ 912,479 $ 462,380
============ ===========
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......... $ -- $ 310,000
============ ===========
Issuance of common
stock upon conversion
of notes payable..... $ 123,500 $ --
============ ===========
See notes to financial statements.
49
<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.
50
<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-
51
<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 1995
financial statements to conform to the presentation used in the 1996 financial
statements.
2. ACQUISITIONS
During the year ended December 31, 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 $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>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
---------- -----------------
<S> <C> <C>
Purchase prices:
Net cash paid.................. $3,613,662 $4,698,468
Amounts payable to sellers..... 310,000
---------- ----------
Total purchase prices............ 3,613,662 5,008,468
Estimated fair values of tangible
and identifiable intangible
assets acquired................. 3,215,111 4,121,809
---------- ----------
Goodwill......................... $ 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>
52
<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 two of the acquisitions in 1996, the Company recorded
amounts payable to the sellers of $310,000, 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.
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.
53
<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>
54
<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>
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>
55
<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.
56
<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>
Outstanding at January 1, 1995.................... 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,
57
<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 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 1995 were $7,750.
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 $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 $770,000 in 1995, 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 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 $102,484 and $61,050, during the fiscal
years 1995 and 1996,
58
<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.
* * * * * *
59
<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
60
<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 the year 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 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 the Company at
December 31, 1995, and the results of their operations and their cash flows
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
BORLAND, BENEFIELD, CRAWFORD & WEBSTER, P.C.
Birmingham, Alabama
March 4, 1996
61
<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.
62
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
OPERATING REVENUE................... $ 19,955,019 $24,357,473
OPERATING EXPENSES:
Telecommunication
costs............................ 8,926,090 9,588,482
Facility commissions.............. 6,097,790 7,875,455
Field operations and
maintenance...................... 602,429 649,739
Selling, general and
administrative................... 2,329,970 1,639,827
Depreciation...................... 975,350 1,001,982
Amortization of
intangibles...................... 380,895 122,180
------------ -----------
Total operating
expense........................ 19,312,524 20,877,665
------------ -----------
OPERATING INCOME.................... 642,495 3,479,808
OTHER (INCOME) EXPENSE:
Interest income................... (9,625) (55,268)
Interest expense.................. 341,461 169,789
Other, net........................ (118,095) (12,321)
------------ -----------
Total other (income)
expense........................ 213,741 102,200
------------ -----------
INCOME BEFORE
INCOME TAXES....................... 428,754 3,377,608
INCOME TAXES........................ 157,339 1,223,989
------------ -----------
NET INCOME.......................... $ 271,415 $ 2,153,619
============ ===========
</TABLE>
See notes to consolidated financial statements.
63
<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, 1995 (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.
64
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ELEVEN MONTHS
ENDED ENDED
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 271,415 $ 2,153,619
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,356,245 1,124,162
Deferred income
taxes................ 354,884 250,989
Changes in operating
assets and
liabilities:
Accounts receivable... (1,077,696) (180,563)
Inventories........... (174,715) 142,233
Prepaid expenses...... 7,536 (55,788)
Accounts payable...... 302,838 14,007
Accrued expenses...... 1,236,118 (97,672)
Income taxes payable.. (523,114) 1,381,652
------------ -----------
Net cash provided by
operating
activities......... 1,753,511 4,732,639
------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (2,617,816) (1,287,703)
Refunds (payments) for
intangible and other.. 260,767 (12,975)
------------ -----------
Net cash used in
investing
activities......... (2,357,049) (1,300,678)
------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt..... 2,000,225
Payments of long-term
debt.................. (1,185,168) (3,383,794)
------------ -----------
Net cash provided by
(used in) financing
activities......... 815,057 (3,383,794)
------------ -----------
INCREASE IN CASH AND
CASH EQUIVALENTS....... 211,519 48,167
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 190,218 401,737
------------ -----------
CASH AND CASH
EQUIVALENTS,
END OF PERIOD.......... $ 401,737 $ 449,904
============ ===========
SUPPLEMENTAL
INFORMATION:
Interest paid.......... $ 338,672 $ 172,578
============ ===========
Income taxes paid
(refunded)............ $ 89,500 $ (408,652)
============ ===========
</TABLE>
See notes to consolidated financial statements.
