<PAGE>
Filed pursuant to Rule 424(b3)
SEC File No. 333-33639
OFFER TO EXCHANGE
11% SERIES B SENIOR NOTES DUE 2007
FOR ANY AND ALL OUTSTANDING 11% SENIOR NOTES DUE 2007
OF
TALTON HOLDINGS, INC.
GUARANTEED BY:
AMERITEL PAY PHONES, INC.
TALTON TELECOMMUNICATIONS CORPORATION
TALTON TELECOMMUNICATIONS OF CAROLINA, INC.
TALTON STC, INC.
TALTON INVISION, INC.
ONE SOURCE TELECOMMUNICATIONS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON FEBRUARY
10, 1998, UNLESS EXTENDED
Talton Holdings, Inc. (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange a principal amount of 11% Series B Senior Notes due 2007 of the
Registrants (the "New Notes") for an equal principal amount of the issued and
outstanding 11% Senior Notes due 2007 (the "Old Notes," and collectively with
the New Notes, the "Senior Notes"). Interest on the Senior Notes is payable
semi-annually commencing January 1, 1998 with a final maturity date of June
30, 2007. As of the date of this Prospectus, $115,000,000 aggregate principal
amount of the Old Notes is outstanding. The terms of the New Notes and the Old
Notes are identical in all material respects, except for certain transfer
restrictions and registration rights and except that holders of New Notes are
not entitled to receive an increase in interest rate that holders of the Old
Notes are entitled to receive in certain circumstances. See "Description of
Senior Notes--Exchange Offer; Registration Rights." For terms of the
guarantees by the Subsidiary Guarantors, see "Description of Senior Notes--
Subsidiary Guarantees."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is January 13, 1998
<PAGE>
The Exchange Offer is being made to satisfy certain obligations of the
Registrants under the Registration Rights Agreement, dated as of June 27,
1997, among the Company, the Subsidiary Guarantors (as defined and, together
with the Company, the "Registrants"), and the Initial Purchaser (as defined)
(the "Registration Rights Agreement"). Upon consummation of the Exchange
Offer, holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes, and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend on the Old
Notes.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") with respect to similar transactions, the
Registrants believe that the New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale, resold, and otherwise
transferred by any holder of such New Notes (other than any such holder that
is an "affiliate" of the Registrants within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes, and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes must acknowledge that it will
deliver a prospectus in connection with any resale of its New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of the New Notes received in exchange for
the Old Notes acquired by the broker-dealer as a result of market-making
activities or other trading activities. The Registrant has agreed that it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale for a period of 365 days after the Exchange Date (as defined)
or, if earlier, until all participating broker-dealers have so resold. See
"Plan of Distribution."
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of Senior Notes."
There will be no cash proceeds to the Registrant from the Exchange Offer. The
Senior Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all current and future senior indebtedness
of the Company and senior to all current and future subordinated indebtedness
of the Company. The Subsidiary Guarantees will be senior unsecured obligations
of the Subsidiary Guarantors and will rank pari passu in right of payment with
all current and future senior indebtedness of the Subsidiary Guarantors and
senior to all current and future subordinated indebtedness of the Subsidiary
Guarantors. The Senior Notes will be jointly and severally guaranteed
(collectively, the "Subsidiary Guarantees"), by each direct and indirect
subsidiary of the Company existing on the date of this Prospectus. As of the
date of this Prospectus, all subsidiaries of the Company are, directly or
indirectly, wholly owned by the Company. As of the date of this Prospectus
there is aggregate indebtedness of $600,000 of the Company's Subsidiaries that
is effectively senior to the Senior Notes because the Company is a holding
company. See "Risk Factors--Holding Company Structure."
The Old Notes were originally issued and sold on June 27, 1997 in an
offering of $115,000,000 aggregate principal amount of Old Notes (the
"Offering"). The Offering was exempt from registration under the Securities
Act under the exemptions provided by Rule 144A and Regulation S under, and
Section 4(2) of, the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold, or otherwise pledged, hypothecated, or transferred in the
United States unless so registered or unless an exemption from the
registration requirements of the Securities Act and applicable state
securities laws is available. BASED ON INTERPRETATIONS OF THE STAFF OF THE
COMMISSION, "AFFILIATES" OF THE COMPANY (AS SUCH TERM IS DEFINED IN RULE 405
UNDER THE SECURITIES ACT) ARE PROHIBITED FROM TENDERING OLD NOTES IN THE
EXCHANGE OFFER.
The Registrants have not entered into any arrangement or understanding with
any person to distribute the New Notes to be received in the Exchange Offer,
and, to the best of the Registrants' information and belief, each person
participating in the Exchange Offer is acquiring the New Notes in its ordinary
course of business
2
<PAGE>
and has no arrangement or understanding with any person to participate in the
distribution of the New Notes to be received in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on February 10, 1998, unless extended
(as it may be so extended, the "Expiration Date"). The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date. Old Notes tendered pursuant
to the Exchange Offer may be withdrawn at any time prior to the Expiration
Date; otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the Senior
Notes. If a market for the New Notes should develop, the New Notes could trade
at a discount from their initial offering price. The Company does not intend
to apply for listing of the New Notes on any securities exchange or in any
automated quotation system. There can be no assurance that an active trading
market for the New Notes will develop.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-4 under the Securities Act with respect to
the Exchange Offer. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Exchange Offer, reference is
made to such Registration Statement and the exhibits and schedules filed as
part thereof. The Registration Statement and the exhibits and schedules
thereto filed with the Commission may be inspected without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and will also be available for
inspection and copying at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and the
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of all or any portion of the Registration Statement may be obtained
from the Public Reference Section of the Commission upon payment of certain
prescribed fees. Electronic registration statements made through the
Electronic Data Gathering, Analysis, and Retrieval system are publicly
available through the Commission's Web site (http://www.sec.gov), which is
maintained by the Commission and which contains reports, proxy, and
information statements and other information regarding registrants that file
electronically with the Commission.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL ANY REGISTRANT ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES LAWS OF SUCH JURISDICTION.
CORPORATE STRUCTURE
Talton Holdings, Inc.
AmeriTel Pay Phones, Inc.(1)(2)
Talton Telecommunications Corporation(1)(2)
Talton Telecommunications of Carolina, Inc.(2)(3)
Talton STC, Inc.(1)(2)
Talton Invision, Inc.(1)(2)
One Source Telecommunications, Inc.(1)(2)
- --------
(1) Wholly owned by Talton Holdings, Inc.
(2) Subsidiary Guarantor.
(3) Wholly owned by Talton Telecommunications Corporation.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including notes) appearing elsewhere in this Prospectus. Except as otherwise
stated or unless the context otherwise requires, the information set forth in
this Prospectus gives effect to the STC Acquisition (as defined), and
references to the "Company" are to Talton Holdings, Inc. and its consolidated
subsidiaries and the historical operations and activities of certain
predecessor companies, including AmeriTel Pay Phones, Inc. ("AmeriTel") and
Talton Telecommunications Corporation ("Talton Telecommunications"), each of
which became wholly owned subsidiaries of the Company in December 1996, Tri-T,
Inc. ("Tataka"), the inmate telecommunications operations of which were
acquired by the Company in May 1997, and STC (as defined). References in this
Prospectus to the "STC Acquisition" are to the acquisition by the Company of
substantially all of the assets of Security Telecom Corporation, a Texas
corporation ("STC"), and its affiliate Law Enforcement Technology, Inc. in a
transaction that closed simultaneously with the closing of the Offering.
THE COMPANY
The Company is the largest independent provider of inmate telecommunications
services to correctional facilities operated by city, county, and state
authorities and other types of confinement facilities such as juvenile
detention centers, private jails, and halfway houses. As of September 30, 1997,
the Company owned and operated inmate telephones in 1,781 correctional
facilities in 43 states. Management believes that the Company provides inmate
telecommunications services to over 75% of the county correctional facilities
in the states of Alabama, Illinois, Iowa, Kansas, Missouri, Nebraska, and Utah
and to over 50% of the county correctional facilities in the states of
Colorado, Idaho, Indiana, Kentucky, Minnesota, Mississippi, Montana, Ohio,
Oklahoma, South Dakota, and Tennessee. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, the Company generated pro forma
operating revenues of $139.4 million and $102.4 million, respectively, and pro
forma EBITDA (as defined) of $24.9 million and $15.0 million, respectively.
Management estimates that the market for local and county correctional
facilities exceeds $700,000,000 in gross revenues annually. Management
estimates that approximately 55% of this market is controlled by RBOCs or other
LECs and by IXCs (as defined). The remainder of this market is served by
independent service providers such as the Company, with the Company accounting
for approximately 50% of the market served by independent service providers.
Management believes that no other independent provider accounts for more than
5% of the revenue derived from inmate telephone operations at local and county
correctional facilities.
The corrections industry has experienced dramatic growth over the last decade
as a result of societal and political trends. Recent anti-crime legislation,
including mandatory sentencing guidelines, limitations on parole, and spending
authorizations for crime prevention and construction of additional correctional
facilities have contributed to this industry growth. The U.S. has one of the
highest incarceration rates of any country in the world. The number of inmates
incarcerated in federal and state prisons and in city and county correctional
facilities increased from approximately 1.1 million at June 30, 1990 to
approximately 1.6 million at June 30, 1996, according to U.S. Department of
Justice statistics.
The inmate telecommunications industry is characterized by the specialized
telecommunications systems and related services required to address the unique
needs of the corrections industry. Security and public safety concerns
associated with inmate telephone use require that correctional facilities have
the ability to control inmate access to telephones and to certain telephone
numbers, and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for inmate
telephone usage have also led to the development of systems and procedures
unique to this industry. Inmate telephones in the U.S. are operated by a large
and diverse group of service providers, including local exchange carriers
("LECs"), regional bell operating companies ("RBOCs"), interexchange carriers
("IXCs") such as AT&T, MCI, Sprint, and LDDS/Worldcom, and independent public
pay telephone and inmate telephone companies.
4
<PAGE>
The Company's inmate telecommunications business consists of owning,
operating, servicing, and maintaining a system of telephones located in
correctional facilities and providing related services. The Company enters into
multi-year agreements with the correctional facilities pursuant to which the
Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights, the
Company pays a negotiated commission to the correctional facility based upon
actual inmate telephone use. Under the terms of the Company's agreements with
correctional facilities, these commissions are a function of revenues generated
from inmate telephone use. For the nine months ended September 30, 1997 pro
forma facility commissions were approximately 28% of pro forma operating
revenues. The Company installs and generally retains ownership of the
telephones and related equipment. In addition, the Company provides services
that are tailored to the specialized needs of the corrections industry and to
the requirements of the individual correctional facility, such as a specialized
law enforcement management system, call activity reporting, and call blocking.
The Company also generates revenues from public pay telephones that are
ancillary to its inmate telecommunications business.
The Company was formed in November 1996 to consummate the acquisitions of
AmeriTel and Talton Telecommunications, thereby combining the unique strengths
of two recognized independent providers of inmate telecommunications services.
The Company was formed by EUF Talton, L.P. ("EUF Talton"), an affiliate of
Engles Urso Follmer Capital Corporation ("EUFCC"), a private investment banking
and consulting firm, the principals of which are experienced in acquiring and
integrating the operations of companies in consolidating industries. With the
acquisition of AmeriTel, the Company acquired a management team with extensive
experience in identifying, consummating, and integrating acquisitions in the
inmate telecommunications industry; with Talton Telecommunications, the Company
acquired a billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a competitive
advantage in the industry. With the acquisition of STC, the Company augmented
its information technology and services offered with, among other assets, a
specialized law enforcement management information system ("LEMS"). The Company
believes this system will be instrumental in retaining STC's customers and will
assist the Company in retaining existing and obtaining new customers. On July
31, 1997, the Company acquired Correctional Communications Corporation ("CCC").
With this acquisition, the Company acquired CCC's proprietary call processor
technology, which management believes will reduce the Company's installation
and operating costs. CCC generated revenues of approximately $9.6 million in
1996. On October 6, 1997, the Company acquired substantially all of the inmate-
telephone assets ("Invision") of Communications Central Inc. for $42.0 million,
subject to adjustment and subject to a provision for working capital of
approximately $1.2 million provided to the Company pursuant to the purchase
agreement (the "Invision Acquisition"). Invision generated revenues of
approximately $48.9 million in 1996.
RECENT DEVELOPMENTS
On December 19, 1997, the Company completed the acquisition of the inmate
telecommunications assets of Peoples Telephone Company, Inc. ("Peoples
Telephone") for a purchase price of $10.625 million, subject to future
contingencies. On December 29, 1997, the Company completed the acquisition of
the operating assets of the inmate division of North American InTeleCom ("NAI")
from TSC Communications Corp. for a purchase price of $6.5 million, subject to
future contingencies.
BUSINESS STRATEGY
The Company was formed to capitalize on consolidation opportunities that the
Company believes exist within the highly fragmented inmate telecommunications
industry. The Company's primary business objectives are to be a cost-efficient,
high-quality provider of telecommunications services to correctional facilities
in the U.S. and to continue to expand its installed base of inmate telephones.
The Company has developed and is implementing the following strategies to meet
these objectives:
5
<PAGE>
. Target the corrections industry with specialized products and
services. The Company has developed specialized telecommunications
systems and services to focus on the unique needs of the corrections
industry. In addition to telecommunications services, the Company offers
a computer-based law enforcement management system, which includes jail
management, victim notification, and prisoner profile software packages.
The Company markets its telecommunications system and services through a
sales force consisting largely of former law enforcement officials and
others with experience in the corrections and telecommunications
industries. The Company also maintains a staff of trained field service
technicians and independent telecommunications service contractors, which
enables the Company to respond quickly (typically within 24 hours) to
service interruptions. In each of the last three years, the Company has
retained in excess of 95% of its beginning of the year customer base
through contract extensions or renewals.
. Reduce operating costs and bad-debt expense. The Company has developed a
billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a
competitive advantage in the inmate telecommunications industry.
Management believes that, through the use of the Company's system, which
was developed by Talton Telecommunications, the Company has achieved
levels of billing and collection costs and bad-debt expense that are
generally lower than those experienced by other competitors in the inmate
telecommunications industry. Management is currently implementing this
system throughout the Company's existing operations and intends to
implement this system in future acquired operations.
The Company also utilizes direct billing agreements with LECs to bill and
collect a majority of its operating revenues. Under the direct billing
agreements, the LEC includes charges for the Company's services on the
local telephone bill sent to the recipient of inmate collect calls.
Management believes that direct billing arrangements with LECs are
advantageous because they eliminate the costs associated with third party
billing arrangements that are utilized by a majority of independent inmate
telecommunications companies, expedite the billing and collection process,
increase collectibility, and reduce account charge-offs. As of November
30, 1996, the Company had negotiated direct billing agreements with
BellSouth and GTE South, which enabled the Company to direct bill
approximately 46% of its pro forma operating revenues. The increased
telecommunications traffic that resulted from the combination of AmeriTel
and Talton Telecommunications enabled the Company to enter into new direct
billing arrangements, which, as of June 1997, enabled the Company to
direct bill in excess of 85% of its operating revenues.
. Expand through internal growth. The Company actively seeks to increase
cash flow by installing additional telephones with current customers that
are expanding and by securing new contracts. From January 1997 through
September 1997, the Company signed 72 new contracts for facilities,
including contracts for the state of Alaska and state of North Dakota
prison systems and a new 1,500-bed facility in Ohio that is privately
managed by Corrections Corporation of America ("CCA"). Through its sales
force, the Company emphasizes the knowledge, experience, and reputation
of the Company in the inmate telecommunications industry, its high level
of service, and the additional specialized products and services offered
by the Company to its correctional facility customers. Historically, the
Company has focused on providing telecommunication services to small and
medium-sized correctional facilities (typically city or county facilities
with fewer than 250 beds). From June 30, 1990 to June 30, 1996, the
inmate population in city and county jails increased at an average annual
rate of approximately 4.2%, to approximately 518,000 of the 1.6 million
individuals incarcerated in the U.S. The Company also intends to
selectively pursue additional state and federal contracts that become
available for bid.
Management also believes that the growth of the private corrections
industry provides the Company opportunities for further expansion. The
private corrections industry has experienced dramatic growth over the last
several years, with the rated capacity of privately managed adult
correctional facilities in the U.S. increasing from 10,973 beds at
December 31, 1989 to 77,584 beds at December 31, 1996, representing an
annual growth rate of approximately 32.2%. As the largest provider of
inmate
6
<PAGE>
telecommunication services to CCA, the largest private prison management
company in the U.S., the Company believes it is positioned to continue to
benefit from the growth in the private corrections industry.
. Pursue selective consolidating acquisitions. Management believes that the
inmate telecommunications industry is highly fragmented, which affords
significant opportunities for consolidation. Independent inmate telephone
companies are generally small, local, or regional operators that may lack
the financial resources and infrastructure necessary to achieve the
efficiencies and economies of scale necessary to develop new systems and
services to compete effectively for new customers and, as such, present
attractive acquisition opportunities for the Company. In addition,
management believes that the Telecommunications Act of 1996 (the "Telecom
Act"), which requires RBOCs to decouple their pay phone operations from
their local telephone businesses, will contribute to the consolidation
opportunities existing in the market.
Management believes that the Company's experience in acquiring independent
inmate telecommunication companies will be instrumental in identifying
acquisition candidates, negotiating favorable terms, and integrating the
acquired operations into the Company. Since January 1993, the Company has
successfully completed 29 acquisitions ranging from the purchase of
relatively small local inmate telecommunication service providers to the
acquisition of larger groups of inmate facility telecommunications
contracts and related assets, including those of Peoples Telephone
Company, Inc. for a seven state region in the midwestern U.S. In May 1997,
the Company acquired the inmate telecommunications operations of Tataka,
the leading independent inmate telecommunications service provider in the
state of Utah; on July 31, 1997, the Company acquired substantially all of
the assets of CCC; and on October 6, 1997, the Company consummated the
Invision Acquisition.
. Increase geographic concentration/clustering. The Company seeks to
increase market penetration in the states in which it operates. High
market penetration contributes to operating efficiencies through
economies of scale and enables the Company to provide better customer
service and more meaningful call activity reports to its correctional
facility customers. The Company currently serves all of the state
operated correctional facilities and 63 of 72 county correctional
facilities in Alabama, 83 of 95 county correctional facilities in Iowa,
82 of 94 county correctional facilities in Kansas, 104 of 108 county
correctional facilities in Missouri, 52 of 67 county correctional
facilities in Nebraska, 21 of 26 county correctional facilities in Utah,
and over half of the county correctional facilities in Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota.
. Capitalize upon economies of scale. Management believes that the
combination of AmeriTel and Talton Telecommunications, in addition to the
completion of the STC Acquisition, has improved operating efficiencies,
and that additional improvements in efficiency will result from future
acquisitions. As a result of the increased telecommunications traffic and
greater market leverage obtained by the Company in connection with its
acquisitions of AmeriTel and Talton Telecommunications, the Company
negotiated more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. To
the extent that the Company is successful in further increasing its
telecommunications traffic through new installations or acquisitions, the
Company expects to be able to negotiate even more favorable terms from
its long distance providers. Management also believes that the continuing
deregulation of local exchange services will enable the Company to
negotiate more favorable rates from incumbent LECs and competitive local
exchange carriers. In addition, management believes that the Company's
existing infrastructure allows the Company to operate new and acquired
inmate telephones in its existing markets without significant incremental
field service, collection, and other general and administrative costs.
Management believes that the expansion of the Company's installed base of
inmate telephones will also allow the Company to enter into additional
direct billing agreements, thereby decreasing billing and collection
costs and bad-debt expense, and increasing the effectiveness of the
Company's call validation process.
The Company's executive offices are located at 1209 W. North Carrier Parkway,
Suite 300, Grand Prairie, Texas 75050. The phone number for the Company is
(972) 988-3737.
7
<PAGE>
THE EXCHANGE OFFER
Securities Offered.......... Up to $115,000,000 aggregate principal amount of
11% Series B Senior Notes due 2007 of the Company
(the "New Notes," and collectively with the Old
Notes, the "Senior Notes"). The terms of the New
Notes and the Old Notes are identical in all ma-
terial respects, except for certain transfer re-
strictions, registration rights, and interest
payments relating to the Old Notes that will not
apply to the New Notes. See "Description of Se-
nior Notes."
The Exchange Offer.......... The Company is offering to exchange a principal
amount of New Notes for an equal principal amount
of Old Notes. See "The Exchange Offer" for a de-
scription of the procedures for tendering Old
Notes. The Exchange Offer satisfies the registra-
tion obligations of the Registrants under the
Registration Rights Agreement. Upon consummation
of the Exchange Offer, holders of Old Notes that
were not prohibited from participating in the Ex-
change Offer and did not tender their Old Notes
will not have any registration rights under the
Registration Rights Agreement with respect to
such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the re-
strictions on transfer contained in the legend on
the Old Notes.
Tenders, Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on February 10, 1998, or such
later date and time to which it is extended. Ten-
ders of Old Notes pursuant to the Exchange Offer
may be withdrawn and retendered at any time prior
to the Expiration Date. Any Old Notes not ac-
cepted for exchange for any reason will be re-
turned without expense to the tendering holder as
promptly as practicable after the expiration or
termination of the Exchange Offer.
Federal Income Tax
Considerations.............. The Exchange Offer will not result in any income,
gain, or loss to the holders of Senior Notes or
the Company for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange of New Notes for the Old Notes pursuant
to the Exchange Offer.
Exchange Agent.............. U.S. Trust Company of Texas, N.A., the Trustee
under the Indenture, is serving as exchange agent
(the "Exchange Agent") in connection with the Ex-
change Offer.
8
<PAGE>
CONSEQUENCES OF EXCHANGING OR FAILURE TO EXCHANGE OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Generally, holders of Old Notes that exchange their Old Notes for New Notes
pursuant to the Exchange Offer may offer their New Notes for resale, resell
their New Notes, and otherwise transfer their New Notes without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided such New Notes are acquired in the ordinary course of the holders'
business, such holders have no arrangement with any person to participate in a
distribution of such New Notes, and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the New Notes. Broker-
dealers that receive New Notes for its own account in exchange for Old Notes
may be considered statutory "underwriters" within the meaning of the Securities
Act and, therefore, each must acknowledge that it will deliver a prospectus in
connection with any resale of its New Notes. See "Plan of Distribution." To
comply with the securities laws of certain jurisdictions, it may be necessary
to qualify for sale or register the New Notes prior to offering or selling such
New Notes. The Company is required, under the Registration Rights Agreement, to
register the New Notes in any jurisdiction requested by the holders, subject to
certain limitations. BASED ON INTERPRETATIONS OF THE STAFF OF THE COMMISSION,
"AFFILIATES" OF THE COMPANY (AS SUCH TERM IS DEFINED IN RULE 405 UNDER THE
SECURITIES ACT) ARE PROHIBITED FROM TENDERING OLD NOTES IN THE EXCHANGE OFFER.
Upon consummation of the Exchange Offer, holders that were not prohibited from
participating in the Exchange Offer and did not tender their Old Notes will not
have any registration rights under the Registration Rights Agreement with
respect to such nontendered Old Notes, and accordingly, such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
on the Old Notes. In general, Old Notes may not be offered or sold, unless
registered under the Securities Act and applicable state securities laws. See
"The Exchange Offer--Consequences of Failure to Exchange."
9
<PAGE>
SUMMARY DESCRIPTION OF SENIOR NOTES
Securities Offered.......... Up to $115,000,000 principal amount of 11% Series
B Senior Notes due 2007 of the Company. The terms
of the New Notes and the Old Notes are identical
in all material respects, except for certain
transfer restrictions, registration rights, and
interest payments relating to the Old Notes,
which will not apply to the New Notes. See "De-
scription of Senior Notes."
Maturity.................... June 30, 2007
Interest.................... The Senior Notes will bear interest at the rate
of 11% per annum, payable semi-annually in cash
in arrears on January 1 and July 1 of each year,
commencing January 1, 1998.
Subsidiary Guarantees....... The Senior Notes will be jointly and severally
guaranteed (collectively, the "Subsidiary Guaran-
tees"), by each direct and indirect Restricted
Subsidiary (as defined) of the Company existing
on the closing date of the Offering (the "Closing
Date") and by all other Restricted Subsidiaries
of the Company formed or acquired thereafter
(collectively the "Subsidiary Guarantors"). Each
subsidiary of the Company is, directly or indi-
rectly, wholly owned by the Company, and the Se-
nior Notes will be jointly and severally guaran-
teed by each direct or indirect subsidiary of the
Company existing on the date of this Prospectus.
The Subsidiary Guarantors' liability under the
Subsidiary Guarantees will be limited as de-
scribed in this Prospectus, and the Subsidiary
Guarantees will be released automatically in con-
nection with certain asset sales and disposi-
tions. See "Description of Notes--Subsidiary
Guarantees."
Ranking..................... The Senior Notes will be senior unsecured
obligations of the Company and will rank pari
passu in right of payment with all current and
future senior indebtedness of the Company and
senior to all current and future subordinated
indebtedness of the Company. The Subsidiary
Guarantees will be senior unsecured obligations
of the Subsidiary Guarantors and will rank pari
passu in right of payment with all current and
future senior indebtedness of the Subsidiary
Guarantors and senior to all current and future
subordinated indebtedness of the Subsidiary
Guarantors. The Company's subsidiaries (the
"Subsidiaries") will be parties to the Senior
Credit Facility and all obligations under the
Senior Credit Facility will be secured by a first
priority lien on substantially all of the assets
of the Company (including the capital stock of
the Subsidiaries) and such Subsidiaries. Although
on the date of this Prospectus there is no
secured indebtedness of the Company or the
Subsidiary Guarantors that ranks senior to the
Senior Notes and the Subsidiary Guarantees, the
Indenture permits the Company and its
Subsidiaries to incur additional indebtedness,
including secured indebtedness, subject to
certain limitations. As of the date of this
Prospectus there is aggregate indebtedness of
$600,000 of the Company's Subsidiaries that is
effectively senior to the Senior Notes because
the Company is a holding company. See "Risk
Factors--Holding Company Structure."
10
<PAGE>
Optional Redemption......... At any time on or after June 30, 2002, the Senior
Notes will be redeemable at the option of the
Company, in whole or in part, at the redemption
prices set forth in this Prospectus plus accrued
and unpaid interest, if any, to the date of re-
demption. Notwithstanding the foregoing, at any
time prior to June 30, 2000, the Company may re-
deem up to 30% of the original aggregate princi-
pal amount of the Senior Notes with the net cash
proceeds of one or more Equity Offerings at a re-
demption price equal to 111% of the principal
amount thereof, plus accrued and unpaid interest,
if any, to the date of redemption; provided,
that, after any such redemption, at least
$80,000,000 aggregate principal amount of Senior
Notes originally issued remains outstanding. See
"Description of Senior Notes--Optional Redemp-
tion."
Change of Control........... Upon a Change of Control, the Company will be re-
quired to offer to purchase the Notes at a pur-
chase price in cash equal to 101% of the aggre-
gate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
See "Description of Senior Notes--Change of Con-
trol Offer." The failure to redeem the Senior
Notes upon the occurrence of a Change of Control
as required by the Indenture would constitute a
Default under the Indenture. A "Change of Con-
trol" is defined by the Indenture to include cer-
tain dispositions of all or substantially all the
assets of the Company; adoption of a plan of dis-
solution or liquidation by the Company; consumma-
tion of certain transactions that result in cer-
tain third parties acquiring beneficial ownership
of more than 50% of the Voting Stock (as defined)
of the Company; or a change in the membership of
the Board of Directors of the Company resulting
in a majority of the directors of the Company not
being Continuing Directors (as defined). For a
detailed description of "Change of Control" see
"Description of Senior Notes--Certain Defini-
tions." Certain events involving a Change of Con-
trol may result in an event of default under the
Senior Credit Facility and may result in an event
of default under other indebtedness of the Com-
pany that may be incurred in the future. An event
of default under the Senior Credit Facility or
other indebtedness could result in an accelera-
tion of such indebtedness, in which case the Se-
nior Notes would be effectively subordinated to
such other secured indebtedness to the extent of
any liens securing such other indebtedness. See
"Description of Senior Notes--Change of Control
Offer" and "Description of Other Indebtedness--
Senior Credit Facility." Under New York law,
which governs the Indenture, it is not clear
which transactions would constitute a sale of
"all or substantially all of the assets" of the
Company. See "Risk Factors--Repurchase of Senior
Notes Upon a Change of Control." There can be no
assurance that the Company would have sufficient
resources to repurchase the Senior Notes and pay
its obligations under the Senior Credit Facility
or other indebtedness upon the occurrence of a
Change of Control.
11
<PAGE>
Certain Covenants........... The indenture governing the Notes (the "Inden-
ture") contains certain covenants that, among
other things, limit the ability of the Company
and its Restricted Subsidiaries (i) to pay the
dividends and make other Restricted Payments (as
defined) or investments; (ii) to incur additional
Indebtedness; (iii) to incur certain liens; (iv)
to enter into transactions with Affiliates (as
defined); (v) to engage in sale- leaseback trans-
actions; (vi) to issue stock of Restricted Sub-
sidiaries to third parties; (vii) to enter into
agreements restricting the ability of Restricted
Subsidiaries to pay dividends and make distribu-
tions; (viii) to merge or consolidate with any
other entity; and (ix) to transfer or sell as-
sets. In addition, under certain circumstances,
the Company will be required to offer to purchase
Senior Notes at a price equal to 100% of the
principal amount of such Senior Notes, plus ac-
crued and unpaid interest, if any, to the date of
purchase with the Net Proceeds (as defined) of
certain Asset Sales (as defined). These covenants
are subject to a number of important exceptions.
See "Description of Senior Notes--Certain Cove-
nants."
Use of Proceeds............. There will be no proceeds to the Company from the
exchange of New Notes for the Old Notes pursuant
to the Exchange Offer.
RISK FACTORS
Prospective participants in the Exchange Offer should consider all of the
information contained in this Prospectus in connection with the Exchange Offer.
In particular, prospective participants should consider the factors set forth
under "Risk Factors."
12
<PAGE>
SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
The following unaudited summary pro forma financial and operating data for
the year ended December 31, 1996 and the nine months ended September 30, 1997
give effect to (i) the acquisitions of AmeriTel, Talton Telecommunications, and
Tataka; (ii) the STC Acquisition; (iii) the CCC Acquisition; (iv) the Invision
Acquisition; and (v) the Offering and the application of the net proceeds
therefrom, as if all such transactions had been consummated on January 1, 1996.
The pro forma balance sheet data gives effect to the Invision Acquisition, as
if such transaction had been consummated on September 30, 1997. The summary pro
forma financial data is for illustrative purposes only and should not be viewed
as a projection or forecast of the Company's performance for any future period.
Such pro forma data should be read in conjunction with "Pro Forma Financial
Data"; "Management's Discussion and Analysis of Financial Condition and Results
of Operations"; and the financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
PRO FORMA OPERATING DATA:
Operating revenues................................... $139,369 $102,474
Operating expenses:
Telecommunication costs............................ 60,069 45,368
Facility commissions............................... 36,723 28,564
Field operations and maintenance................... 5,451 5,162
Selling, general, and administrative............... 12,085 9,332
Depreciation....................................... 2,660 1,995
Amortization of intangibles........................ 20,936 15,702
Non-recurring expenses............................. 250 --
-------- --------
Total operating expenses......................... 138,174 106,123
-------- --------
Operating income (loss).............................. 1,195 (3,649)
Other (income) expense:
Interest expense, net.............................. 15,904 11,928
Other, net......................................... (116) (985)
-------- --------
Total other (income) expense..................... 15,788 10,943
Income (loss) before income taxes.................... (14,593) (14,592)
Income tax expense................................... -- --
-------- --------
Income (loss) from continuing operations............. $(14,593) $(14,592)
======== ========
OTHER PRO FORMA DATA:
EBITDA(1).......................................... $ 24,907 $ 15,033
Capital Expenditures(2)............................ 7,828 7,402
Ratio of EBITDA to net cash interest expense....... 1.6 1.3
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT
SEPTEMBER 30, 1997
------------------
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 1,000
Total assets............................................... 161,542
Total debt (including current maturities).................. 143,510
Total stockholders' deficit................................ (2,185)
</TABLE>
(see notes on the following page)
13
<PAGE>
NOTES TO SUMMARY PRO FORMA FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS)
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation and amortization. Although EBITDA is not a
measure of performance calculated in accordance with generally accepted
accounting principles, the Company has included information concerning
EBITDA in this Prospectus because it is commonly used by certain investors
and analysts as a measure of a company's ability to service its debt
obligations. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income, or cash
flow as an indicator of the Company's operating performance. Pro forma
EBITDA reflects the following adjustments:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
EBITDA on a historical pro forma basis before
pro forma adjustments.......................... $16,769 $11,836
Pro forma adjustments:
Billing and collection savings................ 4,146 1,801
Long distance savings......................... 3,027 1,063
Elimination of selling, general, and
administrative costs of acquired businesses.. 512 345
Elimination of non-recurring expenses......... 434 --
Elimination of minority interest.............. 19 (12)
------- -------
Pro forma EBITDA................................ $24,907 $15,033
======= =======
</TABLE>
Although management believes that revenue enhancements, additional cost
reductions, and operating expense synergies will be realized after the Company
has integrated the acquired businesses and has consolidated administrative
functions, including (i) increased revenues resulting from increases in tariff
rates during 1996; (ii) increases in call blocking limits at Invision that were
substantially lowered by Invision in late 1996; and (iii) reductions in bad-
debt expense resulting from the full implementation of Talton
Telecommunications' billing and bad-debt management system, these and other
possible synergies in overhead expenses have not been reflected in the pro
forma financial data. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Revenue and Cost Synergies" for the
effects of these synergies on the financial performance of the Company.
(2) Capital expenditures include only amounts expended for purchase of property
and equipment and the installation of facility contracts.
14
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Effective December 1, 1996, the Company became the holding company for the
operations of AmeriTel and Talton Telecommunications. The Company accounted for
these acquisitions using the purchase method of accounting. Accordingly, the
Company's consolidated financial statements include the operations of AmeriTel
and Talton Telecommunications only for periods after December 1, 1996.
The following consolidated financial data for the Company for the one month
ended December 31, 1996 and combined financial data of AmeriTel and Talton
Telecommunications for the years ended December 31, 1994 and 1995 and for the
eleven months ended November 30, 1996, have been derived from the audited
consolidated financial statements of the Company and AmeriTel and Talton
Telecommunications. The financial data do not purport to indicate results of
operations as of any future date or for any future period. The combined
financial data of the Company's predecessors for the nine months ended
September 30, 1996 and the consolidated financial data of the Company for the
nine months ended September 30, 1997 are unaudited and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) that are necessary to present fairly the combined or consolidated
financial statements for such periods. Such summary historical financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS THE COMPANY PREDECESSORS THE COMPANY
------------------------------- ------------ ------------- -------------
YEARS ENDED ELEVEN MONTHS ONE MONTH NINE MONTHS NINE MONTHS
DECEMBER 31, ENDED ENDED ENDED ENDED
---------------- NOVEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996 1996 1997
------- ------- ------------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $23,892 $40,326 $53,663 $ 5,506 $42,890 $53,407
Operating expenses:
Telecommunication
costs................. 11,761 18,673 23,317 2,299 19,155 21,571
Facility commissions... 3,901 9,595 13,962 1,455 11,197 14,419
Field operations and
maintenance........... 1,044 1,467 1,816 219 1,352 2,373
Selling, general, and
administrative........ 2,571 4,089 3,921 372 3,002 4,462
Depreciation........... 965 1,359 1,538 111 1,145 1,072
Amortization of intan-
gibles................ 1,392 1,605 1,746 741 1,412 7,788
Non-recurring ex-
penses................ -- -- 684 -- -- --
------- ------- ------- ------- ------- -------
Total operating ex-
penses................ 21,634 36,788 46,984 5,197 37,263 51,685
------- ------- ------- ------- ------- -------
Operating income........ 2,258 3,538 6,679 309 5,627 1,722
Other (income) expense:
Interest expense, net.. 745 1,360 1,469 612 1,210 7,320
Other, net............. (134) (52) 27 (20) 236 (126)
------- ------- ------- ------- ------- -------
Total other expense.... 611 1,308 1,496 592 1,446 7,194
------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 2,230 5,183 (283) 4,181 (5,472)
Income tax expense
(benefit).............. (11) 891 1,917 (23) 1,572 (657)
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss..... 1,658 1,339 3,266 (260) 2,609 (4,815)
Extraordinary loss...... -- -- 52 -- -- 4,396
------- ------- ------- ------- ------- -------
Net Income (loss)....... $ 1,658 $ 1,339 $ 3,214 $ (260) $ 2,608 $(9,211)
======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 4,749 $ 6,554 $ 9,936 $ 1,181 $ 7,948 $10,708
Net cash provided (used)
by operating activi-
ties:.................. 4,413 4,809 5,883 (1,419) 6,380 1,048
Net cash provided (used)
by investing activi-
ties:.................. (9,976) (8,022) (7,515) (47,252) (5,692) (27,726)
Net cash provided (used)
by financing activi-
ties:.................. 5,700 4,087 870 48,966 (1,838) 42,971
Capital expendi-
tures(2)............... 3,223 4,669 2,804 269 993 4,457
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997
----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 16,588
Total assets................................................... 129,181
Total debt (including current maturities)...................... 131,366
Total stockholders' deficit.................................... (2,185)
</TABLE>
(see notes on the following page)
15
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL DATA
(1) For purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation, and amortization. Although EBITDA is not a
measure of performance calculated in accordance with generally accepted
accounting principles, the Company has included information concerning
EBITDA in this Prospectus because it is commonly used by certain investors
and analysts as a measure of a company's ability to service its debt
obligations. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income, or cash flow
as an indicator of the Company's operating performance.
(2) Capital expenditures includes only amounts expended for purchases of
property and equipment and the installation of facility contracts.
16
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business in connection with the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. Based on interpretations of the
staff of the Commission, "affiliates" of the Company (as such term is defined
in Rule 405 under the Securities Act) are prohibited from tendering Old Notes
in the Exchange Offer. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities
laws, except pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. The Company does
not intend to register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission with respect to similar
transactions, the Company believes that the New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
any holder of such New Notes (other than any such holder that is an
"affiliate" of the Registrant within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business, such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Notes, and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that it will deliver a prospectus in connection with
any resale of its New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of the
New Notes received in exchange for the Old Notes acquired by the broker-dealer
as a result of market-making activities or other trading activities. The
Company has agreed that it will make this Prospectus available to any broker-
dealer for use in connection with any such resale for a period of 365 days
after the Exchange Date or, if earlier, until all participating broker-dealers
have so resold. See "Plan of Distribution." The New Notes may not be offered
or sold unless they have been registered or qualified for sale under
applicable state securities laws or an exemption from registration or
qualification is available and is complied with. The Registrants are required,
under the Registration Rights Agreement, to register the New Notes in any
jurisdiction requested by the holders, subject to certain limitations.
ABSENCE OF A PUBLIC MARKET
Prior to this Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, the New Notes could trade
at a discount from their principal amount. The Company does not currently
intend to list the New Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no
assurance that an active public market for the New Notes will develop.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company has significant debt and debt service obligations. At September
30, 1997, the Company had approximately $115.6 million of long-term debt
outstanding (including current maturities). In addition, for the nine months
ended September 30, 1997, the Company's earnings were insufficient to cover
fixed charges by approximately $5.5 million. After giving effect to the
acquisition of Tataka, the STC Acquisition, the CCC Acquisition, the Invision
Acquisition, the Offering, and the application of the net proceeds therefrom,
the Company has, as of September 30, 1997, on a pro forma basis $139.8 million
of long-term debt (including current maturities) and a deficit in
stockholders' equity of $2.2 million.
The significant leverage of the Company will have several important
consequences to holders of the Senior Notes, including, but not limited to,
the following: (i) the Company will incur significant interest expense and
17
<PAGE>
principal repayment obligations in connection with the Senior Notes, the
Senior Credit Facility, and other permitted indebtedness thereby reducing the
funds available for its operations, capital expenditures, and other purposes;
(ii) the Company's leveraged position and the covenants contained in the
Senior Credit Facility and the Indenture will limit the Company's ability to
obtain additional financing and dispose of assets; and (iii) the Company's
substantial leverage may make it more vulnerable to economic fluctuations,
limit its ability to withstand competitive pressures, and reduce its
flexibility in responding to changing business and economic conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Senior
Notes."
The Company will be required to pay the principal of the Senior Notes at
maturity in 2007. The Company's ability to make scheduled principal payments
or to refinance its obligations with respect to its indebtedness, and to pay
interest thereon, will depend on its financial and operating performance,
which in turn is subject to prevailing economic conditions and to certain
financial, business, and other factors beyond its control.
The Senior Credit Facility and the Indenture contain numerous restrictive
covenants including, among others, limitations on the ability of the Company
to incur additional indebtedness, to create liens and other encumbrances, to
make certain payments and investments, to sell or otherwise dispose of assets,
or to merge or consolidate with another entity. The Senior Credit Facility
also requires the Company to meet certain financial tests on a consolidated
basis, some of which may be more restrictive in future years. The Company's
failure to comply with its obligations under the Senior Credit Facility or the
Indenture, or in agreements relating to indebtedness incurred in the future,
could result in an event of default under such agreements, which could permit
acceleration of the related debt and acceleration of debt under other
financing arrangements that may contain cross-acceleration or cross-default
provisions. In addition, because interest under the Company's Senior Credit
Facility accrues at floating rates, the Company remains subject to interest
rate risk with respect to a significant portion of its indebtedness.
The Senior Notes are and will be senior obligations of the Company ranking
pari passu in right of payment with all current and future senior indebtedness
of the Company, including indebtedness under the Senior Credit Facility and
any refinancing of the Senior Credit Facility. The Senior Notes are and will
be unsecured obligations, however, and substantially all of the assets of the
Company (including the capital stock of the Subsidiaries) and the Subsidiaries
will be pledged to secure the obligations of the Company and its Subsidiaries
under the Senior Credit Facility. Indebtedness under the Senior Credit
Facility and any other current and future secured indebtedness of the Company
will effectively rank senior to the Senior Notes to the extent of the
collateral securing such indebtedness in the event of a realization upon the
collateral or a dissolution, liquidation, reorganization, or similar
proceeding related to the Company. After any such realization or proceeding,
there can be no assurance that there will be sufficient proceeds or other
assets available for holders of the Senior Notes to recover all or any portion
of their claims against the Company under the Senior Notes and the Indenture.
See "Capitalization"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources";
"Description of the Other Indebtedness--Senior Credit Facility"; and
"Description of Senior Notes."
HOLDING COMPANY STRUCTURE
The Company is a holding company, the assets of which consist principally of
the stock of its Subsidiaries, through which it conducts substantially all of
its operations. The Company's ability to pay interest on the Senior Notes and
to satisfy its other obligations will depend upon dividends or other
distributions of funds from its Subsidiaries. The Company's Subsidiaries are
distinct legal entities, and the rights of holders of the Senior Notes against
the Subsidiary Guarantors will be subject to the rights of the Subsidiary
Guarantors' creditors, to the extent senior to the obligations of the
Subsidiary Guarantors. The future operating performance of its Subsidiaries
will be affected by economic conditions, and financial, business, and other
factors, many of which are beyond the Company's control. As of the date of
this Prospectus there is aggregate indebtedness of $600,000 of the Company's
Subsidiaries that is effectively senior to the Senior Notes because the
Company is a holding company. The Company has pledged all of the outstanding
capital stock of its Subsidiaries to secure its
18
<PAGE>
obligations under the Senior Credit Facility. The Senior Credit Facility and
all obligations thereunder are also secured by a first priority lien on
substantially all of the assets of the Company's Subsidiaries, including
future Subsidiaries. There can be no assurance that the operating cash flow of
the Company's Subsidiaries will be sufficient to meet the Company's operating
expenses and debt service obligations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
The Company is pursuing a strategy of expanding its installed base of inmate
telephones through acquisitions of inmate telecommunications service
providers. The Company evaluates specific acquisition opportunities based on
market conditions and economic factors existing at the time and intends to
pursue favorable opportunities as they arise. The Company may encounter
increased competition for acquisitions in the future, which could result in
acquisition prices the Company does not consider acceptable. There can be no
assurance that the Company will find suitable acquisition candidates at
acceptable prices, have sufficient available capital resources to realize its
acquisition strategy, be successful in entering into definitive agreements for
desired acquisitions, or that any such acquisitions, if consummated, will
prove to be advantageous to the Company. See "--Substantial Leverage;
Restrictive Covenants"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; and "Business--Business Strategy."
The success of the Company's acquisition strategy is also dependent on the
ability of the Company to integrate acquired operations into the Company's
existing operations. The Company is in the process of integrating the
operations of AmeriTel, Talton Telecommunications, Tataka, STC, CCC, and
Invision. There can be no assurance that the integration of these operations
and future acquired operations will not require the investment of capital or
result in unforeseen difficulties or absorb significant management resources
at levels higher than that anticipated by management, or that the Company will
realize meaningful economies of scale or operating efficiencies from its
acquisitions. The failure of the Company to successfully integrate acquired
operations could have a material adverse effect on the Company. See
"Business--Business Strategy."
REGULATORY FACTORS
The inmate telecommunications industry is regulated by both the Federal
Communications Commission (the "FCC") and state public utility commissions.
The Company's operations are also significantly affected by the regulation of
other telecommunications businesses, including LECs and IXCs. Changes in the
laws and regulations governing the Company's business or other
telecommunications businesses could have a material adverse effect on the
Company.
At the federal level, the industry is currently in a period of substantial
regulatory change in the aftermath of the Telecom Act, which, among other
things, directed the FCC to change the regulatory framework of the pay
telephone industry, including the inmate telephone industry. Because the FCC
is still in the process of implementing its new regulations, and because
several aspects of rule changes proposed by the FCC are subject to requests
for reconsideration, clarification, and final resolution in related
proceedings, as well as pending court challenges, the ultimate effect of
regulatory changes on the Company's business is uncertain. In particular,
whether the FCC's rules designed to eliminate subsidization and discrimination
by the LECs prove to be effective will significantly affect the level of
competition faced by the Company in the inmate telecommunications market.
Similarly, because the rules have only recently been adopted, it is too early
to assess the LECs' competitive responses to them. See "Business--Regulation--
Federal Regulation."
Under the Billed Party Preference ("BPP") proposal currently pending before
the FCC, the Company could be prohibited from carrying many interstate collect
calls made on the Company's inmate telephones, which could substantially
reduce the Company's operating revenues. Any such reduction in the Company's
operating revenues could have a material adverse effect on the Company. See
"Business--Regulation."
In addition to federal regulation, many states have set maximum rates that
can be charged for inmate collect calls. Because collect calls are generally
the only form of calling permitted from inmate telephones, a reduction in the
maximum rates that may be charged by the Company could have a material adverse
effect on the Company. See "Business--Regulation."
19
<PAGE>
COMPETITION
The businesses in which the Company operates are highly competitive. The
Company competes with numerous providers of inmate telephone services, LECs,
RBOCs, IXCs, including major long distance carriers such as AT&T, MCI, Sprint,
and LDDS/Worldcom, and independent public pay telephone and inmate telephone
companies. Many of the Company's competitors are larger and better capitalized
and have significantly greater financial resources available than the Company.
The Company believes that the principal competitive factors in the inmate
telecommunications market are (i) system features and functionality; (ii)
system reliability and service; (iii) the ability to customize inmate call
processing systems to the specifications and needs of the particular
correctional facility; (iv) relationships with correctional facilities; and
(v) rates of commissions paid to the correctional facilities.
Historically, federal and state facilities, which are generally bid on a
system-wide basis, have been served by RBOCs, large LECs, and IXCs, which are
able to leverage their existing systems and infrastructure to serve these
large, high volume customers without the need for additional, significant
capital expenditures. These same service providers, however, have generally
not focused on the smaller city and county correctional systems, which are
typically negotiated on a facility-by-facility basis. As a result, a
significant portion of city and county correctional facilities, which
constitute a substantial majority of the Company's customers, is served by
independent inmate telephone and independent public pay telephone companies. A
decision by RBOCs, large LECs, and major long distance companies to pursue
actively contracts with city and county correctional facilities could have a
material adverse effect on the Company. See "Business--Business Strategy" and
"Business--Competition."