65
<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.
66
<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 1995
financial statements to conform to the presentation used in the 1996 financial
statements.
67
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. PRIOR-PERIOD ADJUSTMENTS
The Company has restated its previously issued consolidated financial
statements for the year ended December 31, 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 1995:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
Income (loss) before income taxes:
As previously reported....................... $ (24,716)
As restated.................................. 428,754
Net income (loss):
As previously reported....................... 154,670
As restated.................................. 271,415
Retained earnings:
As previously reported....................... 303,800
As restated.................................. 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>
68
<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>
69
<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 for the year ended December 31, 1995, and the
eleven months ended November 30, 1996, are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Current taxes payable (refundable):
Federal................................ $(181,387) $ 901,000
State.................................. (16,158) 72,000
Deferred income taxes.................... 354,884 250,989
--------- ----------
$ 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 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, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Tax at statutory rates............. $145,776 $1,148,387
Effect of state income taxes....... 12,434 97,951
Tax penalties and other............ (871) (22,349)
-------- ----------
$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>
70
<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 $29,489 and $32,820 for the year ended
December 31, 1995, and for the eleven months ended November 30, 1996,
respectively.
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 $159,951 and $107,158 for
the year ended December 31, 1995, and for the eleven months ended November 30,
1996, respectively.
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.
* * * * * *
71
<PAGE>
TALTON HOLDINGS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSE DEDUCTIONS BALANCE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $1,125 13,065 8,873 $5,317
</TABLE>
72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31,
1997 about each of the directors and officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------- -------------- ---------------------------------------------
<S> <C> <C>
Julius E. Talton, Sr. (1), (3) 69 Chairman of the Board
John A. Crooks, Jr. 50 President and Chief Operating Officer
Jeffrey D. Cushman 36 Chief Financial Officer, Vice President, Secretary, and
Treasurer
John R. Summers 41 Vice President and Assistant Secretary
Julius E. Talton, Jr. 37 Vice President
James E. Lumpkin 53 Vice President
Todd W. Follmer (1) 38 Vice President, Assistant Secretary, Assistant Treasurer,
Acting Chief Executive Officer, 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 (1), (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
73
<PAGE>
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. In addition, on December 12, 1997, Mr. Cushman was
also named Vice President, Secretary and Treasurer. 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. Mr. Cooks has indicated that it is his
intention to resign as President and to accept another position with the
Company. 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. On December 12, 1997, Mr. Summers
became Vice President and Assistant Secretary. From April 1993 until December
1996, Mr. Summers served as Vice President--Operations and Finance of AmeriTel.
Mr. Summers was a self-employed consultant with Summers and Associates, a
management and financial consulting firm, from January 1992 until April 1993.
Julius E. Talton, Jr. Mr. Talton, Jr. became Vice President of the
Company in December 1996. Mr. Talton, Jr. served in various capacities with
Talton Telecommunications from 1986 until December 1996, most recently as Vice
President of Sales.
James E. Lumpkin. Mr. Lumpkin became Vice President of the Company in
December 1996. Mr. Lumpkin served in various capacities with Talton
Telecommunications from its founding in 1973 until December 1996, most recently
as Vice President, Technical Operations.
Todd W. Follmer. Mr. Follmer became Vice President, Assistant
Secretary, and Assistant Treasurer and was elected to the Company's Board of
Directors in December 1996. Mr. Follmer currently serves as acting chief
executive officer of the Company. 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
74
<PAGE>
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. Mr. Sachs is a Managing Director of ARES Management,
L.P., an investment management firm, and is a principal of Onyx Partners, Inc.,
a merchant banking firm. From October 1990 until June 1994, Mr. Sachs was
employed at TMT-FW, Inc., an affiliate of Taylor & Co., a private investment
management firm. Mr. Sachs is a director of Terex Corporation.
Roger K. Sallee. Mr. Sallee was elected to the Company's Board of
Directors in December 1996. Mr. Sallee founded AmeriTel and served as its
President and Chief Executive Officer from July 1991 until December 1996.
Joseph P. Urso. Mr. Urso was elected to the Company's Board of
Directors in December 1996. Mr. Urso has served as President and has been a
principal of EUFCC since January 1996. Since March 1996, Mr. Urso has served as
Chairman of Interstate Engineering, a manufacturing firm located in California.
Mr. Urso was a shareholder of Stutzman & Bromberg, P.C. from January 1992 until
June 1995.
The Company's Certificate of Incorporation divides the Board of Directors into
two classes, the "Class A/B Directors" and the "Class B Directors," with each
class serving a one-year term. The size of the Board of Directors depends on the
aggregate percentage ownership of all outstanding Common Stock held by Gregg L.
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.
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ITEM 11. 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 $100,000 for the fiscal year ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- -------------
OTHER ANNUAL SHARES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
Name and Principal Position YEAR SALARY($) BONUS($) ($)(1) OPTIONS (#) ($)
- ---------------------------------------------- ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Julius E. Talton, Sr.
Chairman of the Board........................ 1997 96,000 -- -- -- --
1996 149,975
John R. Summers,
Vice President, and Assistant 1997 100,000 20,000
Secretary.................................... 1996 94,565 211,506(2) -- -- --
Julius E. Talton, Jr.,
Vice President............................... 1997 125,000 24,190 -- -- --
1996 101,926
John A. Crooks, Jr.
President and Chief Operating 1997 95,352 50,000 -- -- --
Officer...................................... 1996 0 --
James E. Lumpkin
Vice President............................... 1997 78,000 -- -- --
1996 99,376
</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.
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.
76
<PAGE>
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.
STOCK OPTION GRANTS IN 1997
No stock options were granted to any of the five individuals named in the
summary compensation table during 1997.
77
<PAGE>
AGGREGATED OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES
During 1997, none of the individuals named in the Summary Compensation
Table exercised any options.
78
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
capital stock as of December 31, 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 13.1% -- -- % 11.9% 2,500.0 42.2%
John A. Crooks, Jr. ............................. -- -- -- -- -- -- --
Jeffrey D. Cushman ............................... -- -- -- -- -- -- --
Julius E. Talton, Jr.(2) ......................... 1,237.5 7.8 -- -- 7.1 1,500.0 25.3
James E. Lumpkin(2) .............................. 825.0 5.2 -- -- 4.7 1,000.0 16.9
John R. Summers .................................. 100.0 * -- -- * -- --
Todd W. Follmer(3) ............................... -- -- 100.0 25.0 2.3 -- --
Gregg L. Engles(3) ............................... 150.0 * 100.0 25.0 3.2 -- --
Richard H. Hochman(4) ............................ 2,000.0 12.7 -- -- 11.5 -- --
Jay R. Levine(5) ................................. -- -- -- -- -- -- --
Nina E. McLemore(6) .............................. 2,000.0 12.7 -- -- 11.5 -- --
Bruce I. Raben(5) ................................ -- -- -- -- -- -- --
David A. Sachs(7) ................................ 250.0 1.6 31.5 7.9 2.2 -- --
Roger K. Sallee .................................. 53.0 * -- -- * 61.7 1.0
Joseph P. Urso(3) ................................ -- -- 100.0 25.0 2.3 -- --
CIBC Wood Gundy Ventures, Inc.(8) ................ 5,935.5 37.6 -- -- 34.1 -- --
Regent Capital Partners, L.P.(9) ................. 2,000.0 12.7 -- -- 11.5 -- --
Onyx Talton Partners, L.P.(10) ................... -- -- 100.0 25.0 2.3 -- --
Richard C. Green, Jr. ............................ 250.0 1.6 -- -- 1.4 310.8 5.2
Robert K. Green .................................. 250.0 1.6 -- -- 1.4 310.8 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) .................................... 8,678.0 54.9 331.5 82.9 46.0 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., and affiliate
of CIBC Ventures and CIBC, disclaim beneficial ownership of such shares..
(6) Includes 2,000 shares of Class A Common Stock held by Regent Capital
Partners. Ms. McLemore, who is the president of Regent Capital Management
Corp., an affiliate of Regent Capital Partners, exercises voting and
investment power with respect to such shares. Ms. McLemore's address is
505 Park Avenue, 17th Floor, New York, New York 10022.
(7) Consists of 250 shares of Class A Common Stock held by Sachs Investment
Partners and 31.5 shares of Class B Common Stock held by Onyx Talton
Partners, L.P. Mr. Sachs is a general partner of Sachs Investment Partners
and a principal shareholder of Onyx Partners, Inc., the general partner of
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 is a
general partner of Sachs Investment 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.