GOVERNMENTAL ENTITIES AS CUSTOMERS
The Company's customers include state and local governmental entities
responsible for the administration and operation of correctional facilities.
The Company is subject, therefore, to the administrative policies and
procedures employed by, and the regulations that govern the activities of,
these governmental entities, including policies, procedures, and regulations
concerning the procurement and retention of contract rights and the provision
of services. There can be no assurance that the Company's operations will not
be adversely affected by the policies and procedures employed by, or the
regulations that govern the activities of, these governmental entities or that
the Company will not be limited in its ability to secure additional customer
contracts, renew existing customer contracts, or consummate acquisitions as a
result of such policies, procedures, and regulations.
CONCENTRATION OF ACCOUNTS
The Company serves the entire corrections system operated by the state of
Alabama. Pro forma operating revenues from the State of Alabama totaled
approximately $12.8 million and $8.8 million, respectively, for the fiscal
year ended December 31, 1996 and the nine months ended September 30, 1997, or
9.2% and 8.6%, respectively, of the Company's pro forma operating revenues for
such periods. The Company's contract with the state of Alabama expires in
March 1998. The loss of the state of Alabama as a customer could have a
material adverse effect on the Company. In addition, the Company is the
largest provider of inmate telecommunication services to CCA, a private
operator of correctional facilities. Aggregate pro forma revenues from CCA
under these contracts, which are terminable upon 30 days' notice, totaled
approximately $6.6 million and $9.0 million for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively, representing
4.7% and 8.8% of the Company's pro forma operating revenues for such periods,
respectively. The loss of CCA as a customer could have a material adverse
effect on the Company. See "--Provision of Inmate Telecommunications Services
by Private Operators of Correctional Facilities" and "Business--Competition."
DEPENDENCE ON EQUIPMENT VENDORS
The Company obtains the telecommunications equipment used in its operations
from several equipment vendors. Because the Company does not manufacture its
own equipment, the Company is dependent on these vendors for replacement parts
and technical service and support on its existing equipment. Although there
are
20
<PAGE>
alternative sources for equipment in the market, the inability of more than
one of the Company's equipment vendors to provide replacement parts, service,
or support to the Company could cause an interruption in the services offered
by the Company. Any prolonged interruption of the Company's services could
have a material adverse effect on the Company.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by rapid
technological advancements, frequent new service introductions, and evolving
industry standards. Management believes that its future success will depend on
its ability to anticipate and respond to such changes and new technology.
There can be no assurance that the Company will not be materially adversely
affected by the introduction and acceptance of new technology.
PROVISION OF INMATE TELECOMMUNICATIONS SERVICES BY PRIVATE OPERATORS OF
CORRECTIONAL FACILITIES
The private corrections industry has experienced dramatic growth over the
last several years and is expected to continue to grow for the foreseeable
future. At present, private operators of correctional facilities generally do
not operate their own inmate telecommunications systems. Although the growth
of this industry presents opportunities to the Company, the utilization by
private operators of correctional facilities of their own inmate
telecommunications system could have a material adverse effect on the Company.
See "--Concentration of Accounts" and "Business--Industry Overview."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES
The Company's operations require that its equipment and the equipment of its
service providers be operational 24 hours per day, 365 days per year. As is
the case with other telecommunications companies, the Company's operations may
experience temporary service interruptions or equipment failures, which may
result from causes beyond the Company's control. Any such prolonged event
could have a material adverse effect on the Company.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of certain of its officers and other
senior management personnel. The Company is implementing strategies that
involve targeting the corrections industry with specialized products and
services; reducing operating costs and bad-debt expense; expanding through
internal growth; pursuing consolidating acquisitions; and capitalizing on
economies of scale. The officers and senior management of the Company have
experience in implementing various aspects of these strategies. The Company
believes that it would be difficult to replace the expertise and experience of
such persons in the event that the services of one or more such persons were
to become unavailable. Accordingly, the loss of the services of one or more of
these individuals could have a material adverse effect on the Company and its
ability to implement such strategies and to achieve its goals. In addition,
the failure of the Company to attract and retain additional management to
support its business strategy could also have a material adverse effect on the
Company. See "Management."
FRAUDULENT CONVEYANCE RISKS
The Company's obligations under the Senior Notes will be guaranteed, jointly
and severally, on a senior unsecured basis by each of the Subsidiary
Guarantors. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be applied by a court on behalf of any unpaid
creditor or a representative of the Company's creditors in a lawsuit to
subordinate or avoid the Senior Notes or any Subsidiary Guarantee in favor of
other current or future creditors of the Company or a Subsidiary Guarantor.
Based upon financial and other information currently available to it,
management believes that the Senior Notes and the Subsidiary Guarantees are
being incurred for proper purposes and in good faith, and that the Company and
each of the Subsidiary Guarantors (i) is solvent and will continue to be
solvent after issuing the Senior Notes or its Subsidiary Guarantee, as the
case may be; (ii) will have sufficient capital for carrying on its business
after such issuance; and (iii) will be able to pay its debts as they mature.
Notwithstanding management's belief, if a court
21
<PAGE>
were to find that (i) the indebtedness represented by the Senior Notes or a
Subsidiary Guarantee was incurred with intent to hinder, delay, or defraud any
present or future creditor of the Company or the Subsidiary Guarantor, as the
case may be, or contemplated insolvency with a design to prefer one or more
creditors to the exclusion in whole or in part of other creditors; or (ii) the
Company or a Subsidiary Guarantor did not receive fair consideration or
reasonably equivalent value for issuing the Senior Notes or a Subsidiary
Guarantee, as the case may be, and the Company or a Subsidiary Guarantor (a)
was insolvent, (b) was rendered insolvent by reason of the issuance of the
Senior Notes or a Subsidiary Guarantee, (c) was engaged or about to engage in
business or a transaction for which the remaining assets of the Company or
such Subsidiary Guarantor constitute unreasonably small capital to carry on
its business, (d) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature, or (e) was a defendant in
an action for money damages or had a judgment for money damages docketed
against it (if in either case, after final judgment, the judgment is
unsatisfied), then in each such case, a court could avoid or subordinate the
Senior Notes or the Subsidiary Guarantee in favor of other creditors of the
Company or a Subsidiary Guarantor, as the case may be. Among other things, a
legal challenge of the Senior Notes or a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the Company
or the Subsidiary Guarantor as a result of the issuance by the Company of the
Senior Notes and the execution by a Subsidiary Guarantor of a Subsidiary
Guaranty.
To the extent that any Subsidiary Guarantee were avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Senior
Notes would cease to have any claim in respect of such Subsidiary Guarantor
and would be creditors solely of the Company and any Subsidiary Guarantor
whose Subsidiary Guarantee was not avoided or held unenforceable. In such
event, the claims of the holders of the Senior Notes against the issuer of an
invalid Subsidiary Guarantee would be subject to the prior payment of all
liabilities of such Subsidiary Guarantor. There can be no assurance that,
after providing for all prior claims, there would be sufficient assets to
satisfy the claims of the holders of the Senior Notes relating to any voided
Subsidiary Guarantee. See "Capitalization"; "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources"; and "Description of Senior Notes--Subsidiary Guarantees."
REPURCHASE OF SENIOR NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, the Company will be required to make an offer to
repurchase all or any part of the Senior Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of repurchase. Certain events involving a Change of Control may
result in an event of default under the Senior Credit Facility and may result
in an event of default under other indebtedness of the Company that may be
incurred in the future. An event of default under the Senior Credit Facility
or other indebtedness could result in an acceleration of such indebtedness, in
which case the Senior Notes would be effectively subordinated to such other
secured indebtedness to the extent of any liens securing such other
indebtedness. See "Description of Senior Notes--Change of Control Offer" and
"Description of Other Indebtedness--Senior Credit Facility." There can be no
assurance that the Company would have sufficient resources to repurchase the
Senior Notes and pay its obligations under the Senior Credit Facility or other
indebtedness upon the occurrence of a Change of Control. These may be deemed
to have anti-takeover effects and may delay, defer, or prevent a merger,
tender offer, or other takeover attempt. The failure to redeem the Senior
Notes upon the occurrence of a Change of Control as required by the Indenture
would constitute a Default under the Indenture. A "Change of Control" is
defined by the Indenture to include certain dispositions of all or
substantially all the assets of the Company; adoption of a plan of dissolution
or liquidation by the Company; consummation of certain transactions that
result in certain third parties acquiring beneficial ownership of more than
50% of the Voting Stock (as defined) of the Company; or a change in the
membership of the Board of Directors of the Company resulting in a majority of
the directors of the Company not being Continuing Directors (as defined). For
a detailed description of "Change of Control" see "Description of Senior
Notes--Certain Definitions."
Under New York law, which governs the Indenture, it is not clear which
transactions will constitute a disposition of "all or substantially all" of
the assets of the Company. The Company is not aware of any controlling legal
precedent interpreting this phrase. In other contexts, the courts of the State
of New York have
22
<PAGE>
indicated that for a transaction to involve a transfer of "all or
substantially all the assets" of a New York business corporation, the sale
must be one that is not "in the normal operation of [the corporation's]
business" and that a disposition of "all or substantially all the assets" of a
corporation will result when a corporation disposes of its business so as to
virtually end its historic business or to "practically dissolve." It is not
clear whether a court would apply these same standards in the context of the
Indenture provisions involving a disposition of "all or substantially all the
assets" of the Company. Accordingly, under the law governing the Indenture
there is some uncertainty with respect to whether certain substantial asset
transfers would constitute a "Change of Control."
23
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On June 27, 1997, the Company issued $115,000,000 aggregate principal amount
of Old Notes to CIBC Wood Gundy Securities Corp. (the "Initial Purchaser").
The issuance was not registered under the Securities Act in reliance upon the
exemption under Rule 144 and Regulation S under, and Section 4(2) of, the
Securities Act. In connection with the issuance and sale of the Old Notes, the
Registrants entered into the Registration Rights Agreement, which requires the
Registrants to cause the Old Notes to be registered under the Securities Act
or to file with the Commission a registration statement under the Securities
Act with respect to an issue of new notes of the Company identical in all
material respects to the Old Notes, to use its best efforts to cause such
registration statement to become effective under the Securities Act and, upon
the effectiveness of that registration statement, to offer to the holders of
the Old Notes the opportunity to exchange their Old Notes for a like principal
amount of New Notes, which will be issued without a restrictive legend and may
be reoffered and resold by the holder without restrictions or limitations
under the Securities Act. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The Exchange Offer is being made pursuant to the Registration Rights
Agreement to satisfy the Registrants' obligations under the Registration
Rights Agreement.
Based on no-action letters issued by the staff of the Commission to third
parties, the Registrants believe that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold,
and otherwise transferred by any holder of such New Notes (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes, and neither the holder nor any other
person is engaging in or intends to engage in a distribution of the New Notes.
Any holder who tenders in the Exchange Offer for the purpose of participating
in a distribution of the New Notes cannot rely on such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the
Expiration Date (as defined). The Company will issue a principal amount of New
Notes in exchange for an equal principal amount of outstanding Old Notes
tendered and accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date.
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions, registration rights, and
interest payments relating to the Old Notes, which will not apply to the New
Notes. See "Description of Senior Notes." The New Notes will evidence the same
debt as the Old Notes. The New Notes will be issued under and entitled to the
benefits of the Indenture pursuant to which the Old Notes were issued.
As of the date of this Prospectus, $115,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes.
24
<PAGE>
Holders of Old Notes do not have any appraisal or dissenters' rights under
state law or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Exchange
Act, and the rules and regulations of the Commission under the Exchange Act.
Based on interpretations of the staff of the Commission, "affiliates" of the
Company (as such term is defined in Rule 405 under the Securities Act) are
prohibited from tendering Old Notes in the Exchange Offer. Old Notes that are
not tendered and were not prohibited from being tendered for exchange in the
Exchange Offer will remain outstanding and continue to accrue interest and to
be subject to transfer restrictions, but will not be entitled to any rights or
benefits under the Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer, on
the Exchange Date the Company will accept all Old Notes properly tendered and
not withdrawn and will issue New Notes in exchange therefor. For purposes of
the Exchange Offer, the Company will be deemed to have accepted properly
tendered Old Notes for exchange when, as, and if the Company had given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purposes of receiving the New Notes
from the Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal, and all other required documents; provided,
however, that the Company reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Old Notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
nonexchanged Old Notes or substitute Old Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
holder as promptly as practicable after the expiration or termination of the
Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," means 5:00 p.m., New York City time, on February
10, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" will mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Expiration Date, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement of the extension, prior to 9:00 a.m., New
York City time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer, or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions" has
not been satisfied, by giving oral or written notice of such delay, extension,
or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer. Any such delay in acceptance or extension, termination, or
amendment will be followed as promptly as practicable by oral or written
notice. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of Old Notes
of such amendment.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment, or termination of the
Exchange Offer, the Company will have no obligation to
25
<PAGE>
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to an appropriate news agency.
INTEREST ON THE NEW NOTES
New Notes will bear interest at the rate of 11% per annum, payable semi-
annually, in cash, on January 1 and June 1 of each year, commencing January 1,
1998.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any New Notes for any Old Notes, and may terminate or
amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if the Exchange Offer is not permissible under applicable law or Commission
policy.
PROCEDURES FOR TENDERING
The tender of Old Notes by a holder as set forth below and the acceptance
thereof by the Company will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set
forth in this Prospectus and in the Letter of Transmittal.
Only a holder of Old Notes that is not an "affiliate" of the Company as
defined in Rule 405 under the Securities Act may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must (i) complete,
sign, and date the Letter of Transmittal or a facsimile, have the signatures
on the Letter of Transmittal guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile, together with the Old Notes (unless such tender is being effected
pursuant to the procedure for book-entry transfer described below) and any
other required documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date, or (ii) comply with the guaranteed delivery
procedures described below. Delivery of all documents must be made to the
Exchange Agent at its address set forth in this Prospectus.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES, OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of Old Notes the Old Notes of which are registered in
the name of a broker, dealer, commercial bank, trust company, or other nominee
and that wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering of such owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined) unless the
Old Notes tendered pursuant thereto are tendered (i) by a registered holder
that has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be by a member firm of a registered
national securities exchange or of the National
26
<PAGE>
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed in the Letter of Transmittal, such Old Notes
must be endorsed or accompanied by a properly completed bond power, signed by
such registered holder as such registered holder's name appears on such Old
Notes, with the signature guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
Any financial institution that is a participant in the book-entry transfer
facility for the Old Notes, The Depository Trust Company ("DTC"), may make
book-entry delivery of Old Notes by causing DTC to transfer such Old Notes
into the Exchange Agent's account with respect to the Old Notes in accordance
with DTC's procedures for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at DTC,
an appropriate Letter of Transmittal with any required signature guarantee and
all other required documents must, in each case, be, or be deemed to be,
transmitted to and received and confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes, and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities, or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company determines. Although the Company intends to notify holders of defects
or irregularities with respect to tenders of Old Notes, neither the Company,
the Exchange Agent, nor any other person will incur any liability for failure
to give such notification. Tenders of Old Notes will not be deemed to have
been made until such defects or irregularities have been cured or waived. Any
Old Notes received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date or, as set forth below under "Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Old Notes in the open market, in privately negotiated transactions, or
otherwise. The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
By tendering, each holder will also represent to the Company that (i) the
New Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder; (ii) neither the holder nor any such person has
an arrangement or understanding with any person to participate in the
distribution of such New Notes; and (iii) neither the holder nor any such
other person is an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company.
27
<PAGE>
GUARANTEED DELIVERY PROCEDURES
Holders that wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) that cannot deliver their Old Notes, the Letter of
Transmittal, or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) that cannot complete the procedures for book-
entry transfer of Old Notes to the Exchange Agent's account with DTC prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail, or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes (if possible), and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within five business trading days after the Expiration Date, (i) the
Letter of Transmittal (or facsimile) together with the certificate(s)
representing the Old Notes and any other documents required by the Letter
of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, or (ii) that book-entry transfer of such Old Notes into the
Exchange Agent's account at DTC will be effected and confirmation of such
book-entry transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal, or confirmation of book-entry transfer of the Old
Notes into the Exchange Agent's account at DTC, are received by the
Exchange Agent within five business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns, and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred, and exchanged. The holder represents and warrants to
the Company and the Exchange Agent that (i) it has full power and authority to
tender, exchange, assign, and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes; (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges, and encumbrances
and not subject to any adverse claim; (iii) it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment, and transfer of tendered Old
Notes; and (iv) acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor will constitute performance in full
by the Company of its obligations under the Registration Rights Agreement, and
the Company will have no further obligations or liabilities thereunder to such
holders. All authority conferred by the holder will survive the death or
incapacity of the holder and every obligation of the holder will be binding
upon the heirs, legal representatives, successors, assigns, executors, and
administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act; (ii) is
acquiring the New Notes in the ordinary course of its business; and (iii) has
no arrangement with any person or intent to participate in, and is not
participating in, a distribution of the New Notes.
28
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided in this Prospectus, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
facsimile transmission, or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth in this Prospectus
prior to 5:00 p.m., New York City time, on the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having tendered
the Old Notes to be withdrawn (the "Depositor"); (ii) identify the Old Notes
to be withdrawn (including the certificate number or numbers and principal
amount of such Old Notes); (iii) be signed by the holder in the same manner as
the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied
by documents of transfer sufficient to have the Trustee with respect to the
Old Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender; and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. If Old Notes
have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawn Old Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form, and eligibility (including
time of receipt) of such notices will be determined by the Company, the
determination of which will be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no New Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes that have
been tendered, but not accepted for payment, will be returned to the holder
without cost to such holder as soon as practicable after withdrawal, rejection
of tender, or termination of the Exchange Offer. Properly withdrawn Old Notes
may be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes the Old Notes of which are not tendered or are tendered
but not accepted in the Exchange Offer will continue to hold such Old Notes
and will be entitled to all the rights and preferences and subject to the
limitations applicable to the Old Notes under the Indenture. Following
consummation of the Exchange Offer, the holders of Old Notes will continue to
be subject to the existing restrictions upon transfer, and the Company will
have no further obligations to such holders, other than the Initial Purchaser,
to provide for the registration under the Securities Act of the Old Notes held
by them. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A., the Trustee under the Indenture, has been
appointed as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail, By Facsimile:
by hand or by Overnight Courier U.S. Trust Company of Texas, N.A.
U.S. Trust Company of Texas, N.A. Attention: Corporate Trust
2001 Ross Avenue, Suite 2700 Department
Dallas, Texas 75201 (214) 754-1303
Attention: Corporate Trust Confirm by Telephone:
Department (214) 754-1200
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
29
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be paid by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, or in person by officers, regular
employees, or agents of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses and will pay the
reasonable fees and expenses of holders in delivering their Old Notes to the
Exchange Agent.
The cash expenses of the Company to be incurred in connection with the
Company's performance and completion of the Exchange Offer will be paid by the
Company. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees, and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. Based on interpretations of the
staff of the Commission, "affiliates" of the Company (as such term is defined
in Rule 405 under the Securities Act) are prohibited from tendering Old Notes
in the Exchange Offer. In general, the Old Notes may not be offered or sold
unless registered under the Securities Act and applicable state securities
laws, except pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. The Company does
not intend to register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission with respect to similar
transactions, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold,
and otherwise transferred by any holder of such New Notes (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes, and neither the holder nor any other
person is engaging in or intends to engage in a distribution of the New Notes.
If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
the holder (i) may not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of its New Notes. See "Plan of Distribution." The
New Notes may not be offered or sold unless they have been registered or
qualified for sale under applicable state securities laws or an exemption from
registration or qualification is available and is complied with. The Company
is required, under the Registration Rights Agreement, to register the New
Notes in any such jurisdiction requested by the holders, subject to certain
limitations.
30
<PAGE>
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
whether to participate in the Exchange Offer.
Upon consummation of the Exchange Offer, holders of the Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and, accordingly,
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend on the Old Notes. However, in the event the Company
fails to consummate the Exchange Offer or a holder of Old Notes notifies the
Company in accordance with the Registration Rights Agreement that it will be
unable to participate in the Exchange Offer due to circumstances delineated in
the Registration Rights Agreement, then the holder of the Old Notes will have
certain rights to have such Old Notes registered under the Securities Act
pursuant to the Registration Rights Agreement and subject to conditions
contained in the Registration Rights Agreement.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer. In this regard, the Company will make each person
participating in the Exchange Offer aware (through this Prospectus or
otherwise) that if the Exchange Offer is being registered for the purpose of
secondary resale, any holder using the Exchange Offer to participate in a
distribution of New Notes to be acquired in the registered Exchange Offer (i)
may not rely on the staff position enunciated in Morgan Stanley and Co. Inc.
(avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13, 1988) or
similar letters and (ii) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the Exchange Date.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the New Notes.
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
31
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1997 on an actual basis and on a pro forma basis,
after giving effect to the Invision Acquisition. This table should be read in
conjunction with the other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------
ACTUAL PRO FORMA
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents....................... $ 16,588 $ 1,000
Long-term debt, including current maturities:
Senior Credit Facility:
Revolving loan(1)........................... -- 27,912
Notes offered in the Offering(1).............. 115,000 115,000
Other......................................... 598 598
------------ ------------
Total Long-term debt...................... 115,598 143,510
Stockholders' equity:
Preferred Stock(2)............................ * *
Common Stock.................................. * *
Additional paid-in capital.................... 22,156 22,156
Accumulated deficit........................... (24,341)(3) (24,341)
------------ ------------
Total stockholders' equity................ (2,185) (2,185)
------------ ------------
Total capitalization............................ $ 113,413 $ 142,325
============ ============
</TABLE>
- --------
(1) On December 19, 1997, the Company entered into an amendment and
restatement of its Existing Credit Facility (as defined), which
established (a) a term loan acquisition facility of $55.0 million and (b)
a revolving loan facility of $25.0 million (which includes a $5.0 million
letter of credit facility). See "Description of Other Indebtedness--Senior
Credit Facility." In addition to certain other permitted incurrences of
indebtedness, the Indenture permits the Company to incur up to $80.0
million of indebtedness under its Senior Credit Facility.
(2) The Preferred Stock represents 5,925 shares outstanding with a par value
of $.01 per share, and a liquidation value per share of $1,000 plus
accumulated but unpaid dividends. The cumulative liquidation value of the
outstanding shares of Preferred Stock is $5.9 million plus accumulated but
unpaid dividends, which as of September 30, 1997 were approximately
$355,500. See "Description of Capital Stock--Preferred Stock."
(3) Because certain of the Company's stockholders held ownership interests in
one of the Company's predecessors, their continuing ownership interest in
the Company has been accounted for at their prior historical basis, which
has resulted in a reduction in stockholders' equity of approximately $14.9
million and a corresponding reduction in the fair values assigned to
tangible and identifiable assets, in accordance with the provisions of
Emerging Issue Task Force discussion No. 88-16, "Basis in Leveraged Buyout
Transactions."
* Rounds to 0.
32
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma statements of operations data for the year
ended December 31, 1996 and the nine months ended September 30, 1997 give
effect to (i) the completed acquisitions of AmeriTel (including the
acquisitions of various inmate facility contracts from other telecommunication
companies), Talton Telecommunications, and Tataka; (ii) the STC Acquisition
(including STC's acquisition of five inmate facility contracts from North
American Intellicom ("NAI")); and (iii) the CCC Acquisition and the Invision
Acquisition, as if each such transaction had been consummated on January 1,
1996. The pro forma balance sheet data as of September 30, 1997 give effect to
the Invision Acquisition, as if the transaction had been consummated on
September 30, 1997.
The purchase prices for the acquired businesses were determined based upon
arm's length negotiations between the Company and the respective sellers and
have been allocated primarily to inmate facility contracts and goodwill. The
Company has completed preliminary purchase price allocations for STC and
Tataka. These preliminary purchase price allocations may change upon the final
determination of the fair market values of the net assets acquired.
The pro forma financial data do not give effect to any events occurring
after consummation of the acquisitions, other than reduced telecommunications
costs associated with a new long distance contract with LDDS/Worldcom
effective January 1997 and new direct billing agreements with various LECs,
which were negotiated by the Company as a result of the higher combined
telecommunications traffic anticipated from the acquisitions of AmeriTel and
Talton Telecommunications, and which were executed after the closing of these
acquisitions. Although management believes that revenue enhancements,
additional cost reductions, and operating expense synergies will be realized
after the Company has integrated the acquired businesses and has consolidated
administrative functions, including (i) increased revenues resulting from
increases in tariff rates during 1996; (ii) increases in call blocking limits
at Invision that were substantially lowered by Invision in late 1996; and
(iii) reductions in bad-debt expense resulting from the full implementation of
Talton Telecommunications' billing and bad-debt management system, these and
other possible synergies in overhead expenses have not been reflected in the
pro forma financial data. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Revenue and Cost Synergies" for
the effects of these synergies on the financial performance of the Company.
The pro forma adjustments, which are described in the accompanying notes,
are based on currently available information and certain assumptions that
management believes are reasonable. Such pro forma financial data and the
notes thereto should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Prospectus.
THE PRESENTATION OF PRO FORMA FINANCIAL DATA IS FOR ILLUSTRATIVE PURPOSES
ONLY, IS NOT NECESSARILY INDICATIVE OF THE RESULTS THAT WOULD HAVE BEEN
REPORTED HAD SUCH EVENTS ACTUALLY OCCURRED ON THE DATES SPECIFIED, AND SHOULD
NOT BE VIEWED AS A PROJECTION OR FORECAST OF THE COMPANY'S PERFORMANCE FOR ANY
FUTURE PERIOD. INCLUSION OF PRO FORMA FINANCIAL DATA SHOULD NOT BE REGARDED AS
A REPRESENTATION BY THE COMPANY, AND THERE CAN BE NO ASSURANCE THAT THE
RESULTS REFLECTED IN THE PRO FORMA FINANCIAL DATA WILL BE REALIZED. THE
COMPANY DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE PRO FORMA FINANCIAL
DATA TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF FUTURE EVENTS, EVEN IF THE ASSUMPTIONS OR ESTIMATES UNDERLYING
THE PRO FORMA FINANCIAL DATA ARE SHOWN TO BE IN ERROR. PROSPECTIVE INVESTORS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE PRO FORMA FINANCIAL DATA.
33
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
COMPANY OTHER 1996 OTHER 1997
AND ACQUIRED ACQUIRED TOTAL PRO FORMA
PREDECESSORS(a) BUSINESSES(b) BUSINESSES(c) STC CCC INVISION HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ------------- ------------- ------- ------ -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating
revenues......... $59,169 $2,623 $3,838 $15,282 $9,564 $48,893 $139,369 $ -- $139,369
Operating
expenses:
Telecommunication
costs........... 25,616 1,214 1,982 8,265 2,922 27,243 67,242 (7,173)(d) 60,069
Facility
commissions..... 15,417 737 1,097 3,246 3,668 12,558 36,723 36,723
Field operations
and
maintenance..... 2,035 86 115 1,056 289 1,870 5,451 5,451
Selling, general,
and
administrative.. 4,293 184 269 1,374 1,972 4,505 12,597 (512)(e) 12,085
Depreciation..... 1,649 -- -- 868 209 1,336 4,062 (1,402)(f) 2,660
Amortization of
intangibles..... 2,487 -- -- -- 124 3,499 6,110 14,826 (g) 20,936
Non-recurring
expenses........ 684 -- -- -- -- -- 684 (434)(h) 250
------- ------ ------ ------- ------ ------- -------- -------- --------
Total operating
expenses........ 52,181 2,221 3,463 14,809 9,184 51,011 132,869 5,305 138,174
------- ------ ------ ------- ------ ------- -------- -------- --------
Operating income
(loss)........... 6,988 402 375 473 380 (2,118) 6,500 (5,305) 1,195
Other (income)
expense:
Interest expense,
net............. 2,081 -- -- 447 40 3,416 5.984 9,920 (i) 15,904
Other, net....... 7 -- -- (66) 117 (155) (97) (19)(j) (116)
------- ------ ------ ------- ------ ------- -------- -------- --------
Total other
(income)
expense......... 2,088 -- -- 381 157 3,261 5,887 9,901 15,788
------- ------ ------ ------- ------ ------- -------- -------- --------
Income (loss)
before income
taxes............ 4,900 402 375 92 223 (5,379) 613 (15,206) (14,593)
Income tax expense
(benefit)........ 1,894 156 128 22 -- (285) 1,915 (1,915)(k) --
------- ------ ------ ------- ------ ------- -------- -------- --------
Income (loss) from
continuing
operations....... $ 3,006 $ 246 $ 247 $ 70 $ 223 $(5,094) $ (1,302) $(13,291) $(14,593)
======= ====== ====== ======= ====== ======= ======== ======== ========
EBITDA(1)......... $11,117 $ 402 $ 375 $ 1,407 $ 596 $ 2,872 $ 16,769 $ 8,138 $ 24,907
======= ====== ====== ======= ====== ======= ======== ======== ========
</TABLE>
34
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE TOTAL PRO FORMA
COMPANY TATAKA STC CCC INVISION HISTORICAL ADJUSTMENTS PRO FORMA
------- ------ ------- ------ -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $53,407 $528 $10,576 $6,339 $31,624 $102,474 $ -- $102,474
Operating expenses:
Telecommunication
costs................. 21,571 291 5,528 1,761 19,081 48,232 (2,864)(d) 45,368
Facility commissions... 14,419 87 2,691 2,580 8,787 28,564 28,564
Field operations and
maintenance........... 2,373 16 805 223 1,745 5,162 5,162
Selling, general, and
administrative........ 4,462 37 985 1,198 2,995 9,677 (345)(e) 9,332
Depreciation........... 1,072 -- 514 131 1,123 2,840 (845)(f) 1,995
Amortization and write-
offs of intangibles... 7,788 -- -- 113 2,595 10,496 5,206 (g) 15,702
------- ---- ------- ------ ------- -------- ------- --------
Total operating
expenses.............. 51,685 431 10,523 6,006 36,326 104,971 1,152 106,123
------- ---- ------- ------ ------- -------- ------- --------
Operating income
(loss)................. 1,722 97 53 333 (4,702) (2,497) (1,152) (3,649)
Other (income) expense:
Interest expense, net.. 7,320 -- 282 22 2,483 10,107 1,821 (i) 11,928
Other, net............. (126) -- (76) 64 (859) (997) 12 (j) (985)
------- ---- ------- ------ ------- -------- ------- --------
Total other (income)
expense............... 7,194 -- 206 86 1,624 9,110 1,833 10,943
------- ---- ------- ------ ------- -------- ------- --------
Income (loss) before
income taxes........... (5,472) 97 (153) 247 (6,326) (11,607) (2,985) (14,592)
Income tax expense
(benefit).............. (657) 31 6 -- (2) (622) 622 (k) --
------- ---- ------- ------ ------- -------- ------- --------
Income (loss) from
continuing operations.. $(4,815) $ 66 $ (159) $ 247 $(6,324) $(10,985) $(3,607) $(14,592)
======= ==== ======= ====== ======= ======== ======= ========
EBITDA(1)............... $10,708 $ 97 $ 643 $ 513 $ (125) $ 11,836 $ 3,197 $ 15,033
======= ==== ======= ====== ======= ======== ======= ========
</TABLE>
35
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(a) Represents the combined historical operating results of the Company for
the one-month period from December 1, 1996 (date of acquisition) to
December 31, 1996 and of the Company's predecessors, AmeriTel and Talton
Telecommunications (the "Predecessors"), for the eleven-month pre-
acquisition periods ended November 30, 1996.
(b) Represents the pre-acquisition combined historical operating results of
inmate facility contracts and related telecommunications assets acquired
during 1996 by AmeriTel from Peoples Telephone, Inc., in three separate
transactions, and from Intellipay Systems, Inc., Value-Added
Communications, Inc., and Steelweb, Inc. (the "Other 1996 Acquired
Businesses").
(c) Represents the combined historical operating results of inmate facility
contracts and related telecommunications assets acquired during 1997 by
the Company from Tataka and inmate facility contracts and related
telecommunications assets acquired effective January 1, 1997 by STC from
NAI (the "Other 1997 Acquired Businesses").
(d) Telecommunication costs have been reduced to reflect long distance cost
savings associated with the negotiation of a new long distance contract
with LDDS/Worldcom and billing and collection cost savings associated with
the negotiation of new direct billing agreements with GTE, US West,
Southwestern Bell, Sprint, and other LECs. The Company was able to
negotiate these new agreements as a result of the higher
telecommunications traffic of the combined AmeriTel and Talton
Telecommunications operations.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Billing and collections savings......... $(4,146) $(1,801)
Long distance savings................... (3,027) (1,063)
------- -------
Pro forma adjustment.................. $(7,173) $(2,864)
======= =======
</TABLE>
(e) Selling, general, and administrative costs of the Other 1996 Acquired
Businesses and Other 1997 Acquired Businesses have been eliminated because
such costs were absorbed by the Company's existing overhead structure. In
addition, compensation costs of $59 in 1996 and $308 in 1997 have been
eliminated from Invision's general and administrative expenses for
Invision employees who were terminated upon the consummation of the
Invision Acquisition.
(f) Depreciation expense has been reduced to reflect differences between pro
forma depreciation expense based on the fair values of acquired telephone
system equipment over a useful life of 7.5 years and historical
depreciation expense over useful lives primarily ranging from 5 to 7.5
years.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma depreciation expense.......... $ 2,660 $ 1,995
Historical depreciation expense......... (4,062) (2,840)
------- -------
Pro forma adjustment.................. $(1,402) $ (845)
======= =======
</TABLE>
(g) Amortization expense has been increased to reflect the difference between
historical amortization expense and amortization of the purchase price
amounts allocated to the fair values of (i) acquired inmate facility
contracts over the life of the related contract (generally 3 to 5 years);
(ii) goodwill (over 20 years); and (iii) other identifiable intangibles,
such as organization costs and non-competition agreements, over the life
of the related intangible (generally 2.5 to 5 years).
36
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma amortization expense:
Acquired contracts.................... $17,468 $13,104
Goodwill.............................. 3,376 2,532
Other intangible assets............... 92 66
Historical amortization expense:
Acquired contracts.................... (4,355) (7,827)
Goodwill.............................. (1,703) (2,530)
Other intangible assets............... (52) (139)
------- -------
Pro forma adjustment................ $14,826 $ 5,206
======= =======
</TABLE>
(h) Non-recurring expenses have been reduced to eliminate special management
bonuses paid to certain key managers of AmeriTel, which were contingent
upon the consummation of the Company's acquisition of AmeriTel.
(i) Interest expense has been increased to reflect interest expense on the
Senior Notes and amortization of deferred financing costs related to the
Senior Notes, and to eliminate historical interest expense and deferred
financing costs associated with indebtedness repaid with a portion of the
net proceeds from the Offering.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
Pro forma interest expense on the
Senior Notes at an interest rate of
11.0%................................. $12,650 $ 9,487
Pro forma interest expense on the pro
forma incremental borrowings required
to purchase Invision at an effective
interest rate of 9.5%................. 2,652 1,989
Pro forma amortization of new deferred
financing costs....................... 584 438
Pro forma interest expense on other
long-term debt........................ 18 14
Combined historical interest expense,
including amortization of deferred
financing costs....................... (5,984) (10,107)
------- --------
Pro forma adjustment................. $ 9,920 $ 1,821
======= ========
</TABLE>
(j) Minority interest representing STC's interest in the earnings of its
subsidiary has been eliminated because this subsidiary is now wholly owned
by the Company following the STC Acquisition.
(k) Income taxes have been adjusted to reflect pro forma income taxes at the
Company's estimated effective tax rate of 38.5%, after adjustment for
deferred income tax valuation allowance and the estimated non-deductible
permanent difference relating to goodwill of approximately $1.5 million
annually.
(l) EBITDA represents income before interest expense, income taxes,
depreciation, and amortization. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company has included information concerning EBITDA in this
Prospectus because it is used by certain investors and analysts as a
measure of a company's ability to service its debt obligations. EBITDA
should not be used as an alternative to, or be considered more meaningful
than, operating income, net income, or cash flow as an indicator of the
Company's operating performance.
37
<PAGE>
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY INVISION ADJUSTMENTS PRO FORMA
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 16,588 $ 12 $(43,500)(a) $ 1,000
(12)(b)
27,912 (c)
Accounts receivable............. 12,683 5,649 18,332
Refundable income taxes......... 612 420 (420)(b) 612
Inventories..................... 1,011 -- -- 1,011
Prepaid expenses................ 676 360 -- 1,036
Deferred income tax asset....... 447 -- -- 447
-------- ------- -------- --------
Total current assets.......... 32,017 6,441 (16,020) 22,438
Property and equipment............ 13,728 9,126 (1,101)(a) 21,753
Intangible and other assets....... 83,436 27,194 6,721 (a) 117,351
-------- ------- -------- --------
Total assets.................. $129,181 $42,761 $(10,400) $161,542
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable................ $ 3,173 $ 4,748 $ (299)(b) $ 7,622
Accrued expenses................ 12,148 3,415 (3,415)(b) 12,148
Current portion of long-term
debt........................... 38 -- -- 38
-------- ------- -------- --------
Current liabilities........... 15,359 8,163 (3,714) 19,808
Long-term debt.................... 115,560 -- 27,912 (c) 143,472
Debt owed to Related Party........ 42,820 (42,820)(b) --
Deferred income taxes............. 447 -- -- 447
Minority interest................. -- -- --
Stockholders' Equity:
Preferred stock................. -- -- -- --
Common stock.................... -- 1 (1)(b) --
Additional paid-in capital...... 22,156 1,688 (1,688)(b) 22,156
Retained earnings (deficit)..... (24,341) (9,911) 9,911 (b) (24,341)
-------- ------- -------- --------
Total stockholders' equity.... (2,185) (8,222) 8,222 (2,185)
-------- ------- -------- --------
Total liabilities and
stockholders' equity......... $129,181 $42,761 $(10,400) $161,542
======== ======= ======== ========
</TABLE>
38
<PAGE>
NOTES TO PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(a) Represents the allocation of the excess of the aggregate purchase price of
Invision, including expenses, over the historical carrying value of the
net assets acquired to the fair values of net assets acquired, as follows:
<TABLE>
<CAPTION>
INVISION
--------
<S> <C>
Aggregate purchase price.......................................... $ 43,500
Less historical carrying value of net assets acquired............. (37,880)
--------
Excess purchase prices............................................ $ 5,620
========
Allocation of excess purchase prices:
Excess fair value of property and equipment................... $ (1,101)
Excess fair value of intangibles.............................. 6,721
--------
Total....................................................... $ 5,620
========
</TABLE>
(b) Represents the elimination of assets, liabilities, and stockholders'
equity of Invision that were not purchased or assumed in the Invision
Acquisition.
(c) Represents the pro forma cash required to be borrowed under the Company's
existing debt facilities to fund the Invision Acquisition.
39
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Effective on December 1, 1996, the Company became the holding company for
the operations of AmeriTel and Talton Telecommunications. The Company
accounted for these acquisitions using the purchase method of accounting.
Accordingly, the Company's consolidated financial statements include the
operations of AmeriTel and Talton Telecommunications only for periods after
December 1, 1996.
The following selected consolidated financial data of the Company for the
one month ended December 31, 1996 and the selected combined financial data of
the Company's predecessors for the years ended December 31, 1994 and 1995, and
for the eleven months ended November 30, 1996, have been derived from the
Company's and its predecessors' audited financial statements. The selected
combined financial data of the predecessors for the years ended December 31,
1992 and 1993, and for the nine months ended September 30, 1996, and the
selected consolidated financial data of the Company for the nine months ended
September 30, 1997, are unaudited and, in the opinion of management, reflect
all adjustments (consisting only of normal recurring accruals) that are
necessary to present fairly the combined or consolidated financial statements
for such periods. The selected combined and consolidated financial data do not
purport to indicate results of operations as of any future date or for any
future period.
The selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and the notes thereto included elsewhere in this
Prospectus.
40
<PAGE>
<TABLE>
<CAPTION>
COMBINED THE COMBINED THE
COMBINED PREDECESSORS PREDECESSORS COMPANY PREDECESSORS COMPANY
--------------------------------- ------------- ------------ ------------- -------------
ELEVEN MONTHS ONE MONTH NINE MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED ENDED ENDED
--------------------------------- NOVEMBER 30, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1996 1997
------ ------- ------- ------- ------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $7,137 $13,593 $23,892 $40,326 $53,663 $ 5,506 $42,890 $53,407
Operating expenses:
Telecommunication
costs................. 4,414 7,025 11,761 18,673 23,317 2,299 19,155 21,571
Facility commissions... 1,177 2,225 3,901 9,595 13,962 1,455 11,197 14,419
Field operations and
maintenance........... 310 538 1,044 1,467 1,816 219 1,352 2,373
Selling, general, and
administration........ 884 1,566 2,571 4,089 3,921 372 3,002 4,462
Depreciation........... 496 780 965 1,359 1,538 111 1,145 1,072
Amortization of
intangibles........... 3 684 1,392 1,605 1,746 741 1,412 7,788
Nonrecurring expenses.. -- -- -- -- 684 -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 7,284 12,818 21,634 36,788 46,984 5,197 37,263 51,685
------ ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................. (147) 775 2,258 3,538 6,679 309 5,627 1,722
Other (income) expense:
Interest expense, net.. 131 331 745 1,360 1,469 612 1,210 7,320
Other, net............. (2) (153) (134) (52) 27 (20) 236 (126)
------ ------- ------- ------- ------- ------- ------- -------
Total other (income)
expense............... 129 178 611 1,308 1,496 592 1,446 7,194
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (276) 597 1,647 2,230 5,183 (283) 4,181 (5,472)
Income tax expense
(benefit).............. 1 -- (11) 891 1,917 (23) 1,572 (657)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (277) 597 1,658 1,339 3,266 (260) 2,609 (4,815)
Extraordinary loss...... -- -- -- -- 52 -- -- 4,396
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (277) $ 597 $ 1,658 $ 1,339 $ 3,214 $ (260) $ 2,609 $(9,211)
====== ======= ======= ======= ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 354 $ 2,392 $ 4,749 $ 6,554 $ 9,936 $ 1,181 $ 7,948 $10,708
Net cash provided (used)
by operating
activities............. 371 1,317 3,445 4,069 7,300 (1,419) 6,380 1,048
Net cash provided (used)
by investing
activities............. (1,445) (1,494) (9,976) (8,022) (7,515) (47,252) (5,692) (27,726)
Net cash provided (used)
by financing
activities............. 1,462 (36) 6,668 4,827 (547) 48,966 (1,838) 42,971
Capital
expenditures(2)........ 1,774 1,978 3,223 4,669 2,804 269 993 4,457
Ratio of earnings to
fixed charges(3)....... -- 2.8 3.0 2.5 4.2 -- 4.3 --
Deficiency of earnings
to fixed charges....... $ 276 -- -- -- -- $ 283 -- $ 5,472
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash
equivalents............ $ 370 $ 283 $ 419 $ 1,293 $ 531 $ 294 $ 144 16,588
Total assets............ 4,100 8,528 17,639 26,592 34,708 80,134 31,715 129,181
Total debt (including
current maturities).... 1,938 4,854 10,750 15,074 14,845 63,315 15,663 115,598
Total stockholders'
equity (deficit)....... (40) 556 2,027 4,850 9,361 6,481 7,368 (2,185)
</TABLE>
- -------
(1) For the purposes of this Prospectus, EBITDA means income before interest,
income taxes, depreciation and amortization. Although EBITDA is not a
measure of performance calculated in accordance with generally accepted
accounting principles, the Company has included information concerning
EBITDA in this Prospectus because it is commonly used by certain investors
and analysts as a measure of a company's ability to service its debt
obligations. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income, or cash
flow as an indicator of the Company's operating performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
41
<PAGE>
SELECTED HISTORICAL PREDECESSOR FINANCIAL DATA
The following selected historical predecessor financial data of AmeriTel and
Talton Telecommunications for the years ended December 31, 1994 and 1995, and
for the eleven months ended November 30, 1996 (the period prior to the
effective dates of their respective acquisitions by the Company) have been
derived from AmeriTel's and Talton Telecommunications' audited financial
statements. The selected historical predecessor financial data of Talton
Telecommunications for the years ended December 31, 1992 and 1993, and for
both AmeriTel and Talton Telecommunications for the nine months ended
September 30, 1996, are unaudited and, in the opinion of management, reflect
all adjustments (consisting only of normal recurring accruals) that are
necessary to present fairly their respective financial statements for such
periods.
The selected historical predecessor financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
42
<PAGE>
AMERITEL PAY PHONES, INC.
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------------- NOVEMBER 30, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
------ ------ ------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $1,191 $3,858 $11,699 $20,371 $29,306 $23,331
Operating expenses:
Telecommunication
costs................. 701 1,826 5,347 9,747 13,729 11,099
Facility commissions... 170 623 1,861 3,497 6,087 4,737
Field operations and
maintenance........... 83 192 508 864 1,166 899
Selling, general and
administration........ 162 376 928 1,759 2,281 1,727
Depreciation........... 156 213 194 384 536 431
Amortization of
intangibles........... 2 81 595 1,224 1,624 1,312
Nonrecurring expenses.. -- -- -- -- 684 --
------ ------ ------- ------- ------- -------
Total operating
expenses.............. 1,274 3,311 9,433 17,475 26,107 20,205
------ ------ ------- ------- ------- -------
Operating income
(loss)................. (83) 547 2,266 2,896 3,199 3,126
Other (income) expense:
Interest expense, net.. 90 188 564 1,028 1,355 1,094
Other, net............. -- (123) -- 66 39 248
------ ------ ------- ------- ------- -------
Total other expense.... 90 65 564 1,094 1,394 1,342
------ ------ ------- ------- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (173) 482 1,702 1,802 1,805 1,784
Income tax expense...... -- -- -- 734 693 714
------ ------ ------- ------- ------- -------
Income (loss) before
extraordinary loss..... (173) 482 1,702 1,068 1,112 1,070
Extraordinary loss...... -- -- -- -- 52 --
------ ------ ------- ------- ------- -------
Net income (loss)....... $ (173) 482 $ 1,702 $ 1,068 $ 1,060 1,070
====== ====== ======= ======= ======= =======
OTHER DATA:
EBITDA(1)............... $ 75 $ 964 $ 3,055 $ 4,438 $ 5,320 $ 4,621
Net cash provided (used)
by operating
activities............. (94) 344 1,428 2,315 2,568 1,556
Net cash provided (used)
by investing
activities............. (725) (860) (8,605) (5,665) (6,215) (5,855)
Net cash provided (used)
by financing
activities............. 957 470 7,217 4,012 2,837 3,442
Capital
expenditures(2)........ 725 175 1,779 2,051 1,516 1,287
Ratio of earnings to
fixed charges(3)....... -- 3.5 3.9 2.7 2.3 2.6
Deficiency of earnings
to fixed charges....... 173 -- -- -- -- --
BALANCE SHEET DATA (AT
END OF PERIOD):
Cash and cash
equivalents............ $ 234 $ 189 $ 229 $ 891 $ 81 $ 34
Total assets............ 1,780 2,800 12,449 18,586 26,885 25,071
Long-term debt
(including current
maturities)............ 955 1,735 8,181 11,690 14,845 15,663
Total stockholders'
equity (deficit)....... (12) 470 1,985 4,537 6,894 5,522
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means as income before
interest, income taxes, depreciation, and amortization. Although EBITDA is
not a measure of performance calculated in accordance with generally
accepted accounting principles, the Company has included information
concerning EBITDA in this Prospectus because it is commonly used by
certain investors and analysts as a measure of a company's ability to
service its debt obligations. EBITDA should not be used as an alternative
to, or be considered more meaningful than, operating income, net income,
or cash flow as an indicator of the Company's operating performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
43
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
---------------------------------------- NOVEMBER 30, SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
----------- ----------- ------- ------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues......... $5,946 $9,735 $12,193 $19,955 $24,357 $19,559
Operating expenses:
Telecommunication costs... 3,713 5,199 6,414 8,926 9,588 8,057
Facility commissions...... 1,007 1,602 2,040 6,098 7,875 6,460
Field operations and
maintenance.............. 227 346 536 603 650 454
Selling, general and
administration........... 722 1,190 1,643 2,330 1,640 1,275
Depreciation.............. 340 567 771 975 1,002 713
Amortization of
intangibles.............. 1 603 797 381 122 100
------ ------ ------- ------- ------- -------
Total operating
expenses................. 6,010 9,507 12,201 19,313 20,877 17,059
------ ------ ------- ------- ------- -------
Operating income (loss).... (64) 228 (8) 642 3,480 2,500
Other (income) expense:
Interest expense, net..... 41 143 181 332 114 116
Other, net................ (2) (30) (134) (118) (12) (12)
------ ------ ------- ------- ------- -------
Total other (income)
expense.................. 39 113 47 214 102 104
------ ------ ------- ------- ------- -------
Income (loss) before income
taxes..................... (103) 115 (55) 428 3,378 2,396
Income tax expense
(benefit)................. 1 -- (11) 157 1,224 859
------ ------ ------- ------- ------- -------
Net income (loss).......... $ (104) $ 115 $ (44) $ 271 $ 2,154 $ 1,537
====== ====== ======= ======= ======= =======
OTHER DATA:
EBITDA(1).................. $ 279 $1,428 $ 1,694 $ 2,116 $ 4,616 $ 3,326
Net cash provided (used) by
operating activities...... 464 973 2,017 1,754 4,733 3,133
Net cash provided (used) by
investing activities...... (720) (634) (1,372) (2,357) (1,301) (437)
Net cash provided (used) by
financing activities...... 505 (507) (549) 815 (3,284) (2,987)
Capital expenditures(2).... 1,049 1,803 1,444 2,618 1,288 437
Ratio of earnings to fixed
charges(3)................... -- 1.8 -- 2.1 17.4 18.1
Deficiency of earnings to
fixed charges............. $ 103 -- $ 55 -- -- --
BALANCE SHEET DATA (AT END
OF PERIOD):
Cash and cash equivalents.. $ 136 $ 94 $ 190 $ 402 $ 450 $ 110
Total assets............... 2,320 5,728 5,190 8,006 7,823 6,644
Long-term debt (including
current maturities).......... 983 3,118 2,569 3,384 -- --
Total stockholders' equity
(deficit).................... (28) 86 42 313 2,467 1,847
</TABLE>
- --------
(1) For the purposes of this Prospectus EBITDA means income before interest,
income taxes, depreciation and amortization. Although EBITDA is not a
measure of performance calculated in accordance with generally accepted
accounting principles, the Company has included information concerning
EBITDA in this Prospectus because it is commonly used by certain investors
and analysts as a measure of a company's ability to service its debt
obligations. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income, or cash
flow as an indicator of the Company's operating performance.