79
<PAGE>
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Repayment of Indebtedness
CIBC, an affiliate of CIBC Wood Gundy Ventures, Inc., 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
a previous credit facility (the "Former Credit Facility"), and held $45.0
million and $7.9 million of the principal amount outstanding under the term and
revolving loan portions, respectively, of the Former Credit Facility immediately
prior to the Offering. Upon completion of the Offering, the Company repaid the
entire principal amounts outstanding under the term loan and revolving loan
portions of the Former 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
Former Credit Facility in connection with the Senior Credit Facility.
Immediately prior to the Offering, 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.
Immediately prior to the Offering, Messrs. Talton, Talton, Jr., and Lumpkin
held $2.5 million, $1.5 million, and $1.0 million, respectively, under
subordinated notes issued in connection with the AmeriTel and Talton
Telecommunications acquisitions (the "Talton Subordinated Notes"). 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. The Company has recorded a liability of $591,250 to EUF Talton for
the 1997 acquisitions of InVision, NAI and PTC as of December 31, 1997. 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.
80
<PAGE>
The consulting agreement of Julius E. Talton provides that Mr. Talton will
serve as a director of the Company and will perform such duties related to the
business conducted by the Company as the Board of Directors may designate from
time to time. The consulting agreement has an initial term of two years, with
successive one-year renewal periods thereafter unless earlier terminated by the
Company or Mr. Talton. In addition to an aggregate of $10,000 payable in equal
monthly installments to Mr. Talton over the first twelve months of the
agreement, Mr. Talton will receive payments of $86,000 and $96,000 for the first
and second years of the initial term, respectively, and $120,000 for each year
thereafter that the agreement remains in effect. Mr. Talton's consulting
agreement contains a non-competition provision that applies during the term of
the agreement and for a period of two years after the expiration or earlier
termination of the agreement.
Julius E. Talton, Jr.'s employment agreement provides that Mr. Talton, Jr.
will serve as an executive of the Company, performing such duties and holding
such positions as the Board of Directors or senior management of the Company may
direct. The employment agreement which had 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 which had
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.
Lease Agreement
In December 1996, Talton Telecommunications entered in a lease agreement (the
"Talton Lease") with Mr. Talton for office space located in Selma, Alabama. The
lease has a five-year term commencing January 1, 1997, with an option to renew
for an additional 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.
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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 of the Company.
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 Former Credit Facility.
All stockholders of the Company, including the executive officers and directors
of the Company who hold shares of capital stock of the Company, pledged the
shares of capital stock of the Company held by each of them to CIBC to secure
the Company's obligations under the Former 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 Former Credit Facility, received a fee of
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<PAGE>
approximately $1.8 million in December 1996 for banking services rendered to the
Company in connection with the closing of the Former 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.
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
83
<PAGE>
Registrable Securities and Qualified Warrants. Subject to the CIBC Demand
Rights, Holders of Registrable Securities also have the right to include such
Registrable Securities in any registration statement under the Securities Act
filed by the Company for its own account (other than a registration statement
for securities to be offered in a Rule 145 transaction under the Securities Act
or to employees of the Company pursuant to any employee benefit plan). So long
as the CIBC Entities hold Registrable Securities equaling at least 50% of their
holdings of Common Stock on December 27, 1996, the CIBC Entities have the
following CIBC Demand Rights: (i) one of the Demand Registrations is exclusively
reserved for the use and exercise by the CIBC Entities; (ii) the CIBC Entities
have the right at any time to require the Company to use its best efforts to
effect an Initial Public Offering; and (iii) the CIBC Entities have in certain
circumstances, a first priority to cause a portion of their Registrable
Securities to be registered prior to the registration of the Registrable
Securities of the other Holders.
The Company is also obligated to file and maintain a shelf registration
statement on Form S-3 pursuant to Rule 415 of the Securities Act for all
Registrable Securities as expeditiously as possible after it is eligible to do
so.
Shareholders Agreement
Both the Shareholders Agreement and the Certificate of Incorporation of the
Company initially establish an eleven member board of directors, consisting of
six Class A/B Directors with one vote per director and five Class B Directors
having three total votes (i.e., 0.6 vote per director). The Shareholders
Agreement provides that, subject to the adjustments described below, (i) the
CIBC Entities have the right to designate two Class A/B Directors; (ii) Regent
Capital Partners and its affiliates (the "Regent Entities") have the right to
designate two Class A/B Directors; (iii) Julius E. Talton, Julius E. Talton,
Jr., James E. Lumpkin, and their affiliates (the "Talton Holders") have the
right to designate one Class A/B Director, (iv) all other stockholders, except
the EUF Holders, the Talton Holders, the CIBC Entities, the AmeriTel Holders (as
defined in the Shareholders Agreement), and the Onyx Holders, have the right to
designate one Class A/B Director, and (v) the EUF Holders have the right to
designate five Class B Directors. The CIBC Entities and the Regent Entities
lose the right to designate one Class A/B Director if their respective ownership
of outstanding Common Stock falls below 7.5% (but remains at or above 5%). The
CIBC Entities, the Regent Entities, and the Talton Holders each loses its right
to designate any Class A/B Directors if their respective ownership of
outstanding Common Stock falls below 5%. If the EUF Holders and the Onyx
Holders collectively own less than 10% but at least 7.5%) of the outstanding
Common Stock, the EUF Holders lose the right to designate two Class B Directors,
the three Class B Directors that they remain entitled to designate will have a
total of two votes, and all the holders of the outstanding Common Stock
collectively acquire the right to designate one additional Class A/B Director
with one full vote so as to maintain the total number of votes on the Board of
Directors at nine (and the membership on the Board of Directors will be reduced
to ten). If the EUF Holders and the Onyx Holders collectively own less than
7.5% (but at least 5%) of the outstanding Common Stock, the EUF Holders lose the
right to designate an additional two Class B Directors, the Class B Director
that they remain entitled to designate will have one full vote, and all the
holders of the outstanding Common Stock collectively acquire the right to
designate one additional Class A/B Director with one full vote so as to maintain
the total number of votes on the Board of Directors at nine (and the membership
on the Board of Directors will be reduced to nine). If the EUF Holders and the
Onyx Holders collectively own less than 5% of the outstanding Common Stock, the
EUF Holders lose the right to designate any directors, and all the holders of
the outstanding Common Stock collectively acquire the right to designate one
additional Class A/B Director with one full vote so as to maintain the total
number of votes on the Board of Directors at nine (and the membership on the
Board of Directors will remain at nine). In determining the percentage
ownership of the EUF Holders and the Onyx Holders, the Class B Common Stock 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
84
<PAGE>
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 toted 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% to 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.
85
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted
as a separate section of this report on page 24.
(a) (3) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
- ----------- --------------------------------------------------------------------------------
<C> <S>
2.1 Asset Purchase Agreement, dated as of August 21, 1997, among the Company,
InVision Telecom, Inc., and Communications Central, Inc. (filed as Exhibit 2.1 to
the Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
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. (filed as Exhibit 2.2 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
2.3 Contribution Agreement, dated as of December 20, 1996, among the Company, Julius
E. Talton, Julius E. Talton, Jr., and James E. Lumpkin (filed as Exhibit 2.3 to
the Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
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. (filed as Exhibit 2.4
to the Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
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. (filed as Exhibit 2.5 to the Company's Registration Statement No. 333-33639
and incorporated herein by reference).