(2) Capital expenditures include only amounts expended for purchases of
property and equipment and the implementation of facility contracts.
(3) Earnings are defined as earnings (loss) before income taxes from
continuing operations and fixed charges. Fixed charges are defined as
interest expense and a portion of rental expense representing the interest
factor, which the Company estimates to be one-third of rental expense, and
amortization of deferred financing expense. This calculation is a
prescribed earnings coverage ratio intended to present the extent to which
earnings are sufficient to cover fixed charges, as defined.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenues from its operation of
inmate telecommunication systems located in correctional facilities in 43
states and the provision of related services. The Company enters into multi-
year agreements with the correctional facilities, pursuant to which the
Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights,
the Company pays a commission to the correctional facility based upon inmate
telephone use. The Company installs and generally retains ownership of the
telephones and the associated equipment and provides additional services to
the correctional facility that are tailored to the specialized needs of the
corrections industry and to the requirements of the individual correctional
facility, such as call activity reporting and call blocking. The Company also
generates revenues from public pay telephones that are ancillary to its inmate
telephone business. See "Business--Other Operations."
The Company accumulates call activity data from its various installations
and bills its revenues related to this call activity through major LECs or
through third-party billing services for smaller volume LECs. In addition,
during the same period, the Company accrues the related telecommunications
costs for validating, transmitting, billing and collection, and line and long-
distance charges, along with commissions payable to the facilities. Allowances
for bad debts are based on historical experience.
The Company's principal operating expenses consist of (i) telecommunication
costs; (ii) commissions paid to correctional facilities, which are typically
expressed as a percentage of either gross or net revenues and are fixed for
the term of the agreements with the facilities; (iii) field operations and
maintenance costs, which consist primarily of field service on the Company's
installed base of inmate telephones; and (iv) selling, general, and
administrative costs. The Company pays monthly line and usage charges to RBOCs
and other LECs for interconnection to the local network for local calls, which
are computed on a flat monthly charge plus, for certain LECs, on a per message
or per minute usage rate based on the time and duration of the call. The
Company also pays fees to RBOCs and other LECs and long distance carriers
based on usage for long distance calls. See "Business--Regulation."
The Company became the holding company for the operations of its
predecessors, AmeriTel and Talton Telecommunications, effective December 1,
1996. Because the Company's acquisitions of its predecessors, AmeriTel and
Talton Telecommunications, have been accounted for using the purchase method
of accounting, the Company's results of operations only reflect the operations
of AmeriTel and Talton Telecommunications subsequent to December 1, 1996. In
addition to the acquisitions of its predecessors, AmeriTel and Talton
Telecommunications, the Company also acquired the operations of Security
Telecom Corporation ("STC") on June 27, 1997 and Correctional Communications
Corporation ("CCC") on July 31, 1997. Because these acquisitions of STC and
CCC have also been accounted for using the purchase method of accounting, the
Company's results of operations only reflect the operations of these companies
subsequent to the effective dates of their acquisitions. Management believes
that the growth of the Company and its predecessors, AmeriTel and Talton
Telecommunications, through acquisitions makes meaningful period-to-period
comparisons of historical results of operations difficult. Consequently,
management believes that an investor is presented with more meaningful
information through discussion of the Company and its predecessors, AmeriTel
and Talton Telecommunications, on a combined basis for the periods discussed
below.
45
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the combined historical results of operations
of the Company and its predecessors, AmeriTel and Talton Telecommunications,
without any adjustments to historical results to reflect changes in
depreciation and amortization resulting from purchase accounting revaluations
as follows:
<TABLE>
<S> <C>
Years ended December 31, Combined results of operations of the predecessors,
1994 and 1995 and the AmeriTel and Talton Telecommunications, for those
nine months ended periods
September 30, 1996
Year ended December 31, Combined results of operations of the predecessors,
1996 AmeriTel and Talton Telecommunications, for the eleven
months ended November 30, 1996 and of the Company for
the one month ended December 31, 1996
Nine months ended Results of operations of the Company for the period
September 30, 1997
</TABLE>
These above described combined results of operations include the results of
operations of STC and CCC in the Company's results of operations only for the
periods subsequent to the effective dates of their acquisitions.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ----------------------------------
1994 1995 1996 1996 1997
------------- ------------- ------------- ---------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues...... $23,892 100% $40,326 100% $59,169 100.0% $42,890 100.0% $53,407 100.0%
Operating expenses:
Telecommunication
costs................. 11,761 49.2 18,673 46.3 25,616 43.3 19,155 44.7 21,571 40.4
Facility commissions... 3,901 16.3 9,595 23.8 15,417 26.1 11,197 26.1 14,419 27.0
Field operations and
maintenance........... 1,044 4.4 1,467 3.6 2,035 3.4 1,352 3.1 2,373 4.4
Selling, general, and
administrative........ 2,571 10.8 4,089 10.1 4,293 7.3 3,002 7.0 4,462 8.4
Depreciation........... 965 4.0 1,359 3.4 1,649 2.8 1,145 2.7 1,072 2.0
Amortization of
intangibles........... 1,392 5.8 1,605 4.0 2,487 4.2 1,412 3.3 7,788 14.6
Non-recurring
expenses.............. -- -- -- -- 684 1.2 -- -- -- --
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Total operating
expenses............... 21,634 90.5 36,788 91.2 52,181 88.3 37,263 86.9 51,685 96.8
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Operating income........ 2,258 9.5 3,538 8.8 6,988 11.7 5,627 13.1 1,722 3.2
Other (income) expense:
Interest expense, net.. 745 3.1 1,360 3.4 2,081 3.5 1,210 2.8 7,320 13.7
Other, net............. (134) (0.6) (52) (0.1) 7 0.0 236 0.6 (126) (0.2)
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Total other expense..... 611 2.5 1,308 3.3 2,088 3.5 1,446 3.4 7,194 13.5
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Income (loss) before
income taxes and
extraordinary loss..... 1,647 7.0 2,230 5.5 4,900 8.2 4,181 9.7 (5,472) (10.2)
Income tax expense
(benefit).............. (11) 0.0 891 2.2 1,894 3.2 1,572 3.7 (657) (1.2)
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Income (loss) before
extraordinary loss..... 1,658 7.0 1,339 3.3 3,006 5.0 2,609 6.0 (4,815) (9.0)
Extraordinary loss...... -- -- -- -- 52 0.1 4,396 8.2
------- ---- ------- ---- ------- ----- -------- ------ -------- ------
Net income (loss)....... $ 1,658 7.0% $ 1,339 3.3% $ 2,954 4.9% $ 2,609 6.0% $ (9,211) (17.2)%
======= ==== ======= ==== ======= ===== ======== ====== ======== ======
EBITDA.................. $ 4,749 19.9% $ 6,554 16.3% $11,117 18.8% $ 7,948 18.5% $10,708 20.0%
======= ==== ======= ==== ======= ===== ======== ====== ======== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (RESULTS OF OPERATION OF THE COMPANY)
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 (COMBINED RESULTS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS)
Operating Revenues--The Company's operating revenues increased by $10.5
million, or 24.5%, from $42.9 million for the nine months ended September 30,
1996 to $53.4 million for the nine months ended September 30, 1997. The
increase in operating revenues was primarily due to acquisitions by the
Company of inmate contracts during 1996, acquisitions of STC, CCC, and other
inmate facility contracts during the first nine months of 1997, and new
contract installations.
Operating Expenses--Total operating expenses increased by $14.4 million, or
38.7%, from $37.3 million for the nine months ended September 30, 1996 to
$51.7 million for the nine months ended September 30, 1997. Operating expenses
as a percentage of operating revenues increased 9.9% from 86.9% for the nine
months ended September 30, 1996 to 96.8% for the nine months ended September
1997. Excluding depreciation and amortization, operating expenses as a
percentage of operating revenues decreased from 80.9% for the nine
46
<PAGE>
months ended September 30, 1996 to 80.2% for the nine months ended September
30, 1997. The percentage decrease in operating expenses, excluding
depreciation and amortization, was caused by the factors discussed below.
Telecommunication costs increased by $2.4 million, from $19.2 million for
the nine months ended September 30, 1996 to $21.6 million for the nine months
ended September 30, 1997. Telecommunication costs represented 44.7% of
operating revenues for the nine months ended September 30, 1996 and 40.4% of
operating revenues for the nine months ended September 30, 1997, a decrease of
4.3%. The decrease as a percentage of operating revenues is primarily due to
lower billing and collection costs as a result of direct billing arrangements
entered into with various major LECs, lower relative costs for long distance
as a result of new long distance agreements, and a reduction in bad debts as a
result of the Company's efforts to reduce bad debt exposure and to improved
collection practices.
Facility commissions increased by $3.2 million, from $11.2 million for the
nine months ended September 30, 1996 to $14.4 million for the nine months
ended September 30, 1997. Facility commissions represented 26.1% of operating
revenues for the nine months ended September 30, 1996 and 27.0% of operating
revenues for the nine months ended September 30, 1997, an increase of 0.9%.
The increase as a percentage of operating revenues is primarily due to higher
commission percentages paid as a result of periodic increases in percentages
paid to existing customers as contracts are renewed, due to competitive
pressures, and to the effects of higher commission rates paid by STC and CCC,
both of which were acquired in 1997.
Field operations and maintenance costs increased by $1.0 million, from $1.4
million for the nine months ended September 30, 1996 to $2.4 million for the
nine months ended September 30, 1997. Field operations and maintenance costs
represented 3.1% of operating revenues for the nine months ended September 30,
1996 and 4.4% of operating revenues for the nine months ended September 30,
1997, an increase of 1.3%. The increase as a percentage of operating revenues
is primarily due to an increase in costs associated with servicing acquired
inmate facilities.
Selling, general, and administrative expenses ("SG&A") increased by $1.5
million, from $3.0 million for the nine months ended September 30, 1996 to
$4.5 million for the nine months ended September 30, 1997. SG&A represented
7.0% of operating revenues for the nine months ended September 30, 1996 and
8.4% of operating expenses for the nine months ended September 30, 1997, an
increase of 1.4%. The increase as a percentage of operating revenues is
primarily due to the increased infrastructure necessary to support the
Company's acquisitions and the Company's more aggressive sales efforts.
DEPRECIATION AND AMORTIZATION--depreciation and amortization costs increased
by $6.3 million, from $2.6 million for the nine months ended September 30,
1996 to $8.9 million for the nine months ended September 30, 1997.
Depreciation and amortization costs represented 6.0% of operating revenues for
the nine months ended September 30, 1996 and 16.6% of operating revenues for
the nine months ended September 30, 1997, an increase of 10.6%. The increase
as a percentage of operating revenues is primarily due to additional
amortization expense associated with the acquisitions by the Company of inmate
facility contracts and from the intangible assets related to the acquisition
of AmeriTel and Talton Telecommunications in December 1996, and the
acquisition of STC and CCC in June and July of 1997, respectively.
Operating Income--The Company's operating income decreased by $3.9 million,
from $5.6 million for the nine months ended September 30, 1996 to $1.7 million
for the nine months ended September 30, 1997, as a result of the factors
described above. The Company's operating margin decreased from 13.1% for the
nine months ended September 30, 1996 to 3.2% for the nine months ended
September 30, 1997 primarily due to the increase in amortization expense
associated with the Company's acquisitions described above.
Other (Income) Expense--Other (income) expense, consisting primarily of
interest expense, increased by $5.8 million, from $1.4 million for the nine
months ended September 30, 1996 to $7.2 million for the nine months ended
September 30, 1997. The increase was primarily due to interest expense
associated with indebtedness incurred by the Company in connection with
acquisitions and completion of the Offering in the principal amount of $115.0
million in June 1997.
47
<PAGE>
Extraordinary Loss--The Company incurred an extraordinary loss of $4.4
million in 1997 related to the write-off of the unamortized deferred loan
costs and the unamortized discount on its senior subordinated notes, in
conjunction with the repayment of this debt.
Net Income (Loss)--The Company's net income decreased by $11.8 million, from
$2.6 million for the nine months ended September 30, 1996 to a loss of $9.2
million for the nine months ended September 30, 1997, as a result of the
factors described above.
EBITDA--EBITDA increased by $2.8 million, from $7.9 million for the nine
months ended September 30, 1996 to $10.7 million for the nine months ended
September 30, 1997. EBITDA as a percentage of operating revenues increased
from 18.5% for the nine months ended September 30, 1996 to 20.0% for the nine
months ended September 30, 1997, primarily due to increased revenues and lower
operating costs, excluding amortization and depreciation, as a percentage of
revenue as discussed above.
YEAR ENDED DECEMBER 31, 1996 (COMBINED RESULTS OF OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS, FOR ELEVEN MONTHS ENDED
NOVEMBER 30, 1996 AND OF THE COMPANY FOR THE ONE MONTH ENDED DECEMBER 31,
1996) COMPARED TO YEAR ENDED DECEMBER 31, 1995 (COMBINED OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS)
Operating Revenues. The Company's operating revenues increased by $18.9
million, or 46.7%, from $40.3 million for the year ended December 31, 1995 to
$59.2 million for the year ended December 31, 1996. The increase in operating
revenues was primarily due to (i) the addition of operating revenues from the
Company's acquisitions of contracts covering 76 inmate facilities during 1995
(the results of which were reflected for the full year in 1996) and contracts
covering 140 inmate facilities during 1996; (ii) operating revenues from the
Company's contract with the state of Alabama, a portion of which become
operational during the last half of 1995; and (iii) increases in operating
revenues from the Company's addition of new contracts covering 130 inmate
facilities, net of contract terminations, during 1995 (the results of which
were reflected for the full year in 1996) and, to a lesser extent, from the
addition of new contracts during 1996.
Operating Expenses. Total operating expenses increased $15.4 million, from
$36.8 million in 1995 to $52.2 million in 1996. Operating expenses as a
percentage of operating revenues decreased 2.9% from 91.2% for the year ended
December 31, 1995 to 88.3% for the year ended December 31, 1996. The decrease
in operating expenses as a percentage of revenues is primarily due to a
decrease in telecommunication costs resulting from lower long distance rates
from more favorable long distance service contracts and decreases in local
exchange costs, SG&A expenses, and field operations and maintenance expenses
primarily as a result of the fixed portion of these expenses being spread over
a higher revenue base.
Telecommunication costs increased by $6.9 million, from $18.7 million in
1995 to $25.6 million in 1996. Telecommunication costs represented 46.3% of
operating revenues in 1995 and 43.3% of operating revenues in 1996, a decrease
of 3.0%. The dollar increase is primarily due to increased costs associated
with higher call volumes, while the percentage decrease is primarily due to
lower long distance rates from more favorable long distance service contracts
and decreases in local exchange costs.
Facility commissions increased by $5.8 million, from $9.6 million in 1995 to
$15.4 million in 1996. Facility commissions represented 23.8% of operating
revenues in 1995 and 26.1% of operating revenues in 1996, an increase of 2.3%.
The increase is primarily due to higher commission rates on the Company's
contract with the State of Alabama and on acquired inmate facility contracts.
Field operation and maintenance costs increased by $568,000, from $1.5
million in 1995 to $2.0 million in 1996. Field operation and maintenance costs
represented 3.6% of operating revenues in 1995 and 3.4% of operating revenues
in 1996, a decrease of 0.2%. The dollar increase is primarily due to increased
costs associated with serving a larger account base, while the percentage
decrease is primarily due to the effect of spreading fixed costs over a larger
revenue base.
SG&A increased by $204,000, from $4.1 million in 1995 to $4.3 million in
1996. SG&A represented 10.1% of operating revenues in 1995 and 7.3% of
operating revenues in 1996, a decrease of 2.8%. The decrease in SG&A as a
percentage of operating revenues is primarily due to the effect of spreading
fixed costs over a larger revenue base.
48
<PAGE>
Depreciation and Amortization--depreciation and amortization costs increased
by $1.1 million, from $3.0 million in 1995 to $4.1 million in 1996.
Depreciation and amortization costs represented 7.4% of operating revenues in
1995 and 7.0% of operating revenues in 1996, a decrease of 0.4%. The dollar
increase is primarily due to $600,000 in additional depreciation and
amortization expense resulting from the Company's acquisitions of AmeriTel and
Talton Telecommunications in December 1996.
The Company incurred a non-recurring expense of $684,000 in 1996 related to
$434,000 in bonuses paid by AmeriTel prior to its acquisition by the Company
and $250,000 paid by AmeriTel to settle a lawsuit. Such expense represented
1.2% of operating revenues in 1996.
Operating Income. The Company's operating income increased by $3.5 million,
from $3.5 million in 1995 to $7.0 million in 1996, as a result of the
significant increase in operating revenues offset in part by the increase in
operating costs discussed above. The Company's operating income margin
increased from 8.8% in 1995 to 11.7% in 1996 due to the factors described
above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $780,000 from $1.3 million in 1995 to $2.1
million in 1996. The increase was primarily due to increased interest expense
associated with indebtedness incurred by the Company in connection with the
acquisitions of AmeriTel and Talton Telecommunications.
Net Income (Loss). The Company's net income increased by $1.7 million, from
$1.3 million in 1995 to $3.0 million in 1996 as a result of the factors
described above.
EBITDA. EBITDA increased by $4.5 million from $6.6 million in 1995 to $11.1
million in 1996. EBITDA as a percentage of operating revenues increased from
16.3% in 1995 to 18.8% in 1996 due to the factors described above.
YEAR ENDED DECEMBER 31, 1995 (COMBINED RESULTS OF OPERATIONS OF THE
PREDECESSORS, AMERITEL AND TALTON TELECOMMUNICATIONS) COMPARED TO YEAR ENDED
DECEMBER 31, 1994 (COMBINED RESULTS OF OPERATIONS OF THE PREDECESSORS,
AMERITEL AND TALTON TELECOMMUNICATIONS)
Operating Revenues. The Company's operating revenues increased by $16.4
million, or 68.8%, from $23.9 million for the year ended December 31, 1994 to
$40.3 million for the year ended December 31, 1995. The increase in operating
revenues was primarily due to (i) the addition of operating revenues from the
Company's acquisitions of contracts covering 284 inmate facilities in 1994
(the results of which were reflected for the full year in 1995) and contracts
covering 76 inmate facilities in 1995; (ii) operating revenues from the
Company's contract with the state of Alabama, a portion of which became
operational during the last half of 1995: and (iii) increases in operating
revenues from the Company's addition of new contracts covering 69 inmate
facilities, net of contract terminations, during 1994 (the results of which
were reflected for the full year in 1995) and, to a lesser extent, from the
addition of new contracts during 1995.
Operating Expenses. Total operating expenses increased $15.2 million, from
$21.6 million in 1994 to $36.8 million in 1995. Operating expenses as a
percentage of operating revenues increased 0.7%, from 90.5% in 1994 to 91.2%
in 1995. The increase in operating expenses was primarily due to increased
costs associated with servicing acquired inmate facility contracts. The
increase in operating expenses as a percentage of revenues is attributable
primarily to increased facility commissions, which was primarily due to the
higher commission rates on the Company's contract with the state of Alabama,
which became operational during the last half of 1995. The increase in 1995
operating expenses as a percentage of revenues was also due to an increasing
reserve for bad debts associated with higher uncollectible accounts in certain
territories into which the Company expanded, primarily Iowa, Wisconsin, and
Minnesota.
Telecommunication costs increased by $6.9 million, from $11.8 million in
1994 to $18.7 million in 1995. Telecommunication costs represented 49.2% of
operating revenues in 1994 and 46.3% of operating revenues in 1995, a decrease
of 2.9%. The dollar increase is primarily due to higher expenses associated
with increased call volume, while the percentage decrease is primarily due to
lower billing costs as the Company implemented its direct billing agreements
for a portion of its call volume and to lower bad debt.
49
<PAGE>
Facility commissions increased by $5.7 million, from $3.9 million in 1994 to
$9.6 million in 1995. Facility commissions represented 16.3% of operating
revenues in 1994 and 23.8% of operating revenues in 1995, an increase of 7.5%.
The increases are primarily due to the higher commission rates on the
Company's contract with the State of Alabama, which became operational during
the second half of 1995.
Field operation and maintenance costs increased by $423,000, from $1.0
million in 1994 to $1.5 million in 1995. Field operation and maintenance costs
represented 4.4% of operating revenues in 1994 and 3.6% of operating revenues
in 1995, a decrease of 0.8%. The decrease as a percentage of operating
revenues is primarily due to economies of scale associated with servicing a
larger account base.
SG&A increased by $1.5 million, from $2.6 million in 1994 to $4.1 million in
1995. SG&A represented 10.8% of operating revenues in 1994 and 10.1% of
operating revenues in 1995, a decrease of 0.7%. The dollar increase is
primarily due to increased costs required to service acquired inmate facility
contracts, while the decrease as a percentage of operating revenues is due
primarily to economies of scale associated with such acquisitions.
DEPRECIATION AND AMORTIZATION--depreciation and amortization costs increased
by $607,000, from $2.4 million in 1994 to $3.0 million in 1995. Depreciation
and amortization costs represented 9.8% of operating revenues in 1994 and 7.4%
of operating revenues in 1995, a decrease of 2.4%. The dollar increase is
primarily due to increased depreciation and amortization relating to acquired
and new inmate facility contracts, while the percentage decrease is primarily
due to proportionately less depreciation and amortization applied to a higher
revenue base.
Operating Income. The Company's operating income increased by $1.2 million,
from $2.3 million in 1994 to $3.5 million in 1995, as a result of higher
revenues, net of the increases in operating costs discussed above. The
Company's operating income margin decreased from 9.5% in 1994 to 8.8% in 1995
primarily due to higher operating costs.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $697,000, from $611,000 in 1994 to $1.3 million
in 1995. The increase was due primarily to additional borrowings to fund
acquisitions of inmate facility contracts.
Net Income. The Company's net income decreased by $319,000, from $1.7
million in 1994 to $1.3 million in 1995, as a result of the factors described
above.
EBITDA. EBITDA increased by $1.9 million, from $4.7 million in 1994 to $6.6
million in 1995. EBITDA as a percentage of operating revenues decreased from
19.9% in 1994 to 16.3% in 1995 due primarily to the increases in facility
commissions discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.0 million for the nine
months ended September 30, 1997, as compared to $4.7 million for the nine
months ended September 30, 1996. Net cash used in operating activities was
$5.9 million and $4.1 million for the years ended December 31, 1996 and 1995,
respectively. Net cash used in operating activities consisted primarily of
increases in accounts receivable associated with the addition of new inmate
facility contracts.
Cash used in investing activities was $27.8 million for the nine months
ended September 30, 1997, consisting primarily of cash outflows to purchase
STC and CCC, as compared to $6.3 million for the nine months ended September
30, 1996. Cash used in investing activities was $54.8 million in 1996,
consisting primarily of cash outflows for acquisitions. Cash used in investing
activities was $8.0 million in 1995, consisting primarily of acquisitions of
inmate facility contracts.
Cash provided by financing activities was $43.0 million for the nine months
ended September 30, 1997 consisting primarily of the issuance of the $115.0
million Senior Notes, and offset by the repayment of the Company's Senior
Credit Facility, Senior Subordinated Notes, and Subordinated Notes, as
compared to $.5
50
<PAGE>
million for the nine months ended September 30, 1996. Cash provided by
financing activities was $48.4 million and $4.8 million in 1996 and 1995,
respectively, and consisted primarily of proceeds from borrowings under credit
facilities and the issuance of equity by the Company's predecessors to finance
revenue growth and acquisitions. Financing activity in 1996 included the
issuance of equity by the Company in connection with the acquisitions of
AmeriTel and Talton Telecommunications in December 1996. See "Certain
Relationships and Related Transactions; Historic Relationships and Related
Transactions." The Company raised $115.0 million in proceeds in connection
with the issuance of the Senior Notes in June 1997, of which $67.2 million was
used to repay amounts outstanding under the Company's Senior Credit Facility,
Senior Subordinated Notes, and Subordinated Notes; $9.9 million (subject to
adjustment) was used to acquire STC and 100% of its affiliate, LETI; and $5.8
million was used to pay deferred financing costs related to the Senior Notes.
The remaining net proceeds of $32.1 million along with $18.4 million of
proceeds from the Company's Senior Credit Facility were used to consummate the
CCC Acquisition and the Invision Acquisition.
As of September 30, 1997, the Company had approximately $115.6 of long-term
indebtedness outstanding, a deficit in stockholders' equity of $2.2 million,
and $16.6 million of cash. On July 30, 1997, the Company's Senior Credit
Agreement was amended to provide the Company a $35 million revolving loan
commitment. Subsequent to September 30, 1997, the Company borrowed $30 million
under its revolving loan committment to fund the Invision Acquisition and
provide additional liquidity.
The Company expects that its principal sources of liquidity will be cash
flow from operations, and borrowings under the revolving loan commitment. The
Company anticipates that its principal uses of liquidity will be to provide
working capital, finance future acquisitions, and meet debt service
requirements. The Company anticipates that its primary capital expenditures
for the next 12 months will be for upgrades to its technology infrastructure
of approximately $500,000 and for capital items required to implement new
contracts entered into by the Company. Management believes that cash flow from
operations and from credit facilities that management believes will be
available to the Company will be sufficient to fund the requirements of the
Company for the next 12 months.
As of September 30, 1997, the Company had approximately $115.6 million of
long-term indebtedness outstanding, including (i) $115 million of Senior Notes
outstanding at an interest rate of 11.0% and (ii) $.6 million of other
indebtedness consisting primarily of contingent acquisition costs and capital
leases.
51
<PAGE>
As of December 19, 1997 the Company and its Lenders (as defined) entered
into an amendment and restatement of the Existing Credit Facility establishing
the Senior Credit Facility, which consists of (a) a $55.0 million term loan
acquisition facility and (b) a $25.0 million revolving loan facility (which
includes a $5.0 million letter of credit facility). Amounts borrowed under the
Senior Credit Facility will bear interest, at the option of the Company, at
either (i) the Base Rate (i.e., the higher of CIBC's reference rate and the
overnight federal funds rate plus 0.5%) plus a margin that varies from 0.75%
to 2.25%, depending on the Company's Total Debt to EBITDA Ratio (as defined in
the Senior Credit Facility); or (ii) the LIBO Rate (as defined in the Senior
Credit Facility) plus a margin that varies from 2.0% to 3.5%, depending on the
Company's Total Debt to EBITDA Ratio. The Senior Credit Facility requires the
Company to make quarterly payments of principal amounts due under the term
loan facility in the amounts set forth below on the dates indicated:
<TABLE>
<CAPTION>
QUARTERLY DOLLAR
PAYMENT DATE REPAYMENT
------------ ----------
<S> <C>
September 30, 1998 $2,750,000
December 31, 1998 2,750,000
March 31, 1999 2,406,250
June 30, 1999 2,406,250
September 30, 1999 2,406,250
December 31, 1999 2,406,250
March 31, 2000 3,093,750
June 30, 2000 3,093,750
September 30, 2000 3,093,750
December 31, 2000 3,093,750
March 31, 2001 3,437,500
June 30, 2001 3,437,500
September 30, 2001 3,437,500
December 31, 2001 3,437,500
March 31, 2002 3,437,500
June 30, 2002 3,437,500
September 30, 2002 3,437,500
December 31, 2002 3,437,500
</TABLE>
The Senior Credit Facility requires quarterly interest-only payments to be
made on the Base Rate loans and periodic interest-only payments based on the
applicable interest period on LIBO Rate loans, at least quarterly, in each
case until maturity. In addition, the Senior Credit Facility requires
mandatory prepayments out of the proceeds of certain equity or debt offerings,
asset dispositions, receipt of insurance proceeds not applied as provided in
the Senior Credit Facility, and receipts of funds from certain escrow
accounts. All outstanding principal and interest under the Senior Credit
Facility is due December 31, 2002. The Senior Credit Facility is secured by
substantially all the assets of the Company and the Subsidiary Guarantors. See
"Description of Other Indebtedness--Senior Credit Facility."
Concurrently with the consummation of the Offering, the Company expensed
approximately $4.4 million to write off previously incurred deferred financing
costs related to the Existing Credit Facility, the Senior Subordinated Notes,
and the Subordinated Talton Note, which were repaid with the net proceeds of
the Offering. These expenses have been accounted for as an extraordinary loss
on the early extinguishment of debt.
Management expects that cash flow from operations along with additional
borrowings under existing and future credit facilities will be sufficient to
meet the Company's requirements for the remainder of 1997. The Company spent
$27.8 million for the nine months ended September 30, 1997. The Company
expects to spend approximately $4.5 million in capital expenditures in the
remainder of 1997 for new installations and equipment purchases for its
billing and inquiry center. In July of 1997, the Company acquired
substantially all of the assets of CCC for a purchase price of $10.5 million,
subject to adjustment. On October 6, 1997, the Company completed the Invision
Acquisition for a purchase price of $40.0 million in cash and approximately
$2.0 million
52
<PAGE>
in assumption of liabilities, subject to adjustment and subject to a provision
for working capital of approximately $1.2 million provided to the Company
pursuant to the purchase agreement. The Company financed these acquisitions
through proceeds from the Offering. On December 19, 1997, the Company
consummated the Peoples Telephone acquisition and on December 29, 1997, the
Company consummated the NAI acquisition for the purchase price of $10.625
million and $6.5 million, respectively, subject in each case to future
contingencies. Each of these acquisitions was funded by loans under the Senior
Credit Facility. In addition, the Company used approximately $53.2 of the
proceeds of the Offering to repay all outstanding principal and interest under
the Existing Credit Facility. The Company currently anticipates that interest
payments of approximately $17.9 million per year through December 31, 2000
will be required under the terms of the Senior Notes and the Senior Credit
Facility. As of the date of this Prospectus, the Company has approximately
$25.0 million of unused borrowing capacity under the Senior Credit Facility.
The Company believes that this currently available borrowing capacity together
with its cash flows will be adequate to support its current operations through
December 31, 1998.
The Company intends to pursue additional acquisitions to expand its base of
installed inmate telephones and consider acquisition opportunities from time
to time. There can be no assurance that the Company will have sufficient
available capital resources to realize its acquisition strategy. Such future
acquisitions, depending on their size and the form of consideration, may
require the Company to seek additional debt or equity financing.
The Senior Credit Facility and the Indenture contain numerous restrictive
covenants including, among others, limitations on the ability of the Company
to incur additional indebtedness, to create liens and other encumbrances, to
make certain payments and investments, to sell or otherwise dispose of assets,
or to merge or consolidate with another entity. The Senior Credit Facility
also requires the Company to meet certain financial tests on a consolidated
basis, some of which may be more restrictive in future years. The Company's
failure to comply with its obligations under the Senior Credit Facility or the
Indenture, or in agreements relating to indebtedness incurred in the future,
could result in an event of default under such agreements, which could permit
acceleration of the related debt and acceleration of debt under other
financing arrangements that may contain cross-acceleration or cross-default
provisions. In addition, because interest under the Company's Senior Credit
Facility accrues at floating rates, the Company remains subject to interest
rate risk with respect to a significant portion of its indebtedness. See
"Description of the Other Indebtedness--Senior Credit Facility"; and
"Description of Senior Notes."
The Company is a holding company, the assets of which consist principally of
the stock of its Subsidiaries, through which it conducts substantially all of
its operations. The Company's ability to pay interest on the Senior Notes and
to satisfy its other obligations will depend upon dividends or other
distributions of funds from its Subsidiaries. The Company's Subsidiaries are
distinct legal entities, and the rights of holders of the Senior Notes against
the Subsidiary Guarantors will be subject to the rights of the Subsidiary
Guarantors' creditors, to the extent senior to the obligations of the
Subsidiary Guarantors. The future operating performance of its Subsidiaries
will be affected by economic conditions, and financial, business, and other
factors, many of which are beyond the Company's control. The Company's
Subsidiaries are parties to no contractual agreements that would restrict
their ability to pay dividends or advance funds to the Company. As of the date
of this Prospectus there is aggregate indebtedness of $600,000 of the
Company's Subsidiaries that is effectively senior to the Senior Notes because
the Company is a holding company. See "Risk Factors--Holding Company
Structure." The Company has pledged all of the outstanding capital stock of
its Subsidiaries to secure its obligations under the Senior Credit Facility.
The Senior Credit Facility and all obligations thereunder are also secured by
a first priority lien on substantially all of the assets of the Company's
Subsidiaries, including future Subsidiaries. There can be no assurance that
the operating cash flow of the Company's Subsidiaries will be sufficient to
meet the Company's operating expenses and debt service obligations.
INCOME TAXES
Since the Company's acquisitions of AmeriTel and Talton Telecommunications
were stock purchases, the Company was required to retain the tax bases of
AmeriTel and Talton Telecommunications in the assets
53
<PAGE>
acquired. As a result, the Company will not be entitled to a tax deduction for
the amortization of goodwill or the depreciation and amortization of certain
other tangible and intangible assets related to these acquisitions. The
Company has provided deferred income tax liabilities for differences in the
financial accounting and tax bases of its tangible and identifiable intangible
assets. However, in accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," future
amortization of non-deductible goodwill will be treated as a permanent
difference in the Company's financial statements.
REVENUES AND COST SYNERGIES
The combined historical results of operations of the Company do not give
effect to the historical operating results of the acquisitions of Tataka, STC,
CCC, and Invision, prior to their respective acquisition dates. While the pro
forma financial data included in this Prospectus does give effect to these
acquisitions as if they were consummated on January 1, 1996, the pro forma
financial data do not give effect to any events occurring after consummation
of the acquisitions, other than as specified. See "Pro Forma Financial Data."
During 1996, regulatory authorities approved certain increases and decreases
in tariff rates the Company is allowed to charge its customers, which had the
net effect of increasing the Company's revenues for the periods during 1996
after such rates became effective. As a result of these tariff rate increases
and decreases during 1996, the Company believes that it is probable that its
future operating results will reflect higher net revenues than those reflected
on both a historical and pro forma basis for the year ended December 31, 1996.
As part of the Company's business and operating strategy, it has developed a
billing and bad-debt management system that management believes will
significantly reduce operating costs in the future. This billing and bad-debt
management system includes pre-established call blocking limits, validation
and credit checks on all call attempts, and the generation of timely call
reporting information, which enable the Company to identify customers of
marginal credit quality more quickly. After the completion of each of the
Company's acquisitions, the Company has begun the implementation of this
billing and bad-debt management system at each acquired business. While this
implementation process takes time to complete, the implementation of this
billing and bad-debt management system generally results in some reduction in
revenues as pre-established call blocking limits are established, which is
generally more than offset by favorable cost savings, especially in the area
of lower bad-debt expense. In the case of the Invision Acquisition, however,
the implementation of the pre-established call blocking limits has resulted in
increased 1997 revenues because the Company increased Invision's call blocking
limits from unusually low limits established by Invision in late 1996.
Set forth below is a summary of the effect of these revenue and cost
synergies on pro forma EBITDA for the year ended December 31, 1996 and the
nine months ended September 30, 1997, had these revenue and cost synergies
been fully implemented as of January 1, 1996. The effect of net tariff rate
increases is shown net of related increases in operating expenses such as
commissions and the billing and collections and bad-debt expense components of
telecommunications costs. The effect of implementation of the billing and bad-
debt management system results in higher revenues at Invision for 1997 and
lower bad-debt expense for all the acquired businesses for 1996 and 1997,
partially offset by related changes in revenues, facility commissions, long
distance charges, and validation and other costs. The effect of these changes
is based on estimates and assumptions made and believed to be reasonable by
the Company and are inherently uncertain and subject to significant business,
economic, and competitive contingencies, many of which are beyond the control
of the Company, and are based on assumptions with respect to future business
decisions that are subject to change. See "Special Note Regarding Forward-
Looking Statements." The material assumptions on which the information in the
following table is based are as follows:
(1) the Company would have immediately increased their rates charged to
customers in conjunction with tariff rate changes in 1996 upon the
effective date of such changes in the applicable jurisdictions. The
adjustment is calculated as if such changes were effective as of January 1,
1996. The effect of such rate increases, based on these assumptions, would
have increased the Company's pro forma 1996 operating revenue by
approximately 1.7% with a corresponding increase in commissions, billing
and collection fees,
54
<PAGE>
and bad debt expense. Such incremental expenses are assumed to approximate
the Company's pro forma ratios of such costs to pro forma revenues.
(2) the Company would realize savings on a pro forma basis in both 1996
and 1997 from the full implementation of the Company's billing and bad debt
management system. The savings from such implementation are estimated on a
pro forma basis by assuming the Company's Subsidiaries that had not already
implemented the billing and bad debt management system could reduce their
bad debt by implementing Talton Telecommunications's billing and bad debt
management system. This estimate is based on historical bad debt
percentages experienced by Talton Telecommunications. Finally, the Company
would successfully increase revenue in 1997 at its Invision Subsidiary by
relaxing this Subsidiary's very restrictive call blocking program, which
was implemented in late 1996. The increases in revenue from such policy
changes is assumed to have increased 1997 Invision revenues by
approximately 15% with a corresponding increase in commission expense,
billing and collection fees, and bad debt expense, estimated upon pro forma
Invision direct cost ratios to pro forma Invision revenues.
The following table should not be viewed as indicative of actual historical or
future results and were not prepared with a view towards compliance with
published guidelines of the Commission or the AICPA with respect to
prospective financial information and have not been examined or compiled by
any certified public accountant.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
1996 1997
------------ -------------------
<S> <C> <C>
Pro forma EBITDA.......................... $24,907 $15,033
Effect of net tariff rate increases....... 1,342
Effect of full implementation of the
Company's billing and bad-debt management
systems.................................. 3,927 6,655
------- -------
EBITDA (as adjusted)...................... $30,176 $21,688
======= =======
</TABLE>
ACCOUNTING PRONOUNCEMENTS
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for Long-Lived Assets and for Long-Lived Assets to be
Disposed of," which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Impairment is evaluated by comparing
future cash flows (undiscounted and without interest charges) expected to
result from use of the asset and its eventual disposition to the carrying
amount of the asset. The adoption of this pronouncement had no material impact
on the Company's financial statements.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on new fair value
accounting rules. Although expense recognition for employee stock-based
compensation is not mandatory, SFAS No. 123 requires companies that choose not
to adopt the new fair value accounting to disclose pro forma net income and
earnings per share under the new method. During 1996, the Company's
predecessor, AmeriTel, implemented the disclosure requirements of this
pronouncement. During 1996, neither the Company nor Talton Telecommunications
was a party to any stock-based compensation plans requiring the implementation
of SFAS No. 123.
55
<PAGE>
BUSINESS
GENERAL
The Company is the largest independent provider of inmate telecommunications
services to correctional facilities operated by city, county, and state
authorities and other types of confinement facilities such as juvenile
detention centers, private jails, and halfway houses. As of September 30,
1997, the Company owned and operated inmate telephones located in 1,781
correctional facilities in 43 states. Management believes that the Company
provides inmate telecommunications services to over 75% of the county
correctional facilities in the states of Alabama, Illinois, Iowa, Kansas,
Missouri, Nebraska, and Utah and to over 50% of the county correctional
facilities in the states of Colorado, Idaho, Indiana, Kentucky, Minnesota,
Mississippi, Montana, Ohio, Oklahoma, South Dakota, and Tennessee. For the
year ended December 31, 1996 and the nine months ended September 30, 1997, the
Company generated pro forma revenues of $139.4 million and $102.5 million,
respectively, and pro forma EBITDA (as defined) of $24.9 million and $15.0
million, respectively. Management estimates that the market for local and
county correctional facilities exceeds $700,000,000 in gross revenues
annually. Management estimates that approximately 55% of this market is
controlled by RBOCs or other LECs and by IXCs. The remainder of this market is
served by independent service providers such as the Company, with the Company
accounting for approximately 50% of the market served by independent service
providers. Management believes that no other independent provider accounts for
more than 5% of the revenue derived from inmate telephone operations at local
and county correctional facilities.
The Company's inmate telecommunications business consists of owning,
operating, servicing, and maintaining a system of telephones located in
correctional facilities and providing related services. The Company enters
into multi-year agreements with the correctional facilities pursuant to which
the Company serves as the exclusive provider of telecommunications services to
inmates within each facility. In exchange for the exclusive service rights,
the Company pays a negotiated commission to the correctional facility based
upon actual inmate telephone use. The Company installs and generally retains
ownership of the telephones and related equipment. Under the terms of the
Company's agreements with correctional facilities, these commissions are a
function of revenues generated from inmate telephone use. For the nine months
ended September 30, 1997 pro forma facility commissions were approximately 28%
of pro forma operating revenues. In addition, the Company provides services
that are tailored to the specialized needs of the corrections industry and to
the requirements of the individual correctional facility, such as a
specialized law enforcement management system, call activity reporting, and
call blocking. The Company also generates revenues from public pay telephones
that are ancillary to its inmate telecommunications business.
The Company was formed in November 1996 to consummate the acquisitions of
AmeriTel and Talton Telecommunications, thereby combining the unique strengths
of two recognized independent providers of inmate telecommunications services.
The Company was formed by EUF Talton, an affiliate of EUFCC, a private
investment banking and consulting firm, the principals of which are
experienced in acquiring and integrating the operations of companies in
consolidating industries. The Company has recently been awarded the contract
with the Department of Corrections of the State of North Carolina to provide
inmate telephone services. The agreement covers 96 correctional facilities
with a current inmate population of approximately 32,000. The Company will
also provide coin telephone service for 1,600 telephones throughout North
Carolina in connection with this contract. With the acquisition of AmeriTel,
the Company acquired a management team with extensive experience in
identifying, consummating, and integrating acquisitions in the inmate
telecommunications industry. With Talton Telecommunications, the Company
acquired a billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a competitive
advantage in the industry. With the acquisition of STC, the Company augmented
its information technology and services offered with, among other assets, a
specialized law enforcement management information system. The Company
believes that this system will be instrumental in retaining STC's customers
and will assist the Company in retaining existing and obtaining new customers.
On July 31, 1997, the Company acquired CCC. With this acquisition, the
Company acquired CCC's proprietary call processor technology, which management
believes will reduce the Company's installation and operating costs. CCC
generated revenues of approximately $9.6 million in 1996. On October 6 , 1997,
the Company consummated the Invision Acquisition. Invision generated revenues
of approximately $48.9 million in 1996.
56
<PAGE>
The Company has pursued a strategy of increasing its installed base of
inmate telephones through selective acquisitions of other inmate
telecommunications operators and has successfully completed 29 acquisitions in
the industry since 1993. The following table sets forth the acquisition
history of the Company:
<TABLE>
<CAPTION>
TOTAL NUMBER OF PRIMARY
DATE SELLER FACILITIES SERVED STATES SERVED
---- ------ ----------------- -------------
<C> <C> <C> <S>
January 1993 Pay-Comm Systems Corp. 7 Iowa
January 1993 to February 1994 Pay-Tel of America, Inc. 94 Colorado, Iowa, Kansas,
(4 transactions) Missouri,
Oklahoma, South Dakota,
Wisconsin
February 1993 Best Serve, Inc. 60 Iowa, Kansas, Missouri,
Nebraska,
South Dakota
July 1993 Coin Telephone, Inc. 37 North Carolina, South
Carolina
April 1994 Ad/Vantage Communications 12 Missouri, Iowa, South
Consultants, Inc. Dakota
April 1994 World Communications 1 Missouri
June 1994 to June 1996 Peoples Telephone Company, Inc. 224 Arkansas, Colorado
(6 transactions) Idaho, Iowa, Kansas,
Minnesota, Missouri,
Nebraska, New Mexico,
North Dakota, Oklahoma,
South Dakota, Utah,
Washington, Wisconsin
September 1994 Phone Management Properties 8 Minnesota
October 1994 Midwest Communications, Inc. 9 Minnesota, North Dakota
October 1994 Star Payphones, Inc. 10 Minnesota
March 1995 Inmate Tel. 26 Louisiana, Mississippi,
Texas
June 1995 Publicom, Inc. 26 Indiana, Michigan, Ohio
January 1996 Intellipay Systems, Inc. 37 Indiana, Michigan, Ohio,
West Virginia
May 1996 Value-Added Communications, Inc. 3 Florida
June 1996 Executone (Steelweb, Inc.) 57 California, Colorado,
Kansas, Maryland,
Oklahoma, South
Carolina, Tennessee,
Texas, Washington
February 1997 North American Intellicom 5 Oklahoma, Texas
May 1997 Tri-T, Inc. (Tataka) 20 Utah
July 1997 Correctional Communications 26 California
Corporation (CCC)
October 1997 Communications Central, Inc. (Invision) 595 California, Illinois,
Indiana, Kentucky,
Massachusetts, Tennessee
December 1997 Peoples Telephone 84 Texas, Georgia
NAI 27 Texas, Mississippi,
Florida, Georgia,
Pennsylvania
</TABLE>
INDUSTRY OVERVIEW
Corrections Industry
The corrections industry has experienced dramatic growth over the last
decade as a result of societal and political trends. Recent anti-crime
legislation, including mandatory sentencing guidelines, limitations on parole,
and spending authorizations for crime prevention and construction of
additional correctional facilities have contributed to this industry growth.
The U.S. has one of the highest incarceration rates of any country in the
world. The U.S. Department of Justice estimates that as of June 30, 1996 there
were approximately 1.6 million inmates housed in U.S. correctional facilities,
or approximately one inmate for every 163 U.S. residents. Of this total,
approximately two-thirds were housed in federal and state prisons and
approximately one-third were housed in city and county correctional
facilities.
According to U.S. Department of Justice statistics, the inmate population in
federal and state prisons, which generally house inmates for longer terms than
city and county facilities, increased from approximately 743,000
57
<PAGE>
at December 31, 1990 to approximately 1.1 million at June 30, 1996,
representing an average annual growth rate of approximately 7.6%. The inmate
population in city and county facilities, which generally house inmates for
terms of one year or less, increased from approximately 405,000 at June 30,
1990 to approximately 518,000 at June 30, 1996, representing an average annual
growth rate of approximately 4.2%. At June 30, 1996, approximately 92.0% of
city and county jail capacity in the U.S. was occupied.
Over the past several years, the private corrections industry has also
experienced dramatic growth. Increasing costs and rising inmate populations
have led a number of jurisdictions to privatize all or a portion of their
corrections operations in an attempt to control or lower expenditures. From
December 31, 1989 to December 31, 1996, the rated capacity of privately
managed adult correctional facilities in the U.S. increased from 10,973 beds
to 77,584 beds, representing an annual growth rate of approximately 32.2%.
Although 25 states have expressed statutory authority for privatized
corrections at the state level, only approximately 2.6% of the nation's inmate
population was housed in privately managed facilities as of December 31, 1996.
Inmate Telecommunications Industry
The inmate telecommunications industry is characterized by the specialized
telecommunications systems and related services required to address the unique
needs of the corrections industry. Security and public safety concerns
associated with inmate telephone use require that correctional facilities have
the ability to control inmate access to telephones and to certain telephone
numbers and to monitor inmate telephone activity. In addition, concerns
regarding fraud and the credit quality of the parties billed for inmate
telephone usage have also led to the development of systems and procedures
unique to this industry.
Inmate telephones in the U.S. are operated by a large and diverse group of
service providers, including RBOCs, other LECs, IXCs, such as AT&T, MCI,
Sprint, and LDDS/Worldcom, and independent public pay telephone and inmate
telephone companies. Within the inmate telecommunications industry, companies
compete for the right to serve as the exclusive provider of inmate calling
services within a particular correctional facility. Contracts may be awarded
on a facility-by-facility basis, such as for most city or county correctional
systems, which generally include small and medium-sized facilities (less than
250 beds), or system-wide, such as for most state prison systems. Generally,
contracts for federal facilities and state systems are awarded pursuant to a
competitive bidding process, while contracts for city and county facilities
are often negotiated with a single party. Contracts generally have multi-year
terms and typically contain renewal options. As part of the service contract,
the service provider generally installs, operates, and maintains all inmate
telecommunications equipment. In exchange for the exclusive contract rights,
the service provider pays a commission to the operator of the correctional
facility based upon inmate telephone use.
Inmates are generally allowed to make only collect calls from correctional
facilities. Because collect calls have, on average, the second highest revenue
per call (after operator-assisted, person-to-person calls), revenues per
inmate telephone have historically been higher than for public pay telephones.
In addition, maintenance and related labor costs for inmate telephones are
generally lower than for public pay telephones due to the use of automated
operator services and the absence of expenses associated with coin collection
and repairs of coin mechanisms. However, the inmate telecommunications
industry has also historically experienced higher levels of uncollectible
accounts and fraud than the public pay telephone market.
58
<PAGE>
BUSINESS STRATEGY
The Company was formed to capitalize on consolidation opportunities that the
Company believes exist within the highly fragmented inmate telecommunications
industry. The Company's primary business objectives are to be a cost-
efficient, high-quality provider of telecommunications services to
correctional facilities in the U.S. and to continue to expand its installed
base of inmate telephones. The Company has developed and is implementing the
following strategies to meet these objectives:
. Target the corrections industry with specialized products and
services. The Company has developed specialized telecommunications
systems and services to focus on the unique needs of the corrections
industry. In addition to telecommunications services, the Company offers
its LEMS system, which includes jail management, victim notification, and
prisoner profile software packages.
The Company markets its telecommunications system and services through a
sales force consisting largely of former law enforcement officials and
others with experience in the corrections and telecommunications
industries. The Company also maintains a staff of trained field service
technicians and independent telecommunications service contractors, which
enables the Company to respond quickly (typically within 24 hours) to
service interruptions. In each of the last three years, the Company has
retained in excess of 95% of its beginning of the year customer base
through contract extensions or renewals.
. Reduce operating costs and bad-debt expense. The Company has developed a
billing and bad-debt management system that management believes
significantly reduces operating costs and affords the Company a
competitive advantage in the inmate telecommunications industry.
Management believes that, through the use of the Company's system, which
was developed by Talton Telecommunications, the Company has achieved
levels of billing and collection costs and bad-debt expense that are
generally lower than those experienced by other competitors in the inmate
telecommunications industry. Management is currently implementing this
system throughout the Company's existing operations and intends to
implement this system in future acquired operations.
The Company also utilizes direct billing agreements with LECs to bill and
collect a majority of its operating revenues. Under the direct billing
agreements, the LEC includes charges for the Company's services on the
local telephone bill sent to the recipient of inmate collect calls.
Management believes that direct billing arrangements with LECs are
advantageous because they eliminate the costs associated with third party
billing arrangements that are utilized by a majority of independent
inmate telecommunications companies, expedite the billing and collection
process, increase collectibility, and reduce account charge-offs. As of
November 30, 1996, the Company had negotiated direct billing agreements
with BellSouth and GTE South, which enabled the Company to direct bill
approximately 46% of its pro forma operating revenues. The increased
telecommunications traffic that resulted from the combination of AmeriTel
and Talton Telecommunications enabled the Company to enter into new
direct billing arrangements, which, as of June 1997, enabled the Company
to direct bill in excess of 85% of its operating revenues.
. Expand through internal growth. The Company actively seeks to increase
cash flow by installing additional telephones with current customers that
are expanding and by securing new contracts. From January 1997 through
September 1997, the Company signed 72 new contracts for facilities,
including contracts for the state of Alaska and state of North Dakota
prison systems and a new 1,500-bed CCA facility in Ohio. Through its
sales force, the Company emphasizes the knowledge, experience, and
reputation of the Company in the inmate telecommunications industry, its
high level of service, and the additional specialized products and
services offered by the Company to its correctional facility customers.
Historically, the Company has focused on providing telecommunication
services to small and medium-sized correctional facilities (typically
city or county facilities with fewer than 250 beds). From June 30, 1990
to June 30, 1996, the inmate population in city and county jails
increased at an average annual rate of approximately 4.2%, to
approximately 518,000 of the 1.6 million individuals incarcerated in the
U.S. The Company also intends to selectively pursue additional state and
federal contracts that become available for bid.
59
<PAGE>
Management also believes that the growth of the private corrections
industry provides the Company opportunities for further expansion. The
private corrections industry has experienced dramatic growth over the
last several years, with the rated capacity of privately managed adult
correctional facilities in the U.S. increasing from 10,973 beds at
December 31, 1989 to 77,584 beds at December 31, 1996, representing an
annual growth rate of approximately 32.2%. As the largest provider of
inmate telecommunications services to CCA, the largest private prison
management company in the U.S., the Company is positioned to continue to
benefit from the growth in the private corrections industry.
. Pursue selective consolidating acquisitions. Management believes that the
inmate telecommunications industry is highly fragmented, which affords
significant opportunities for consolidation. Independent inmate telephone
companies are generally small, local, or regional operators that may lack
the financial resources and infrastructure necessary to achieve the
efficiencies and economies of scale necessary to develop new systems and
services to compete effectively for new customers and, as such, present
attractive acquisition opportunities for the Company. In addition,
management believes that the Telecom Act, which requires RBOCs to
decouple their pay phone operations from their local telephone
businesses, will contribute to the consolidation opportunities existing
in the market. As a result of the decoupling mandated under the Telecom
Act, RBOCs are no longer entitled to earn a minimum rate of return on
their pay phone business, including their inmate pay phone business. In
addition, RBOCs will be required to charge their own pay phone business
the same rates for local exchange service that RBOCs charge to third
party pay phone operators for the same service. For these reasons, and
because of the incremental costs to the RBOCs to operate their pay phone
business as a separate business, management believes that RBOCs may
reevaluate their pay phone operations, which could increase acquisition
opportunities for the Company.
Management believes that the Company's experience in acquiring
independent inmate telecommunication companies will be instrumental in
identifying acquisition candidates, negotiating favorable terms, and
integrating the acquired operations into the Company. Since January 1993,
the Company has successfully completed 29 acquisitions ranging from the
purchase of relatively small local inmate telecommunication service
providers to the acquisition of larger groups of inmate facility
telecommunications contracts and related assets, including those of
Peoples Telephone Company, Inc. for a seven state region in the
midwestern U.S. In May 1997, the Company acquired the inmate
telecommunications operations of Tataka, the leading independent inmate
telecommunications service provider in the state of Utah; on July 31,
1997, the Company acquired substantially all of the assets of CCC; and on
October 6, 1997, the Company consummated the Invision Acquisition.
. Increase geographic concentration/clustering. The Company seeks to
increase market penetration in the states in which it operates. High
market penetration contributes to operating efficiencies through
economies of scale and enables the Company to provide better customer
service and more meaningful call activity reports to its correctional
facility customers. The Company currently serves all of the state
operated correctional facilities and 63 of 72 county correctional
facilities in Alabama, 83 of 95 county correctional facilities in Iowa,
82 of 94 county correctional facilities in Kansas, 104 of 108 county
correctional facilities in Missouri, 52 of 67 county correctional
facilities in Nebraska, 21 of 26 county correctional facilities in Utah,
and over half of the county correctional facilities in Colorado,
Minnesota, Mississippi, Oklahoma, and South Dakota.
. Capitalize upon economies of scale. Management believes that the
combination of AmeriTel and Talton Telecommunications, in addition to the
completion of the STC Acquisition, has improved operating efficiencies,
and that additional improvements in efficiency will result from future
acquisitions. As a result of the increased telecommunications traffic and
greater market leverage obtained by the Company in connection with its
acquisitions of AmeriTel and Talton Telecommunications, the Company
negotiated more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. To
the extent that the Company is successful in further increasing its
telecommunications traffic through new installations or acquisitions, the
Company expects to be able to negotiate even more favorable terms from
its long distance providers. Management also believes that the
60
<PAGE>
continuing deregulation of local exchange services will enable the Company
to negotiate more favorable rates from incumbent LECs and competitive
local exchange carriers. In addition, management believes that the
Company's existing infrastructure allows the Company to operate new and
acquired inmate telephones in its existing markets without significant
incremental field service, collection, and other general and
administrative costs. Management believes that the expansion of the
Company's installed base of inmate telephones will also allow the Company
to enter into additional direct billing agreements, thereby decreasing
billing and collection costs and bad-debt expense, and increasing the
effectiveness of the Company's call validation process.
OPERATIONS
Contracts
The Company has contracts to provide inmate telecommunications services on
an exclusive basis to correctional facilities ranging in size from small
municipal jails to large, state-operated facilities, as well as other types of
confinement facilities, including juvenile detention centers, private jails,
and halfway houses. The Company's contracts have multi-year terms, and
typically contain renewal options. Typically, the Company negotiates
extensions of its contracts before the end of their stated terms, in each of
the last three years, the Company has retained more than 95% of its beginning
of the year customer base through contract extensions or renewals. Although
the Company has experienced what management believes to be a high retention
rate on contracts that come up for renewal, there can be no assurance that the
Company will be successful in renewing existing inmate telephone contracts in
the future. The average remaining term of the Company's contracts with
facilities is approximately 3 years. The Company's contracts generally provide
for automatic renewal unless terminated by written notice a specified period
of time before the end of a calendar year. The Company believes that its
customer retention rate for 1997 will be at least as favorable as its
historical rate for the last three years.
Marketing
The Company seeks new contracts by participating in competitive bidding
processes and by negotiating directly with the individuals or entities
responsible for operating correctional facilities. The Company markets its
inmate telecommunications services through a sales staff largely made up of
former law enforcement officials and others with experience in the corrections
and telecommunications industries who understand the specialized needs of
correctional facilities. The Company's marketing strategy emphasizes the
knowledge, experience, and reputation of the Company in the inmate
telecommunications industry, its high level of service, and the additional
specialized products and services offered by the Company. The Company relies
on the experience and background of its sales staff to effectively communicate
the capabilities of the Company to both existing and potential customers. In
addition to conducting in-person sales calls on the operators of correctional
facilities, the Company participates in trade shows and is active in local law
enforcement associations.
The Company has historically focused its marketing efforts on city and
county correctional facilities. City and county facilities house inmates for
shorter durations than federal and state prisons and generally have higher
inmate call volumes. In addition, because bidding for contracts to serve city
and county correctional facilities is generally less competitive than that for
state and federal facilities, the Company pays relatively lower commission
rates for these facilities. However, because of their smaller size and limited
resources, these facilities typically require a higher level of service than
federal and state facilities.
Products and Services
Management believes that the specialized products and services offered by
the Company differentiate the Company from its competitors. These services
include the use of the Company's LEMS system, which includes jail management,
victim notification, and prisoner profile software packages. LEMS is a
computer-based system that allows prison authorities to better manage facility
operations and track operating information, including, among other data,
inmate profiles, payroll, and inventory. The Company offers LEMS to
correctional facilities at
61
<PAGE>
no up-front cost in exchange for lower commission rates and longer contract
terms. LEMS is a key selling point for the Company to potential customers and
will also be marketed to its existing customers. The Company also offers
additional services tailored to the corrections industry such as Guardcheck, a
system that verifies the completion of guard rounds, "man down" notification,
an emergency notification system that indicates when a guard needs assistance,
and jail training services. The Company's jail training services include
Company sponsored training seminars for jail personnel on a variety of topics
including safety and fraud detection. In addition, the Company's call activity
reporting capabilities and its ability to control inmate access to specific
telephone numbers through call blocking are valuable services to correctional
facilities. These specialized products and services afford the Company a
competitive advantage because it is less likely that a correctional facility
will be able to replace all of the services provided by the Company from a
single alternative source, or from several alternative sources, on an
economical basis.
Systems and Equipment
The Company currently utilizes automated operator calling systems that
consist of purchased and internally developed software applications installed
on specialized equipment. The Company's specialized systems limit inmates to
collect calls, validate and verify the payment history of each number dialed
for billing purposes, and confirm that the destination number has not been
blocked. If the number is valid and has not been blocked, the system
automatically requests the inmate's name, records the inmate's response, and
waits for the called party to answer. When the call is answered the system
informs the called party that there is a collect call, plays back the name of
the inmate in the inmate's voice, and instructs the called party to accept or
reject the call. The system only completes calls that have been accepted by
the called party.
The system automatically records the details of each call (i.e., the number
called and the length of the call) and transmits the data to the Company's
centralized billing center for bill processing and input into the Company's
call activity database. See "Billing and Collection." The Company's database
of telephone numbers and call activity allows the Company to provide extensive
call activity reports to the correctional facilities and to law enforcement
authorities, in addition to identifying numbers appropriate for blocking, thus
helping to reduce the number of uncollectible calls. These include reports of
frequently called numbers, calls of longer than normal duration, and calls by
more than one inmate to the same number, which can assist law enforcement
authorities in connection with ongoing investigations. Management believes
this database offers competitive advantages, particularly within states in
which the Company has achieved substantial market penetration.
Maintenance and Service
The Company provides and installs the telephone system in each correctional
facility at no cost to the operator of the facility and generally performs all
maintenance activities. The Company maintains a geographically dispersed staff
of trained field service technicians and independent contractors, which allows
the Company to respond quickly (typically within 24 hours) to service
interruptions. In addition, the Company has the ability to make some repairs
remotely through electronic communication with the installed equipment without
the need of an on-site service call. Management believes that system
reliability and service quality are particularly important in the inmate
telecommunications industry because of the potential for disruptions among
inmates if telephone service remains unavailable for extended periods.
Billing and Collection
The Company uses direct and third party billing agreements to bill and
collect phone charges. Under direct billing agreements, the LEC includes
collect call charges for the Company's services on the local telephone bill
sent to the recipient of the inmate collect call. The Company generally
receives payment for such calls thirty days after the end of the month in
which the call is submitted to the LEC for billing. The payment received by
the Company is net of a service fee and net of write-offs of uncollectible
accounts for which the Company previously received payment, or net of a
reserve for bad-debt expense.
62
<PAGE>
Unlike many smaller independent service providers with lower
telecommunications traffic, the Company has been able to enter into direct
billing agreements in most of its markets because of the Company's high market
penetration. As of November 30, 1996, the Company had negotiated direct
billing agreements with BellSouth and GTE South, which enabled the Company to
direct bill approximately 46% of its pro forma operating revenues. The
increased telecommunications traffic that resulted from the combination of
AmeriTel and Talton Telecommunications enabled the Company to enter into new
direct billing arrangements, which, as of June 1997, enable the Company to
direct bill over 85% of its operating revenues. Management believes that
direct billing agreements with LECs decrease bad-debt expense and billing
expenses by eliminating an additional third-party billing entity, while
expediting and increasing collectibility. In addition, direct billing
agreements help the Company resolve disputes with billed parties by
facilitating direct communication between the Company and the called party,
thereby reducing the number of charge-offs.
In the absence of a direct billing arrangement, the Company bills and
collects its fees through a third party billing and collection clearinghouse
that has a billing and collection agreement with the LEC. When the Company
employs a third party billing and collection clearinghouse, the account
proceeds are forwarded by the various LECs to the clearinghouse, which then
forwards the proceeds to the Company, less a processing fee. With both direct
and third party billing and collection agreements, the Company reconciles its
call records with collections and write-offs on a regular basis. The entire
billing and collection cycle (including reconciliation) generally takes
between four and eight months after the call record is submitted to the LEC or
to a third party billing and collection clearinghouse by the Company.
The Company's specialized billing and bad-debt management system integrates
its direct billing arrangements with LECs with its call blocking, validation,
and customer inquiry procedures. Through the use of this system, which was
developed by Talton Telecommunications, the Company has experienced levels of
bad-debt expense that are generally lower than those experienced in the inmate
telecommunications industry. Management is currently implementing this system
throughout the Company's existing operations and intends to implement this
system in future acquired operations.
Long Distance and Local Exchange Costs
Effective January 1997, as a result of the increased telecommunications
traffic and greater market leverage obtained by the Company in connection with
its acquisitions of AmeriTel and Talton Telecommunications, the Company was
able to negotiate more favorable terms from its primary long distance carrier,
LDDS/Worldcom, which has reduced the Company's long distance expenses. The
Company expects to continue to benefit from this reduced long distance cost
structure and further reduce costs as the Company consummates additional
acquisitions and increases its long distance traffic. The Company also
maintains relationships with other long-distance carriers, including AT&T and
MCI.
The Company obtains local exchange services from LECs. The cost of local
exchange services is tariffed in certain jurisdictions. As the deregulation of
the telecommunications industry, including local exchange service, continues
the Company is exploring alternative sources for its local exchange service
requirements. Management believes that the deregulation of local exchange
service could result in additional cost savings to the Company.
OTHER OPERATIONS
The Company owns, operates, services, and maintains a system of
microprocessor controlled public pay telephones that are ancillary to its
inmate telecommunications business. The Company occasionally installs public
pay telephones as an accommodation to, or pursuant to a contract requirement
imposed by, its correctional facility customers. As of September 30, 1997, the
Company had 1,779 public pay telephones installed in 29 states. The Company
obtains contracts with location owners to operate public pay telephones at
locations such as shopping centers, convenience stores, service stations,
grocery stores, restaurants, and truck stops. Such contracts usually provide
for the payment of a commission by the Company to the location owner based on
revenues generated by the telephones.
63
<PAGE>
COMPETITION
In the inmate telecommunications business, the Company competes with
numerous independent providers of inmate telephone systems, LECs, and IXCs
such as AT&T and MCI. Many of the Company's competitors are larger and better
capitalized with significantly greater financial resources than the Company.
The Company believes that the principal competitive factors in the inmate
telecommunications industry are (i) system features and functionality; (ii)
system reliability and service; (iii) the ability to customize inmate call
processing systems to the specific needs of the particular correctional
facility; (iv) relationships with correctional facilities; and (v) rates of
commissions paid to the correctional facilities. The Company competes for
business on local, county, and state levels, and in privately managed
correctional facilities, and intends to compete for business at the federal
level on a selective basis.
Historically, federal and state correctional facilities, which are generally
bid on a system-wide basis, have been served by RBOCs, large LECs, and major
long distance companies, which are able to leverage their existing systems and
infrastructure to serve these large, high-volume customers without significant
additional capital expenditures. These same service providers, however, have
generally not focused on the smaller city and county correctional systems,
service contracts for which may be awarded on a facility-by-facility basis.
Because of the variance in the level of service required by these relatively
small facilities, service providers must maintain a more extensive service
infrastructure in order to compete within this segment of the corrections
industry. Due to greater costs associated with serving smaller facilities and
their lower volume of telecommunications traffic, management believes that
large service providers have historically found the smaller facilities less
attractive to serve. As a result, a significant portion of city and county
correctional facilities are served by independent inmate telephone and public
pay telephone companies. Management believes that the market for city and
county correctional facilities is fragmented and is occupied by a number of
competing service providers.
REGULATION
The inmate telephone industry is regulated at the federal level by the FCC
and at the state level by the public utility commissions of the various
states. In addition, from time to time, legislation may be enacted by Congress
or the various state legislatures that affects the telecommunications industry
generally and the inmate telephone industry specifically. Court decisions
interpreting applicable laws and regulations may also have a significant
effect on the inmate telephone industry. Changes in existing laws and
regulations, as well as the adoption of new laws and regulations applicable to
the activities of the Company or other telecommunications business, could have
a material adverse effect on the Company.
Federal Regulation
Prior to 1996, the federal government's role in the regulation of the inmate
telephone industry was limited. The enactment of the Telecom Act, however,
marked a significant change in the scope of federal regulation of inmate
telephone service. Section 276 of the Telecom Act directed the FCC to
implement rules to overhaul the regulation of the provision of pay telephone
service, which Congress defined to include the provision of inmate telephone
service in correctional institutions.
Before adoption of the Telecom Act, LECs generally included inmate telephone
operations as part of their regulated local exchange telephone company
operations. This allowed the LECs to pool revenue and expenses from their
monopoly local exchange operations with revenue and expenses from their inmate
telephone operations. This mingling of operations made possible the
subsidization of the LECs' inmate operations through other regulated revenues.
The LECs were also able to shift certain costs from their inmate operations to
their local exchange monopoly accounts. In particular, the LECs were able to
pool the bad debt from their inmate operations with their other bad debt.
Because inmate telephone providers act as their own carrier, they bear the
risk of fraudulent calling and uncollectible calls and other bad debt. Bad
debt is substantially higher in the inmate telephone industry than in other
segments of the telecommunications industry. The LECs' practice of pooling bad
debt shifts the high costs of bad debt from inmate telephone operations to the
expense accounts of other
64
<PAGE>
LEC operations, presenting a vehicle for the cross-subsidization of the LECs'
inmate operations, which, in turn, has allowed the LECs to offer commissions
to correctional facilities that are significantly higher than those that
independent inmate telephone providers can offer.
Section 276 directed the FCC to adopt regulations to end the LECs'
subsidization of their inmate telephone operations from regulated revenues.
Congress also directed the FCC to ensure that the LECs could not discriminate
in favor of their own operations to the competitive detriment of independent
inmate telephone providers. Finally, Congress required the FCC to ensure that
all inmate telephone providers were fairly compensated for "each and every"
call made from their telephones.
To carry out its Congressional mandate, the FCC adopted regulations
requiring all LECs to transfer their inmate telephone operations from their
regulated accounts to the LECs' unregulated accounts no later than April 15,
1997. While the FCC's rules implementing Section 276 are designed to eliminate
cross-subsidization and cost-shifting, there are significant questions
regarding their ultimate effect. For example, it is unclear whether the FCC's
rules will fully prevent the shifting of bad debt from inmate operations to
the LECs' regulated accounts. Since the bad debt arises from the charges for
collect calls, which have traditionally been regulated carrier activities, the
FCC has not yet fully resolved exactly how the bad debt from inmate operations
will be allocated between regulated and unregulated accounts.
The FCC also addressed the one-time transfer of existing inmate telephone
operation assets from the LECs' regulated accounts to the unregulated accounts
established for inmate telephone operations. The FCC ordered the transfer of
those assets at their net book value rather than at their fair market value.
The inmate telecommunications industry had argued to the FCC that the transfer
should be accomplished at the assets' fair market value, including the value
of the contracts between the LECs' inmate operations and correctional
facilities. The net book value of those assets is much lower than their fair
market value. As a result of the below market valuation of the assets, the
LECs' inmate telephone operations may be able to post nominally higher returns
on their assets than they would otherwise be able to and hence relieve
operating pressures for returns on assets. This also could result in a
competitive advantage for the LECs with respect to access to capital markets
vis-a-vis the Company and other independent inmate telephone providers. While
this issue may be raised in a currently pending court challenge by the inmate
telecommunications industry of the FCC's decision, the prospects are uncertain
since the court has already ruled in the FCC's favor on this issue in an
interpretation of Section 276 that is the same as the one the FCC adopted
regarding inmate telephone operations.
To eliminate discrimination, the FCC required, among other things, that the
LECs' inmate telephone operations take any tariffed services from its
regulated operations at the tariffed rate for the service, rather than the
actual cost of the service. Before the Telecom Act, the LECs' inmate
operations were able to take these services at some variant of their
underlying costs without regard to the tariffed rate being charged to
independent providers. Under the Telecom Act, the LECs' inmate operations must
take tariffed services on an arm's length basis, at tariffed rates that are
subject to regulatory approval. Further, the rates for the tariffed services
offered to both the LECs' inmate telephone operations and independent inmate
telephone providers must be developed on a consistent basis. The test that the
FCC has mandated for the pricing of services to both independent inmate
telephone providers and the LECs' own inmate operations will require a
reexamination of existing rates and may lead to a rate reduction for services
in some instances, while it is also possible that the rate reexamination may
result in some rate increases. In either event, the requirement for a
consistent methodology for developing rates should substantially reduce LEC
opportunities for unfavorable rate discrimination against independent inmate
telephone providers like the Company.
The FCC did allow the LECs to offer certain non-tariffed services, for
example, repair and installation services, to the LECs' inmate operations on a
cost-sharing basis, which could result in some cost advantage to the LECs'
inmate operations. The LECs are free to price these services at full market
rates to independent inmate telephone providers. Independent inmate telephone
providers are not, however, dependent on the LEC for these services, as they
are with telephone lines; independent inmate telephone providers can provide
services like repair and installation with their own staff or contractors.
65
<PAGE>
To ensure "fair compensation" for inmate telephone providers, the FCC held
that it was not required to prescribe compensation for collect calls because
inmate providers act as their own carriers and collect the revenue from those
calls directly from end users. The inmate telephone industry had argued to the
FCC, however, that because of state-mandated ceilings on the rates for
intrastate collect calls, inmate telephone providers could not recover
adequate revenue for those calls, and accordingly, had sought an "inmate
system compensation charge" in addition to the charges collected for carrying
the call. See "--State Regulation."
Because of continuing restrictions stemming from the 1984 divestiture of the
RBOCs by AT&T, the RBOCs are not able to carry long distance traffic. Prior to
the Telecom Act, the RBOCs were also precluded from choosing a long distance
carrier for calls originating from facilities where the RBOCs provided the
inmate telephone service and receiving commission revenue from that carrier.
Instead, carriers were selected by, and paid commissions directly to, the
individual correctional facilities being served by RBOCs.
Pursuant to the Telecom Act, the FCC decided that the RBOCs would be allowed
to choose their own carrier for their traffic from a given correctional
facility. As a result, the RBOCs may gain the ability to negotiate higher
commission rates to be paid to them from their contracted carrier by
aggregating traffic from several facilities into a single contract with the
carrier.
Many aspects of the FCC's rules implementing Section 276 are currently the
subject of requests for clarification or reconsideration by the FCC or in
collateral proceedings. In addition, several elements of the new rules are
subject to pending court challenges. The most significant is the FCC's
decision not to prescribe compensation for inmate collect calls. If the FCC is
reversed on that issue, the Company could potentially benefit from the ability
to collect additional revenue. It is not possible to predict the likelihood of
the success of the appeal, and the degree to which the Company could benefit,
if at all, would depend on the exact compensation scheme ultimately prescribed
by the FCC for inmate collect calls.
Because of the pending requests for clarification, reconsiderations,
collateral proceedings, and court challenges, and because the FCC is still in
the process of implementing its new rules, the ultimate effects of the rule
changes mandated by the Telecom Act are uncertain. In particular, whether the
FCC's rules designed to eliminate subsidization and discrimination by the LECs
prove to be effective will significantly affect the level of competition faced
by the Company in the inmate telecommunications market. Similarly, because the
rules have only recently been adopted, it is too early to assess the LECs'
competitive responses to them.
Apart from the FCC proceedings to implement the provisions of the Telecom
Act, there are other matters pending before the FCC that could potentially
affect the Company and its operations. In 1992, the FCC proposed a new plan
for operator assisted interstate calls, including collect calls. Collect calls
are the predominant method of calling from inmate telephones. Currently, the
inmate telephone provider generally acts as the carrier for these calls and
receives the revenues generated by the calls. Under the proposed new plan,
known as "Billed Party Preference" ("BPP"), those calls would be sent instead
to the pre-subscribed carrier of the called-party, thereby bypassing the
opportunity for the inmate telephone provider to carry, and receive revenues
from, the calls. Since the time that the FCC initially proposed BPP,
opposition has surfaced from virtually every industry segment, including large
and small LECs, IXCs, and independent providers of both pay telephone and
inmate telephoned services. The FCC has recognized that the substantial costs
of implementing BPP should lead to an examination of alternatives.
In response to the FCC's BPP proposal and its subsequent call for
alternatives, an inmate telephone providers industry group, along with other
telecommunications companies and trade associations, has proposed an
alternative plan that would set caps on the rates for interstate inmate
collect calls by tying those rates to the rates charged by the largest IXCs.
The FCC is also considering requiring carriers to disclose their rates to
called parties before completing inmate collect calls. These alternative
approaches are designed to address the FCC's concerns with regard to a small
minority of inmate telephone service providers that may be charging excessive
rates, while allowing the inmate telephone industry to receive a fair rate of
return. As with the underlying BPP proposal, the rate ceiling alternative and
the disclosure option are pending before the FCC, and the outcome or
66
<PAGE>
mix of remedies remains uncertain. Although a rate ceiling or disclosure
regime could be substantially less burdensome to the Company than BPP, the
ultimate effect on the Company's operations would depend on the levels at
which the ceilings were set or the nature of the disclosure.
If the BPP system were to be adopted, the Company could experience a
reduction in the revenues it now receives on inmate collect calls and,
accordingly, might be unable to continue to pay its present levels of
commissions to correctional facilities for accounts. Since the FCC has stated
that inmate service providers are to recover the "fair compensation" required
under the Telecom Act from revenues they earn on those calls, and BPP would
deprive them of that revenue, adoption of BPP would require the FCC to revisit
its decision not to prescribe such compensation. The outcome of such
proceedings is extremely uncertain.
State Regulation
The most significant state involvement in the regulation of inmate telephone
service is the limit on the maximum rates that can be charged for intrastate
collect calls set by most states, referred to as "rate ceilings." Since
collect calls are generally the only kind of calls that can be made by inmates
in correctional facilities, the state-imposed rate ceilings on those calls can
have a significant effect on the Company's business.
In many states, the rate ceilings on inmate collect calls within the
originating LEC's service area are tied to the rates charged by the LEC and
subject to state regulatory approval. Thus, where the LEC chooses not to raise
its rates, independent inmate telephone providers are precluded from raising
theirs. Prior to the passage of the Telecom Act, the LECs had less incentive
to raise their rates than independent inmate telephone providers because the
LECs were able to subsidize their inmate telephone operations and discriminate
in their favor, as described above. See "--Federal Regulation." It is possible
that as a result of the FCC's new rules designed to eliminate such subsidies,
some LECs may choose to file with their state commissions to raise their rates
for inmate collect calls. If this occurs, the Company and other independent
inmate telephone providers could also raise their rates. It is difficult to
predict the extent to which the LECs will raise their rates.
For calls going outside the originating LEC's service area, there may be
state rate ceilings tied to the rates of the largest IXCs. In some cases,
these rate ceilings can also make sufficient cost recovery difficult. In
general, the cost recovery problems that arise from rate ceilings tied to IXC
rates are not as severe as the difficulties created by rate ceilings tied to
LEC rates.
In its rulemaking implementing the Telecom Act, the FCC declined to address
these state rate ceilings. The FCC ruled that inmate telephone providers must
first seek relief from the state rate ceilings at the state level. The outcome
of any such proceedings at the state level, if undertaken, is uncertain.
Further, it is uncertain whether the FCC would intervene or if so, how, in the
event a state failed to provide relief. This issue is also the subject of a
currently pending court challenge by the inmate telecommunications industry.
In addition to imposing rate caps, the states regulate other aspects of the
inmate calling industry. While the degree of regulatory oversight varies
significantly from state to state, state regulations generally establish
minimum technical and operating standards to ensure that public interest
considerations are met. Among other things, most states have established rules
that govern registration requirements, notice to end users of the identity of
the service provider in the form of postings or verbal announcements, and
requirements for rate quotes upon request. In some jurisdictions, in order for
the Company to operate its inmate telephones and public pay telephones, it is
necessary to become certificated and to file tariffs with the appropriate
state regulatory authority.
In connection with the Exchange Offer, the Company may be required to obtain
consents or approvals of the state regulatory authorities in certain states in
which the Company conducts a limited portion of its business. The Company does
not believe that the failure to obtain such consents or approvals,
individually or in the aggregate, would have a material adverse effect on the
Company or its operations.
67
<PAGE>
TRADENAMES
The Company has two registered trademarks, Security Telecom Corporation(R)
and STC(R) and has developed or acquired a number of additional unregistered
tradenames that it uses in its business. Although the use of these trademarks
and tradenames has created goodwill in certain markets, management does not
believe that the loss of these trademarks and tradenames would have a material
adverse effect on the Company's operations.
FACILITIES
The Company's principal executive offices are located in, and a portion of
its operations are conducted from, leased premises located at 1209 W. North
Carrier Parkway, Suite 300, Grand Prairie, Texas 75050. The Company also has
four additional facilities from which it conducts its operations located in
Selma, Alabama; Dublin, California; Louisville, Kentucky; and Lee's Summit,
Missouri, all of which are leased.
ENVIRONMENTAL
The Company is subject to certain federal, state, and local environmental
regulations. Management does not expect environmental compliance to have a
material impact on the Company's capital expenditures, earnings, or
competitive position in the foreseeable future.
EMPLOYEES
As of September 30, 1997, the Company had approximately 228 employees of
which approximately 43 were executive and administrative personnel, and
approximately 185 were sales, marketing, technical, and other operations
personnel.
LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the
resolution of any threatened or pending legal proceedings will have a material
adverse affect on the Company.
68
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages (as of December 1, 1997)
and positions of each of the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Julius E. Talton (1),
(3).................... 69 Chairman of the Board
John A. Crooks, Jr...... 50 President and Chief Operating Officer
Jeffrey D. Cushman...... 36 Chief Financial Officer
John R. Summers......... 41 Vice President, Secretary, and Treasurer
Julius E. Talton, Jr.... 37 Vice President
James E. Lumpkin........ 53 Vice President
Todd W. Follmer (1)..... 38 Vice President, Assistant Secretary, Assistant Treasurer, and Director
Gregg L. Engles......... 40 Director
Richard H. Hochman (1),
(3).................... 52 Director
Jay R. Levine (2)....... 41 Director
Nina E. McLemore (2).... 52 Director
Bruce I. Raben (l),
(3).................... 44 Director
David A. Sachs (2)...... 38 Director
Roger K. Sallee (3)..... 49 Director
Joseph P. Urso.......... 43 Director
</TABLE>
- --------
(1) Member of the Executive Committee
(2) Member of the Audit and Finance Committee
(3) Member of the Compensation Committee
Julius E. Talton. Mr. Talton became Chairman of the Board in December 1996.
From December 1996 until June 1997, Mr. Talton served as President of the
Company. Mr. Talton founded Talton Telecommunications and served as its
Chairman of the Board, President, and Chief Executive Officer from 1973 until
December 1996. Mr. Talton served as President of Talton Outdoor Advertising
from 1976 until November 1996. Mr. Talton is a Director of the People's Bank
and Trust Company in Alabama.
Jeffrey D. Cushman. Mr. Cushman became Chief Financial Officer of the
Company in November 1997. From 1985 until October 1997, Mr. Cushman served in
various capacities with Electronic Data Systems Corporation, most recently as
director of Business Development for EDS's Customer Solutions Unit.
John A. Crooks, Jr. Mr. Crooks became President and Chief Operating Officer
of the Company in June 1997. From 1990 until June 1997, Mr. Crooks served in
various capacities with MCI Telecommunications Corporation, most recently as
director of Enterprise Marketing for MCI's Business Services Division.
John R. Summers. Mr. Summers became Vice President, Secretary, and Treasurer
of the Company in December 1996. From April 1993 until December 1996, Mr.
Summers served as Vice President--Operations and Finance of AmeriTel. Mr.
Summers was a self-employed consultant with Summers and Associates, a
management and financial consulting firm, from January 1992 until April 1993.
Julius E. Talton, Jr. Mr. Talton, Jr. became Vice President of the Company
in December 1996. Mr. Talton, Jr. served in various capacities with Talton
Telecommunications from 1986 until December 1996, most recently as Vice
President of Sales.
James E. Lumpkin. Mr. Lumpkin became Vice President of the Company in
December 1996. Mr. Lumpkin served in various capacities with Talton
Telecommunications from its founding in 1973 until December 1996, most
recently as Vice President, Technical Operations.
69
<PAGE>
Todd W. Follmer. Mr. Follmer became Vice President, Assistant Secretary, and
Assistant Treasurer and was elected to the Company's Board of Directors in
December 1996. Mr. Follmer has been a principal of EUFCC since January 1996.
From January 1993 until December 1995, Mr. Follmer served as President of Gulf
Capital Partners Inc., a merchant banking firm. From May 1988 until December
1992, Mr. Follmer served in various capacities with Donaldson, Lufkin &
Jenrette Securities Corporation, an investment banking firm.
Gregg L. Engles. Mr. Engles was elected to the Company's Board of Directors
in December 1996. Mr. Engles has served as Chairman and has been a principal
of EUFCC since January 1996. Mr. Engles has served as Chairman of the Board
and Chief Executive Officer of Suiza Foods Corporation since October 1994. Mr.
Engles has also served in various senior management positions with certain
subsidiaries of Suiza Foods since 1988. In addition, Mr. Engles has served as
President of Kaminski Engles Capital Corporation ("KECC") since May 1988 and
as President of Engles Management Corporation ("EMC") since February 1993.
KECC and EMC are investment banking and consulting firms. Mr. Engles was also
President of Engles Capital Corporation, an investment banking and consulting
firm, from May 1989 to October 1992. Mr. Engles is a director of Columbus
Realty Trust.
Richard H. Hochman. Mr. Hochman was elected to the Company's Board of
Directors in December 1996. Mr. Hochman has served as the Chairman of Regent
Capital Management Corp., a private investment firm, since January 1995. From
1990 to December 1994, Mr. Hochman was a Managing Director of PaineWebber,
Inc., an investment banking firm. Mr. Hochman is a director of Cablevision
Systems Corporation.
Jay R. Levine. Mr. Levine was elected to the Company's Board of Directors in
December 1996. Since April 1997, Mr. Levine has served as a Managing Director
of CIBC Wood Gundy Securities Corp., an investment banking firm. From
September 1996 to April 1997, Mr. Levine served as President of PPMJ, Inc., an
investment banking and consulting firm. From January 1994 to June 1996, Mr.
Levine served as President of Springfield Services, Inc. ("Springfield"), a
private investment company. From August 1990 to January 1994, Mr. Levine
served as Vice President of Morningside/North America Limited, a private
investment company affiliated with Springfield.
Nina E. McLemore. Ms. McLemore was elected to the Company's Board of
Directors in December 1996. Ms. McLemore has been the President of Regent
Capital Management Corp. since January 1995. From 1990 until 1993, Ms.
McLemore served in various capacities with Liz Claiborne Accessories.
Bruce I. Raben. Mr. Raben was elected to the Company's Board of Directors in
December 1996. Since February 1996, Mr. Raben has served as a Managing
Director of CIBC Wood Gundy Securities Corp., an investment banking firm. From
March 1990 to February 1996, Mr. Raben served as a Managing Director of
Jefferies & Co., an investment banking firm. Mr. Raben is a director of GT
Parent Holdings, L.D.C., Terex Corporation, Optical Security, Inc., and Equity
Marketing, Inc.
David A. Sachs. Mr. Sachs was elected to the Company's Board of Directors in
December 1996. Since July 1994, Mr. Sachs has been a principal of Onyx
Partners, Inc., a merchant banking firm. From October 1990 until June 1994,
Mr. Sachs was employed at TMT-FW, Inc., an affiliate of Taylor & Co., a
private investment management firm. Mr. Sachs is a director of Terex
Corporation.
Roger K. Sallee. Mr. Sallee was elected to the Company's Board of Directors
in December 1996. Mr. Sallee founded AmeriTel and served as its President and
Chief Executive Officer from July 1991 until December 1996.
Joseph P. Urso. Mr. Urso was elected to the Company's Board of Directors in
December 1996. Mr. Urso has served as President and has been a principal of
EUFCC since January 1996. Since March 1996, Mr. Urso has served as Chairman of
Interstate Engineering, a manufacturing firm located in California. Mr. Urso
was a shareholder of Stutzman & Bromberg, P.C. from January 1992 until June
1995.
The Company's Certificate of Incorporation divides the Board of Directors
into two classes, the "Class A/B Directors" and the "Class B Directors," with
each class serving a one-year term. The size of the Board of
70
<PAGE>
Directors depends on the aggregate percentage ownership of all outstanding
Common Stock held by Gregg L. Engles, Joseph P. Urso, Todd W. Follmer, and
their respective affiliates (the "EUF Holders") and Onyx Talton Partners, L.P.
and Sachs Investment Partners and their respective affiliates (the "Onyx
Holders").
The size of the Company's Board of Directors is currently eleven (11)
members, with the holders of Class A Common Stock and Class B Common Stock
entitled to elect six Class A/B Directors and the holders of Class B Common
Stock entitled exclusively to elect five Class B Directors. The Class A/B
Directors are Richard H. Hochman, Jay R. Levine, Nina E. McLemore, Bruce I.
Raben, and Julius E. Talton. There is one vacant Class A/B Director position
on the Board of Directors. The Class B Directors are Gregg L. Engles, Todd W.
Follmer, David A. Sachs, Roger K. Sallee, and Joseph P. Urso.
Each Class A/B Director is entitled, at all times, to one vote on any matter
voted on by the Board of Directors. The number of votes that each Class B
Director is entitled to on any matter voted on by the Board of Directors
depends on the aggregate percentage ownership of all outstanding Common Stock
held by the EUF Holders and the Onyx Holders. Each Class B Director is
currently entitled to a 0.6 director vote on any matter voted on by the Board
of Directors, resulting in the Class B Directors having an aggregate of three
(3) director votes as a class. As the EUF Holders' and the Onyx Holders'
ownership of the outstanding common stock decreases, the number of Class B
Directors that the EUF Holders have the right to designate, the aggregate
number of votes held by the remaining Class B Directors, and the size of the
Company's Board of Directors decrease (and the number of Class A/B Directors
increases), all as set forth in the Company's Certificate of Incorporation and
the Shareholders Agreement (as defined). Under the terms of the Certificate of
Incorporation and the Shareholders Agreement, the total number of votes on the
Board of Directors will remain at nine. See "Certain Relationships and Related
Transactions--Historic Relationships and Related Transactions--Acquisitions--
Shareholders Agreement" and "Description of Capital Stock."
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth annual cash compensation paid or accrued by
the Company, AmeriTel, or Talton Telecommunications to the Company's Chief
Executive Officer and its other Executive Officers receiving total salary and
bonus in excess of $100,000 for the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
OTHER ANNUAL SHARES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS (#) ($)
- --------------------------- ---- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Julius E. Talton,
Chairman of the Board
and President.......... 1996 149,975 -- -- -- --
John R. Summers,
Vice President, Chief
Financial Officer,
Secretary, and
Treasurer.............. 1996 94,565 211,506(2) -- -- --
Julius E. Talton, Jr.,
Vice President......... 1996 101,926 -- -- -- --
James E. Lumpkin,
Vice President......... 1996 99,376 -- -- -- --
Terry C. Matlack,
Vice President(3)...... 1996 106,000 244,500(4) -- -- --
</TABLE>
- --------
(1) In each case, the aggregate value of perquisites and other personal
benefit does not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus report for the named executive officer.
(2) Includes special bonuses of $195,506 paid in connection with the Company's
acquisition of AmeriTel in December 1996.
(3) Mr. Matlack resigned as Vice President of the Company effective May 30,
1997.
(4) Consists of a special bonus paid in connection with the Company's
acquisition of AmeriTel in December 1996.
71
<PAGE>
Employment Agreements and Other Arrangements
In connection with the Company's acquisitions of AmeriTel and Talton
Telecommunications in December 1996, the Company entered into consulting or
employment agreements with each of Julius E. Talton, Julius E. Talton, Jr.,
Roger K. Sallee, James E. Lumpkin, and John R. Summers, each of whom was a
former stockholder of AmeriTel or Talton Telecommunications. See "Certain
Relationships and Related Transactions--Consulting and Employment Agreements."
In addition, the Company is a party to an employment agreements with each of
John A. Crooks and Jeffrey D. Cushman, which are described below.
John A. Crooks joined the Company as President and Chief Operating Officer
in June 1997. The Company entered into a written employment agreement with Mr.
Crooks that has an initial term expiring on December 31, 1998, with successive
one-year renewals thereafter unless earlier terminated by the Company or Mr.
Crooks. Mr. Crooks receives an annual base salary of $170,000 and a guaranteed
bonus of $50,000 payable on or before December 31, 1997. In addition, Mr.
Crooks received the right to purchase 165 shares of the Company's Class A
Common Stock at a price of $2,000 per share, and is eligible to receive
options to acquire an additional 330 shares of Class A Common Stock at a price
of $2,000 per share. The employment agreement provides for a severance payment
equal to one year's base salary if Mr. Crook's employment is terminated by the
Company without cause. The employment agreement also contains non-competition
provisions that cover the Company's existing markets and expansion markets
that apply during the term of the agreement and for a period of three years
and two years, respectively, after the expiration or earlier termination of
the agreement.
Jeffrey D. Cushman joined the Company as Chief Financial Officer in November
1997. The Company entered into a written employment agreement with Mr. Cushman
that has an initial term expiring on December 31, 1999, with successive one-
year renewals thereafter unless notice is given by either party not later than
90 days immediately preceding the commencement of the renewal period. Mr.
Cushman receives an annual base salary of $140,000 and a one-time guaranteed
bonus of $70,000, $35,000 of which is payable on or before January 30, 1998,
and the remaining $35,000 of which is payable on or before December 31, 1998.
In addition, Mr. Cushman is eligible to receive options to purchase 100 shares
of the Company's Class A Common Stock at a price of $2,000 per share. The
employment agreement provides for a severance payment equal to one year's base
salary if Mr. Cushman is terminated by the Company without cause. The
employment agreement also contains non-competition provisions that cover the
Company's existing markets and expansion markets that apply during the term of
the agreement and for a period of one year after the expiration or earlier
termination of the agreement, provided that the one year period shall be
extended for an additional year in the event that Mr. Cushman, rather than the
Company, terminates the employment agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides, consistent with the
provisions of the Delaware General Corporation Law, that no director of the
Company will be personally liable to the Company or any of its stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director. This does not apply, however, with respect to any action for
unlawful payments of dividends, stock purchases, or redemptions, nor does it
apply if the director (i) has breached his duty of loyalty to the Company and
its stockholders; (ii) does not act or, in failing to act, has not acted in
good faith; (iii) has acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, has acted in a manner
involving intentional misconduct or a knowing violation of law; or (iv) has
derived an improper personal benefit. The provisions of the Certificate of
Incorporation eliminating liability of directors for monetary damages do not
affect the standard of conduct to which directors must adhere, nor do such
provisions affect the availability of equitable relief. In addition, such
limitations on personal liability do not affect the availability of monetary
damages under claims based on federal law.