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
3.3 Articles of Incorporation of AmeriTel Pay Phones, Inc., as amended (filed as
Exhibit 3.3 to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
</TABLE>
86
<PAGE>
<TABLE>
<S> <C>
3.4 Amended and Restated Bylaws of AmeriTel Pay Phones, Inc., (filed as Exhibit 3.4
to the Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
3.5 Articles of Incorporation of Talton Telecommunications Corporation as amended
(filed as Exhibit 3.5 to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
3.6 Amended and Restated Bylaws of Talton Telecommunications Corporation (filed as
Exhibit 3.6 to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
3.7 Articles of Incorporation of Talton Telecommunications of Carolina, Inc., as
amended (filed as Exhibit 3.7 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
3.8 Amended and Restated Bylaws of Talton Telecommunications of Carolina, Inc. (filed
as Exhibit 3.8 to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
3.9 Certificate of Incorporation of Talton STC, Inc. (filed as Exhibit 3.9 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
3.10 Bylaws of Talton STC, Inc. (filed as Exhibit 3.10 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
3.11 Certificate of Incorporation of Talton InVision, Inc. (filed as Exhibit 3.11 to
the Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
3.12 Bylaws of Talton InVision, Inc. (filed as Exhibit 3.12 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.1 Indenture, dated as of June 27, 1997, between the Company and U.S. Trust Company
of Texas, N.A. (filed as Exhibit 4.1 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.2 Form of Note (contained in Indenture filed as Exhibit 4.2 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.3 Form of Subsidiary Guaranty (contained in Indenture filed as Exhibit 4.3 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
4.4 Registration Rights Agreement, dated as of June 27, 1997, between the Company and
the Initial Purchaser (filed as Exhibit 4.4 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.5 Registration Rights Agreement, dated as of December 27, 1996, by and among the
Company and certain Holders named therein (filed as Exhibit 4.5 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
</TABLE>
87
<PAGE>
<TABLE>
<S> <C>
4.6 Shareholders Agreement, dated as of December 27, 1996, by and among the Company
and certain Persons named therein (filed as Exhibit 4.6 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.7 Warrant Agreement, dated as of December 27, 1996, between the Company and CIBC
Wood Gundy Ventures, Inc. (filed as Exhibit 4.7 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.8 Warrant Agreement, dated as of December 27, 1996, between the Company and Gregg
L. Engles (filed as Exhibit 4.8 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.9 Warrant Agreement, dated as of December 27, 1996, between the Company and Gregg
L. Engles (filed as Exhibit 4.9 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.10 Warrant Agreement, dated as of December 27, 1996, between the Company and Gregg
L. Engles (filed as Exhibit 4.10 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.11 Warrant Agreement, dated as of December 27, 1996, between the Company and Onyx
Talton Partners, L.P. (filed as Exhibit 4.11 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.12 Warrant Agreement, dated as of December 27, 1996, between the Company and Onyx
Talton Partners, L.P. (filed as Exhibit 4.12 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.13 Warrant Agreement, dated as of December 27, 1996, between the Company and Onyx
Talton Partners, L.P. (filed as Exhibit 4.13 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.14 Warrant Agreement, dated as of December 27, 1996, between the Company and Joseph
P. Urso (filed as Exhibit 4.14 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.15 Warrant Agreement, dated as of December 27, 1996, between the Company and Joseph
P. Urso (filed as Exhibit 4.15 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.16 Warrant Agreement, dated as of December 27, 1996, between the Company and Joseph
P. Urso (filed as Exhibit 4.16 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.17 Warrant Agreement, dated as of December 27, 1996, between the Company and Todd W.
Follmer (filed as Exhibit 4.17 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
4.18 Warrant Agreement, dated as of December 27, 1996, between the Company and Todd W.
Follmer (filed as Exhibit 4.18 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
</TABLE>
88
<PAGE>
<TABLE>
<S> <C>
4.19 Warrant Agreement, dated as of December 27, 1996, between the Company and Todd W.
Follmer (filed as Exhibit 4.19 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
10.1 Purchase Agreement dated as of June 27, 1997, between the Company and CIBC Wood
Gundy Securities Corp. (filed as Exhibit 10.1 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
10.2 Amended and Restated Credit Agreement, dated as of July 30, 1997, among the
Company, Canadian Imperial Bank of Commerce, CIBC Inc., and First Source
Financial LLP (filed as Exhibit 10.2 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
10.3 Asset Purchase Agreement, dated as of May 9, 1997, among the Company, Security
Telecom Corporation, and William H. Ohland (filed as Exhibit 10.3 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
10.4 First Amendment to Asset Purchase Agreement, dated as of June 21, 1997, among the
Company, Security Telecom Corporation, and William H. Ohland (filed as Exhibit
10.4 to the Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.5 Employment Agreement, dated as of June 2, 1997, between the Company and John A.