The Company's By-laws provide for indemnification of its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law.
72
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Company's
capital stock as of September 30, 1997 by (i) each stockholder known by the
Company to beneficially own more than 5% of any class of the Company's
outstanding capital stock; (ii) each director of the Company; (iii) each
executive officer named in the Summary Compensation Table; and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES OF PERCENT SHARES OF
CLASS A CLASS B OF TOTAL SENIOR
COMMON PERCENT COMMON PERCENT OF VOTING PREFERRED PERCENT
NAME OF BENEFICIAL OWNER STOCK OF CLASS STOCK CLASS POWER(1) STOCK OF CLASS
- ------------------------ --------- -------- --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Julius E. Talton(2)..... 2,062.5 13.8% -- -- % 12.5% 2,500.0 42.2%
John A. Crooks, Jr. .... -- -- -- -- -- -- --
Jeffrey D. Cushman...... -- -- -- -- -- -- --
Julius E. Talton,
Jr.(2)................. 1,237.5 8.3 -- -- 7.5 1,500.0 25.3
James E. Lumpkin(2)..... 825.0 5.5 -- -- 5.0 1,000.0 16.9
John R. Summers......... 100.0 * -- -- * -- --
Todd W. Follmer(3)...... -- -- 100.0 25.0 2.4 -- --
Gregg L. Engles(3)...... 150.0 1.0 100.0 25.0 3.3 -- --
Richard H. Hochman(4)... 2,000.0 13.4 -- -- 12.1 -- --
Jay R. Levine(5)........ -- -- -- -- -- -- --
Nina E. McLemore(6)..... 2,000.0 13.4 -- -- 12.1 -- --
Bruce I. Raben(5)....... -- -- -- -- -- -- --
David A. Sachs(7)....... 250.0 1.7 31.5 7.9 2.3 -- --
Roger K. Sallee......... 53.0 * -- -- -- 61.7 1.0
Joseph P. Urso(3)....... -- -- 100.0 25.0 2.4 -- --
CIBC Wood Gundy
Ventures, Inc.(8)...... 5,935.5 37.1 -- -- 33.8 -- --
Regent Capital Partners,
L.P.(9)................ 2,000.0 13.4 -- -- 12.1 -- --
Onyx Talton Partners,
L.P.(10)............... -- -- 100.0 25.0 2.4 -- --
Richard C. Green, Jr.... 250.0 1.7 -- -- 1.5 310.8 5.2
Robert K. Green......... 250.0 1.7 -- -- 1.5 310.8 5.2
Terry C. Matlack........ 125.0 * -- -- * -- --
William M. Ohland(11)... 900.0 5.7 -- -- 5.2 -- --
All executive officers
and directors as a
group (15 persons)..... 6,678.0 44.8 331.5 82.9 48.5 5,061.7 85.4
</TABLE>
- --------
* Less than 1.0%
(l) In calculating the percent of total voting power, the voting power of
shares of Class A Common Stock (one vote per share) and Class B Common
Stock (four votes per share) is aggregated. This calculation also assumes
that no shares of Senior Preferred Stock are converted into shares of
Class A Common Stock.
(2) The address for each of these stockholders is 720 Alabama Avenue, Selma,
Alabama 36701.
(3) The address for each of these stockholders is 3811 Turtle Creek Blvd.,
Suite 1300, Dallas, Texas 75219.
(4) Includes 2,000 shares of Class A Common Stock held by Regent Capital
Partners. Mr. Hochman, who is the chairman of Regent Capital Management
Corp., an affiliate of Regent Capital Partners, exercises voting and
investment power with respect to such shares. Mr. Hochman's address is
505 Park Avenue, 17th Floor, New York, New York 10022.
(5) Excludes shares of Class A Common Stock and warrants to acquire shares of
Class A Common Stock held by CIBC Ventures. Mr. Levine and Mr. Raben, who
are designees of CIBC Ventures to the Company's Board of Directors and
who are managing directors of CIBC Wood Gundy Securities Corp., an
affiliate of CIBC Ventures and CIBC, disclaim beneficial ownership of
such shares.
(6) Includes 2,000 shares of Class A Common Stock held by Regent Capital
Partners. Ms. McLemore, who is the president of Regent Capital Management
Corp., an affiliate of Regent Capital Partners, exercises voting and
investment power with respect to such shares. Ms. McLemore's address is
505 Park Avenue, 17th Floor, New York, New York 10022.
(7) Consists of 250 shares of Class A Common Stock held by Sachs Investment
Partners and 31.5 shares of Class B Common Stock held by Onyx Talton
Partners, L.P. Mr. Sachs is a general partner of Sachs
73
<PAGE>
Investment Partners and a principal shareholder of Onyx Talton Partners,
Inc., the general partner of Onyx Talton Class B Common Stock held by Onyx
Talton Partners, L.P. Mr. Sachs is a general partner of Sachs Partners,
L.P., and exercises voting and investment power with respect to such
shares. Mr. Sachs disclaims beneficial ownership of an additional 68.5
shares of Class B Common Stock held by Onyx Talton Partners, L.P. Mr.
Sachs' address is 9595 Wilshire Blvd., Suite 700, Beverly Hills,
California 90212.
(8) Includes 1,085.5 shares of Class A Common Stock subject to a warrant that
is exercisable within 60 days. CIBC Ventures' address is 425 Lexington
Avenue, Third Floor, New York, New York 10017.
(9) Includes 500 shares of Class A Common Stock held by Regent Capital Equity
Partners, L.P., an affiliate of Regent Capital Partners. Regent Capital
Partners' address is 505 Park Avenue, 17th Floor, New York, New York
10022.
(10) Onyx Talton Partners, L.P.'s address is 9595 Wilshire Blvd., Suite 700,
Beverly Hills, California 90212.
(11) Consists of shares issued to STC as part of the purchase price in the STC
Acquisition. Mr. Ohland owns all of the outstanding capital stock of STC.
74
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CURRENT RELATIONSHIPS AND RELATED TRANSACTIONS
Repayment of Indebtedness
CIBC, an affiliate of CIBC Ventures, a principal stockholder of the Company,
and of CIBC Merchant Fund, a former holder of a portion of the Company's
Senior Subordinated Notes described below, is agent and a lender under the
Existing Credit Facility, and held $28.6 million and $4.7 million of the
principal amount outstanding under the term and revolving loan portions,
respectively, of the Existing Credit Facility at March 31, 1997. Upon
completion of the Offering, the Company repaid the entire principal amounts
outstanding under the term loan and revolving loan portions of the Existing
Credit Facility, together with accrued and unpaid interest. In addition to
this repayment, CIBC received a customary fee for banking services rendered to
the Company in its capacity as agent under the Existing Credit Facility in
connection with the Senior Credit Facility that closed following the Offering.
At March 31, 1997, CIBC Merchant Fund and Regent Capital Partners, a principal
stockholder of the Company, held $7.5 million and $1.0 million, respectively,
of the Company's outstanding Senior Subordinated Notes. Upon completion of the
Offering, the Company repaid the entire amount of the Senior Subordinated
Notes, together with accrued and unpaid interest. In addition, CIBC Wood Gundy
Securities Corp. and Onyx Partners, Inc. ("Onyx Partners") from time to time
provide financial and investment banking services to the Company for customary
fees.
At March 31, 1997, Messrs. Talton, Talton, Jr., and Lumpkin held $2.5
million, $1.5 million, and $1.0 million, respectively, of the Talton
Subordinated Note. Upon completion of the Offering, the Company repaid the
entire amount of the Talton Subordinated Note, together with accrued and
unpaid interest.
Consulting and Strategic Services Agreement
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company entered into a Consulting and Strategic
Services Agreement with EUF Talton, a limited partnership controlled by
Messrs. Engles, Urso, and Follmer, pursuant to which the Company will pay to
EUF Talton an annual consulting fee of $300,000 for an initial term of three
years ending December 27, 1999. Pursuant to this agreement, EUF Talton will
provide management consulting services relating to strategic and financial
matters, including acquisitions, business strategies, and financial planning.
The Company also paid to EUF Talton a $200,000 refinancing fee upon the
repayment of the Senior Subordinated Notes and the Subordinated Talton Note
upon the closing of the Offering. The Company paid an acquisition fee of
$357,000 to EUF Talton upon the closing of the STC Acquisition. In addition,
the Company has agreed to pay to EUF Talton an acquisition fee of 1% of the
gross acquisition price of any acquisitions of assets or stock by the Company
up to an aggregate maximum of $1.25 million.
Consulting and Employment Agreements
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company entered into the agreements described below.
Each of the named persons was a former stockholder of AmeriTel or Talton
Telecommunications.
The consulting agreement of Julius E. Talton provides that Mr. Talton will
serve as a director of the Company and will perform such duties related to the
business conducted by the Company as the Board of Directors may designate from
time to time. The consulting agreement has an initial term of two years, with
successive one-year renewal periods thereafter unless earlier terminated by
the Company or Mr. Talton. In addition to an aggregate of $10,000 payable in
equal monthly installments to Mr. Talton over the first twelve months of the
agreement, Mr. Talton will receive payments of $86,000 and $96,000 for the
first and second years of the initial term, respectively, and $120,000 for
each year thereafter that the agreement remains in effect. Mr. Talton's
consulting agreement contains a non-competition provision that applies during
the term of the agreement and for a period of two years after the expiration
or earlier termination of the agreement.
75
<PAGE>
Julius E. Talton, Jr.'s employment agreement provides that Mr. Talton, Jr.
will serve as an executive of the Company, performing such duties and holding
such positions as the Board of Directors or senior management of the Company
may direct. The employment agreement has an initial term of one year, with
successive one-year periods thereafter unless earlier terminated by the
Company or Mr. Talton, Jr. In addition to an aggregate of $25,000 payable in
equal monthly installments to Mr. Talton, Jr. over the first twelve months of
the agreement, Mr. Talton will receive an annual base salary of $100,000, a
guaranteed bonus of $25,000 which was paid, in accordance with the agreement,
upon closing of the Offering, and an incentive cash bonus of up to 37.5% of
base salary if certain performance goals established by the Board of Directors
are achieved. Mr. Talton Jr.'s employment agreement contains a non-competition
provision that applies during the term of the agreement and for a period of
two years after the expiration or earlier termination of the agreement. Mr.
Talton, Jr. is also expected to receive an option to purchase up to 247.5
shares of Class A Common Stock at an exercise price of $2,000 per share.
The consulting agreement of James E. Lumpkin provides that Mr. Lumpkin will
serve, if requested, as a director of the Company and will perform such duties
related to the business conducted by the Company as the chief executive
officer or the Board of Directors may designate from time to time. The
consulting agreement has an initial term of two years, with successive one-
year renewal periods thereafter unless earlier terminated by the Company or
Mr. Lumpkin. In addition to an aggregate of $10,000 payable in equal monthly
installments to Mr. Lumpkin over the first twelve months of the agreement, Mr.
Lumpkin will receive $62,000 and $72,000 for the first and second years of the
initial term, respectively. Mr. Lumpkin's consulting agreement contains a non-
competition provision that applies during the term of the agreement and for a
period of two years after the expiration or earlier termination of the
agreement.
The consulting agreement of Roger K. Sallee provides that Mr. Sallee will
serve as a director of the Company and will perform such duties related to the
business conducted by the Company as the chief executive officer or the Board
of Directors may designate from time to time. The consulting agreement has an
initial term of one year, with successive one-year renewal periods thereafter
unless earlier terminated by the Company or Mr. Sallee. In addition to a lump
sum payment of $5,000 paid on the effective date of the agreement, Mr. Sallee
will receive an annual consulting fee of $30,000 for each year that the
agreement remains in effect. Mr. Sallee's consulting agreement contains non-
competition provisions covering the Company's existing markets and expansion
markets that apply during the term of the agreement and for a period of three
years and two years, respectively, after the expiration or earlier termination
of the agreement.
The employment agreement of John R. Summers provides that Mr. Summers will
serve as an executive of the Company, performing such duties and holding such
positions as the Board of Directors or senior management of the Company may
direct. The employment agreement has an initial term of one year, with
successive one-year renewal periods thereafter unless earlier terminated by
the Company or Mr. Summers. In addition to a lump sum payment of $30,000 paid
on the effective date of the agreement, Mr. Summers received or will receive
an annual base salary of $100,000, a cash bonus of $20,000, which was paid, in
accordance with the agreement, upon closing of the Offering, and an incentive
cash bonus of up to 30.0% of base salary if certain performance goals
established by the Board of Directors are achieved. In addition, the agreement
provides that if the Company terminates Mr. Summers without cause, the Company
is required, upon request from Mr. Summers, to redeem shares of Class A Common
Stock purchased by Mr. Summers in connection with the Company's acquisition of
AmeriTel for $100,000, which redemption price is equal to the original
purchase price for such shares. Mr. Summers' employment agreement contains a
non-competition provision that applies during the term of the agreement and
for a period of three years after the expiration or earlier termination of the
agreement. Mr. Summers is also expected to receive an option to purchase up to
247.5 shares of Class A Common Stock at an exercise price of $2,000 per share.
Lease Agreement
In December 1996, Talton Telecommunications entered in a lease agreement
(the "Talton Lease") with Mr. Talton for office space located in Selma,
Alabama. The lease has a five-year term commencing January 1,
76
<PAGE>
1997, with an option to renew for an additional five-year term. Under the
Talton Lease, Talton Telecommunications will pay fixed annual rent of
approximately $109,000, $112,000, $90,000, $93,000, and $96,000, respectively,
for the five years of the initial term.
Financial Advisor
The Company and the Subsidiary Guarantors agreed to indemnify Onyx Partners
against certain liabilities in connection with the Offering, including
liabilities under the Securities Act.
The Offering
CIBC acted as Initial Purchaser in connection with the Offering, which was
completed on June 27, 1997. In such capacity, CIBC received an aggregate
discount of $3,852,500. In addition, the Company and the Subsidiary Guarantors
agreed to indemnify the Initial Purchaser against certain liabilities,
including liabilities under the Securities Act, in connection with the
Offering.
HISTORIC RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisitions
In December 1996, the Company acquired the outstanding capital stock of
AmeriTel for a purchase price of approximately $23.4 million. Terry C.
Matlack, a former executive officer of the Company, John R. Summers, an
executive officer of the Company, and Roger K. Sallee, a director of the
Company, were stockholders of AmeriTel and received an aggregate of
approximately $361,000, $354,000, and $1.4 million, respectively, of the
purchase price, and 125, 100, and 53 shares, respectively, of Class A Common
Stock in exchange for shares of AmeriTel capital stock held by each of them.
In addition, Mr. Sallee received 61.699 shares of Senior Preferred Stock.
Concurrently with its acquisition of AmeriTel, the Company acquired the
outstanding capital stock of Talton Telecommunications for an aggregate
purchase price of approximately $39.4 million, which included the issuance of
the $5.0 million Subordinated Talton Note. Julius E. Talton, the Chairman of
the Board of the Company, Julius E. Talton, Jr., and James E. Lumpkin, each of
whom is an executive officer of the Company, and Mr. Talton's daughter, were
stockholders of Talton Telecommunications and received an aggregate of
approximately $11.2 million (including $2.5 million of the Subordinated Talton
Note), $9.1 million (including $1.5 million of the Subordinated Talton Note),
$6.0 million (including $1.0 million of the Subordinated Talton Note), and
$4.0 million, respectively, of the purchase price. Messrs. Talton, Talton Jr.,
and Lumpkin also received 2,062.5 shares of Class A Common Stock and 2,500
shares of Senior Preferred Stock, 1,237.5 shares of Class A Common Stock and
1,500 shares of Senior Preferred Stock, and 825 shares of Class A Common Stock
and 1,000 shares of Senior Preferred Stock, respectively in exchange for
shares of Talton Telecommunications capital stock held by each of them.
The cash portions of the respective purchase prices for AmeriTel and Talton
Telecommunications were financed with the proceeds of the following: (i) the
issuance by the Company of an aggregate of 9,775 shares of Class A Common
Stock to the stockholders of the Company, including CIBC Ventures, an
affiliate of Regent Capital Partners, and Mr. Engles, a director of the
Company, for aggregate consideration of approximately $9.8 million; (ii) the
issuance by the Company of an aggregate of 400 shares of Class B Common Stock
and warrants to acquire an aggregate of 4,309.4488 shares of Class A Common
Stock to Onyx Talton Partners, L.P. ("Onyx Talton Partners") and to Messrs.
Follmer, Engles, and Urso, each of whom is an executive officer and/or
director of the Company, for aggregate consideration of $400,000; (iii) the
issuance of an aggregate of $8.5 million in Senior Subordinated Notes to CIBC
Merchant Fund and to Regent Capital Partners and related warrants for the
purchase of Class A Common Stock to CIBC Ventures and to Regent Equity
Partners, L.P.; (iv) the issuance of the $5.0 million Subordinated Talton Note
(including related warrants) to Messrs. Talton, Talton, Jr., and Lumpkin; and
(v) an aggregate of $50.7 million of the proceeds from the term and revolving
loan facilities under the Existing Credit Facility. All stockholders of the
Company, including the executive officers and directors of
77
<PAGE>
the Company who hold shares of capital stock of the Company, pledged the
shares of capital stock of the Company held by each of them to CIBC to secure
the Company's obligations under the Existing Credit Facility.
The holders of Class A Common Stock received registration rights with
respect to such shares pursuant to the terms of that certain registration
rights agreement (the "Equity Registration Rights Agreement"). In addition,
the Company and its stockholders entered into a Shareholders Agreement (the
"Shareholders Agreement"). The following summary of the warrants referred to
above, the Equity Registration Rights Agreement, and the Shareholders
Agreement are qualified in their entirety to the actual documents, which are
included in the Registration Statement.
CIBC Merchant Fund and Onyx Partners, Inc., the general partner of Onyx
Talton Partners, were reimbursed for expenses and received transaction fees
totaling approximately $852,000 and $635,000, respectively, and EUF Talton
received approximately $183,000 as reimbursement for its expenses, in December
1996 in connection with the acquisitions of AmeriTel and Talton
Telecommunications and the consummation of the related financing. CIBC, which
is the agent and a lender under the Existing Credit Facility, received a fee
of approximately $1.8 million in December 1996 for banking services rendered
to the Company in connection with the closing of the Existing Credit Facility.
Warrants
In connection with the acquisitions of AmeriTel and Talton
Telecommunications, the Company issued to CIBC Ventures a warrant to acquire
up to 1,085.5263 shares of Class A Common Stock (subject to certain
adjustments) with an exercise price of $0.01 per share. This warrant is
exercisable at any time, and unless exercised, will automatically expire on
December 26, 2006. The Company also issued to CIBC Ventures and Regent Equity
Partners warrants to acquire an aggregate of up to 1,199.9227 shares of Class
A Common Stock (subject to certain adjustments), with an exercise price of
$1,000 per share. These warrants expired by their terms upon closing of the
Offering. A portion of the net proceeds from the Offering was used to repay
the Senior Subordinated Notes, and upon such payment, such warrants
terminated.
The Company issued to Julius E. Talton, Julius E. Talton, Jr., and James E.
Lumpkin warrants to acquire up to 719.9536 shares of Class A Common Stock
(subject to certain adjustments) with an exercise price of $1,000 per share.
These warrants may only be exercised if the Subordinated Talton Note issued by
the Company to Messrs. Talton, Talton, Jr., and Lumpkin is not repaid on or
before September 30, 1997. A portion of the net proceeds from the Offering was
used to repay the Subordinated Talton Note, and upon such payments such
warrants terminated.
The Company issued to each of Messrs. Follmer, Urso, and Engles (i) a
warrant to acquire up to 448.6842 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $1,000; (ii) a
warrant to acquire up to 336.5132 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $2,000; and (iii) a
warrant to acquire up to 328.0769 shares of Class A Common Stock (subject to
certain adjustments) with an exercise price per share of $3,000. The Company
also issued to Onyx Talton Partners: (i) a warrant to acquire up to 390.7895
shares of Class A Common Stock (subject to certain adjustments) with an
exercise price per share of $1,000; (ii) a warrant to acquire up to 293.0920
shares of Class A Common Stock (subject to certain adjustments) with an
exercise price per share of $2,000; and (iii) a warrant to acquire up to
285.7444 shares of Class A Common Stock (subject to certain adjustments) with
an exercise price per share of $3,000. Each of these warrants is exercisable
upon the earlier to occur of the following dates: (i) December 27, 1999; (ii)
the date when a change in control notice (as defined in the warrant) is given;
(iii) the date the Consulting and Strategic Services Agreement with EUF Talton
is terminated; or (iv) the date upon which a registered public offering of
equity interests in the Company is made (but in no event earlier than June 27,
1998, if such offering occurs prior to such date). Unless exercised, each of
these warrants will automatically expire on December 26, 2006.
78
<PAGE>
Equity Registration Rights Agreement
The Equity Registration Rights Agreement applies to all currently
outstanding shares of Class A Common Stock, including shares issuable upon
exercise of the currently outstanding warrants or the conversion of the
currently outstanding Class B Common Stock or the Senior Preferred Stock
("Registrable Securities"), and grants to all holders of Registrable
Securities ("Holders") certain registration rights with respect to such
Registrable Securities.
Subject to certain special rights (the "CIBC Demand Rights") granted to CIBC
Ventures and its affiliates (the "CIBC Entities"), at any time after the
earlier to occur of (i) six months after the initial registered public
offering by the Company under the Securities Act of the Class A Common Stock
(the "Initial Public Offering"); or (ii) November 30, 1998, Initiating Holders
(defined below) are entitled to require the Company to effect up to three
registrations under the Securities Act of all or a part of the Registrable
Securities (each a "Demand Registration"), subject to certain limitations.
Initiating Holders are defined as (i) Holders of at least 25% (or 35% in
certain circumstances) of the Registrable Securities; or (ii) a combination of
Holders of Registrable Securities and Holders of warrants having an exercise
price less than or equal to the per share reported price for the Class A
Common Stock (the "Qualified Warrants") that in the aggregate hold at least
25% (or 35% in certain circumstances) of all Registrable Securities and
Qualified Warrants. Subject to the CIBC Demand Rights, Holders of Registrable
Securities also have the right to include such Registrable Securities in any
registration statement under the Securities Act filed by the Company for its
own account (other than a registration statement for securities to be offered
in a Rule 145 transaction under the Securities Act or to employees of the
Company pursuant to any employee benefit plan). So long as the CIBC Entities
hold Registrable Securities equaling at least 50% of their holdings of Common
Stock on December 27, 1996, the CIBC Entities have the following CIBC Demand
Rights: (i) one of the Demand Registrations is exclusively reserved for the
use and exercise by the CIBC Entities; (ii) the CIBC Entities have the right
at any time to require the Company to use its best efforts to effect an
Initial Public Offering; and (iii) the CIBC Entities have in certain
circumstances, a first priority to cause a portion of their Registrable
Securities to be registered prior to the registration of the Registrable
Securities of the other Holders.
The Company is also obligated to file and maintain a shelf registration
statement on Form S-3 pursuant to Rule 415 of the Securities Act for all
Registrable Securities as expeditiously as possible after it is eligible to do
so.
Shareholders Agreement
Both the Shareholders Agreement and the Certificate of Incorporation of the
Company initially establish an eleven member board of directors, consisting of
six Class A/B Directors with one vote per director and five Class B Directors
having three total votes (i.e., 0.6 vote per director). The Shareholders
Agreement provides that, subject to the adjustments described below, (i) the
CIBC Entities have the right to designate two Class A/B Directors; (ii) Regent
Capital Partners and its affiliates (the "Regent Entities") have the right to
designate two Class A/B Directors; (iii) Julius E. Talton, Julius E. Talton,
Jr., James E. Lumpkin, and their affiliates (the "Talton Holders") have the
right to designate one Class A/B Director; (iv) all other stockholders, except
the EUF Holders, the Talton Holders, the CIBC Entities, the AmeriTel Holders
(as defined in the Shareholders Agreement), and the Onyx Holders, have the
right to designate one Class A/B Director; and (v) the EUF Holders have the
right to designate five Class B Directors. The CIBC Entities and the Regent
Entities lose the right to designate one Class A/B Director if their
respective ownership of outstanding Common Stock falls below 7.5% (but remains
at or above 5%). The CIBC Entities, the Regent Entities, and the Talton
Holders each loses its right to designate any Class A/B Directors if their
respective ownership of outstanding Common Stock falls below 5%. If the EUF
Holders and the Onyx Holders collectively own less than 10% (but at least
7.5%) of the outstanding Common Stock, the EUF Holders lose the right to
designate two Class B Directors, the three Class B Directors that they remain
entitled to designate will have a total of two votes, and all the holders of
the outstanding Common Stock collectively acquire the right to designate one
additional Class A/B Director with one full vote so as to maintain the total
number of votes on the Board of Directors at nine (and the membership on the
Board of Directors will be reduced to ten). If the EUF Holders and the Onyx
Holders collectively own
79
<PAGE>
less than 7.5% (but at least 5%) of the outstanding Common Stock, the EUF
Holders lose the right to designate an additional two Class B Directors, the
Class B Director that they remain entitled to designate will have one full
vote, and all the holders of the outstanding Common Stock collectively acquire
the right to designate one additional Class A/B Director with one full vote so
as to maintain the total number of votes on the Board of Directors at nine
(and the membership on the Board of Directors will be reduced to nine). If the
EUF Holders and the Onyx Holders collectively own less than 5% of the
outstanding Common Stock, the EUF Holders lose the right to designate any
directors, and all the holders of the outstanding Common Stock collectively
acquire the right to designate one additional Class A/B Director with one full
vote so as to maintain the total number of votes on the Board of Directors at
nine (and the membership on the Board of Directors will remain at nine). In
determining the percentage ownership of the EUF Holders and the Onyx Holders,
the Class B Common Stock held by them is deemed to have been converted into
shares of Class A Common Stock, and if one of the director designees of the
EUF Holders is not a principal of the Onyx Holders, then the Common Stock
owned by the Onyx Holders is not considered in calculating the ownership
percentages. Director designation rights are generally not assignable.
However, in certain circumstances, the CIBC Entities may assign its
designation rights in connection with a transfer of its Common Stock.
Pursuant to the Shareholders Agreement, the Company has a right of first
refusal with respect to most transfers of Common Stock and rights, warrants,
options, convertible securities, or debt convertible into Common Stock (the
"Common Stock Equivalents"). To the extent the Company does not fully exercise
such right of first refusal, the stockholders generally have the right to
purchase the offered Common Stock or Common Stock Equivalents on a pro rata
basis. Transfers to affiliates, testamentary transfers, and intestate
succession are generally excluded from the Company's first refusal rights and
any stockholder acquisition rights. In addition, the Shareholders Agreement
establishes certain "tag-along" rights whereby if any holder of 10% or more of
the fully diluted Common Stock or any EUF Holder proposes to sell any of its
Common Stock, then the other stockholders have the right to require the
proposed buyer to purchase from each of them a proportionate number of shares
of Common Stock.
The Shareholders Agreement also provides for certain "drag along rights"
whereby any stockholder or group of stockholders owning Common Stock
representing 60% or more of the total amount of the outstanding Common Stock
and warrants having a value in excess of their exercise price proposes to
transfer all their Common Stock to any third party, such stockholders have the
right to require all other holders to sell all of their Common Stock and
Common Stock Equivalents to such third party. The Shareholders Agreement
further provides that if a third party offers to acquire 75% or more of all
outstanding Common Stock and all warrants having a value in excess of their
exercise price, and a holder or a group of holders owning 75% or more of the
outstanding Common Stock plus such warrants proposes to accept such offer,
then such holders desiring to accept such offer have the right to require all
other holders of Common Stock and such warrants to sell to the third party
their outstanding Common Stock and such warrants pro rata in accordance with
such offer.
The Shareholders Agreement terminates upon (i) the effective date of an
Initial Public Offering by the Company resulting in at least $20.0 million in
gross proceeds; (ii) the merger, consolidation, or reorganization of the
Company, or the sale of all or substantially all of the assets of the Company,
if, immediately following such transaction, the stockholders of the Company
immediately prior to such transaction own less than a majority of the combined
voting power to elect directors and the combined equity ownership interest in
the surviving entity, or such surviving entity has publicly traded common
stock not held by the parties to the Shareholders Agreement with a market
value in excess of $30.0 million; or (iii) the written consent of the CIBC
Entities, the Talton Holders, the Regent Entities, and the EUF Holders (but
only so long as each such party is entitled to designate at least one member
of the Board of Directors) and a majority in interest of the other
stockholders; or (iv) with respect to any party, when such party no longer
owns any capital stock of the Company.
80
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000 shares of
common stock, par value $0.01 per share (the "Common Stock"), and 50,000
shares of preferred stock, par value $0.01 per share (the "Preferred Stock").
The Common Stock is divided into two classes. One class consists of 49,600
shares and is designated "Class A Common Stock" and the other class consists
of 400 shares and is designated "Class B Common Stock." The Preferred Stock is
also divided into two classes. One class consists of 6,000 shares and is
designated "Senior Preferred Stock" and the other class consists of 44,000
shares and is designated "Junior Preferred Stock."
As of September 30, 1997, (i) 15,800 shares of Class A Common Stock were
issued and outstanding, (ii) 400 shares of Class B Common Stock were issued
and outstanding, (iii) 5,925 shares of Senior Preferred Stock were issued and
outstanding, (iv) 7,414.8514 shares of Class A Common Stock were reserved for
issuance pursuant to outstanding warrant agreements, and (v) 503.9213 shares
of Class A Common Stock were reserved for issuance in the event the holders of
the Senior Preferred Stock exercise their conversion rights. See "Certain
Relationships and Related Transactions--Historic Relationships and Related
Transactions--Acquisitions--Warrants." All outstanding shares of Common Stock
and Preferred Stock are duly authorized, validly issued, fully paid, and
nonassessable. There is currently no public trading market for the capital
stock of the Company.
COMMON STOCK
The holders of Class A Common Stock are entitled to one vote for each share
of Class A Common Stock, and the holders of Class B Common Stock are entitled
to four votes for each share of Class B Common Stock on all matters voted on
by the stockholders of the Company. The holders of both classes of Common
Stock are entitled to receive, pari passu, such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the preferential dividend rights of the Senior
Preferred Stock and any preferential dividend rights that may be designated by
the Board of Directors with respect to the Junior Preferred Stock. See "--
Preferred Stock." In the event of the liquidation, dissolution, or winding up
of the Company, subject to the preferential liquidation rights of the Senior
Preferred Stock, and any preferential liquidation rights that may be
designated by the Board of Directors with respect to the Junior Preferred
Stock, the holders of Class A Common Stock are entitled to receive, prior to
and in preference of any distribution to the holders of Class B Common Stock,
the amount of $1,000 per share (as adjusted for any stock dividends,
combinations, or splits), from all assets of the Company available for
distribution, and after payment in full thereof, all remaining assets of the
Company available for distribution are distributed ratably among the holders
of both classes of Common Stock.
In the event any additional shares of Class A Common Stock are issued, all
shares of Class B Common Stock may be converted, at the election of the
holders of a majority of the outstanding Class B Common Stock, into four
shares of Class A Common Stock for each share of Class B Common Stock. In
addition, upon the consummation of a "Major Event," each share of Class B
Common Stock will be automatically converted into four shares of Class A
Common Stock. The Certificate of Incorporation defines a Major Event as (i) a
sale of all or substantially all of the Company's assets or (ii) a registered
public offering of equity interests in the Company made pursuant to a
registration statement on Form S-1 or a successor form that yields gross
proceeds of at least $20.0 million to the Company. The Certificate of
Incorporation also provides for adjustments to be made in the number of shares
of Class A Common Stock into which Class B Common Stock may be convened in
order reflect any stock dividends, splits, reclassification, combinations, or
other changes affecting the number of outstanding shares of Class A Common
Stock. Upon the conversion of Class B Common Stock into Class A Common Stock,
the Class A Common Stock's $1,000 per share liquidation preference will be
eliminated.
81
<PAGE>
PREFERRED STOCK
Senior Preferred Stock
The holders of the Senior Preferred Stock are entitled to receive dividends
at a rate of $80.00 per share (as adjusted for any stock dividends,
combinations, or splits) per annum, payable quarterly out of funds legally
available therefor. Dividends are payable only when, as, and if declared by
the Board of Directors and are cumulative, but do not bear or accrue any
interest. No dividends (other than those payable in Common Stock) may be paid
on any Common Stock unless full cumulative dividends for all Senior Preferred
Stock have been paid or declared and set aside by the Company. In the event of
the liquidation, dissolution, or winding up of the Company, the holders of the
Senior Preferred Stock are entitled to receive a liquidation preference of
$1,000 per share (as adjusted for any stock dividends, combinations or
splits), plus all accrued or declared but unpaid dividends.
Each share of Senior Preferred Stock is convertible into 0.08505 shares of
Class A Common Stock (as adjusted for any stock dividends, splits,
reclassifications, combinations, or other changes affecting the Class A Common
Stock) at any time at the option of the holder thereof.
Upon the occurrence of a Major Event or the exercise of the drag along
rights under the Shareholders Agreement, the Company is required to redeem all
Senior Preferred Stock unless the holders thereof elect to convert their
shares into Class A Common Stock. The redemption price for the Senior
Preferred Stock is $1,000 per share (as adjusted for any stock dividends,
combinations, or splits), plus all accrued or declared but unpaid dividends.
The Senior Preferred Stock is non-voting. There are no redemption or sinking
fund provisions applicable to the Senior Preferred Stock.
Junior Preferred Stock
The Certificate of Incorporation provides that the Board of Directors,
acting unanimously, has the authority to issue up to 44,000 shares of Junior
Preferred Stock in one or more series and to establish the number of shares
constituting any such series, the voting powers, designation, preferences, and
relative participation, option, or other special rights and qualifications,
limitations, or restrictions thereof, including the dividend rights and
dividend rate, redemption price, conversion rights, and liquidation
preferences of the shares constituting any series. Upon the unanimous consent
of the Board of Directors, the Company may issue to each holder of Class A
Common Stock one share of Junior Preferred Stock having a liquidation
preference of $1,000 per share in exchange for one share of Class A Common
Stock held by such stockholder, and each such stockholder has agreed under the
Shareholders Agreement to such exchange, provided that (i) issues of Junior
Preferred Stock are made to all stockholders of Class A Common Stock on a pro
rata basis and are subject to the rights of the parties under the Equity
Registration Rights Agreement, and (ii) no more than ninety percent (90%) of
the Class A Common Stock may be exchanged for Junior Preferred Stock. As of
the date of this Prospectus, the Company has not issued any Junior Preferred
Stock and has no present intention to do so, either pursuant to the terms of
the Shareholders Agreement or otherwise.
DESCRIPTION OF OTHER INDEBTEDNESS
SENIOR CREDIT FACILITY
On December 19, 1997, the Company amended and restated its Existing Credit
Facility with CIBC and First Source Financial LLP (collectively, the
"Lenders"). This amendment and restatement established (a) a term loan
acquisition facility of $55.0 million and (b) a revolving loan facility of
$25.0 million (which includes a $5.0 million letter of credit facility) (the
"Senior Credit Facility"). The following summary is a description of the terms
of the Senior Credit Facility, as amended.
82
<PAGE>
The Company may use borrowings under the Senior Credit Facility for working
capital, capital expenditures, and general corporate purpose, and to fund
certain permitted acquisitions, as set forth in the Senior Credit Facility. In
addition to a $1.2 million fee that was paid at the closing of the Senior
Credit Facility, the Company will pay an annual administrative fee and an
annual commitment fee of 0.5% of the unused portion of the facility.
Amounts borrowed under the Senior Credit Facility bear interest, at the
option of the Company, at either (i) the Base Rate (i.e. the higher of CIBC's
reference rate and the overnight federal funds rate plus 0.5%) plus a margin
that varies from 0.75% to 2.25%, depending on the Company's Total Debt to
EBITDA Ratio (as defined in the Senior Credit Facility) or (ii) the LIBO Rate
(as defined in the Senior Credit Facility) plus a margin that varies from 2.0%
to 3.5%, depending on the Company's Total Debt to EBITDA Ratio. The Senior
Credit Facility requires the Company to make quarterly payments of principal
amounts due under the term loan facility in the amounts set forth below on the
dates indicated:
<TABLE>
<CAPTION>
QUARTERLY DOLLAR
PAYMENT DATE REPAYMENT
------------ ----------
<S> <C>
September 30, 1998 $2,750,000
December 31, 1998 2,750,000
March 31, 1999 2,406,250
June 30, 1999 2,406,250
September 30, 1999 2,406,250
December 31, 1999 2,406,250
March 31, 2000 3,093,750
June 30, 2000 3,093,750
September 30, 2000 3,093,750
December 31, 2000 3,093,750
March 31, 2001 3,437,500
June 30, 2001 3,437,500
September 30, 2001 3,437,500
December 31, 2001 3,437,500
March 31, 2002 3,437,500
June 30, 2002 3,437,500
September 30, 2002 3,437,500
December 31, 2002 3,437,500
</TABLE>
The Senior Credit Facility requires quarterly interest-only payments to be
made on the Base Rate loans and periodic interest-only payments based on the
applicable interest period on LIBO Rate loans, at least quarterly, in each
case until maturity. In addition, the Senior Credit Facility requires
mandatory prepayments out of the proceeds of certain equity debt offerings,
asset dispositions, receipt of insurance proceeds not applied as provided in
the Senior Credit Facility, and receipts of funds from certain escrow
accounts. All outstanding principal and interest under the Senior Credit
Facility is due December 31, 2002. The Senior Credit Facility is secured by
substantially all the assets of the Company and the Subsidiary Guarantors. In
addition, the Company is permitted to make certain voluntary prepayments,
without penalty, and to reduce the size of the commitment, subject to certain
limitations.
Obligations under the Senior Credit Facility are guaranteed by all of the
Company's subsidiaries, and are secured by a perfected first priority security
interest in substantially all of the existing and after-acquired tangible and
intangible assets of the Company (including the capital stock of the Company
and its subsidiaries) and its subsidiaries.
The Senior Credit Facility contains a number of restrictive covenants
including (i) prohibitions on the incurrence of certain liens, the incurrence
of certain additional indebtedness, the repurchase of equity, the
83
<PAGE>
redemption of other indebtedness, the consummation of certain mergers and
other fundamental changes (including change in control of the Company), the
consummation of certain purchases and sales of assets or stock, take or pay
contracts, and negative pledges and restrictive agreements; (ii) limitations
on capital expenditures, leases, transactions with affiliates, use of
proceeds, business activities, investments, the payment of dividends, and
management and advisory fees; (iii) requirements to furnish certain financial
reports, statements, notices, and information; (iv) requirements relating to
the maintenance of separate existence, authorizations, insurance, books and
records, and properties; (v) requirements relating to the conduct of business,
additional collateral, and future subsidiaries; and (vi) environmental
compliance requirements.
The Senior Credit Facility requires the Company to comply with certain
financial covenants and ratios. The Company is currently in compliance with
all material covenants and ratios in the Senior Credit Facility. These
financial covenants and ratios include, without limitation, that the Company
will not permit;
(i) the Total Debt to EBITDA Ratio (as defined in the Senior Credit
Facility) at any time during any period set forth below to be greater than
the ratio set forth opposite such period:
<TABLE>
<CAPTION>
TOTAL DEBT
TO
PERIOD EBITDA RATIO
------ ------------
<S> <C>
12/19/97 to (and including) 12/30/98 6.0:1
12/31/98 to (and including) 12/30/99 5.5:1
12/31/99 to (and including) 12/30/00 5.0:1
12/31/00 to (and including) 12/30/01 4.5:1
12/31/01 and thereafter 4.0:1;
</TABLE>
(ii) the Senior Secured Debt to EBITDA Ratio (as defined in the Senior
Credit Facility) at any time during any period set forth below to be
greater than the ratio set forth opposite such period:
<TABLE>
<CAPTION>
SENIOR DEBT
TO
PERIOD EBITDA RATIO
------ ------------
<S> <C>
12/19/97 to (and including) 12/30/99 3.5:1
12/31/99 and thereafter 3.0:1;
</TABLE>
(iii) the EBITDA to Cash Interest Expense Ratio (as defined in the Senior
Credit Facility) as at the last day of any quarter ending on a date set
forth below to be less than the ratio set forth opposite such date:
<TABLE>
<CAPTION>
EBITDA TO
CASH INTEREST
PERIOD EXPENSE RATIO
------ -------------
<S> <C>
12/19/97 to (and including) 12/31/98 1.5:1
01/01/99 and thereafter 1.75:1;
</TABLE>
(iv) the EBITDA to Fixed Charges Ratio (as defined in the Senior Credit
Facility) as at the last day of any quarter beginning on March 31, 1998 for
the period comprising such quarter and the immediately preceding three
quarters to be less than 1.10:1.
The Senior Credit Facility also contains customary representations,
warranties, and events of default for a facility of this type.
SUBORDINATED INDEBTEDNESS
In connection with the Offering, the Company repaid its obligations under
the Senior Subordinated Notes in the aggregate principal amount of $8.5
million and its $5.0 million Subordinated Talton Note. See "Certain
Relationships and Related Transactions; Current Relationships and Related
Transactions."
84
<PAGE>
DESCRIPTION OF SENIOR NOTES
GENERAL
The New Notes, like the Old Notes, will be issued pursuant to the Indenture,
dated as of June 27, 1997 (the "Indenture") between the Company and U.S. Trust
Company of Texas, N.A., as trustee (the "Trustee"). The terms of the Senior
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"). The terms of the New Notes are identical to the Old Notes in
all material respects (including interest rate and maturity), except that (i)
the New Notes will not be subject to the restrictions on transfer (other than
with respect to holders that are broker-dealers, persons who participated in
the distribution of the Old Notes, or affiliates of the Company); (ii) the
Registration Rights Agreement covenants regarding registration will have been
deemed satisfied; and (iii) there will be no right on the part of holders of
the New Notes to receive increased interest payments if registration is not
effected under the Securities Act. The Senior Notes are subject to all such
terms, and Holders of Senior Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of the material
provisions of the Indenture is subject to, and qualified in its entirety by
reference to, the provisions of Indenture, including the definitions therein
of certain terms used below. A copy of the form of Indenture is available as
set forth under "--Available Information." The definitions of certain terms
used in the following summary are set forth below under "--Certain
Definitions." As used in this Description of Senior Notes, the "Company"
refers only to Talton Holdings, Inc. and not to any of its Subsidiaries.
The Senior Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all other current and future
senior Indebtedness of the Company, including borrowings under the Senior
Credit Facilities, and senior to all subordinated Indebtedness of the Company.
The Senior Notes will be guaranteed on a senior unsecured basis by all of the
Company's current and future Restricted Subsidiaries. See "--Subsidiary
Guarantees." The Senior Notes will be effectively subordinated, however, to
all secured obligations of the Company and the Subsidiary Guarantors to the
extent of the assets securing such obligations, including borrowings under the
Senior Credit Facilities. The Indenture permits the incurrence of additional
Indebtedness, including additional secured Indebtedness, under certain
circumstances.
As of the date of this Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
As of the date of this Prospectus, $115,000,000 principal amount of the Old
Notes was outstanding.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited in aggregate principal amount to $115.0 million
and will mature on June 30, 2007. Interest on the Senior Notes accrues at the
rate of 11% per annum and is payable semi-annually in arrears on January 1 and
July 1, commencing on January 1, 1998, to Holders of record on the immediately
preceding December 15 and June 15. Interest on the Senior Notes accrues from
the most recent date to which interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest is computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal of,
premium, if any, and interest on the Senior Notes is payable at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of interest may be made by
check mailed to the Holders of the Senior Notes at their respective addresses
set forth in the register of Holders of the Senior Notes; provided that all
payments of principal, premium, and interest with respect to the Senior Notes
the Holders of which have given wire transfer instructions to the Company must
be made by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. Until otherwise designated by the Company,
the Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Senior Notes are and will be issued in
denominations of $1,000 and integral multiples thereof.
85
<PAGE>
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Subsidiary
Guarantors. The Subsidiary Guarantors are each of the direct and indirect
subsidiaries of the Company as of the date of this Prospectus: AmeriTel Pay
Phones, Inc., Talton Telecommunications Corporation, Talton Telecommunications
of Carolina, Inc., Talton STC, Inc., Talton Invision, Inc., and One Source
Telecommunications, Inc. The Subsidiary Guarantee of each Subsidiary Guarantor
is a general unsecured obligation of such Subsidiary Guarantor, ranking pari
passu in right of payment with all other senior Indebtedness of such
Subsidiary Guarantor and senior in right of payment to all subordinated
Indebtedness of such Subsidiary Guarantor. The obligations of each Subsidiary
Guarantor under its Subsidiary Guarantee will be limited so as not to
constitute a fraudulent conveyance under applicable law. As of the date of
this Prospectus, all subsidiaries of the Company are, directly or indirectly,
wholly owned by the Company. As of the date of this Prospectus there is
aggregate indebtedness of $600,000 of the Company's Subsidiaries that is
effectively senior to the Senior Notes because the Company is a holding
company. See "Risk Factors--Holding Company Structure" and "Risk Factors--
Fraudulent Conveyance Risks."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another Person, whether or not affiliated with such Subsidiary
Guarantor, unless (i) subject to the provisions of the following paragraph,
the Person formed by or surviving any such consolidation or merger (if other
than such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor, pursuant to a supplemental indenture in form and substance
reasonably satisfactory to the Trustee, under the Senior Notes and the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default exists; and (iii) the Company would be permitted
by virtue of the Company's pro forma Fixed Charge Coverage Ratio, immediately
after giving effect to such transaction, to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
covenant described below under the caption "--Certain Covenants--Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation, or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, then such Subsidiary Guarantor (in
the event of a sale or other disposition, by way of such a merger,
consolidation, or otherwise, of all of the capital stock of such Subsidiary
Guarantor) or the corporation acquiring the property (in the event of a sale
or other disposition of all of the assets of such Subsidiary Guarantor) will
be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the Indenture. See "--Certain
Covenants--Limitation on Asset Sales."
OPTIONAL REDEMPTION
The Senior Notes are not redeemable at the Company's option prior to June
30, 2002. Thereafter, the Senior Notes are subject to redemption at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest thereon, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on June 30 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.......................................................... 105.500
2003.......................................................... 103.667
2004.......................................................... 101.833
2005 and thereafter........................................... 100.000
</TABLE>
Notwithstanding the foregoing, at any time or from time to time on or prior
to June 30, 2000, the Company may redeem up to 30% of aggregate principal
amount of the Senior Notes originally issued under the Indenture on the
Issuance Date at a redemption price of 111% of the principal amount thereof,
in each case plus accrued
86
<PAGE>
and unpaid interest thereon, if any, to the redemption date, with the net cash
proceeds of one or more Equity Offerings; provided that at least $80.0 million
aggregate principal amount of the Senior Notes originally issued remains
outstanding immediately after the occurrence of each such redemption; and
provided, further, that any such redemption occurs within 90 days of the date
of the closing of such Equity Offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of the Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed, or, if the Senior
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee deems fair and appropriate (and in such manner as complies with
applicable legal requirements); provided that no Senior Notes of $1,000 or
less will be redeemed in part. Notices of redemption will be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each Holder of the Senior Notes to be redeemed at its registered address.
Notices of redemption may not be conditional. If any Senior Note is to be
redeemed in part only, the notice of redemption that relates to such Senior
Note will state the portion of the principal amount thereof to be redeemed. A
new Senior Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Senior Note. Senior Notes called for redemption become due and
payable on the date fixed for redemption. On and after the redemption date,
unless the Company defaults in payment of the redemption price, interest
ceases to accrue on the Senior Notes or portions thereof called for
redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Change of Control Offer" and "--Certain
Covenants--Limitation on Asset Sales," the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Senior
Notes.
CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each Holder of the Senior Notes
will have the right to require the Company to repurchase all or any part equal
to $1,000 or an integral multiple thereof of such Holder's Senior Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase (the "Change
of Control Payment"). Within 30 days following any Change of Control, the
Company will mail a notice to each Holder stating that (i) the Change of
Control Offer is being made pursuant to this covenant and all the Senior Notes
tendered will be accepted for payment; (ii) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date");
(iii) any Senior Note not tendered will continue to accrue interest; (iv)
unless the Company defaults in the payment of the Change of Control Payment,
all Senior Notes accepted for payment pursuant to the Change of Control Offer
will cease to accrue interest after the Change of Control Payment Date; (v)
Holders electing to have any Senior Notes purchased pursuant to a Change of
Control Offer will be required to surrender the Senior Notes, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Senior
Notes completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third Business Day preceding the Change
of Control Payment Date; (vi) any Holder will be entitled to withdraw its
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission, or letter setting forth the name of
the Holder, the principal amount of the Senior Notes delivered for purchase,
and a statement that such Holder is withdrawing such Holder's election to have
such Senior Notes purchased; and (vii) Holders whose Senior Notes are being
purchased only in part will be issued new Senior Notes equal in principal
amount to the unpurchased portion of the Senior Notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an integral
multiple thereof. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Senior Notes as a result of a Change of
Control.
87
<PAGE>
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Senior Notes or portions thereof so tendered, and (iii) deliver or cause to be
delivered to the Trustee the Senior Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Senior
Notes or portions thereof being purchased by the Company. The Paying Agent
will promptly mail to each Holder of Senior Notes so tendered the Change of
Control Payment for such Senior Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
Holder a new Senior Note equal in principal amount to any unpurchased portion
of the Senior Notes surrendered, if any; provided that each such new Senior
Note will be in a principal amount of $1,000 or an integral multiple thereof.
The Company will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Senior Notes to require that
the Company repurchase or redeem the Senior Notes in the event of a takeover,
recapitalization, or similar transaction. In addition, the Company could enter
into certain transactions, including acquisitions, refinancings, or other
recapitalizations, that could affect the Company's capital structure or the
value of the Senior Notes, but that would not constitute a Change of Control.
The Company's other senior indebtedness contains prohibitions of certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of the Senior Notes of their right to require the Company to
repurchase the Senior Notes could cause a default under such other senior
indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchases on the Company. The Company's ability to
repurchase the Senior Notes following a Change of Control may also be limited
by the Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Senior Notes validly tendered and not withdrawn
under such Change of Control Offer.
A "Change of Control" is defined by the Indenture to include certain
dispositions of all or substantially all the assets of the Company; adoption
of a plan of dissolution or liquidation by the Company; consummation of
certain transactions that result in certain third parties acquiring beneficial
ownership of more than 50% of the Voting Stock (as defined) of the Company; or
a change in the membership of the Board of Directors of the Company resulting
in a majority of the directors of the Company not being Continuing Directors
(as defined). For a detailed description of "Change of Control" see
"Description of Senior Notes--Certain Definitions." Certain events involving a
Change of Control may result in an event of default under the Senior Credit
Facility and may result in an event of default under other indebtedness of the
Company that may be incurred in the future. An event of default under the
Senior Credit Facility or other indebtedness could result in an acceleration
of such indebtedness, in which case the Senior Notes would be effectively
subordinated to such other secured indebtedness to the extent of any liens
securing such other indebtedness. See "Description of Other Indebtedness--
Senior Credit Facility." Under New York law, which governs the Indenture, it
is not clear which transactions would constitute a sale of "all or
substantially all of the assets" of the Company. See "Risk Factors--Repurchase
of Senior Notes Upon a Change of Control." There can be no assurance that the
Company would have sufficient resources to repurchase the Senior Notes and pay
its obligations under the Senior Credit Facility or other indebtedness upon
the occurrence of a Change of Control.
88
<PAGE>
CERTAIN COVENANTS
Limitation on Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
or any of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company); (ii) purchase, redeem, or otherwise
acquire or retire for value (including, without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company; (iii) make any payment on or with respect to, or purchase, redeem,
defease, or otherwise acquire or retire for value any Subordinated
Indebtedness, except a payment of principal or interest at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or
would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness under the provisions of
the first paragraph of the covenant described below under the caption "--
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock";
and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), and (v) (but only to the extent of the dividends
paid to the Company or its Wholly Owned Restricted Subsidiaries pursuant to
such clause (v)) of the next succeeding paragraph), is less than the sum of
(i) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company from
the issue or sale since the date of the Indenture of Equity Interests of
the Company (other than Disqualified Stock) or Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) to the extent that any Restricted
Investment that was made after the date of the Indenture is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would
have complied with the provisions of the Indenture;
(ii) so long as no Default or Event of Default has occurred and is
continuing, the redemption, repurchase, defeasance, retirement, or
other acquisition of any Subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any
Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
defeasance, retirement, or other acquisition will be excluded from
clause (c)(ii) of the preceding paragraph;
89
<PAGE>
(iii) so long as no Default or Event of Default has occurred and is
continuing, the redemption, repurchase, defeasance, retirement, or
other acquisition of any Subordinated Indebtedness with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) so long as no Default or Event of Default has occurred and is
continuing, the retirement of any shares of Disqualified Stock by
conversion into, or by exchange for, shares of Disqualified Stock, or
out of the net cash proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of other shares of
Disqualified Stock; provided that (a) such Disqualified Stock is not
subject to mandatory redemption earlier than the maturity of the Senior
Notes; (b) such Disqualified Stock is in an aggregate liquidation
preference that is equal to or less than the sum of (x) the aggregate
liquidation preference of the Disqualified Stock being retired, (y) the
amount of accrued and unpaid dividends, if any, and premiums owed, if
any, on the Disqualified Stock being retired, and (z) the amount of
customary fees, expenses, and costs related to the incurrence of such
Disqualified Stock; and (c) such Disqualified Stock is incurred by the
same Person that initially incurred the Disqualified Stock being
retired, except that the Company may incur Disqualified Stock to refund
or refinance Disqualified Stock of any Wholly Owned Subsidiary of the
Company;
(v) the payment of any dividend by a Restricted Subsidiary of the
Company to the holders of its Equity Interests on a pro rata basis;
(vi) the payment of cash dividends on the Existing Preferred Stock
when such dividends are required to be paid in accordance with the
Certificate of Designation with respect to the Existing Preferred
Stock;
(vii) so long as no Default or Event of Default has occurred and is
continuing, the repurchase, redemption, or other acquisition or
retirement for value of any Equity Interests of the Company or any
Restricted Subsidiary of the Company held by any member of the
Company's (or any of its Restricted Subsidiaries') management pursuant
to any management equity subscription agreement or stock option
agreement in effect as of the date of the Indenture; provided that the
aggregate price paid for all such repurchased, redeemed, acquired, or
retired Equity Interests will not exceed $300,000 in any twelve-month
period:
(viii) so long as no Default or Event of Default has occurred and is
continuing, repurchases of Equity Interests deemed to occur upon the
exercise of stock options or warrants upon surrender of Equity
Interests to pay the exercise price of such stock options or warrants;
and
(ix) so long as no Default or Event of Default has occurred and is
continuing, other Restricted Payments in an aggregate amount not to
exceed $1.0 million since the date of the Indenture.
The Company intends, as soon as practicable, to enter into a supplemental
indenture for the purpose of clarifying, and resolving an ambiguity with
respect to, clause (vi) above to make it clear that, to the extent that the
Board of Directors declares dividends as provided in the Certificate of
Designation for the Senior Preferred Stock, such dividends will be "required
to be paid" for the purposes of clause (vi). For a description of the Senior
Preferred Stock and its dividend rights, see "Description of Capital Stock--
Preferred Stock--Senior Preferred Stock."
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default;
provided that in no event will the business currently operated by AmeriTel or
Talton Telecommunications be transferred to or held by any Subsidiary other
than a Wholly Owned Restricted Subsidiary. For purposes of making such
determination, all outstanding Investments by the Company and its Restricted
Subsidiaries (except to the extent repaid in cash) in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the greatest of (x) the
net book value of such Investments at the time of such designation, (y) the
fair market value of such Investments at the time of such designation, and (z)
the original fair market value of such Investments at the time they were made.
Such designation will only be
90
<PAGE>
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment will be determined by the
Board of Directors, whose resolution with respect thereto will be set forth in
an Officer's Certificate delivered to the Trustee, such determination to be
based upon an opinion or appraisal issued by an accounting, appraisal, or
investment banking firm of national standing if such fair market value exceeds
$5.0 million. Not later than the date of making any Restricted Payment, the
Company will deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed and
that no Default or Event of Default will result from making the Restricted
Payment, together with a copy of any fairness opinion or appraisal required by
the Indenture.
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee, or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and that the Company will not issue any Disqualified
Stock and will not permit any of its Subsidiaries to issue any shares of
preferred stock; provided, however, that the Company may incur Indebtedness
(including Acquired Indebtedness) or issue shares of Disqualified Stock if (A)
the Fixed Charge Coverage Ratio for the Company's most recently ended four
full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is
incurred or such Disqualified Stock is issued would have been at least (x)
1.75 to 1.0 if the Indebtedness is incurred prior to December 31, 1998, (y)
2.0 to 1.0 if the Indebtedness is incurred prior to December 31, 1999, or (z)
2.5 to 1.0 if the Indebtedness is incurred on or after December 31, 1999,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred or
the Disqualified Stock had been issued, as the case may be, at the beginning
of such four-quarter period, and (B) no Default or Event of Default occurs and
is continuing at the time or as a consequence of the incurrence of such
Indebtedness or the issuance of such Disqualified Stock.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(i) the incurrence by the Company or its Restricted Subsidiaries of
Indebtedness under the Senior Credit Facilities and the issuance and
creation of letters of credit and banker's acceptances thereunder (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Restricted Subsidiaries
thereunder) not to exceed an amount equal to $80.0 million outstanding at
any one time, less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such
Indebtedness pursuant to the covenant described below under the caption "--
Limitation on Asset Sales":
(ii) the incurrence by the Company and its Subsidiaries of the Existing
Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Notes issued on the Issuance Date and the incurrence by the
Subsidiary Guarantors of the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance, or replace Indebtedness that was
permitted by the Indenture to be incurred;
(v) the incurrence by the Company or any of its Wholly Owned Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, however, that
(i) if the Company or a Subsidiary Guarantor is the obligor on such
91
<PAGE>
Indebtedness, such Indebtedness is unsecured and expressly subordinated to
the prior payment in full in cash of all Obligations with respect to the
Senior Notes and the Subsidiary Guarantees, respectively, and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a Wholly
Owned Restricted Subsidiary and (B) any sale or other transfer of any such
Indebtedness to a Person that is not either the Company or a Wholly Owned
Restricted Subsidiary will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, that was not permitted by this clause (v);
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations in the ordinary course of business of the Company or
any of its Restricted Subsidiaries; provided that the notional principal
amount of such Hedging Obligation does not exceed the principal amount of
Indebtedness to which such Hedging Obligation relates;
(vii) the guarantee by the Company or any of the Subsidiary Guarantors of
Indebtedness of the Company or any of its Restricted Subsidiaries that was
permitted to be incurred by another provision of this covenant;
(viii) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt; provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event will be
deemed to constitute an incurrence of Indebtedness (and Liens, if any,
securing such Indebtedness) by a Restricted Subsidiary of the Company; or
(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance, or replace any
other Indebtedness incurred pursuant to this clause (ix), not to exceed
$5.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Indebtedness described in clauses (i) through (ix) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant and such item of Indebtedness will
be treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Accrual of interest, the accretion of
accreted value, and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Limitation on Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to consummate an Asset Sale unless (i) the Company
(or the Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (evidenced
by a resolution of the Board of Directors set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor received by the Company or such Restricted Subsidiary is in the form
of cash or Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet), of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Senior
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities,
notes, or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are immediately converted by the Company
or such Restricted Subsidiary into cash (to the extent of the cash received),
will be deemed to be cash for purposes of this clause (ii).
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Restricted Subsidiary may apply such Net Proceeds, at
its option, (a) to repay Indebtedness outstanding under the Senior Credit
Facilities (and to correspondingly reduce commitments with respect thereto),
or (b) to the acquisition of a controlling interest in another business, the
making of a capital expenditure, or the acquisition of
92
<PAGE>
other long-term assets, in each case, in the same or a similar line of
business as the Company was engaged in on the date of the Indenture. Pending
the final application of any such Net Proceeds, the Company or such Restricted
Subsidiary may temporarily reduce outstanding revolving credit borrowings,
including borrowings under the Senior Credit Facilities or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any
Net Proceeds from Asset Sales that are not applied or invested as provided in
the first sentence of this paragraph will be deemed to constitute "Excess
Proceeds."
Not later than 30 days after any date (an "Asset Sale Offer Trigger Date")
that the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will mail to each holder of the Senior Notes at such holder's
registered address a notice stating (i) that an Asset Sale Offer Trigger Date
has occurred and that the Company is offering to purchase the maximum
principal amount of the Senior Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase (the "Asset
Sale Offer Purchase Date"), which will be a business day, specified in such
notice, that is not earlier than 30 days or later than 60 days from the date
such notice is mailed; (ii) the amount of accrued and unpaid interest as of
the Asset Sale Offer Purchase Date; (iii) that any Senior Note not tendered
will continue to accrue interest; (iv) that, unless the Company defaults in
the payment of the purchase price for the Senior Notes payable pursuant to the
Asset Sale Offer, any Senior Notes accepted for payment pursuant to the Asset
Sale Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date; (v) the procedures, consistent with the Indenture, to be followed by a
holder of the Senior Notes in order to accept an Asset Sale Offer or to
withdraw such acceptance; and (vi) such other information as may be required
by the Indenture and applicable laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of the Senior Notes or portions thereof
tendered pursuant to the Asset Sale Offer that can be purchased out of Excess
Proceeds from such Asset Sale; (ii) deposit with the Paying Agent the
aggregate purchase price of all the Senior Notes or portions thereof accepted
for payment and any accrued and unpaid interest on such Senior Notes as of the
Asset Sale Offer Purchase Date; and (iii) deliver or cause to be delivered to
the Trustee all the Senior Notes tendered pursuant to the Asset Sale Offer. If
less than all the Senior Notes tendered pursuant to the Asset Sale Offer are
accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Senior Notes to be purchased by the Company will
be in compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed or, if the Senior Notes
are not so listed, on a pro rata basis, by lot or by such method as the
Trustee deems fair and appropriate; provided that the Senior Notes accepted
for payment in part will only be purchased in integral multiples of $1,000.
The paying agent will promptly mail to each holder of the Senior Notes or
portions thereof accepted for payment an amount equal to the purchase price
for such Senior Notes plus any accrued and unpaid interest thereon, and the
Trustee will promptly authenticate and mail to such holder of the Senior Notes
accepted for payment in part a new Senior Note equal in principal amount to
any unpurchased portion of the Senior Notes, and any Senior Note not accepted
for payment in whole or in part will be promptly returned to the holder of
such Senior Note. On and after an Asset Sale Offer Purchase Date, interest
will cease to accrue on the Senior Notes or portions thereof accepted for
payment, unless the Company defaults in the payment of the purchase price
therefor. The Company will announce the results of the Asset Sale Offer to
holders of the Senior Notes on or as soon as practicable after the Asset Sale
Offer Purchase Date. To the extent that the aggregate amount of the Senior
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of the Senior Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee will select the Senior Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
The Company will comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Asset Sale
Offer.
93
<PAGE>
Limitation on Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, or otherwise cause or suffer to
exist or become effective any Liens of any kind (other than Permitted Liens)
upon any property or assets of the Company or any such Restricted Subsidiary
or any shares of stock or debt of any such Restricted Subsidiary unless (i) if
such Lien secures Indebtedness that is pari passu with the Senior Notes, then
the Senior Notes are secured on an equal and ratable basis with the
obligations so secured until such time as such obligation is no longer secured
by a Lien or (ii) if such Lien secures Subordinated Indebtedness, any such
Lien will be subordinated to a Lien granted to the holders of the Senior Notes
in the same collateral as that securing such Lien to the same extent as such
Subordinated Indebtedness is subordinated to the Senior Notes.
Limitation on Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey, or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Company is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance,
or other disposition has been made is a corporation organized or existing
under the laws of the United States, any state thereof, or the District of
Columbia; (ii) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such sale,
assignment, transfer, lease, conveyance, or other disposition has been made
assumes all the obligations of the Company under the Senior Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee and the obligations under the Indenture will
remain in full force and effect; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment,
transfer, lease, conveyance, or other disposition has been made will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock."
In connection with any consolidation, merger, or transfer of assets
contemplated by this provision, the Company will deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an Officers' Certificate and an opinion of counsel, each stating
that such consolidation, merger, or transfer and the supplemental indenture in
respect thereto comply with this provision and that all conditions precedent
relating to such transaction or transactions have been complied with.
Limitation on Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer,
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, understanding, loan, advance, or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Trustee (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$500,000, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (b) with respect to
any Affiliate Transaction
94
<PAGE>
or series of related Affiliate Transactions involving aggregate consideration
in excess of $5.0 million, an opinion as to the fairness to the Holders of
such Affiliate Transaction from a financial point of view issued by an
accounting, appraisal, or investment banking firm of national standing;
provided that the following shall not be deemed to be Affiliate Transactions:
(1) transactions pursuant to the Senior Credit Facilities; (2) customary
investment banking or financial advisory services rendered by CIBC Wood Gundy
Securities Corp. or Onyx Partners, Inc. or any of their respective affiliates;
(3) transactions under the Talton Lease (as such agreement may be amended or
replaced, so long as any amounts paid under such amended or replacement
agreement do not exceed the amounts payable under such agreement as in effect
on the Issuance Date); (4) payments made by the Company or any of its
Restricted Subsidiaries pursuant to the terms of the Consulting and Strategic
Services Agreement (as such agreement may be amended or replaced, so long as
any amounts paid under such amended or replacement agreement do not exceed the
amounts payable under such agreement as in effect on the Issuance Date); (5)
transactions pursuant to the Shareholders Agreement and the Equity
Registration Rights Agreement, each as in effect on the Issuance Date; (6) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary; (7) transactions
between or among the Company and/or its Restricted Subsidiaries; and (8)
Restricted Payments and Permitted Investments that are permitted by the
provisions of the Indenture described above under the caption "--Limitation on
Restricted Payments."
Limitation on Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company or such Restricted Subsidiary may enter into a sale
and leaseback transaction if (i) the Company or such Restricted Subsidiary
could have (a) incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Limitation on Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described under the caption
"--Limitation on Liens," (ii) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as
determined in good faith by the Board of Directors and set forth in an
Officers' Certificates delivered to the Trustee) of the property that is the
subject of such sale and lease back transaction, and (iii) the transfer of
assets in such sale and leaseback transaction is permitted by, and the Company
or such Restricted Subsidiary applies the proceeds of such transaction in
compliance with, the covenant described under the caption "--Limitation on
Asset Sales."
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries acquire or create another Restricted Subsidiary or designate an
Unrestricted Subsidiary to be a Restricted Subsidiary after the date of the
Indenture, then such newly acquired or created or designated Restricted
Subsidiary will execute a Subsidiary Guarantee and deliver an opinion of
counsel, in accordance with the terms of the Indenture.
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries on
its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or pay any indebtedness owed to the Company or
any of its Restricted Subsidiaries; (ii) pay any Indebtedness owed to the
Company or any of its Restricted Subsidiaries; (iii) make loans or advances to
the Company or any of its Restricted Subsidiaries; (iv) guarantee any
Indebtedness of the Company or any other Restricted Subsidiary of the Company;
or (v) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the date of
the Indenture, (b) the Senior Credit Facility, and
95
<PAGE>
any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements, or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement, or refinancings are no more restrictive with respect
to such dividend and other payment restrictions than those contained in the
Existing Credit Facility, (c) any acquisition facility under the Senior Credit
Facilities and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements, or refinancings thereof,
provided that any such encumbrances or restrictions in such acquisition
facility or any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements, or refinancings thereof are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in the Existing Credit Facility, (d) the Indenture, the Senior
Notes, and the Subsidiary Guarantees, (e) applicable law, (f) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (g) customary non-
assignment provisions in leases and other agreements entered into in the
ordinary course of business and consistent with past practices, (h) purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (v) above on the
property so acquired, or (i) Permitted Refinancing Indebtedness, provided that
the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in the
agreements governing the Indebtedness being refinanced.
Limitation on Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Restricted Subsidiary of the Company to, transfer, convey, sell, lease,
pledge, hypothecate, or otherwise dispose of any Capital Stock of any
Restricted Subsidiary of the Company to any Person (other than the Company or
a wholly Owned Restricted Subsidiary of the Company), other than Capital Stock
of a Restricted Subsidiary of the Company that holds property or assets
acquired by the Company and its Restricted Subsidiaries after the Issuance
Date, and (ii) will not permit any Restricted Subsidiary of the Company to
issue any of its Equity Interests to any Person other than to the Company or a
wholly Owned Restricted Subsidiary of the Company. The foregoing restrictions
will not apply to (a) an Asset Sale made in compliance with the covenant
described under the caption "--Limitation on Asset Sales" or (b) a pledge or
hypothecation or other Lien on Capital Stock of a Restricted Subsidiary
otherwise permitted by the covenant described under the caption "--Limitation
on Liens."
Reports
The Indenture provides that, whether or not the Company is then subject to
Section 13(a) or 15(d) of the Exchange Act, so long as any Senior Notes are
outstanding, the Company will furnish to the Trustee and all Holders of the
Senior Notes (i) all annual reports, quarterly reports and other periodic
reports which the Company would have been required to file with the Securities
and Exchange Commission (the "Commission") pursuant to Section 13(a) or 15(d)
of the Exchange Act if the Company were so subject. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission, on or
prior to the respective dates by which the Company would have been required to
file such documents if subject to Section 13(a) or 15(d) of the Exchange Act,
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Subsidiary Guarantors
have agreed that, for so long as any Senior Notes remain outstanding, they
will furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
96
<PAGE>
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest on the Senior
Notes;
(ii) default in payment when due of the principal of or premium, if any,
on the Senior Notes;
(iii) failure by the Company or any Subsidiary to comply with the
provisions described under the caption "Change of Control Offer," "--
Certain Covenants--Limitation on Asset Sales," "--Certain Covenants--
Limitation on Restricted Payments" or "Certain Covenants--Limitation on
Incurrence of Indebtedness";
(iv) failure by the Company or any Subsidiary for 60 days after receipt
of written notice given by the Trustee or the holders of at least 25% in
principal amount of the Senior Notes then outstanding to comply with any of
its other agreements in the Indenture or the Senior Notes;
(v) default under any mortgage, indenture, or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more, and such default has not been
cured, waived, or postponed pursuant to an agreement with the holders of
such Indebtedness within 30 days after written notice as provided in the
Indenture, or such acceleration is not rescinded or annulled within 10 days
after written notice as provided in the Indenture;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged, or stayed for a period of 60 days after their entry;
(vii) any holder (or person acting on its behalf) of at least $5.0
million in aggregate principal amount of Indebtedness of the Company or any
of its Restricted Subsidiaries, subsequent to the occurrence of a default
with respect to such Indebtedness and in accordance with the terms of the
document or agreement governing such Indebtedness, commences judicial
proceedings to foreclose upon assets of the Company or any of its
Restricted Subsidiaries having an aggregate fair market value in excess of
$5.0 million or exercises any rights under applicable law or applicable
security documents to take ownership of any such assets in lieu of
foreclosure;
(viii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary; and
(ix) except as permitted by the Indenture, any Subsidiary Guarantee is
held in any judicial proceeding to be unenforceable or invalid or ceases
for any reason to be in full force and effect or any Subsidiary Guarantor,
or any Person acting on behalf of any Subsidiary Guarantor, denies or
disaffirms its obligations under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company or any
Restricted Subsidiary, all outstanding Senior Notes will become due and
payable without further action or notice. Holders of the Senior Notes may not
enforce the Indenture or the Senior Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of
the then outstanding Senior Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Senior Notes
notice of any continuing Default or
97
<PAGE>
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
will also become and be immediately due and payable to the extent permitted by
law upon the acceleration of the Senior Notes. If an Event of Default occurs
prior to June 30, 2002 by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Senior Notes prior to June 30, 2002, then the
premium specified in the Indenture will also become immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may, on behalf of the Holders of all
of the Senior Notes, waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior Notes.
No Holder of any Senior Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy under the Indenture, unless
such holder has previously given to the Trustee written notice of a continuing
Event of Default and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Senior Notes has made written request and
offered reasonable indemnity to the Trustee to institute such proceeding as a
trustee, and unless the Trustee has not received from the holders of a
majority in aggregate principal amount of the outstanding Senior Notes, a
direction inconsistent with such request and has failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted on such Senior Note on or after the respective due dates expressed
in such Senior Note.
The Company is required to deliver to the Trustee on or before 100 days
after the end of the Company's fiscal year and on or before 50 days after the
end of the first three fiscal quarters in each year an Officers' Certificate
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator, or stockholder of the Company,
as such, will have any liability for any obligations of the Company under the
Senior Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of the Senior
Notes, by accepting a Senior Note, waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Senior
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Senior Notes
to receive payments in respect of the principal of, premium, if any, and
interest on such Senior Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Senior
Notes concerning issuing temporary Senior Notes, registration of Senior Notes,
mutilated, destroyed, lost, or stolen Senior Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties, and immunities of the Trustee, and
the Company's obligations in connection therewith, and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply
98
<PAGE>
with such obligations will not constitute a Default or Event of Default with
respect to the Senior Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation,
and insolvency events) described under the caption "--Events of Default" will
no longer constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on,
the outstanding Senior Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether the
Senior Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee confirming that (A) the Company has received from, or there has
been published by the Internal Revenue Service a ruling or (B) since the date
of the Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that the Holders of the outstanding Senior Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company must deliver to the Trustee an opinion of counsel in
the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Senior Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Senior Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying, or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Senior Note selected for redemption. Also, the Company is not
required to transfer or exchange any Senior Note for a period of 15 days
before a selection of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of such
Senior Note for all purposes.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect as
to all the Senior Notes issued thereunder, when either (a) all such Senior
Notes theretofore authenticated and delivered (except lost, stolen or
99
<PAGE>
destroyed Senior Notes which have been replaced or paid and the Senior Notes
for whose payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for cancellation; or
(b) (i) all such Senior Notes not theretofore delivered to the Trustee for
cancellation have become due and payable within one year and the Company or a
Subsidiary Guarantor, if any, has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust an amount of money
sufficient to pay and discharge the entire Indebtedness on such Senior Notes
not theretofore delivered to the Trustee for cancellation for principal,
premium, if any, and accrued interest to the date of maturity or redemption;
(ii) no Default or Event of Default with respect to the Indenture or the
Senior Notes has occurred and is continuing on the date of such deposit or
will occur as a result of such deposit and such deposit will not result in a
breach or violation of, or constitute a default under, any other instrument to
which the Company or a Subsidiary Guarantor, is a party or by which the
Company or a Subsidiary Guarantor is bound; (iii) the Company or a Subsidiary
Guarantor, has paid or caused to be paid all sums payable by it under such
Indenture; and (iv) the Company has delivered irrevocable instructions to the
Trustee under such Indenture to apply the deposited money toward the payment
of such Senior Notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an Officers' Certificate and an opinion
of counsel to the Trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
AMENDMENT, SUPPLEMENT, AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Senior Notes, and the Registration Rights Agreement may be amended or
supplemented with the consent of the Holders of at least a majority in
principal amount of the Senior Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Senior Notes), and any existing default or
compliance with any provision of the Indenture or the Senior Notes may be
waived with the consent of the Holders of a majority in principal amount of
the then outstanding Senior Notes (including consents obtained in connection
with a tender offer or exchange offer for Senior Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an
amendment, supplement or waiver; (ii) reduce the principal of or change the
fixed maturity of any Senior Note or alter the provisions with respect to the
redemption of the Senior Notes (other than provisions relating to the
covenants described above under the captions "--Change of Control Offer" and
"--Certain Covenants--Limitation on Asset Sales"); (iii) reduce the rate of or
change the time for payment of interest on any Senior Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Senior Notes (except a rescission of acceleration of the
Senior Notes by the Holders of at least a majority in aggregate principal
amount of the Senior Notes and a waiver of the payment default that resulted
from such acceleration); (v) make any Senior Note payable in money other than
that stated in the Senior Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Senior Notes to receive payments of principal of or premium, if any, or
interest on the Senior Notes; (vii) waive a redemption payment with respect to
any Senior Note (other than a payment required by one of the covenants
described above under the caption "--Change of Control Offer" or "--Certain
Covenants--Limitation on Asset Sales"); (viii) affect the ranking of the
Senior Notes in a manner adverse to the Holders of the Senior Notes; or (ix)
make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company and the Trustee may amend or supplement the Indenture, the
Senior Notes, and the Registration Rights Agreement to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Senior Notes in
addition to or in place of certificated Senior Notes, to provide for the
assumption of the Company's obligations to Holders of Senior Notes in the case
of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of Senior Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
100
<PAGE>
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Notes will have the right to direct the time, method, and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (that is not cured), the Trustee is required, in the exercise of its
power, to use the degree of care of a prudent person in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of the Senior Notes, unless such Holder has offered to the Trustee
security and indemnity satisfactory to it against any loss, liability, or
expense.
GOVERNING LAW
The Indenture, the Senior Notes, and the Subsidiary Guarantees are subject
to certain exceptions, governed by and construed in accordance with, the
internal laws of the State of New York, without regard to choice of law rules.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Talton Holdings,
Inc., 1209 W. North Carrier Parkway, Suite 300, Grand Prairie, Texas, 75050
Attention: Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used in this Prospectus for which no definition is
provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory or equipment in the ordinary course
of business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company and its Restricted Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "change
of Control Offer" and/or the provisions described above under the caption "--
Certain Covenants--Limitation on Merger, Consolidation
101
<PAGE>
or Sale of Assets" and not by the provisions described under the caption "--
Certain Covenants--Limitation on Asset Sales"), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $100,000 or (b) for net proceeds in excess of $100,000 and
(ii) the issue or sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries, whether in a
single transaction or a series of related transactions. Notwithstanding the
foregoing: (i) any simultaneous exchanges of telephones and related contracts
and equipment of the Company or any Restricted Subsidiaries for telephones and
related contracts and equipment of another Person with equivalent fair market
value (provided that the fair market value of telephones and related contracts
and equipment so exchanged in any fiscal year shall not exceed 10% of the
total assets of the Company on a consolidated basis); (ii) a transfer of
assets by the Company to a Wholly Owned Restricted Subsidiary or by a Wholly
Owned Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary; (iii) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary; and (iv) a Restricted Payment that is permitted by the covenant
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments", in each case, will not be deemed to be an Asset Sale.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means: (i) in the case of a corporation, corporate stock;
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock; (iii) in the case of a partnership or a limited liability
company, partnership or membership interests (whether general or limited); and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means: (i) United States dollars; (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than 365
days from the date of acquisition; (iii) certificates of deposit and
eurodollar time deposits with maturities of 365 days or less from the date of
acquisition, bankers' acceptances with maturities not exceeding 365 days and
overnight bank deposits, in each case with any commercial banking institution
that is a lender under the Senior Credit Facilities or a member of the Federal
Reserve System having capital and surplus in excess of $500 million; (iv)
repurchase obligations with a term of not more than 365 days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above; (v) commercial paper rated at least P-1 by Moody's Investors
Service, Inc. or at least A-1 by Standard & Poor's Corporation and in each
case maturing within nine months after the date of acquisition; and (vi) money
market funds which invest substantially all of their assets in instruments of
the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties (as defined below); (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company; (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has
102
<PAGE>
the right to acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition) directly or
indirectly, of more than 50% of the Voting Stock of the Company (measured by
voting power rather than number of shares); or (iv) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors. For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring
Voting Stock of the Company will be deemed to be a transfer of such portion of
such Voting Stock as corresponds to the portion of the equity of such entity
that has been so transferred.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period (to the
extent that such provision for taxes was included in computing such
Consolidated Net Income), plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, imputed interest with respect to Attributable Debt, commissions,
discounts and other fees and charges incurred in respect of letter of credit
or bankers' acceptance financings, and net payments (if any) pursuant to
Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expenses to the extent
that it represents an accrual of or reserve for cash expenses in any future
period or amortization of a prepaid cash expense that was paid in a prior
period) of such Person and its Restricted Subsidiaries for such period (to the
extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income), minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the
Net Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Subsidiary Guarantor; (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders; (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded; and (iv) the
cumulative effect of a change in accounting principles shall be excluded.
"Consulting and Strategic Services Agreement" means that certain Consulting
and Strategic Services Agreement between the Company and EUF Talton, L.P.,
dated as of December 27, 1996.
103
<PAGE>
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors for a period of two consecutive years or on the date of the
Indenture if less than two years have elapsed since the date of Indenture) or
(ii) was nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of such
Board at the time of such nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof in whole or in part, on or prior to the
date that is 91 days after the date on which the Senior Notes mature, provided
that only the portion of Capital Stock which so matures or is mandatorily
redeemable, is so convertible or exchangeable or is so redeemable at the
option of the holder thereof prior to such final maturity date will be deemed
to be Disqualified Stock; provided, however, that preferred stock of the
Company that is issued with the benefit of provisions requiring a change of
control offer to be made for such Capital Stock in the event of a Change of
Control of the Company, which provisions have substantially the same effect as
the provisions of the Indenture described under "Change of Control Offer,"
will not be deemed to be Disqualified Stock solely by virtue of such
provisions.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any (i) issuance of common stock or preferred stock
by the Company (excluding Disqualified Stock) that is registered pursuant to
the Securities Act, other than issuances registered on Form S-8 and issuances
registered on Form S-4, and (ii) any private issuance of common stock or
preferred stock of the Company (excluding Disqualified Stock), other than
issuances of common stock pursuant to employee benefit plans of the Company or
otherwise as compensation to employees of the Company, in each case generating
aggregate gross proceeds to the Company of at least $25.0 million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Existing Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Existing Preferred Stock" means the Company's Senior Preferred Stock issued
and outstanding as of the Issuance Date.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the Company
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues preferred
stock subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event
for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption. Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or
104
<PAGE>
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense (including
capitalized interest) of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued (including, without limitation, amortization
of debt issuance costs and original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Hedging Obligations) and (ii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Subsidiary Guarantee or Lien is
called upon) and (iii) the product of (A) all dividend payments, whether or
not in cash, on any series of preferred stock of such Person, other than
dividend payments on Equity Interests payable solely in Equity Interests
(other than Disqualified Stock), times (B) a fraction, the numerator of which
is one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a Person controlled or supervised
by and acting as an agency or instrumentality of the United States of America
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such
105
<PAGE>
Person) and, to the extent not otherwise included, the Guarantee by such
Person of any indebtedness of any other Person. The amount of any Indebtedness
outstanding as of any date shall be (i) the accreted value thereof, in the
case of any Indebtedness that does not require current payments of interest,
and (ii) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Limitation on Restricted Payments." Investments
will exclude extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices.
"Issuance Date" means the closing date for the sale and original issuance of
the Old Notes under the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) and (ii)
any extraordinary gain or loss, together with any related provision for taxes
on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than indebtedness under the Senior
Credit Facilities or Acquisition Facility) secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including and undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
106
<PAGE>
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means (a) with respect to the Senior Notes, any
Indebtedness which ranks pari passu in right of payment to the Senior Notes
and (b) with respect to any Subsidiary Guarantee, any Indebtedness which ranks
pari passu in right of payment to such Subsidiary Guarantee.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is a Subsidiary
Guarantor and that is engaged in the same or a similar line of business as the
Company and its Restricted Subsidiaries were engaged in on the date of the
Indenture; (b) any Investment in Cash Equivalents; (c) any Investment by the
Company or any Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company and a Subsidiary Guarantor that is engaged in the same or a similar
line of business as the Company and its Restricted Subsidiaries were engaged
in on the date of the Indenture or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company that is a Subsidiary Guarantor and that is engaged
in the same or a similar line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of the Indenture; (d) any Investment
made as a result of the receipt of non-cash consideration from an Asset Sale
that was made pursuant to and in compliance with the covenant described above
under the caption "--Certain Covenants--Limitation on Asset Sales"; (e) any
Investment in the same or substantially similar line of business as the
Company or any of its Restricted Subsidiaries acquired solely in exchange for
Equity Interests (other than Disqualified Stock) of the Company; (f) Hedging
Obligations permitted to be incurred under the covenant described above under
the caption "--Certain Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock"; and (g) other Investments in any Person having
an aggregate fair market value (measured on the date each such Investment was
made and without giving effect to subsequent changes in value), when taken
together with all other Investments made pursuant to this clause (g) that are
at the time outstanding, not to exceed $2.0 million.
"Permitted Liens" means (i) Liens securing Senior Indebtedness of the
Company and any Subsidiary Guarantor that was permitted by the terms of the
Indenture to be incurred; (ii) Liens in favor of the Company or any Wholly
Owned Restricted Subsidiary of the Company; (iii) Liens on property of a
Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
purchase money security interests on any property acquired by the Company or
any Subsidiary in the ordinary course of business, securing Indebtedness
incurred or assumed for the purpose of financing all or any part of the cost
of acquiring such property; provided that (a) any such Lien attached to such
property concurrently with or within 90 days after the acquisition thereof,
(b) such Lien attaches solely to the property so acquired in such transaction,
(c) the principal amount of the Indebtedness secured thereby does not exceed
100% of the cost of such property and (d) the Indebtedness secured by such
purchase money security interests is otherwise permitted by the covenant
entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (vii) Liens existing on the date of the Indenture; (viii)
Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (ix) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries; and
(x) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $2.0 million at any one time outstanding and that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances
107
<PAGE>
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of, such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date no earlier than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Senior Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Senior
Notes on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded, except that the Company may incur Permitted
Refinancing Indebtedness to extend, refinance, renew, replace, defease or
refund, Indebtedness of any Wholly Owned Restricted Subsidiary of the Company.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"preferred stock" means any Equity Interest with, preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Principals" means (i) Gregg L. Engles, (ii) Joseph P. Urso, (iii) Todd W.
Follmer, (iv) David A. Sachs, (v) CIBC Wood Gundy Ventures, Inc., (vi) Onyx
Talton Partners, L.P., (vii) Regent Capital Equity Partners, L.P., (viii)
Julius E. Talton, or (ix) Julius E. Talton, Jr.
"Related Party" with respect to any Principal means (A) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal, (B) or trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners, or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A), or (C) the estate of such
Principal until such estate is distributed pursuant to such Principal's will
or applicable state law.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facilities" means, collectively, (i) that certain Senior
Credit Facility to be entered into on the terms described herein and (ii) a
senior credit facility to be entered into subsequent to the Issuance Date for
permitted acquisitions by the Company or its Restricted Subsidiaries on the
terms described herein, in each case by and among the Company and the lenders
from time to time parties thereto and Canadian Imperial Bank of Commerce, as
agent for such lenders, including any related notes, guarantees, collateral
documents, instruments, and agreements executed in connection therewith, and
in each case as amended, modified, renewed, refunded, replaced, or refinanced
from time to time.
108
<PAGE>
"Senior Indebtedness" means all Indebtedness of the Company or any
Subsidiary Guarantors that is not, by its terms, subordinated in right of
payment to the Senior Notes.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem, or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subordinated Indebtedness" means (a) with respect to the Senior Notes, any
Indebtedness of the Company which is by its terms subordinated in right of
payment to the Senior Notes and (b) with respect to any Subsidiary Guarantee,
any Indebtedness of the applicable Subsidiary Guarantor which by its terms is
subordinated in right of payment to such Subsidiary Guarantee.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers,
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Subsidiary Guarantors" means each of (i) AmeriTel Pay Phones, Inc., Talton
Telecommunications Corporation, Talton Telecommunications of Carolina, Inc.,
Talton STC, Inc., and Talton Invision, Inc., and (ii) any other subsidiary
that executes a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns.
"Talton Lease" means the lease dated as of December 27, 1996 between Julius
E. Talton and Talton Telecommunications Corporation.
"Unrestricted Subsidiary" means (i) any Subsidiary (other than AmeriTel or
Talton Telecommunications or any successor to any of them) that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Limitation on
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness and Liens of such Subsidiary shall be deemed to
be incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness or any such Lien is not permitted to be incurred as of such
date under the covenant described under the caption "--Certain Covenants--
Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock" or
the covenant described under the caption "--Certain Covenants--Limitation on
Liens," respectively, the Company shall be in default of such covenant).
109
<PAGE>
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness and Liens by a
Restricted Subsidiary of the Company of any outstanding Indebtedness and Liens
of such Unrestricted Subsidiary and such designation shall only be permitted
if (i) such Indebtedness is permitted under the covenant described under the
caption "--Certain Covenants--Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, (ii) such Liens are permitted under the covenant described under the
caption "--Certain Covenants--Limitation on Liens," and (iii) no Default or
Event of Default would be in existence following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth that will elapse
between such date and the making of such payment by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more wholly Owned Restricted
Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes will initially be
issued in the form of one or more registered notes in global form (the "New
Global Note," and together with the global notes representing the Old Notes,
the "Global Note"). The New Global Note will be deposited on the Exchange Date
with, or on behalf of, the Depositary and registered in the name of the Global
Note Holder. See "Exchange Offer."
DTC has advised the Company that DTC is a limited-purpose trust company that
was created to hold securities for its participating organizations
(collectively, the "Participants") and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers (including the Initial
Purchaser), banks, trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants
may beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests and
transfer of ownership interests of each actual purchaser of each security held
by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Notes). Holders
are advised that the laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to such extent. Because DTC can act only on
behalf of
110
<PAGE>
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in a Global Note to
pledge such interests to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such interests, may be
affected by the lack of a physical certificate evidencing such interests.
Payments in respect of the principal of and premium, and interest on a
Global Note registered in the name of DTC or its nominee will be payable by
the Trustee to DTC in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Senior Notes, including the Global Notes,
are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Senior Notes
(including principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the principal amount of beneficial interests in
the relevant security as shown on the records of DTC unless DTC has reason to
believe it will not receive payment on such payment date. Payments by the
Participants and the Indirect Participants to the beneficial owners of Senior
Notes will be governed by standing instructions and customary practices and
will be the responsibility of the Participants or the Indirect Participants
and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Senior Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED SENIOR NOTES
A Global Note is exchangeable for definitive Senior Notes in registered
certificated form if (i) DTC (a) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Note and the Company thereupon
fails to appoint a successor depositary or (b) has ceased to be a clearing
agency registered under the Exchange Act, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of the
Senior Notes in certificated form or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of
time or both would be an Event of Default with respect to the Senior Notes. In
addition, beneficial interests in a Global Note may be exchanged for
certificated Senior Notes upon request but only upon at least 20 days prior
written notice given to the Trustee by or on behalf of DTC in accordance with
its customary procedures. In all cases, certificated Senior Notes delivered in
exchange for any Global Note or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested
by or on behalf of the depositary (in accordance with its customary
procedures) and will bear a restrictive legend unless the Company determines
otherwise in compliance with applicable law.
EXCHANGE OF CERTIFICATED SENIOR NOTES FOR BOOK ENTRY NOTES
Senior Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the
Trustee a written certificate (in the form provided in the Indenture) to the
effect that such transfer will comply with the appropriate transfer
restrictions applicable to such Senior Notes as provided in the Indenture.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Senior Notes, and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depositary for all purposes.
111
<PAGE>
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Senior Notes
represented by the Global Note (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Senior Notes in
definitive certificated form, the Company will make all payments of principal,
premium, if any, and interest, by wire transfer of immediately available funds
to the accounts specified by the Holders thereof or, if no such account is
specified, by mailing a check to each such Holder's registered address.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-houses or next-day funds. The Company expects
that secondary trading in the certificated notes will also be settled in
immediately available funds.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain federal income tax
considerations relevant to the exchange of the Old Notes for the New Notes,
but does not purport to be a complete analysis of all potential tax effects.
The discussion is based upon the United States Internal Revenue Code of 1986,
as amended, (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and pronouncements and judicial decisions now in effect, all
of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a holder of the New Notes. The following
discussion assumes that holders hold the Old Notes and the New Notes as
capital assets within the meaning of Section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the exchange of the Old Notes for the New Notes or that any
such position would not be sustained.
The tax treatment of a holder may vary depending on his or its particular
situation or status. This summary does not address the tax consequences to
taxpayers who are subject to special rules such as insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign entities
and individuals, persons holding Old Notes or New Notes as a part of a hedging
or conversion transaction or a straddle and holders whose "functional
currency" is not the U.S. dollar, or aspects of federal income taxation that
may be relevant to a prospective investor based upon such investor's
particular tax situation. In addition, the description does not consider the
effect of any applicable foreign, state, local or other tax laws.
EACH HOLDER SHOULD CONSULT HIS OR ITS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OR IT OF EXCHANGING OLD NOTES FOR NEW NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE
The exchange of the New Notes for Old Notes will not constitute a
recognition event for federal income tax purposes. Consequently, no gain or
loss will be recognized by holders upon receipt of the New Notes. For purposes
of determining gain or loss upon the subsequent exchange of New Notes, a
holder's basis in the New Notes will be the same as a holder's basis in the
Old Notes exchanged therefor. Holders will be considered to have held the New
Notes from the time of their original acquisition of the Old Notes. As used
herein, the term "Senior Note" refers to both an Old Note and a New Note
received in exchange therefor.
INTEREST ON THE NEW NOTES
A holder of a New Note will be required to report as income for federal
income tax purposes interest earned on a New Note in accordance with the
holder's method of tax accounting. A holder of a New Note using the accrual
method of accounting for tax purposes is, as a general rule, required to
include interest in ordinary income as such interest accrues. A cash basis
holder must include interest in income when cash payments are received by (or
made available to) such holder.
112
<PAGE>
MARKET DISCOUNT
If a holder acquired an Old Note at a market discount (i.e., at a price less
than the stated redemption price at maturity of the Old Note), the Old Note is
subject to the market discount rules of the Code unless the market discount is
de minimis. Market discount is de minimis if it is less than one quarter of
one percent of the principal amount of the Old Note multiplied by the number
of complete years to maturity after the holder acquired the Old Note. If the
holder exchanges an Old Note that has more than de minimis market discount for
a New Note, the New Note also will be subject to the market discount rules of
the Code. New Notes purchased by a subsequent purchaser also will be subject
to the market discount rules if the New Notes are purchased with more than a
de minimis amount of market discount. Notes that have more than de minimis
market discount are herein referred to as "Market Discount Notes."
Any gain recognized on the maturity or disposition of a Market Discount Note
will be treated as ordinary income to the extent that such gain does not
exceed the accrued market discount on the Market Discount Note. Alternatively,
a holder may elect to include market discount in income currently over the
life of the Market Discount Note. Such an election shall apply to all debt
instruments with market discount acquired by the holder on or after the first
day of the first taxable year to which the election applies. This election may
not be revoked without the consent of the IRS.
Market discount will accrue on a straight-line basis unless the holder
elects to accrue market discount on a constant yield to maturity basis. Such
an election shall apply only to the Market Discount Note with respect to which
it is made and may not be revoked without the consent of the IRS. A holder who
does not elect to include market discount in income currently generally will
be required to defer deductions for interest on borrowings allocable to a
Market Discount Note in an amount not exceeding the accrued market discount on
the Market Discount Note until the maturity or disposition of the Market
Discount Note.
AMORTIZABLE BOND PREMIUM
A holder that purchased an Old Note for an amount in excess of its principal
amount may elect to treat such excess as "amortizable bond premium," in which
case the amount required to be included in the holder's income each year with
respect to interest on the Old Note will be reduced by the amount of
amortizable bond premium allocable (based on the yield to maturity of the Old
Note) to such year. If a holder made an election to amortize bond premium with
respect to an Old Note and exchanges the Old Note for a New Note pursuant to
the Exchange Offer, the election will apply to the New Note. A holder who
exchanges an Old Note for which an election has not been made for a New Note,
and a subsequent purchaser of a New Note, may also elect to amortize bond
premium if the holder acquired the Note for an amount in excess of its
principal amount. Any election to amortize bond premium shall apply to all
bonds (other than bonds the interest on which is excludable from gross income)
held by the holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the holder, and is irrevocable
without the consent of the IRS.
DISPOSITION OF THE NOTES
Subject to the market discount rules discussed above, a holder of Senior
Notes will recognize gain or loss upon the sale, redemption, retirement or
other disposition of such securities equal to the difference between (i) the
amount of cash and the fair market value of the property received (except to
the extent attributable to the payment of accrued interest) and (ii) the
holder's adjusted tax basis in the securities. Gain or loss recognized will be
capital gain or loss provided the Notes are held as capital assets by the
holder, and will be subject to income tax at rates that may be lower than the
rate at which ordinary income is taxed, depending on the length of time that
the holder has held such securities (or is treated as having held such
securities).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Holders of the Senior Notes may be subject to backup withholding at a rate
of 31% with respect to interest paid on the Senior Notes unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number, certifies as to
113
<PAGE>
no loss of exemption from backup withholding and otherwise complies with the
requirements of the backup withholding rules.
The Company will report to the holders of the Senior Notes and the IRS the
amount of any "reportable payment" for each calendar year and amount of tax
withheld, if any, with respect to payments on the Senior Notes.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER
SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT
OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE SENIOR NOTES (INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS).
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this Prospectus available to any
broker-dealer for use in connection with any such resale for a period of 365
days after the Expiration Date or until all participating broker-dealers have
so resold.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concession from any
such broker-dealer and/or the purchasers of any New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant
to the Exchange Offer and any broker-dealer that participates in a
distribution of New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any resale of New Notes and
any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and
to the best of the Company's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
LEGAL MATTERS
Certain legal matters in connection with this Offering will be passed upon
for the Company by Hughes & Luce, L.L.P., Dallas, Texas.
114
<PAGE>
EXPERTS
The consolidated financial statements of Talton Holdings, Inc. as of
December 3l, 1996 and for the one- month period from December 1, 1996 (date of
acquisition) to December 31, 1996; the financial statements of AmeriTel Pay
Phones Inc. as of November 30, 1996 and for the eleven months ended November
30, 1996; the consolidated financial statements of Talton Telecommunications
Corporation as of November 30, 1996 and for the eleven months ended November
30, 1996; the consolidated financial statements of Security Telecom
Corporation as of June 30, 1997 and for the six months ended June 30, 1997;
and the financial statements of InVision Telecom, Inc. as of December 31, 1996
and September 30, 1997 and for each of the two years ended December 31, 1995
and 1996, and for the nine months ended September 30, 1997 appearing in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their reports appearing herein and are included in reliance upon
the reports of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of AmeriTel Pay Phones, Inc. as of December 31,
1995 and for each of the two years in the period ended December 31, 1995
included in this Prospectus have been audited by Arthur Andersen LLP,
independent auditors, as stated in their reports herein and are included in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Talton Telecommunications Corporation as of
December 31, 1995 and for each of the two years in the period ended December
31, 1995 appearing in this Prospectus have been audited by Borland, Benefield,
Crawford & Webster, P.C., independent auditors, as stated in their report
appearing herein and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Security Telecom Corporation as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus have been audited by Davis, Clark and
Company, P.C., independent auditors, as stated in their report appearing
herein and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Correctional Communications Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus have been audited by Ginsberg,
Weiss & Company, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under "Prospectus Summary"; "Risk Factors"; "Pro Forma
Combined Financial Data"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; "Business"; and elsewhere in this
Offering Memorandum constitute forward-looking statements, which involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company, or
industry results, to be materially different from any future results, levels
of activity, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: general
economic and business conditions; the ability of the Company to implement its
business and acquisition strategy, including the ability to integrate recently
acquired businesses into the Company; the ability of the Company to meet its
debt service obligations and to obtain additional financing for general
corporate and other purposes; changes in the telecommunications industry;
competition; availability of key personnel; and changes in, or the failure to
comply with government regulations. See "Risk Factors." As a result of the
foregoing and other factors, no assurance can be given as to future results,
levels of activity and achievements and neither the Company nor any other
person assumes responsibility for the accuracy and completeness of these
statements.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TALTON HOLDINGS, INC.
Independent Auditors' Report--Deloitte & Touche LLP...................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
AMERITEL PAY PHONES, INC.
Independent Auditors' Report--Deloitte & Touche LLP...................... F-18
Independent Auditors' Report--Arthur Andersen LLP........................ F-19
Balance Sheets........................................................... F-20
Statements of Income..................................................... F-21
Statements of Stockholders' Equity....................................... F-22
Statements of Cash Flows................................................. F-23
Notes to Financial Statements............................................ F-24
TALTON TELECOMMUNICATIONS CORPORATION
Report of Independent Auditors--Deloitte & Touche LLP.................... F-34
Report of Independent Auditors--Borland, Benefield, Crawford & Webster,
P.C. ................................................................... F-35
Consolidated Balance Sheets.............................................. F-36
Consolidated Statements of Operations.................................... F-37
Consolidated Statements of Stockholders' Equity.......................... F-38
Consolidated Statements of Cash Flows.................................... F-39
Notes to Consolidated Financial Statements............................... F-40
SECURITY TELECOM CORPORATION
Report of Independent Auditors--Deloitte & Touche LLP.................... F-46
Report of Independent Auditors--Davis, Clark and Company, P.C. .......... F-47
Consolidated Balance Sheets.............................................. F-48
Consolidated Statements of Income........................................ F-49
Consolidated Statements of Stockholders' Equity.......................... F-50
Consolidated Statements of Cash Flows.................................... F-51
Notes to Consolidated Financial Statements............................... F-52
CORRECTIONAL COMMUNICATIONS CORPORATION
Report of Independent Auditors--Ginsberg, Weiss & Company................ F-58
Balance Sheets........................................................... F-59
Statements of Income..................................................... F-60
Statements of Stockholders' Equity....................................... F-61
Statements of Cash Flows................................................. F-62
Notes to Financial Statements............................................ F-63
INVISION TELECOM, INC.
Report of Independent Auditors--Deloitte & Touche LLP.................... F-68
Balance Sheets........................................................... F-69
Statements of Operations................................................. F-70
Statements of Stockholder's Equity (Deficit)............................. F-71
Statements of Cash Flows................................................. F-72
Notes to Financial Statements............................................ F-73
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Talton Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Talton
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the one-month period from December 1, 1996 (date
of acquisition) to December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Talton Holdings,
Inc. and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the one-month period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 4, 1997
(December 29, 1997 as to Note 13)
F-2
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 294,494 $ 16,587,601
Accounts receivable.............................. 7,346,270 12,683,005
Refundable income taxes.......................... 601,842 612,136
Inventories...................................... 941,819 1,010,951
Prepaid expenses................................. 259,984 676,243
Deferred income tax asset........................ 673,259 447,135
------------ ------------
Total current assets........................... 10,117,668 32,017,071
PROPERTY AND EQUIPMENT............................. 7,969,134 13,728,265
INTANGIBLE AND OTHER ASSETS........................ 62,046,732 83,435,701
------------ ------------
TOTAL.......................................... $ 80,133,534 $129,181,037
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................. $ 1,369,697 $ 3,173,299
Accrued expenses................................. 6,021,241 12,147,922
Income taxes payable............................. 978,000
Current portion of long-term debt................ 3,150,000 38,047
------------ ------------
Total current liabilities...................... 11,518,938 15,359,268
LONG-TERM DEBT..................................... 60,164,500 115,559,851
DEFERRED INCOME TAXES.............................. 1,968,767 447,135
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value; 6,000 shares
authorized, 5,925 shares issued and outstanding
(cumulative liquidation value of $5,925,000).... 59 59
Common stock, $.01 par value; 50,000 shares
authorized, 15,300 shares and 16,200 shares
issued and outstanding as of December 31, 1996
and September 30, 1997, respectively............ 153 162
Additional paid-in capital....................... 21,610,972 22,155,463
Retained earnings (deficit)...................... (15,129,855) (24,340,901)
------------ ------------
Total stockholders' equity (deficit)........... 6,481,329 (2,185,217)
------------ ------------
TOTAL.......................................... $ 80,133,534 $129,181,037
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ONE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUE................................... $5,506,110 $53,406,700
OPERATING EXPENSES:
Telecommunication costs........................... 2,298,712 21,570,606
Facility commissions.............................. 1,455,375 14,419,123
Field operations and maintenance.................. 218,895 2,373,432
Selling, general and administrative............... 372,341 4,462,349
Depreciation...................................... 110,803 1,071,827
Amortization of intangibles....................... 741,032 7,787,607
---------- -----------
Total operating expense......................... 5,197,158 51,684,944
---------- -----------
OPERATING INCOME.................................... 308,952 1,721,756
OTHER (INCOME) EXPENSE:
Interest expense, net............................. 612,071 7,320,330
Other, net........................................ (20,490) (126,082)
---------- -----------
Total other (income) expense.................... 591,581 7,194,248
---------- -----------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY LOSS .... (282,629) (5,472,492)
INCOME TAX EXPENSE (BENEFIT)........................ (22,502) (657,127)
---------- -----------
LOSS BEFORE EXTRAORDINARY ITEM...................... $ (260,127) $(4,815,365)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT........... -- 4,395,681
---------- -----------
NET LOSS............................................ $ (260,127) $(9,211,046)
Preferred Stock Dividends........................... -- (355,500)
---------- -----------
NET LOSS APPLICABLE TO COMMON STOCK................. $ (260,127) $(9,566,546)
========== ===========
Primary Loss per Common Share:
Net Loss before extraordinary loss.................. (14.38) (281.01)
Extraordinary loss.................................. -- (238.88)
---------- -----------
Net Loss per common share........................... (14.38) (519.89)
========== ===========
Weighted average shares outstanding................. 18,089 18,401
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
----------------- ------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- ------- ------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF PREFERRED
STOCK.................. 5,925 $ 59 $ 5,924,941 $ 5,925,000
ISSUANCE OF COMMON
STOCK.................. 15,300 153 15,686,031 15,686,184
PORTION OF ACQUISITION
CASH PAYMENTS TO
CONTINUING
STOCKHOLDERS, TREATED
AS A DIVIDEND.......... (14,869,728) (14,869,728)
NET LOSS................ (260,127) (260,127)
-------- ------ ------ ---- ----------- ------------ ------------
BALANCE, DECEMBER 31,
1996................... 5,925 $ 59 15,300 $153 $21,610,972 $(15,129,855) $ 6,481,329
PREFERRED DIVIDENDS
(UNAUDITED)............ (355,500) (355,500)
ISSUANCE OF COMMON
STOCK(UNAUDITED)....... 900 9 899,991 900,000
NET LOSS (UNAUDITED).... (9,211,046) (9,211,046)
-------- ------ ------ ---- ----------- ------------ ------------
BALANCE, SEPTEMBER 30,
1997 (UNAUDITED)....... 5,925 $ 59 16,200 $162 $22,155,463 $(24,340,901) $ (2,185,217)
======== ====== ====== ==== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ONE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (260,127) $ (9,211,046)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation..................................... 110,803 1,071,827
Amortization of intangible assets, including
deferred financing costs and bond discount...... 803,023 8,292,220
Extraordinary loss on debt extinguishment........ -- 4,395,681
Deferred income taxes............................ 160,512 (1,295,508)
Changes in operating assets and liabilities, net
of effects of acquisitions:
Accounts receivable............................. 44,823 (3,414,072)
Inventories..................................... 12,013 (43,034)
Prepaid expenses and other assets............... (166,096) (256,669)
Accounts payable................................ (1,010,795) (402,748)
Accrued expenses................................ (718,313) 2,900,035
Income taxes.................................... (394,963) (988,294)
------------ ------------
Net cash (used in) provided by operating
activities.................................... (1,419,120) 1,048,392
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash....................... -- (1,693,000)
Capital expenditures.............................. (268,801) (4,456,785)
Cash outflows for acquisitions.................... (46,983,442) (21,576,079)
------------ ------------
Net cash used in investing activities.......... (47,252,243) (27,725,864)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt................ 59,200,000 118,200,000
Repayment of advances............................. -- (850,400)
Repayment of debt................................. (15,912,706) (67,422,318)
Payments of deferred financing costs.............. (3,804,121) (6,956,703)
Proceeds from the issuance of common and preferred
stock, net of expenses........................... 9,482,684 --
------------ ------------
Net cash provided by financing activities...... 48,965,857 42,970,579
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS.............. 294,494 16,293,107
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... -- 294,494
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 294,494 $ 16,587,601
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ 640,035 $ 3,764,113
============ ============
Cash paid for income taxes........................ $ 211,950 $ 1,495,902
============ ============
NONCASH TRANSACTION:
Issuance of subordinate notes, preferred stock and
common stock in the acquisition.................. $ 16,043,000 $ --
============ ============
Reduction of stockholders' equity to reflect
continuing shareholder interests................. $(14,869,728) $ --
============ ============
Dividends payable................................. $ -- $ 355,500
============ ============
Issuance of stock for acquisition of assets....... $ -- $ 900,000
============ ============
Issuance of debt for acquisition of assets........ $ -- $ 300,000
============ ============
Amounts payable for acquisition costs............. $ -- $ 3,386,919
============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Talton Holdings, Inc. (the "Company") was incorporated on November
20, 1996, and, effective December 1, 1996, acquired all of the outstanding
equity interests of Talton Telecommunications Corporation and AmeriTel Pay
Phones, Inc., as discussed in Note 2. Effective with the acquisitions, the
Company became a holding company to these two operating companies, which own,
operate and maintain telephone systems under contracts with correctional
facilities in 33 states, with the majority of their installations in the
Central and Southeastern United States.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services for smaller volume
LECs, all of which are granted credit in the normal course of business with
terms of between 30 and 60 days. The Company performs ongoing credit
evaluations of its customers and maintains allowances for unbillable and
uncollectible losses based on historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
and reserves for unbillable and uncollectible chargebacks, that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Talton Telecommunications Corporation and AmeriTel Pay Phones,
Inc. All significant intercompany balances and transactions are eliminated in
consolidation.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and investments with a remaining
maturity at date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of advance payments received, and an
allowance for unbillable and uncollectible calls, based on historical
experience, for estimated chargebacks to be made by the LECs. Under account
advance agreements with various third-party billing services, advance payments
equal to a percentage of the outstanding billed receivables are remitted to
the Company when calls are submitted to the third-party billing service, and
the Company grants a lien to the third-party billing service on the related
accounts receivable for the advance. The remainder of the billed receivable is
paid to the Company, net of the advance amount, after the third-party billing
service has collected the amounts receivable from the respective LECs.
Interest is charged on the advance payment at varying rates.
INVENTORIES--Inventories are stated at the lower of cost, as determined
primarily using the weighted average cost method, or market. Inventory is
primarily composed of equipment for installation on new contracts and supplies
and parts for the telephone systems serviced by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment.
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- -------------
<S> <C>
Leasehold improvements...................................... Term of lease
Telephone system equipment.................................. 7.5 years
Vehicles.................................................... 3 years
Office equipment............................................ 3 to 7 years
</TABLE>
F-7
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts, and the net difference less any amount realized
from the disposition is reflected in earnings.
INTANGIBLE AND OTHER ASSETS--Intangible and other assets primarily include
amounts allocated to acquired facility contracts, noncompete agreements,
goodwill and other intangible assets, which are stated at cost, along with the
long-term portion of customer advances. Amortization of intangible assets is
provided on a straight-line basis over the estimated useful lives of the
related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
Deferred loan costs........................................ Loan term
Other intangibles.......................................... 2 to 5 years
Goodwill................................................... 20 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with signing bonuses paid to the facilities under new
facility installations and other incremental direct costs paid to obtain the
facility contracts.
Other intangibles include organizational costs and licensing fees to obtain
state licenses to conduct business.
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flow, undiscounted and without interest charges, to the
carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--The Company accounts for income taxes using the liability
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are provided for temporary differences
between the financial statement and tax bases of the assets and liabilities
using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long-distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," includes
primarily cash and cash equivalents, accounts receivable, accounts payable and
long-term debt. The Company believes that the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and long-term debt are
a reasonable estimate of their fair
F-8
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value because of the short-term maturities of such instruments or, in the case
of long-term debt under the Senior Credit Agreement, because of the floating
interest rates on such long-term debt. In the case of the Company's senior
subordinated and subordinated notes, which bear fixed interest rates, subject
to scheduled increases, the Company believes that the interest rates on these
notes approximate fair value since they were established in December 1996.
LOSS PER SHARE--The Company computes earnings per share based on the
weighted average number of common shares outstanding during the year,
including common equivalent shares, when dilutive.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of
September 30, 1997 and the statements of operations and cash flows for the
nine months ended September 30, 1997, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the financial
position and results of operations and cash flows of the Company as of
September 30, 1997 and for the nine months ended September 30, 1997, have been
made. The financial position and results of operations for the interim period
are not necessarily indicative of the results to be expected for the full
years.
2. ACQUISITIONS
Effective December 1, 1996, the Company acquired all of the outstanding
equity interests of Talton Telecommunications Corporation and AmeriTel Pay
Phones, Inc. The aggregate net purchase price was approximately $47.9 million,
which was funded with the net proceeds from the issuance of common and
preferred stock and the proceeds from the issuance of long-term debt.
The above acquisitions were accounted for using the purchase method of
accounting as of their respective acquisition dates and, accordingly, only the
results of operations of the acquired companies subsequent to their respective
acquisition dates are included in the consolidated financial statements of the
Company. At the acquisition date, the purchase price was allocated to assets
acquired, including identifiable intangibles, and liabilities assumed based on
their fair market values. The excess of the total purchase prices over the
fair value of the net assets acquired represents goodwill. In connection with
the acquisitions, assets were acquired and liabilities were assumed as
follows:
<TABLE>
<S> <C>
Purchase prices:
Net cash paid............................................. $ 46,983,442
Subordinated notes, preferred stock and common stock
issued to sellers, net of expenses....................... 15,768,624
Portion of purchase price for continuing stockholders,
treated as a dividend.................................... (14,869,728)
------------
Total net purchase prices................................ 47,882,338
Fair values of net assets acquired:
Fair values of assets acquired............................ 35,987,320
Liabilities assumed....................................... (27,864,398)
------------
Total net assets acquired................................ 8,122,922
------------
Goodwill................................................... $ 39,759,416
============
</TABLE>
Since certain of the stockholders of the Company held ownership interests in
the acquired companies, their continuing ownership interest in the Company has
been accounted for at their prior historical basis, which has resulted in a
reduction in stockholders' equity of approximately $14.9 million and a
corresponding reduction in the fair values assigned to tangible and
identifiable intangible assets, in accordance with the provisions of Emerging
Issue Task Force discussion No. 88-16, "Basis in Leveraged Buyout
Transactions."
Please refer to footnote 13 for a discussion of the Company's acquisitions
which were consummated subsequent to December 31, 1996.
F-9
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable, net of advance payments
received of $1,188,671 and $338,271 at December 31,
1996 and September 30, 1997, respectively.......... $ 7,975,016 $12,637,119
Advance commissions receivable...................... 349,094 380,971
Amounts receivable from stockholders................ 135,627 154,635
Employees and other................................. 11,556 221,977
----------- -----------
8,471,293 13,394,702
Less allowance for unbillable and uncollectible
chargebacks........................................ (1,125,023) (711,697)
----------- -----------
$ 7,346,270 $12,683,005
=========== ===========
</TABLE>
At December 31, 1996 and September 30, 1997, the Company had advanced
commissions to certain facilities of $835,641 and $771,322 (unaudited) which
are recoverable from such facilities as a reduction of earned commissions at
specified monthly amounts. Amounts included in accounts receivable represent
the estimated recoverable amounts during the next fiscal year with the
remaining balance recorded in other assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements............................... $ 432,036 $ 472,079
Telephone system equipment........................... 7,259,333 13,187,984
Vehicles............................................. 123,977 236,377
Office equipment..................................... 264,591 1,014,455
---------- -----------
8,079,937 14,910,895
Less accumulated depreciation........................ (110,803) (1,182,630)
---------- -----------
$7,969,134 $13,728,265
========== ===========
</TABLE>
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts.................... $18,440,124 $30,696,912
Noncompete agreements........................... 303,611 403,611
Deferred loan costs............................. 3,804,121 5,839,642
Goodwill........................................ 39,759,416 53,040,078
Other intangibles............................... 55,936 467,350
----------- -----------
62,363,208 90,447,593
Less accumulated amortization.................... (803,023) (9,095,243)
----------- -----------
Total intangible assets........................... 61,560,185 81,352,350
Other assets--noncurrent portion of commission
advances to facilities........................... 486,547 390,351
Restricted cash................................... -- 1,693,000
----------- -----------
$62,046,732 $83,435,701
=========== ===========
</TABLE>
F-10
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Facility commissions............................ $2,034,070 $ 2,880,829
Billing and collection fees..................... 455,517 471,697
Uncollectible call chargebacks.................. 840,000 1,091,233
Long-distance charges........................... 1,428,148 1,000,314
Accrued acquisition costs....................... 1,068,124 2,959,829
Accrued interest................................ 9,946 3,265,914
Other........................................... 185,436 478,106
---------- -----------
$6,021,241 $12,147,922
========== ===========
</TABLE>
The accrual for uncollectible call chargebacks represents a reserve for
amounts collected from the various LECs or third-party billing services which
are expected to be charged back to the Company in future periods.
7. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Senior Notes.................................. $ -- $115,000,000
Senior Credit Agreement:
Revolving loan facility..................... 5,700,000
Term loan facility.......................... 45,000,000
Senior subordinated notes..................... 8,500,000
Subordinated notes............................ 5,000,000
Other......................................... 200,000 597,898
----------- ------------
64,400,000 115,597,898
Less unamortized discount..................... (1,085,500)
Less current portion of long-term debt........ (3,150,000) (38,047)
----------- ------------
$60,164,500 $115,559,851
=========== ============
</TABLE>
SENIOR CREDIT AGREEMENT--In December 1996, the Company entered into a Senior
Credit Agreement with a group of lenders, which included a revolving loan
facility and a term loan facility. Under the revolving loan facility, the
Company has availability of up to $10 million, subject to certain
restrictions. The revolving loan facility matures on December 27, 1998, and
requires quarterly interest payments beginning March 31, 1997.
The term loan facility is a $45 million facility, which requires quarterly
interest payments beginning on March 31, 1997, and quarterly principal
installments, beginning on September 30, 1997, of $1,575,000 through December
1997, decreasing to $1,462,500 on March 31, 1998, and increasing to $2,137,500
on March 31, 1999, $2,868,750 on March 31, 2000, and $3,993,750 on March 31,
2001, with the remaining unpaid balance due on December 27, 2001. These
scheduled payments under the term loan facility are subject to mandatory
prepayments beginning March 31, 1998, based on excess cash flows as defined in
the Senior Credit Agreement.
Amounts outstanding under both the revolving loan facility and the term loan
facility bear interest based on one of the following rates at the Company's
option: (i) a variable rate equal to the higher of the administrative agent's
established commercial lending rate or the federal funds rate plus 0.5% or
(ii) a variable rate based on
F-11
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the LIBO (London Interbank Offering) rate. The Company pays a commitment fee
to the lenders at the rate of 0.5% per annum on the average daily unused
portion of the commitment amounts for both the revolving loan and term loan
facilities.
Both the revolving and term loan facilities are collateralized by
substantially all the assets of the Company.
SENIOR SUBORDINATED NOTES--In connection with the acquisitions, the Company
issued $8.5 million of senior subordinated notes which mature on December 27,
2002, and accrue interest, payable quarterly, at an initial rate of 12% per
annum for the period from the date of issuance until March 27, 1997.
Thereafter, the interest rate increases 0.5% on a quarterly basis up to a
maximum rate of 19%. The interest rates on these notes are payable in
additional notes for interest paid in excess of 16%. In connection with the
issuance of the senior subordinated notes, stock purchase warrants to acquire
1,085 shares of the Company's Class A common stock at an exercise price of
$.01 per share were issued to certain note holders. As a result, the senior
subordinated notes were discounted from their face value by $1,085,500, which
represented the estimated value of the proceeds assigned to the warrants as
discussed in Note 9. This discount is being amortized as additional interest
expense over the term of the notes, resulting in an effective interest rate on
the senior subordinated notes of 13.76% as of December 31, 1996.
SUBORDINATED NOTES--In connection with the acquisitions, the Company issued
subordinated notes to three stockholders of the Company, which mature on
December 27, 2002, and accrue interest, payable quarterly, at an initial rate
of 12.5% per annum, for the period from the date of issuance through September
30, 1997. Thereafter, the interest rate increases 0.5% on a quarterly basis up
to a maximum rate of 19%.
COVENANTS AND OTHER--The Senior Credit Agreement contains financial and
operating covenants requiring, among other items, the maintenance of certain
financial ratios, as defined, including total debt to free cash flow, senior
debt to free cash flow and various other ratios of free cash flow to specified
minimums. In the event the Company fails to comply with the covenants and
other restrictions, as specified below, it could be in default under the
Senior Credit Agreement and substantially all of the Company's long-term
maturities could be accelerated.
In addition, the Senior Credit Agreement contains various covenants which,
among other things, limit the Company's ability to incur additional
indebtedness, restrict the Company's ability to invest in and divest of
assets, and restrict the Company's ability to pay dividends, redeem or
purchase its common stock or redeem or prepay principal and interest on its
subordinated debt.
At December 31, 1996, the scheduled maturities of long-term debt were as
follows:
<TABLE>
<S> <C>
1997........................................................... $ 3,150,000
1998........................................................... 11,550,000
1999........................................................... 8,750,000
2000........................................................... 11,475,000
2001........................................................... 15,975,000
Thereafter..................................................... 13,500,000
-----------
$64,400,000
===========
</TABLE>
Amounts outstanding under the Senior Credit Agreement, Senior Subordinated
Notes, and Subordinated Notes were repaid on June 27, 1997. Please refer to
footnote 13 for a discussion of the Company's financing transactions
subsequent to December 31, 1996.
F-12
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
A summary of the income tax benefit for the one-month period ended December
31, 1996, is as follows:
<TABLE>
<S> <C>
Refundable income taxes:
Federal........................................................ $(73,837)
State.......................................................... (10,260)
Deferred income taxes............................................ 61,595
--------
$(22,502)
========
</TABLE>
The Company has provided for income taxes during the nine months ended
September 30, 1997 using expected 1997 effective tax rates for each of its
taxing jurisdictions which have been allocated between current income taxes
payable and deferred income taxes based on anticipated 1997 temporary
differences.
The income tax benefit differs from statutory rates primarily because of
permanent differences related to nondeductible goodwill amortization. The
following is a reconciliation of the income tax benefit reported in the
statement of operations:
<TABLE>
<S> <C>
Tax benefit at statutory rates.................................. $(96,094)
Effect of state income taxes.................................... (13,284)
Effect of nondeductible goodwill amortization................... 86,876
--------
$(22,502)
========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<S> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible chargebacks..... $ 440,547
Reserves................................................... 232,712
-----------
673,259
Deferred income tax liabilities:
Depreciation and amortization.............................. (1,944,922)
Other...................................................... (23,845)
-----------
(1,968,767)
-----------
Net deferred income tax liability............................ $(1,295,508)
===========
</TABLE>
This net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<S> <C>
Current asset................................................. $ 673,259
Noncurrent liability.......................................... (1,968,767)
-----------
$(1,295,508)
===========
</TABLE>
9. STOCKHOLDERS' EQUITY
COMMON STOCK--The authorized common stock of the Company includes 49,600
shares of Class A common stock and 400 shares of Class B common stock. Holders
of the shares of Class A and Class B common stock have identical rights and
privileges except that holders of Class B common stock are entitled to four
votes per share as compared to one vote per share for holders of Class A
common stock.
F-13
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Issued and outstanding shares of common stock as of December 31, 1996
include 14,900 shares of Class A common stock and 400 shares of Class B common
stock. The Class B common stock is convertible into four shares of Class A
common stock upon the occurrence of a major event, as defined.
PREFERRED STOCK--In connection with the acquisitions as discussed in Note 2,
the Company issued 5,925 shares of senior preferred stock to former
stockholders of the acquired companies. The preferred stockholders have no
voting rights and are entitled to receive cumulative dividends at the rate of
$80 per share per annum, payable quarterly, when declared by the Board of
Directors. In the event of any liquidation, dissolution or winding up of the
Company (voluntary or involuntary), the holders of the preferred stock shall
be entitled to receive a preference over common shareholders in any
distribution of assets of the Company, equal to $1,000 per share plus
cumulative unpaid dividends. Upon the occurrence of a major event, which
includes (i) a sale of all or substantially all the assets of the Company or
(ii) a registered public offering of equity interests with gross proceeds of
at least $20 million under the Securities Act of 1933, as amended, the Company
is required to redeem the outstanding shares of preferred stock at a price
equal to $1,000 per share plus cumulative unpaid dividends. Each holder of
preferred stock is entitled to convert each preferred share into 0.08505
shares of Class A common stock, at the option of the holder, at any time after
the date of issuance and on or prior to the occurrence of a major event, as
defined.
In addition to the senior preferred stock discussed above, the Company is
authorized to issue up to 44,000 shares of junior preferred stock, of which no
shares have been issued as of December 31, 1996.
WARRANTS--At the acquisition date, the Company entered into a warrant
agreement with certain of its senior subordinated note holders, which granted
the note holders the right to purchase 1,085 shares of Class A common stock at
an exercise price of $.01 per share, which was below the market value of the
underlying shares at that date. Accordingly, as of December 31, 1996
approximately $1,085,500 of the proceeds of the senior subordinated note
borrowings have been allocated to these warrants and are recorded as
additional paid-in capital.
At the acquisition date, the Company also entered into various warrant
agreements with its other subordinated lenders along with its Class B common
shareholders which granted such holders the right to purchase 6,230 shares of
Class A common stock of the Company upon terms established by the Board of
Directors. These warrants are exercisable in whole or part, at various dates
through December 27, 2006, at warrant prices ranging from $1,000 to $3,000 per
share.
As of December 31, 1996, no warrant holders have exercised their warrants to
acquire additional shares of Class A common stock.
10. RELATED-PARTY TRANSACTIONS
A stockholder of the Company has personally guaranteed three of the
Company's operating leases, which have expiration dates ranging from March
1997 to September 1998. In addition, one of the Company's subsidiaries leased
office space from this stockholder under a month-to-month lease with monthly
rentals of $3,000. This lease expired on December 31, 1996. Subsequently, the
Company entered into a new lease agreement with the stockholder, which
requires monthly payments in 1997 of $9,083, and thereafter at agreed-upon
monthly rates through December 31, 2001, at which time the Company has an
option to extend the lease for an additional five years.
The Company entered into a management services and consulting agreement with
a company affiliated with certain stockholders, along with separate consulting
agreements with three stockholders who were formerly
F-14
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees of the acquired companies. These agreements require the payment of
aggregate minimum annual consulting fees over the next three years in the
following amounts:
<TABLE>
<S> <C>
1997.............................................................. $478,000
1998.............................................................. $468,000
1999.............................................................. $300,000
</TABLE>
These agreements also provide for the reimbursement of direct expenses along
with future payments for transaction consulting services. One of the
agreements entitles an affiliate of certain stockholders to a 1% fee based on
the gross acquisition price for any asset or stock acquisitions by the
Company. This agreement, which expires in December 1999, limits the cumulative
acquisition fees paid to this consultant to an amount not to exceed $1,250,000
over the life of the agreement.
The management services and consulting agreement has a three-year term and
is cancelable at either party's discretion, with all consulting fees under the
remaining term of the agreement to be paid upon the date of termination. The
remaining consulting agreements are cancelable only at the option of the
consultants and expire over one- and two-year terms.
In connection with these agreements, the Company paid $225,000 during the
nine months ended September 30, 1997, of which $75,000 was recorded as a
prepaid expense at September 30, 1997.
In conjunction with the formation of the Company and the consummation and
financing of the acquisitions, the Company paid transaction fees and expenses
of $1,670,000 to three companies affiliated with certain stockholders which
have been capitalized in the acquisitions.
11. BENEFIT PLAN
The Company's subsidiaries sponsor 401(k) savings plans for the benefit of
eligible full-time employees, which are qualified benefit plans in accordance
with the Employee Retirement Income Security Act (ERISA). Employees
participating in the plan can generally make contributions to the plan of up
to 15% of their compensation. The plans provide for discretionary matching
contributions by the Company of up to 50% of an eligible employee's
contribution. Total plan expense was $3,517 for the one month ended December
31, 1996. There was no plan expense during the unaudited nine months ended
September 30, 1997.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases office furniture, office space and
vehicles under various operating lease agreements. Rent expense under these
operating lease agreements was $19,900 and $198,841, respectively, during the
one-month period ended December 31, 1996 and the unaudited nine-month period
ended September 30, 1997. Minimum future rental payments under noncancelable
operating leases for each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
December 31:
1997........................................................... $238,809
1998........................................................... 208,337
1999........................................................... 129,986
2000........................................................... 93,602
2001........................................................... 95,668
--------
Total minimum future rental payments............................. $766,402
========
</TABLE>
F-15
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OTHER--In connection with the acquisitions, the Company entered into
consulting agreements with certain shareholders, which are discussed in Note
10. Additionally, the Company entered into an employment agreement with one
stockholder who was formerly an employee of one of the acquired companies. The
employment agreement has an initial term of one year and requires payment of
an annual base salary of $100,000 along with a $25,000 payment to be paid in
equal monthly installments over the first twelve months of the agreement.
The Company is subject to various legal proceedings and claims which arise
in the ordinary course of business operations. In the opinion of management,
the amount of liability, if any, with respect to these actions would not
materially affect the financial position of the Company or its results of
operation.
13. SUBSEQUENT EVENTS
On April 4, 1997, the Company acquired substantially all of the net assets
of Tri-T, Inc. (d/b/a "Tataka") for cash of $0.6 million and a contingent
payment of $0.3 million, subject to certain performance related benchmarks to
be evaluated in the future.
On June 27, 1997, the Company acquired substantially all of the net assets
of Security Telecom Corporation for cash of $9.9 million and issuance of 900
shares of the Company's Common Stock. Approximately $2.5 million of additional
purchase price was withheld at closing, pending certain regulatory approvals
and final adjustments. On June 27, 1997, in conjunction with the acquisition
of Security Telecom Corporation, the Company entered into an agreement with an
employee of Security Telecom Corporation giving the employee the right to
purchase 100 shares of the Company's Class A common stock for $2,000 per
share. The employee may elect to exercise the options after December 31, 1997
or may elect to receive a $200,000 payment in cash. The options must be
exercised by June 30, 1999. The Company has recorded this liability in the
June 30, 1997 financial statements with a corresponding increase in goodwill
resulting from the Security Telecom Acquisition.
On June 27, 1997 the Company issued $115 million of 11% Senior Notes due
2007 in a private placement under Section 144A of the Securities Act of 1933.
A portion of the proceeds of the issuance was used to repay all of the debt
outstanding under the Senior Credit Agreement, the Senior Subordinated Notes
and the Subordinated Notes and to fund the purchase of Security Telecom
Corporation. As a result of the repayment of the outstanding debt, the Company
incurred an extraordinary loss of $4.4 million resulting from the write-off of
the unamortized deferred loan costs and the unamortized discount on the Senior
Subordinated Notes. In addition, on July 30, 1997 the Company's Senior Credit
Agreement was amended to provide the Company a $35 million revolving loan
commitment with interest rates similar to the prior revolving loan commitment
and a maturity date of December 31, 2000. All of the Company's subsidiaries
(the "Subsidiary Guarantors") are fully, unconditionally, and jointly and
severally liable for the Notes. The Subsidiary Guarantors are wholly owned and
constitute all of the Company's direct and indirect subsidiaries. The Company
has not included separate financial statements of its subsidiaries because (a)
the aggregate assets, liabilities, earnings and equity of such subsidiaries
are substantially equivalent to the assets, liabilities, earnings and equity
of the Company on a consolidated basis, and (b) the Company believes that
separate financial statements and other disclosures concerning such
subsidiaries are not material to investors.
On July 31, 1997, the Company acquired all of the net assets of Correctional
Communications Corporation for a cash purchase price of $10.5 million. Of this
amount, $5.5 million is held in escrow serving as security for certain
representations and warranties made by the sellers. The acquisition agreement
also provides for a contingent payment of up to $1.5 million if certain
financial performance benchmarks are achieved in the future
F-16
<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and grants the sellers the right to acquire up to 267 shares of the Company's
common stock at a price of at least $3,000 per share.
On October 6, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of
Communications Central Inc. for $42 million subject to various adjustments as
defined in the agreement and subject to a provision for working capital of
approximately $1.2 million provided to the Company pursuant to the purchase
agreement.
On December 19, 1997, the Company's Senior Credit Agreement was amended and
restated to provide the Company a term loan acquisition agreement of $55.0
million and a revolving loan agreement of $25.0 million with a maturity date
of December 31, 2002. The revolving loan agreement includes up to a $5.0
million letter of credit. The amended and restated Senior Credit Agreement
contains interest rates similar to the prior revolving loan commitment. The
Senior Credit Agreement requires the Company to make quarterly interest-only
payments on the revolving loan and term loan. In addition, the Company is
required to make quarterly payments of principal amounts for the term loan
beginning at September 1998.
On December 19, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of
Peoples Telephone Company, Inc. for $10.6 million with the assumption of
certain liabilities. The acquisition agreement also provides for payment of
certain deferred compensation if certain financial results are obtained in the
future.
On December 29, 1997, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate pay-phone division of North
American InTeleCom, Inc. from TSC Communications Corporation for a cash
purchase price of $6.5 million with the assumption of certain liabilities
approximating $650,000. The acquisition agreement also provides for a
contingent payment of up to $1.0 million if certain inmate agreements and
financial results are obtained in the future.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
AmeriTel Pay Phones, Inc.:
We have audited the accompanying balance sheet of AmeriTel Pay Phones, Inc.
(the "Company"), as of November 30, 1996, and the related statements of
income, stockholders' equity and cash flows for the eleven months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AmeriTel Pay Phones, Inc., as of November
30, 1996, and the results of its income and its cash flows for the eleven
months then ended, in conformity with generally accepted accounting
principles.
Deloitte & Touche llp
Dallas, Texas
April 4, 1997
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
AmeriTel Pay Phones, Inc.:
We have audited the accompanying balance sheet of AmeriTel Pay Phones, Inc.
(a Missouri Corporation), as of December 31, 1995, and the related statements
of income, stockholders' equity and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AmeriTel Pay Phones, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Kansas City, Missouri
March 22, 1996
F-19
<PAGE>
AMERITEL PAY PHONES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 891,026 $ 80,664
Accounts receivable................................ 1,754,777 5,546,304
Stock subscriptions receivable..................... 1,061,384
Refundable income taxes............................ 242,277 342,986
Inventories........................................ 1,056,724 785,438
Prepaid expenses................................... 79,526 34,646
Deferred tax asset................................. 253,893 396,752
------------ ------------
Total current assets............................. 4,278,223 8,248,174
PROPERTY AND EQUIPMENT............................... 3,671,940 4,521,521
INTANGIBLE AND OTHER ASSETS.......................... 10,635,478 14,114,958
------------ ------------
TOTAL............................................ $ 18,585,641 $ 26,884,653
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $ 337,485 $ 1,429,916
Accrued expenses................................... 1,702,786 3,289,957
Current maturities of long-term debt............... 220,592 1,824,907
------------ ------------
Total current liabilities........................ 2,260,863 6,544,780
LONG-TERM DEBT....................................... 11,469,408 13,019,811
DEFERRED INCOME TAXES................................ 318,354 425,689
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000 shares
authorized; 244,800 shares issued and outstanding
(liquidation value of $1,534,157 at November 30,
1996)............................................. 2,448 2,448
Common stock, $.01 par value, 10,000,000 shares
authorized; 3,233,854 and 3,519,315 shares issued
and outstanding as of December 31, 1995, and
November 30, 1996, respectively................... 32,338 35,193
Additional paid-in capital......................... 2,292,548 3,704,863
Retained earnings.................................. 2,209,682 3,151,869
------------ ------------
Total stockholders' equity....................... 4,537,016 6,894,373
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 18,585,641 $ 26,884,653
============ ============
</TABLE>
See notes to financial statements.
F-20
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------- NOVEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 11,698,641 $ 20,371,388 $29,305,641 $23,330,540
OPERATING EXPENSES:
Telecommunication
costs................ 5,346,949 9,747,326 13,728,316 11,098,532
Facility commissions.. 1,861,154 3,497,488 6,086,469 4,736,823
Field operations and
maintenance.......... 507,460 863,901 1,166,063 898,505
Selling, general and
administrative....... 927,441 1,758,744 2,281,177 1,727,302
Depreciation.......... 194,413 384,277 536,264 431,486
Amortization of
intangibles.......... 595,268 1,224,071 1,624,017 1,312,238
Nonrecurring
expenses............. 684,320
------------ ------------ ----------- -----------
Total operating
expenses........... 9,432,685 17,475,807 26,106,626 20,204,886
------------ ------------ ----------- -----------
OPERATING INCOME........ 2,265,956 2,895,581 3,199,015 3,125,654
OTHER (INCOME) EXPENSE:
Interest income....... (8,637) (32,165) (20,816) (20,705)
Interest expense...... 572,618 1,059,860 1,375,701 1,114,318
Other, net............ 66,139 38,881 247,882
------------ ------------ ----------- -----------
Total other (income)
expense............ 563,981 1,093,834 1,393,766 1,341,495
------------ ------------ ----------- -----------
INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY
LOSS................... 1,701,975 1,801,747 1,805,249 1,784,159
INCOME TAXES............ 734,363 693,001 713,663
------------ ------------ ----------- -----------
INCOME BEFORE
EXTRAORDINARY LOSS..... 1,701,975 1,067,384 1,112,248 1,070,496
EXTRAORDINARY LOSS FROM
EARLY EXTINGUISHMENT OF
DEBT................... 52,353
------------ ------------ ----------- -----------
NET INCOME.............. $ 1,701,975 $ 1,067,384 $ 1,059,895 $ 1,070,496
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
PREFERRED --------------------- PAID-IN RETAINED
STOCK SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1994................... 3,750 $ 3,750 $ 196,250 $ 269,865 $ 469,865
Issuance of common
stock................. 5,625 5,625 541,875 547,500
Net income for 1994.... 1,701,975 1,701,975
Distributions to
shareholders ($78 per
share)................ (734,575) (734,575)
------ --------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31,
1994................... 9,375 9,375 738,125 1,237,265 1,984,765
Stock split............ 3,054,377 3,054,377 (3,054,377) --
Change in par value.... (3,033,115) 3,033,115 --
Issuance of common
stock................. 173,370 1,734 130,891 132,625
Purchase and retirement
of treasury stock..... (3,268) (33) (14,967) (15,000)
Issuance of preferred
stock................. 2,400 1,414,842 1,417,242
Preferred stock
dividends ($.21 per
share)................ 48 29,952 (80,000) (50,000)
Net income for 1995.... 1,067,384 1,067,384
------ --------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31,
1995................... 2,448 3,233,854 32,338 2,292,548 2,209,682 4,537,016
Issuance of common
stock................. 285,461 2,855 1,412,315 1,415,170
Preferred stock
dividends ($0.48 per
share)................ (117,708) (117,708)
Net income for the
eleven months ended
November 30, 1996..... 1,059,895 1,059,895
------ --------- ---------- ---------- ---------- ----------
BALANCE, NOVEMBER 30,
1996................... $2,448 3,519,315 $ 35,193 $3,704,863 $3,151,869 $6,894,373
====== ========= ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
AMERITEL PAY PHONES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
------------------------ NOVEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 1,701,975 $ 1,067,384 $ 1,059,895 $ 1,070,496
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Extraordinary loss.... 52,353
Depreciation and
amortization......... 789,681 1,608,348 2,160,281 1,743,724
Deferred income
taxes................ 64,461 (35,524)
Changes in operating
assets and
liabilities:
Accounts receivable.. (605,975) (992,079) (3,803,925) (3,594,096)
Inventory............ (604,411) (299,555) 271,286 154,205
Prepaid expenses..... (30,619) (44,017) 44,880 (33,003)
Accounts payable..... (189,185) (135,633) 1,092,431 1,284,378
Accrued expenses..... 366,783 1,288,008 1,460,005 687,701
Income taxes......... (242,277) 266,149 242,277
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 1,428,249 2,314,640 2,567,831 1,555,682
------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (1,779,468) (2,051,111) (1,516,236) (1,286,778)
Cash outflows for
acquisition of
facility contracts... (6,770,292) (3,613,662) (4,698,468) (4,568,603)
Payments under
noncompete
agreements........... (55,000)
------------ ------------ ----------- -----------
Net cash used in
investing
activities......... (8,604,760) (5,664,773) (6,214,704) (5,855,381)
------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from long-
term debt
borrowings........... 12,305,000 11,890,000 5,600,000 4,300,000
Proceeds from
(payments on) advance
from related
parties.............. 480,742 (571,653)
Proceeds from issuance
of common stock...... 547,500 19,501
Proceeds from issuance
of preferred stock... 1,417,242
Purchase of treasury
stock................ (15,000)
Payments of long-term
debt................. (5,859,932) (8,200,510) (2,645,282) (857,715)
Dividends paid on
common and preferred
stock................ (256,735) (507,840) (137,708)
------------ ------------ ----------- -----------
Net cash provided by
financing
activities......... 7,216,575 4,012,239 2,836,511 3,442,285
------------ ------------ ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 40,064 662,106 (810,362) (857,414)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 188,856 228,920 891,026 891,026
------------ ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 228,920 $ 891,026 $ 80,664 $ 33,612
============ ============ =========== ===========
SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for
interest............. $ 516,732 $ 930,906 $ 1,489,076 $ 846,646
============ ============ =========== ===========
Cash paid for income
tax.................. $ -- $ 912,479 $ 462,380 $ 451,500
============ ============ =========== ===========
Noncash transactions:
Issuance of common
stock upon exercise
of stock options in
exchange for stock
subscriptions
receivable, along
with the related tax
benefit.............. $ -- $ -- $ 1,395,669 $ --
============ ============ =========== ===========
Amounts payable for
acquisitions......... $ 354,839 $ -- $ 310,000 $ --
============ ============ =========== ===========
Issuance of common
stock upon conversion
of notes payable..... $ -- $ 123,500 $ -- $ --
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
F-23
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--AmeriTel Pay Phones, Inc. (the "Company"), which was incorporated
on June 6, 1991, owns, operates and maintains telephone systems under
contracts with correctional facilities in 30 states, with the majority of its
installations in Missouri, Kansas, Iowa, Indiana, Minnesota and Nebraska.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services, all of which are
granted credit in the normal course of business with terms of between 30 and
60 days. The Company performs ongoing credit evaluations of its customers and
maintains allowances for unbillable and uncollectible losses based on
historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
for unbillable and uncollectible chargebacks, that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of advance payments received, and an
allowance for unbillable and uncollectible calls based on historical
experience for estimated chargebacks to be made by the LECs. Under account
advance agreements with various third-party billing services, advance payments
equal to a percentage of the outstanding billed receivables are remitted to
the Company when calls are submitted to the third-party billing service and
the Company grants a lien to the third-party billing service on the related
accounts receivable for the advance. The remainder of the billed receivable is
paid to the Company, net of the advance amount, after the third-party billing
service has collected the amounts receivable from the respective LECs.
Interest is charged on the advance payment at varying rates.