Crooks, Jr. (filed as Exhibit 10.5 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
10.6 Consulting Agreement, dated as of December 27, 196, between the Company and James
E. Lumpkin (filed as Exhibit 10.6 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
10.7 Consulting Agreement, dated as of December 27, 1996, between the Company and
Julius E. Talton (filed as Exhibit 10.7 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
10.8 Consulting and Strategic Services Agreement, dated as of December 27, 1996,
between the Company and EUF Talton, L.P. (filed as Exhibit 10.8 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
10.9 Employment Agreement, dated as of December 27, 1996, between the Company and
Julius E. Talton, Jr. (filed as Exhibit 10.9 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
10.10 Employment Agreement, dated as of December 27, 1996, between the Company and John
R. Summers (filed as Exhibit 10.10 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
10.11 Stock Option Letter, dated as of June 2, 1997, from the Company to John A.
Crooks, Jr. (filed as Exhibit 10.11 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
</TABLE>
89
<PAGE>
<TABLE>
<S> <C>
10.12 Employment Agreement, dated as of November 17, 1997, between the Company and
Jeffrey D. Cushman (filed as Exhibit 10.12 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of the Company.
23.2* Consent of Deloitte & Touche LLP.
23.3* Consent of Arthur Andersen LLP.
23.4* Consent of Borland, Benefield, Crawford & Webster, P.C.
25.1 Form T-1 Statement of Eligibility of Trustee (filed as Exhibit 25.1 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
27.1* Financial Data Schedule.
99.1 Form of Letter of Transmittal (filed as Exhibit 99.1 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
99.2 Form of Broker, Dealer Letter (filed as Exhibit 99.2 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
99.3 Form of Clients' Letter (filed as Exhibit 99.3 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
99.4 Form of Notice of Guaranteed Delivery (filed as Exhibit 99.4 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
</TABLE>
____________________
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during 1997.
(c) Exhibits -- The response to this portion of Item 14 is submitted
as separate section of this report as indicated on pages 86 to
90.
(d) Financial Statement Schedules -- The response to this portion of
Item 14 is submitted as a separate section of this report on
page 72.
The agreements set forth above described the contents of certain exhibits
thereunto that are not included. Such exhibits will be furnished to the
Commission upon request.
90
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Talton Holdings, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TALTON HOLDINGS, INC.
By: /s/ TODD W. FOLLMER
---------------------------------------
Todd W. Follmer
Acting Chief Executive Officer,
Vice President, Assistant Secretary,
Assistant Treasurer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RICHARD H. HOCHMAN
- ---------------------------------------------------- Director March 31, 1998
Richard H. Hochman
/s/ NINA E. MCLEMORE
- ---------------------------------------------------- Director March 31, 1998
Nina E. McLemore
/s/ JULIUS E. TALTON, SR.
- ---------------------------------------------------- Director March 31, 1998
Julius E. Talton, Sr.
/s/ DAVID A. SACHS
- ---------------------------------------------------- Director March 31, 1998
David A. Sachs
/s/ TODD W. FOLLMER
- ---------------------------------------------------- Director March 31, 1998
Todd W. Follmer
- ---------------------------------------------------- Director
Bruce I. Raben
/s/ ROGER K. SALLEE
- ---------------------------------------------------- Director March 31, 1998
Roger K. Sallee
/s/ JOSEPH P. URSO
- ---------------------------------------------------- Director March 31, 1998
Joseph P. Urso
/s/ JAY R. LEVINE
- ---------------------------------------------------- Director March 31, 1998
Jay R. Levine
/s/ GREGG L. ENGLES
- ---------------------------------------------------- Director March 31, 1998
Gregg L. Engles
Chief Financial Officer, Vice
President, Secretary and Treasurer March 31, 1998
/s/ JEFFREY D. CUSHMAN
- ----------------------------------------------------
Jeffrey D. Cushman
</TABLE>
91
<PAGE>
EXHIBIT 12.1
TALTON HOLDINGS, INC.
STATEMENTS REGARDING COMPUTATION OF RATIOS
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
The
Combined Predecessors Company
--------------------------------------------- ---------------------------
Years Ended December 31, Eleven Months One Month Year
------------------------------ Ended Ended Ended
November 30, December 31, December 31,
1993 1994 1995 1996 1996 1997
-------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income (Loss) from continuing operations before
income taxes and extraordinary loss $ 597 $ 1,647 $ 2,230 $ 5,183 $ (283) $ (12,829)
Interest expense 331 745 1,360 1,469 612 11,138
Interest portion of rent expense - 57 87 56 7 129
-------- -------- -------- ------------ ------------ ------------
Earnings available for fixed charges $ 928 $ 2,449 $ 3,677 $ 6,708 $ 336 $ (1,562)
======== ======== ======== ============ ============ ============
Fixed Charges:
Interest expense $ 331 $ 745 $ 1,360 $ 1,469 $ 612 $ 11,138
Interest portion of rent expense - 57 87 56 7 129
-------- -------- -------- ------------ ------------ ------------
Total fixed charges $ 331 $ 802 $ 1,447 $ 1,525 $ 619 $ 11,267
======== ======== ======== ============ ============ ============
Ratio of earnings to fixed charges 2.8 3.1 2.5 4.4 - -
Deficiency of earnings to fixed charges - - - - $ 283 $ 12,829
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
AmeriTel Pay Phones, Inc., a Missouri corporation(1)
Talton Telecommunications Corporation, an Alabama corporation(1)
Talton Telecommunications of Carolina, Inc., an Alabama corporation(2)
Talton STC, Inc., a Delaware corporation(1)
Talton Invision, Inc., a Delaware corporation(1)
One Source Telecommunications, Inc., a Delaware corporation(1)
MOG Communications, Inc., an Alabama corporation(1)
_____________
(1) Wholly owned by Talton Holdings, Inc.
(2) Wholly owned by Talton Telecommunications Corporation.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' REPORT
We consent to the use in this Form 10-K of Talton Holdings, Inc. of our report
dated April 4, 1997, with respect to the financial statements of AmeriTel Pay
Phones, Inc. as of November 30, 1996 and for the eleven months ended November
30, 1996; and our report dated April 4, 1997 with respect to the consolidated
financial statements of Talton Telecommunications Corporation as of November 30,
1996, and for the eleven months ended November 30, 1996; all appearing in this
Form 10-K.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 31, 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 or made in a
part of this Form 10-K.
ARTHUR ANDERSEN LLP
Kansas City, Missouri
March 31, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' REPORT
We consent to the use in this Form 10-K of Talton Holdings, Inc. of our report
dated March 4, 1996, with respect to the consolidated financial statements of
Talton Telecommunications Corporation as of December 31, 1995, and for the year
ended December 31, 1995; all appearing in this Form 10-K.
BORLAND, BENEFIELD, CRAWFORD & WEBSTER, P.C.
Birmingham, Alabama
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 1-MO YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> DEC-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 294,494 7,777,996
<SECURITIES> 0 0
<RECEIVABLES> 8,471,293 22,718,596
<ALLOWANCES> (1,125,023) (5,316,689)
<INVENTORY> 941,819 1,690,930
<CURRENT-ASSETS> 10,117,668 30,840,634
<PP&E> 8,079,937 26,300,232
<DEPRECIATION> (110,803) (2,293,193)
<TOTAL-ASSETS> 80,133,534 189,388,440
<CURRENT-LIABILITIES> 11,518,938 37,157,395
<BONDS> 60,164,500 161,190,938
0 0
59 59
<COMMON> 153 162
<OTHER-SE> 6,481,117 (10,019,866)
<TOTAL-LIABILITY-AND-EQUITY> 80,133,534 189,388,440
<SALES> 5,506,110 91,773,041
<TOTAL-REVENUES> 5,506,110 91,773,041
<CGS> 5,197,158 93,540,443
<TOTAL-COSTS> 5,197,158 93,540,443
<OTHER-EXPENSES> 591,581 11,061,485
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 612,071 11,137,877
<INCOME-PRETAX> (282,629) (12,828,887)
<INCOME-TAX> (22,502) (641,670)
<INCOME-CONTINUING> (260,127) (12,187,217)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 4,739,757
<CHANGES> 0 0
<NET-INCOME> (260,127) (16,926,974)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