INVENTORIES--Inventories are stated at the lower of cost, as determined
using the weighted average cost method, or market. Inventory is primarily
composed of equipment available for installation on new contracts and supplies
and parts for the telephone systems serviced by the Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- ---------------
<S> <C>
Leasehold improvements.................................... Term of lease
Telephone system equipment................................ 7.5 to 10 years
Vehicles.................................................. 5 years
Office equipment.......................................... 3 to 7 years
</TABLE>
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net difference less any amount
realized from the disposition is reflected in earnings.
F-24
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE AND OTHER ASSETS--Intangible and other assets primarily include
amounts allocated to acquired facility contracts, noncompete agreements,
goodwill and other intangible assets, which are stated at cost, along with the
long-term portion of customer advances. Amortization of intangible assets is
provided on a straight-line basis over the estimated useful lives of the
related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ 7.5 years
Noncompete agreements...................................... Agreement term
Deferred loan costs........................................ Loan term
Other intangibles.......................................... 5 to 20 years
Goodwill................................................... 15 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with signing bonuses paid to the facilities under new
facility installations and other incremental direct costs paid to obtain the
facility contracts.
Other intangibles include organizational costs and licensing fees to obtain
state licenses to conduct business.
The Company began in 1996 to periodically assess the net realizable value of
its intangible assets, as well as all other assets, by comparing the expected
future net operating cash flow, undiscounted and without interest charges, to
the carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--Prior to 1995, the Company had elected to be treated as an S
corporation under certain provisions of the Internal Revenue Code.
Accordingly, the 1994 statement of income includes no provision for federal or
state income taxes since the taxable income of the Company is included in the
shareholders' individual income tax returns. Effective January 1, 1995, the
Company terminated its S corporation status.
The Company accounts for income taxes using the liability method in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are provided for temporary differences between the
financial statement and tax bases of the assets and liabilities using current
tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," include cash and
cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company believes that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are a reasonable
estimate of their fair value because of the short-
F-25
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
term maturities of such instruments or, in the case of the revolving credit
facility borrowings, because of the floating interest rates on such
borrowings. In the case of the subordinated promissory notes to related
parties, which bear a fixed interest rate, the Company believes that the
current interest rates on these notes approximate the rates which could be
currently negotiated with such related parties.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's statements of income
and cash flows for the nine months ended September 30, 1996, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal, recurring adjustments) necessary to
present fairly the results of operations and cash flows of the Company for the
nine months ended September 30, 1996, have been made. The results of
operations for the interim period are not necessarily indicative of the
results to be expected for the full year.
2. ACQUISITIONS
During the years ended December 31, 1994 and 1995, and the eleven months
ended November 30, 1996, the Company acquired facility contracts and the
related facility equipment from various other independent inmate phone
operators for purchase prices aggregating $7.2 million, $3.6 million and $5.0
million, respectively.
These acquisitions were each accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only the
results of the operations of these facilities subsequent to their respective
acquisition dates are included in the financial statements of the Company. At
the acquisition dates, the purchase prices were allocated to the assets
acquired, including telephone system equipment, facility contracts and other
identifiable intangibles based on their fair market values. The excess of the
total purchase prices over the fair values of the assets acquired represented
goodwill. In connection with the acquisitions, assets were acquired and
liabilities were assumed as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, ELEVEN MONTHS
--------------------- ENDED
1994 1995 NOVEMBER 30, 1996
---------- ---------- -----------------
<S> <C> <C> <C>
Purchase prices:
Net cash paid.................. $6,825,292 $3,613,662 $4,698,468
Amounts payable to sellers..... 354,839 310,000
---------- ---------- ----------
Total purchase prices............ 7,180,131 3,613,662 5,008,468
Estimated fair values of tangible
and identifiable intangible
assets acquired................. 3,204,881 3,215,111 4,121,809
---------- ---------- ----------
Goodwill......................... $3,975,250 $ 398,551 $ 886,659
========== ========== ==========
</TABLE>
The following table presents unaudited pro forma results of operations of
the Company for the year ended December 31, 1995, and the eleven months ended
November 30, 1996, as if the 1995 and 1996 acquisitions had occurred at the
beginning of 1995.
<TABLE>
<CAPTION>
(UNAUDITED)
1995 1996
----------- -----------
<S> <C> <C>
Net sales......................................... $32,770,086 $31,929,045
=========== ===========
Income before extraordinary loss.................. $ 1,430,165 $ 1,308,344
=========== ===========
Net income........................................ $ 1,430,165 $ 1,255,991
=========== ===========
</TABLE>
F-26
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The unaudited pro forma results of operations are not necessarily indicative
of what the actual results of operations of the Company would have been had
the acquisitions occurred at the beginning of the year, nor do they purport to
be indicative of the future results of operations of the Company.
In connection with four of the acquisitions in 1994 and two of the
acquisitions in 1996, the Company recorded amounts payable to the sellers of
$354,839 and $310,000, respectively, the payment of which was contingent upon
the fulfillment of certain stipulations which the Company believed were
probable of being met. In the event that the stipulations were not met and the
full balance was not paid by the Company, intangible assets previously
recorded on these acquisitions would be reduced. During 1995, certain of the
stipulations related to the 1994 acquisitions were not met and $171,500 of the
amounts payable to sellers recorded in 1994 was not paid, which was accounted
for as an adjustment to the purchase prices in 1995, thus reducing the amount
of goodwill originally recorded on these acquisitions.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Trade accounts receivable..................... $ 4,255,170 $ 6,895,904
Advance commissions receivable................ 111,211 353,378
Receivable related to an acquisition.......... 163,867
Employees and other........................... 22,621 50,670
----------- -----------
4,552,869 7,299,952
Less advances on receivables.................. (2,136,156) (719,093)
Less allowance for unbillable and uncollecti-
ble chargebacks.............................. (661,936) (1,034,555)
----------- -----------
$ 1,754,777 $ 5,546,304
=========== ===========
</TABLE>
At December 31, 1995, and November 30, 1996, the Company had advanced
commissions to certain facilities of $306,243 and $843,378, respectively,
which are recoverable from such facilities as a reduction of earned
commissions at specified monthly amounts. Amounts included in accounts
receivable represent the estimated recoverable amounts during the next fiscal
year with the remaining balance recorded in other assets.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements......................... $ 66,156 $ 59,145
Telephone system equipment..................... 3,845,877 5,159,020
Vehicles....................................... 157,506 138,914
Office equipment............................... 263,558 334,543
---------- -----------
4,333,097 5,691,622
Less accumulated depreciation and amortiza-
tion.......................................... (661,157) (1,170,101)
---------- -----------
$3,671,940 $ 4,521,521
========== ===========
</TABLE>
Substantially all of the Company's property and equipment is collateral for
the Company's long-term debt.
F-27
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Intangible assets:
Acquired facility contracts................... $ 7,549,937 $11,432,435
Noncompete agreements......................... 455,000 375,000
Goodwill...................................... 4,202,301 5,088,960
Other intangibles............................. 199,819 100,945
----------- -----------
12,407,057 16,997,340
Less accumulated amortization................. (1,966,611) (3,372,382)
----------- -----------
Total intangible assets......................... 10,440,446 13,624,958
Other assets--noncurrent portion of commission
advances to facilities......................... 195,032 490,000
----------- -----------
$10,635,478 $14,114,958
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Billing and collection fees........................ $ 382,965 $ 420,338
Facility commissions............................... 326,613 722,769
Long-distance charges.............................. 740,006 1,399,180
Recurring and special bonuses...................... 521,875
Other.............................................. 253,202 225,795
---------- ----------
$1,702,786 $3,289,957
========== ==========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Revolving credit facility advances................ $ 9,500,000 $12,600,000
Subordinated promissory note payable to a related
party, with interest at 10%, due on December 31,
2001............................................. 800,000 800,000
Subordinated promissory notes payable to a related
party, with interest of 10%, payable in quarterly
installments of $106,472 until maturity on March
31, 2000, collateralized by a security interest
in certain facility equipment and contracts...... 1,390,000 1,244,718
Amount payable in connection with a facility con-
tract acquisition, due in February 1999.......... 200,000
----------- -----------
11,690,000 14,844,718
Current maturities of long-term debt.............. (220,592) (1,824,907)
----------- -----------
$11,469,408 $13,019,811
=========== ===========
</TABLE>
F-28
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The revolving credit facility is a $20,000,000 revolving credit facility
with United Missouri Bank, N.A. and NBD Bank, with interest at a floating rate
based on either prime or LIBOR options plus applicable basis points based on
the Company's applicable coverage ratios. The outstanding balance at September
30, 1996, was converted into an installment note at that date, with the
remaining balance of the revolving credit facility available until September
30, 1998. The installment note is payable in quarterly installments of
$378,000 in 1997, increasing on an annual basis thereafter through September
30, 2001. The Company pays a commitment and facility fee of 0.5% on the
average daily unused portion of the revolving credit facility. The revolving
credit facility is collateralized by substantially all assets of the Company.
Scheduled principal maturities on long-term debt for the five years
subsequent to December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 1,824,907
1998........................................................... 2,374,490
1999........................................................... 3,194,374
2000........................................................... 3,122,947
2001........................................................... 4,328,000
-----------
$14,844,718
===========
</TABLE>
In conjunction with the sale of the Company as discussed in Note 14, all of
the outstanding debt was repaid.
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1995, and the
eleven months ended November 30, 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current taxes payable:
Federal............................................... $553,459 $609,228
State................................................. 116,443 119,297
Deferred income taxes................................... 64,461 (35,524)
-------- --------
$734,363 $693,001
======== ========
</TABLE>
There was no provision for income taxes in 1994 because of the Company's
election to be treated as an S corporation during that period.
The Company has provided income tax expense during the nine months ended
September 30, 1996 using the effective tax rates for each of its taxing
jurisdictions which have been allocated between current income taxes payable
and deferred income taxes based on 1996 temporary differences.
The provision for income taxes differs from statutory rates primarily as a
result of state income taxes and permanent differences. The following is a
reconciliation of income taxes reported in the statement of operations:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Tax at statutory rates.................................. $612,594 $613,785
Effect of state income taxes............................ 78,919 102,487
Termination of S corporation status..................... 15,141
Other................................................... 27,709 (23,271)
-------- --------
$734,363 $693,001
======== ========
</TABLE>
F-29
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<CAPTION>
ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
Deferred tax asset:
Allowance for unbillable and
uncollectible chargebacks.............. $ 253,893 $ 396,752
Deferred tax liabilities:
Depreciation and amortization........... (313,584) (402,892)
Other................................... (4,770) (22,797)
--------- ---------
(318,354) (425,689)
--------- ---------
Net deferred income tax liability......... $ (64,461) $ (28,937)
========= =========
</TABLE>
This net deferred income tax liability is classified in the balance sheet as
follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
DECEMBER 31, ENDED
1995 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
Current asset............................... $ 253,893 $ 396,752
Noncurrent liability........................ (318,354) (425,689)
--------- ---------
$ (64,461) $ (28,937)
========= =========
</TABLE>
9. STOCKHOLDERS' EQUITY
STOCK SPLIT--On April 26, 1995, the Company's Board of Directors approved a
326.8-for-1 split of the Company's common stock, a change in the par value of
the stock from $1 to $.01 and a change in the number of authorized common
shares to 10,000,000 shares of common stock. All share amounts in the
financial statements have been restated for the stock split.
STOCK OPTIONS--On May 1, 1994, the Board of Directors of the Company adopted
a stock option agreement for certain employees and consultants of the Company.
On the same date, the Board of Directors granted options for 233,335 shares of
common stock at $.765 per share, the then-estimated fair market value per
share of common stock of the Company which were exercisable at any time for a
period of up to ten years from the date of grant.
On December 19, 1994, the Board of Directors of the Company adopted the 1995
Stock Option Plan (the "Plan") for the directors, officers and other key
employees of the Company, effective for fiscal year 1995. The maximum number
of shares that could be granted under the Plan was amended from 653,600 shares
to 446,248 shares on April 28, 1995. Under the provisions of the Plan, options
were to be granted at an exercise price per share not less than the fair
market value at the date of grant, as determined by the Compensation Committee
(the "Committee"), and were to be exercisable on the date of grant. The
Committee was also assigned responsibility for determining the term of each
option, which in no event could exceed ten years from the date of grant. A
total of 225,492 options were granted under the Plan during 1995 at a price of
$4.59 per share, the then estimated fair market value per share of common
stock of the Company.
F-30
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1996, no additional stock options were granted to employees, and
employees exercised all remaining unexercised options prior to the sale of the
Company, as discussed in Note 14. The following is a summary of changes in
stock options during 1995 and 1996:
<TABLE>
<CAPTION>
EXERCISE
WEIGHTED
NUMBER OF AVERAGE PRICE
SHARES PER SHARE
--------- -------------
<S> <C> <C>
Granted during 1994............................. 233,339 $ .765
--------
Outstanding at December 31, 1994.................. 233,339 .765
Granted during 1995............................. 225,492 4.590
Exercised during 1995........................... (173,370) .765
--------
Outstanding at December 31, 1995.................. 285,461 3.790
Exercised during 1996........................... (285,461) 3.790
--------
Outstanding at November 30, 1996.................. --
========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans, and accordingly, no compensation has
been recognized since stock options granted under these plans were at exercise
prices which approximated market value at the grant date. Had the Company
implemented SFAS No. 123, the implementation would not have affected the net
income of the Company for the eleven months ending November 30, 1996, because
no options were granted during the period and because options granted prior to
1996 were fully vested. Had the Company implemented SFAS No. 123 in 1995, the
implementation would have increased the Company's compensation expense by
approximately $307,000 and the Company's pro forma net income, considering the
effect of implementing SFAS No. 123, net of tax effects, would have been
approximately $878,384.
In connection with the issuance of shares of the Company's common stock for
exercised options in 1996, the Company recognized, as increases in common
stock and additional paid-in capital, the aggregate exercise prices of
$1,080,885, along with the tax benefits related to such options of $334,285.
At November 30, 1996, the Company had recorded stock subscriptions receivable
of $1,061,384 from certain employees for unpaid exercise proceeds, which were
subsequently collected by the Company in December 1996.
PREFERRED STOCK--On May 1, 1995, the Company authorized the issuance of up
to 500,000 shares of preferred stock at $.01 par value. Subsequently, 244,800
shares were issued during 1995 (of which 4,800 were issued in the form of a
stock dividend), 208,000 of such shares were purchased by Kansas City Equity
Partners, L.P. The preferred stock accrues dividends at 8% for the one-year
period ending on the first anniversary of the original issue date, 10% until
the second anniversary date and 12% thereafter. The preferred stock dividend,
at the election of the Company, is payable in cash or additional shares of
preferred stock. The preferred stock is convertible any time into 244,800
shares of common stock on an after-stock-conversion basis. During 1996,
$137,708 of the cash dividends were paid on the preferred stock. During 1995,
$30,000 of dividends were paid on the preferred stock in the form of a stock
dividend, resulting in the issuance of an additional 4,800 preferred shares;
and $50,000 of cash dividends were paid on the preferred stock.
In conjunction with the sale of the Company, as discussed in Note 14, all
outstanding shares of preferred stock were redeemed.
10. RELATED PARTY TRANSACTIONS
In addition to the related party notes payable discussed in Note 7 and the
stock subscription receivables related to exercised stock options discussed in
Note 9, during 1995 and the eleven months ended November 30,
F-31
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996, the Company paid an affiliate of its majority stockholders a consulting
fee of $57,005 and $37,500, respectively, and, in 1996, incurred certain legal
costs on behalf of its stockholders which are recorded as accounts receivable
from such stockholders.
In 1994 and 1995, the Company shared a common office facility with Green
Street Capital, Inc. ("Green Street"), which is owned by the two principal
shareholders of the Company. Rental payments received from Green Street in
1994 and 1995 were $12,000 and $7,750, respectively. There were no similar
arrangements in 1996.
In addition to the above shared facilities, the Company entered into several
other related party transactions with Green Street. A management fee of
$185,689 in 1994 and $40,000 through June 1995 was paid to Green Street for
reimbursement of services provided to the Company and is included in selling,
general and administrative expenses in the accompanying statements of income.
Subsequent to the termination of the management fee, certain salaries and
expenses of Green Street employees were billed and paid monthly by the Company
for services rendered. During 1994, an advance of $571,653 was received by the
Company, representing Company expenses paid by Green Street during the year.
The advance carried interest at 9.5% and was repaid by the Company in 1995.
Other related party transactions included the Company's purchase of
telephone contracts and equipment from Pay-Tel of America, Inc., an affiliate
of certain stockholders, for $3,978,216 and $770,000 in 1994 and 1995,
respectively; and during 1995, the Company paid Phone Bell Systems, Inc., an
affiliate of certain stockholders, $18,825 for billing services and purchased
the stock of this entity for $10,000.
11. BENEFIT PLAN
The Company sponsors a 401(k) savings plan for the benefit of eligible full-
time employees which is a qualified benefit plan in accordance with the
Employee Retirement Income Security Act ("ERISA"). The employees participating
in the plan can generally make contributions to the plan of up to 15% of their
compensation. The plan provides for discretionary matching contributions by
the Company of up to 50% of an eligible employee's contribution. No
significant contributions to this plan were made by the Company during 1994,
1995 and 1996.
12. OTHER COSTS
NONRECURRING COSTS--During 1996, the Company incurred costs of $250,000
related to the settlement of a lawsuit related to a prior acquisition, along
with special bonuses of $434,320 paid to key management at the date of the
sale of the Company, as discussed in Note 14. These special bonuses were
payable to key management upon the closing of the sale of the Company pursuant
to a transaction bonus agreement with such employees, due and payable only
upon the closing of the sale, a portion of which was attributable to the
buyout of existing employment contracts with such employees.
EXTRAORDINARY LOSS--In connection with the sale of the Company, all
outstanding long-term debt was repaid, resulting in the expensing of existing
unamortized debt issue costs of $52,353 (net of income tax benefit of
$32,573). This loss has been classified as an extraordinary loss in accordance
with the provisions of SFAS No. 4, "Reporting Gains and Losses From the Early
Extinguishment of Debt."
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE--The Company leases office space under an operating lease
agreement which expires on July 31, 1999. Rent expense under this and prior
operating lease agreements was $18,800, $102,484, $61,050, and $69,083 during
the fiscal years 1994, 1995, 1996, and the unaudited nine months ended
September 30, 1996,
F-32
<PAGE>
AMERITEL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
respectively. The total remaining future minimum lease payments for the
Company under the operating lease agreement is as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 66,600
1998.............................................................. 66,600
1999.............................................................. 38,850
--------
$172,050
========
</TABLE>
CONTINGENCIES--The Company is subject to various legal proceedings and
claims which arise in the ordinary course of business operations. In the
opinion of management, the amount of liability, if any, with respect to these
actions would not materially affect the financial position of the Company or
its results of operations.
14. SUBSEQUENT SALE OF COMPANY
On December 27, 1996, Talton Holdings, Inc. acquired all of the outstanding
common stock of the Company in a purchase business combination effective
December 1, 1996. In conjunction with this transaction, all of the outstanding
debt of the Company was repaid and all of the outstanding preferred stock was
redeemed.
* * * * * *
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Talton Telecommunications Corporation:
We have audited the accompanying consolidated balance sheet of Talton
Telecommunications Corporation and subsidiary (the "Company") as November 30,
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the eleven months then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Talton
Telecommunications Corporation and subsidiary as of November 30, 1996, and the
results of their income and their cash flows for the eleven months then ended,
in conformity with generally accepted accounting principles.
Deloitte & Touche llp
Dallas, Texas
April 4, 1997
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Talton Telecommunications
Corporation:
We have audited the accompanying consolidated balance sheet of Talton
Telecommunications Corporation and subsidiary (the "Company") as of December
31, 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1995, and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Borland, Benefield, Crawford & Webster, P.C.
Birmingham, Alabama
March 4, 1996
F-35
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 401,737 $ 449,904
Accounts receivable................................ 2,054,141 2,388,958
Refundable income taxes............................ 489,652
Inventories........................................ 310,628 168,395
Prepaid expenses................................... 55,788
Deferred income tax asset.......................... 220,653 54,400
---------- ----------
Total current assets............................. 3,476,811 3,117,445
PROPERTY AND EQUIPMENT............................... 3,833,426 4,119,147
INTANGIBLE AND OTHER ASSETS.......................... 695,861 586,656
---------- ----------
TOTAL............................................ $8,006,098 $7,823,248
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 936,569 $ 950,576
Accrued expenses.................................... 3,148,445 3,205,027
Income taxes payable................................ 892,000
Current portion of debt............................. 1,848,716
---------- ----------
Total current liabilities........................ 5,933,730 5,047,603
LONG-TERM DEBT....................................... 1,535,078
DEFERRED INCOME TAXES................................ 223,869 308,605
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 5,000 shares
authorized, issued and outstanding................ 5,000 5,000
Retained earnings.................................. 308,421 2,462,040
---------- ----------
Total stockholders' equity....................... 313,421 2,467,040
---------- ----------
TOTAL............................................ $8,006,098 $7,823,248
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, ELEVEN MONTHS NINE MONTHS
-------------------------- ENDED ENDED
1994 1995 NOVEMBER 30, 1996 SEPTEMBER 30, 1996
------------ ------------ ----------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUE....... $ 12,192,640 $ 19,955,019 $24,357,473 $19,559,229
OPERATING EXPENSES:
Telecommunication
costs................ 6,413,500 8,926,090 9,588,482 8,056,547
Facility commissions.. 2,040,281 6,097,790 7,875,455 6,460,136
Field operations and
maintenance.......... 535,971 602,429 649,739 453,972
Selling, general and
administrative....... 1,642,976 2,329,970 1,639,827 1,274,638
Depreciation.......... 771,419 975,350 1,001,982 713,522
Amortization of
intangibles.......... 796,548 380,895 122,180 100,069
------------ ------------ ----------- -----------
Total operating
expense............ 12,200,695 19,312,524 20,877,665 17,058,884
------------ ------------ ----------- -----------
OPERATING INCOME
(LOSS)................. (8,055) 642,495 3,479,808 2,500,345
OTHER (INCOME) EXPENSE:
Interest income....... (111) (9,625) (55,268) (50,886)
Interest expense...... 181,521 341,461 169,789 167,076
Other, net............ (134,548) (118,095) (12,321) (12,320)
------------ ------------ ----------- -----------
Total other (income)
expense............ 46,862 213,741 102,200 103,870
------------ ------------ ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES........... (54,917) 428,754 3,377,608 2,396,475
INCOME TAXES (BENEFIT).. (10,716) 157,339 1,223,989 858,656
------------ ------------ ----------- -----------
NET INCOME (LOSS)....... $ (44,201) $ 271,415 $ 2,153,619 $ 1,537,819
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 (As restated--
Note 2)................................. 5,000 $5,000 $ 81,207 $ 86,207
Net loss for 1994 (as restated)........ (44,201) (44,201)
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1994 (As restated--
Note 2)................................. 5,000 5,000 37,006 42,006
Net income for 1995 (as restated)...... 271,415 271,415
----- ------ ---------- ----------
BALANCE, DECEMBER 31, 1995 (As restated--
Note 2)................................. 5,000 5,000 308,421 313,421
Net income for the eleven months ended
November 30, 1996..................... 2,153,619 2,153,619
----- ------ ---------- ----------
BALANCE, NOVEMBER 30, 1996............... 5,000 $5,000 $2,462,040 $2,467,040
===== ====== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
ELEVEN MONTHS NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED ENDED
-------------------------- NOVEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (44,201) $ 271,415 $ 2,153,619 $ 1,537,819
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 1,567,967 1,356,245 1,124,162 813,591
Deferred income
taxes................ (101,180) 354,884 250,989 126,645
Changes in operating
assets and
liabilities:
Accounts receivable... 608,077 (1,077,696) (180,563) (128,850)
Inventories........... (62,254) (174,715) 142,233 220,925
Prepaid expenses...... (7,217) 7,536 (55,788) (53,779)
Accounts payable...... 9,663 302,838 14,007 1,029,179
Accrued expenses...... 157,638 1,236,118 (97,672) (901,945)
Income taxes payable.. (111,272) (523,114) 1,381,652 489,652
------------ ------------ ----------- -----------
Net cash provided by
operating
activities......... 2,017,221 1,753,511 4,732,639 3,133,237
------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures... (1,443,911) (2,617,816) (1,287,703) (437,285)
Payments (refunds) for
intangible and other.. 72,179 260,767 (12,975)
------------ ------------ ----------- -----------
Net cash used in
investing
activities......... (1,371,732) (2,357,049) (1,300,678) (437,285)
------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt..... 400,000 2,000,225
Payments of long-term
debt.................. (949,488) (1,185,168) (3,383,794) (2,987,330)
------------ ------------ ----------- -----------
Net cash provided by
(used in) financing
activities......... (549,488) 815,057 (3,383,794) (2,987,330)
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ 96,001 211,519 48,167 (291,378)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 94,217 190,218 401,737 401,737
------------ ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS,
END OF PERIOD.......... $ 190,218 $ 401,737 $ 449,904 $ 110,359
============ ============ =========== ===========
SUPPLEMENTAL
INFORMATION:
Interest paid.......... $ 181,521 $ 338,672 $ 172,578 167,076
============ ============ =========== ===========
Income taxes paid
(refunded)............ $ 201,736 $ 89,500 $ (408,652) $ --
============ ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Talton Telecommunications Corporation (the "Company"), which was
incorporated in 1973, owns, operates and maintains telephone systems under
contracts with correctional facilities in Alabama, Mississippi, North Carolina
and South Carolina. The Company also operates and maintains public pay
telephone systems at various third-party property locations.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through major local exchange
carriers ("LECs") or through third-party billing services for smaller volume
LECs, all of which are granted credit in the normal course of business with
terms of between 30 and 60 days. The Company performs ongoing credit
evaluations of its customers and maintains allowances for unbillable and
uncollectible losses based on historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions, such as estimates of allowances
and reserves for unbillable and uncollectible chargebacks, that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, Talton
Telecommunications of Carolina, Inc. All significant intercompany balances and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services, net of an allowance for unbillable and
uncollectible calls, based on historical experience, for estimated chargebacks
to be made by the LECs.
INVENTORIES--Inventories are stated at the lower of cost, as determined
using the first-in, first-out ("FIFO") method of valuation or market.
Inventory is primarily composed of equipment available for installation on new
contracts and supplies and parts for the telephone systems serviced by the
Company.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful lives of the related assets. The following is a summary of
useful lives for major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Leasehold improvements..................................... 15 to 39 years
Telephone system equipment................................. 5 to 6 years
Vehicles................................................... 5 years
Office equipment........................................... 5 to 7 years
</TABLE>
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net difference less any amount
realized from the disposition is reflected in earnings.
F-40
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTANGIBLE AND OTHER ASSETS--Intangible and other assets include amounts
allocated to acquired facility contracts, noncompete agreements, goodwill and
other intangible assets, which are stated at cost. Amortization of intangible
assets is provided on a straight-line basis over the estimated useful lives of
the related assets. The following is a summary of useful lives for major
categories of intangible assets:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
---------------- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
Goodwill................................................... 15 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with other incremental direct costs paid to obtain
the facility contracts.
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flows, undiscounted and without interest charges, to the
carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
INCOME TAXES--The Company accounts for income taxes using the liability
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are provided for temporary differences
between the financial statement and tax bases of the assets and liabilities
using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowances for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," include cash and
cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company believes that the carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are a reasonable
estimate of their fair value because of the short-term maturities of such
instruments or, in the case of long-term debt, because of the floating
interest rates on such long-term debt.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's statements of income
and cash flows for the nine months ended September 30, 1996, have been
prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal, recurring adjustments) necessary to
present fairly the results of operations and cash flows of the Company for the
nine months ended September 30, 1996, have been
F-41
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
made. The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
2. PRIOR-PERIOD ADJUSTMENTS
The Company has restated its previously issued consolidated financial
statements for the years ended December 31, 1994 and 1995, to correct for
certain errors principally related to the timing of when certain recurring
costs are recognized in the consolidated financial statements. These
corrections relate primarily to the capitalization of certain direct costs of
facility contract installations previously expensed, the recording of
allowances and reserves for unbillable and uncollectible chargebacks, the
recording of excise taxes and the recording of deferred income taxes, and
reduced previously reported retained earnings as of January 1, 1994, by
$396,209. The following table summarizes the impact of these corrections on
previously reported results of operations and retained earnings during 1994
and 1995:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995
------------ ------------
<S> <C> <C>
Income (loss) before income taxes:
As previously reported....................... $ (190,808) $ (24,716)
As restated.................................. (54,917) 428,754
Net income (loss):
As previously reported....................... (328,286) 154,670
As restated.................................. (44,201) 271,415
Retained earnings:
As previously reported....................... 149,130 303,800
As restated.................................. 37,006 308,421
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Trade accounts receivable...................... $2,159,660 $2,390,864
Amounts due from shareholders.................. -- 154,894
Other.......................................... 54,481 3,200
---------- ----------
2,214,141 2,548,958
Less allowance for unbillable and uncollectible
chargebacks................................... (160,000) (160,000)
---------- ----------
$2,054,141 $2,388,958
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements........................ $ 430,346 $ 449,116
Telephone system equipment.................... 6,301,141 7,425,582
Vehicles...................................... 227,370 246,611
Office equipment.............................. 194,942 319,167
----------- -----------
7,153,799 8,440,476
Less accumulated depreciation and
amortization................................. (3,320,373) (4,321,329)
----------- -----------
$ 3,833,426 $ 4,119,147
=========== ===========
</TABLE>
F-42
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Acquired facility contracts.................... $ 1,562,906 $ 1,562,906
Noncompete agreement........................... 250,000 250,000
Goodwill....................................... 455,704 455,704
Other.......................................... 53,400 66,375
----------- -----------
2,322,010 2,334,985
Less accumulated amortization.................. (1,626,149) (1,748,329)
----------- -----------
$ 695,861 $ 586,656
=========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Facility commissions............................. $1,293,030 $1,317,000
Uncollectible call chargebacks................... 840,000 840,000
Sales and excise taxes........................... 530,161 702,838
Payroll and benefits............................. 161,000 145,295
Other............................................ 324,254 199,894
---------- ----------
$3,148,445 $3,205,027
========== ==========
</TABLE>
The accrual for uncollectible call chargebacks represents a reserve for
amounts collected from the various LECs or third-party billing services which
are expected to be charged back to the Company in future periods.
7. LONG-TERM DEBT
The following table summarizes the Company's long-term debt at December 31,
1995. Since all of the outstanding debt was repaid by the Company during 1996,
there are no outstanding balances at November 30, 1996:
<TABLE>
<S> <C>
Notes payable, with interest of 8.5%, payable in monthly
installments of $110,000 until maturity in June 1997,
collateralized by equipment and personally guaranteed by the
majority stockholder........................................ $ 1,980,545
Note payable, with interest of 9.75%, payable in monthly
installments of $50,000 until maturity in December 1997,
collateralized by accounts receivable and certain equipment
and personally guaranteed by the majority stockholder....... 1,112,226
Note payable, with interest of 8.5%, payable in monthly
installments of $12,660 until maturity in January 1998,
collateralized by equipment and personally guaranteed by the
majority stockholder........................................ 291,023
-----------
3,383,794
Current maturities of long-term debt......................... (1,848,716)
-----------
$ 1,535,078
===========
</TABLE>
F-43
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a $750,000 line of credit arrangement with The Peoples Bank
and Trust Company. The line had no outstanding balance at either December 31,
1995, or November 30, 1996. The line of credit bears interest at the prime
rate, and is personally guaranteed by the majority stockholder.
8. INCOME TAXES
The provision for income taxes (benefit) for the years ended December 31,
1994 and 1995, and the eleven months ended November 30, 1996, are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Current taxes payable (refundable):
Federal................................ $ 82,306 $(181,387) $ 901,000
State.................................. 8,158 (16,158) 72,000
Deferred income taxes.................... (101,180) 354,884 250,989
--------- --------- ----------
$ (10,716) $ 157,339 $1,223,989
========= ========= ==========
</TABLE>
The Company has provided income tax expense during the nine months ended
September 30, 1996 using the effective tax rates for each of its taxing
jurisdictions which have been allocated between current income taxes payable
and deferred income taxes based on 1996 anticipated temporary differences.
The provision for income taxes (benefit) differs from statutory rates
primarily as a result of state income taxes and permanent differences. The
following is a reconciliation of income taxes reported in the statement of
operations:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, NOVEMBER 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax at statutory rates............. $(18,672) $145,776 $1,148,387
Effect of state income taxes....... (1,593) 12,434 97,951
Tax penalties and other............ 9,549 (871) (22,349)
-------- -------- ----------
$(10,716) $157,339 $1,223,989
======== ======== ==========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
asset and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible
revenues.................................... $ 54,400 $ 54,400
Reserves..................................... 146,201 --
Other........................................ 20,052 --
--------- ---------
220,653 54,400
Deferred income tax liabilities:
Depreciation and amortization................ (222,821) (307,557)
Other........................................ (1,048) (1,048)
--------- ---------
(223,869) (308,605)
--------- ---------
Net deferred income tax liability.............. $ (3,216) $(254,205)
========= =========
</TABLE>
F-44
<PAGE>
TALTON TELECOMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
This net deferred income tax liability is classified in the consolidated
balance sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1995 1996
------------ ------------
<S> <C> <C>
Current asset.................................... $ 220,653 $ 54,400
Noncurrent liability............................. (223,869) (308,605)
--------- ---------
$ (3,216) $(254,205)
========= =========
</TABLE>
9. BENEFIT PLAN
The Company sponsors a 401(k) savings plan for the benefit of eligible full-
time employees which is a qualified benefit plan in accordance with the
Employee Retirement Income Security Act ("ERISA"). The employees participating
in the plan can generally make contributions to the plan of between 5% and 10%
of their compensation. The plan provides for discretionary matching
contributions by the Company of up to 50% of an eligible employee's
contribution. Total plan expense was $19,029, $29,489 and $32,820 for the
years ended December 31, 1994 and 1995, and for the eleven months ended
November 30, 1996. There was no plan expense during the unaudited nine months
ended September 30, 1996.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment used in its operations
under operating lease agreements. Such leases, which are primarily for office
furniture, office space and vehicles, have lease terms ranging from one to
four years.
Future minimum lease payments for years ending December 31 under
noncancelable operating leases are summarized below:
<TABLE>
<S> <C>
1996 (one month)................................................. $ 10,848
1997............................................................. 63,209
1998............................................................. 30,187
1999............................................................. 960
2000............................................................. 720
--------
Total minimum future rental payments............................. $105,924
========
</TABLE>
Rent expense in connection with these leases totaled $152,815, $159,951 and
$107,158 for the years ended December 31, 1994 and 1995, and for the period
ended November 30, 1996, respectively, and $71,925 for the unaudited nine
months ended September 30, 1996.
11. RELATED PARTY TRANSACTIONS
The Company's majority stockholder and president has personally guaranteed
three of the Company's operating leases, which have expiration dates ranging
from March 1997 to September 1998. Total payments under the guaranteed leases
for the year ended December 31, 1995, and for the eleven months ended
November 30, 1996, totaled $75,282 and $79,239, respectively.
During 1996, the Company's stockholders incurred $154,894 of legal expenses
which were paid by the Company and are recorded as amounts due from
stockholders in accounts receivable at November 30, 1996, pending
reimbursement from such stockholders.
12. SUBSEQUENT SALE OF COMPANY
On December 27, 1996, Talton Holdings, Inc. acquired all of the outstanding
common stock of the Company in a purchase business combination effective
December 1, 1996.
* * * * * *
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Security Telecom Corporation:
We have audited the accompanying consolidated balance sheet of Security
Telecom Corporation and subsidiary (the "Company") as of June 30, 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the six-month period ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Security Telecom
Corporation and subsidiary as of June 30, 1997, and the results of their
operations and their cash flows for the six-month period then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 10, 1997
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Security Telecom Corporation
We have audited the accompanying consolidated balance sheets of Security
Telecom Corporation and subsidiary (the "Company") as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Telecom Corporation and subsidiary as of December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Davis, Clark and Company, P.C.
Dallas, Texas
May 23, 1997
F-47
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 11,601 $ 15,391 $ 14,381
Accounts receivable......................... 257,847 788,070 1,072,263
Prepaid expenses............................ 27,191 69,817 104,590
---------- ---------- ----------
Total current assets...................... 296,639 873,278 1,191,234
PROPERTY AND EQUIPMENT........................ 3,275,040 4,213,412 5,017,469
OTHER ASSETS.................................. 79,192 44,473 588,863
---------- ---------- ----------
TOTAL..................................... $3,650,871 $5,131,163 $6,797,566
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $1,139,488 $1,633,773 $2,572,702
Accrued expenses............................ 383,387 523,517 690,439
Current portion of long-term debt........... 963,069 1,692,647 2,615,419
---------- ---------- ----------
Total current liabilities................. 2,485,944 3,849,937 5,878,560
LONG-TERM DEBT................................ 567,538 758,513 560,782
DEFERRED INCOME TAXES......................... 87,125 106,915 113,396
MINORITY INTEREST............................. 156,546 175,352 163,818
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000 shares
authorized, 105 and 70 shares,
respectively, issued and outstanding....... 2,857 1,905 1,905
Retained earnings........................... 350,861 238,541 79,105
---------- ---------- ----------
Total stockholders' equity................ 353,718 240,446 81,010
---------- ---------- ----------
TOTAL..................................... $3,650,871 $5,131,163 $6,797,566
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30,
------------------------------------ ------------- ------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....... $8,091,728 $11,892,919 $15,281,621 $ 10,912,589 $ 10,576,209
OPERATING EXPENSES:
Telecommunication
costs................ 4,176,907 6,134,823 8,265,116 5,940,196 5,527,903
Facility commissions.. 1,814,997 2,590,813 3,246,247 2,413,334 2,690,984
Field operations and
maintenance.......... 483,012 632,178 1,055,506 989,721 805,400
Selling, general and
administrative....... 866,762 1,201,567 1,373,701 1,182,556 985,536
Depreciation and
amortization......... 255,324 442,952 868,265 581,937 513,695
---------- ----------- ----------- ------------ ------------
Total operating
expense............ 7,597,002 11,002,333 14,808,835 11,107,744 10,523,518
---------- ----------- ----------- ------------ ------------
OPERATING INCOME
(LOSS)................. 494,726 890,586 472,786 (195,155) 52,691
OTHER (INCOME) EXPENSE:
Interest income....... (29,040) (24,204) (13,643) (7,161)
Interest expense...... 252,904 314,110 460,880 273,626 281,980
Minority interest..... 117,478 19,724 18,806 (12,606) (11,534)
Other, net............ (21,667) 20,544 (84,970) (2,207) (64,800)
---------- ----------- ----------- ------------ ------------
Total other (income)
expense............ 319,675 330,174 381,073 251,652 205,646
---------- ----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES........... 175,051 560,412 91,713 (446,807) (152,955)
INCOME TAXES............ 66,730 13,548 21,609 3,371 6,481
---------- ----------- ----------- ------------ ------------
NET INCOME (LOSS)....... $ 108,321 $ 546,864 $ 70,104 $ (450,178) $ (159,436)
========== =========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.................. 105 $2,857 $(304,324) $(301,467)
Net income.............................. 108,321 108,321
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1994................ 105 2,857 (196,003) (193,146)
Net income.............................. 546,864 546,864
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1995................ 105 2,857 350,861 353,718
Net income.............................. 70,104 70,104
Purchase and retirement of treasury
stock.................................. (35) (952) (117,359) (118,311)
Dividends............................... (65,065) (65,065)
--- ------ --------- ---------
BALANCE, DECEMBER 31, 1996................ 70 1,905 238,541 240,446
Net loss for the six months ended June
30, 1997............................... (159,436) (159,436)
--- ------ --------- ---------
BALANCE, JUNE 30, 1997.................... 70 $1,905 $ 79,105 $ 81,010
=== ====== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
SECURITY TELECOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS SIX MONTHS
ENDED ENDED JUNE
YEARS ENDED DECEMBER 31, SEPTEMBER 30, 30,
------------------------------------- ------------- -----------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income..... $ 108,321 $ 546,864 $ 70,104 $ (450,178) $(159,436)
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 255,324 442,952 868,265 581,937 513,695
Minority interest.... 117,478 19,724 18,806 27,519 (11,534)
Deferred income
taxes............... 78,472 13,548 19,790 3,371 6,481
Changes in operating
assets and
liabilities:
Accounts receivable.. (283,405) (319,099) (1,096,079) (228,575) (699,870)
Prepaid expenses..... (27,191) (42,626) (32,751) (34,773)
Accounts payable..... 275,536 419,939 494,285 111,333 915,037
Accrued expenses..... 97,332 137,486 140,130 127,642 166,922
Other assets......... (18,251) 4,160 34,719 26,429 (44,731)
----------- ----------- ----------- ---------- ---------
Net cash provided by
(used in) operating
activities......... 630,807 1,238,383 507,394 166,727 651,791
----------- ----------- ----------- ---------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (1,522,914) (1,085,286) (1,687,649) (959,320) (749,791)
Cash outflows for
acquisitions......... (237,111)
Increase in
investments.......... (21,154)
----------- ----------- ----------- ---------- ---------
Net cash used in
investing
activities......... (1,544,068) (1,085,286) (1,687,649) (959,320) (986,902)
----------- ----------- ----------- ---------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Dividends paid........ (43,376)
Net proceeds from
advances on accounts
receivable........... 201,789 294,273 565,856 215,179 415,677
Proceeds from issuance
of long-term debt.... 1,065,723 158,763 1,006,955 1,143,495 825,487
Payments of long-term
debt................. (317,823) (634,769) (345,390) (557,325) (907,063)
----------- ----------- ----------- ---------- ---------
Net cash provided by
(used in) financing
activities......... 949,689 (181,733) 1,184,045 801,349 334,101
----------- ----------- ----------- ---------- ---------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 36,428 (28,636) 3,790 8,756 (1,010)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 3,809 40,237 11,601 11,601 15,391
----------- ----------- ----------- ---------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 40,237 $ 11,601 $ 15,391 $ 20,357 $ 14,381
=========== =========== =========== ========== =========
SUPPLEMENTAL
INFORMATION:
Interest paid......... $ 214,090 $ 295,204 $ 429,365 $ 87,839 $ 313,495
=========== =========== =========== ========== =========
SUPPLEMENTAL DISCLOSURE
OF NONCASH
TRANSACTIONS:
Purchase of fixed
assets through the
issuance of long-term
debt................. $ 194,999 $ 385,829 $ 118,988 $ 140,596 $ 400,508
=========== =========== =========== ========== =========
Purchase of treasury
stock through the
issuance of long-term
debt................. $ -- $ -- $ 118,311 $ -- $ --
=========== =========== =========== ========== =========
Dividends paid through
the issuance of long-
term debt............ $ -- $ -- $ 21,689 $ -- $ --
=========== =========== =========== ========== =========
Amounts payable for
acquisitions......... $ -- $ -- $ -- $ -- $ 430,000
=========== =========== =========== ========== =========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Security Telecom Corporation (the "Company" or "STC"), which was
incorporated on November 1, 1990, owns, operates and maintains telephone
systems under contracts with correctional facilities.
The Company accumulates call activity from its various installations and
bills its revenues related to this call activity through third-party billing
services to local exchange carriers ("LECs"), all of which are granted credit
in the normal course of business with terms of between 30 and 60 days. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for unbillable and uncollectible losses based on historical
experience.
In fulfilling its responsibility for the preparation of the Company's
financial statements and disclosures, Company management selects generally
accepted accounting principles and adopts methods for their application. The
application of accounting principles requires the estimating, matching and
timing of revenue and costs in the determination of income or loss. It is also
necessary for management to determine, measure and allocate Company resources
and obligations within the financial process according to those principles.
PRINCIPLES OF CONSOLIDATION--The financial statements include accounts of
the Company and its 25% owned subsidiary, Law Enforcement Technologies, Inc.
("LETI"). The Company consolidates LETI because of its ability to control the
operations of LETI pursuant to an exclusive marketing agreement with LETI
whereby STC is the primary customer of LETI. All material intercompany
transactions and balances have been eliminated in consolidation. In May 1997,
one of the Company's affiliates acquired the remaining outstanding Common
Stock of LETI.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represents amounts billed for
calls placed through the Company's telephone systems to the third-party
billing services, net of advance payments received, and an allowance for
unbillable and uncollectible calls based on historical experience for
estimated chargebacks to be made by the LECs. Under account advance agreements
with third-party billing services, advance payments equal to a percentage of
the outstanding billed receivables are remitted to the Company when calls are
submitted to the third-party billing service and the Company grants a lien to
the third-party billing service on the related accounts receivable for the
advance. The remainder of the billed receivable is paid to the Company, net of
the advance amount, after the third-party billing service has collected the
receivables from the respective LECs. Interest is charged on the advance
payment at varying rates.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization is provided on a straight-line basis over the
estimated lives of the related assets, or in the case of capital lease assets,
over the life of the leases. The following is a summary of useful lives for
major categories of property and equipment.
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- -------------
<S> <C>
Leasehold improvements....................................... 2 to 10 years
Telephone system equipment................................... 5 to 10 years
Office equipment............................................. 5 to 7 years
</TABLE>
F-52
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed of, the related carrying value and accumulated depreciation are
removed from the respective accounts, and the net differences less any amount
realized from the disposition is reflected in earnings.
The Company capitalizes internally developed software by its LETI subsidiary
based on the guidelines of Statement of Financial Accounting Standards
("SFAS") No. 86. Accordingly, cost incurred after technological feasibility
has been established for a product are capitalized. Costs capitalized in 1994,
1995 and 1996 were $30,870, $103,863 and $119,826, respectively, and cost
capitalized during the nine month period ended September 30, 1996 and the six
month period ended June 30, 1997 were $29,957 and $53,146, respectively. These
costs are being amortized over 60 months. Amortization expense was $3,087,
$16,560 and $38,930 in 1994, 1995 and 1996, respectively. Amortization expense
for the nine month period ended September 30, 1996 and the six month period
ended June 30, 1997 were $29,197 and $25,456, respectively.
INCOME TAXES--The Company has elected to be treated as an S corporation
under certain provisions of the Internal Revenue Code and the Company's
subsidiary, LETI, is a C corporation. Accordingly, the statements of income
included a provision for federal income taxes only on the operations of LETI
since the taxable income of the Company is included in the shareholders'
individual income tax returns.
The Company's LETI subsidiary accounts for income taxes using the liability
method in accordance with the provisions of SFAS No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
provided for temporary differences between the financial statement and tax
bases of the assets and liabilities using current tax rates.
REVENUE RECOGNITION--Revenues are recognized during the period the calls are
made. In addition, during the same period, the Company accrues the related
telecommunication costs for validating, transmitting, billing and collection,
and line and long distance charges, along with commissions payable to the
facilities and allowance for unbillable and uncollectible calls, based on
historical experience.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with corrections facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," includes cash
and cash equivalents, accounts receivable, accounts payable and long-term
debt. The Company believes that the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt are a
reasonable estimate of their fair value because of the short-term maturities
of such instruments or, in the case of long-term debt due after one year,
because the Company believes that the current interest rates on these notes
approximates the rates which could be currently negotiated with such lenders.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1994 and
1995 financial statements to conform to the presentation used in the 1996
financial statements.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's statement of income
and cash flows for the nine months ended September 30, 1996 have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal, recurring adjustments) necessary to present fairly
the results of operations and cash flows of the Company for the nine months
ended September 30, 1996 have been made. The financial position and the
results of operations for the interim period are not necessarily indicative of
the results to be expected for the full years.
F-53
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RELATED PARTIES
The Company purchases software and enters into other related transactions
with the Company's subsidiary, LETI, which are eliminated in consolidation.
The Company has also entered into financing arrangements with its shareholders
which are discussed in Note 6. At December 31, 1995 and 1996, and September
30, 1996 and the six month period ended June 30, 1997, the outstanding
balances of these related party notes payable were $534,848, $655,451,
$515,451 and $1,384,243, respectively. Interest paid or accrued to these
related parties pursuant to these financing arrangements was $46,704 in 1994,
$43,007 in 1995, $55,576 in 1996, $41,701 in the nine months ended September
30, 1996 and $7,790 in the six month period ended June 30, 1997.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Trade accounts receivable.............. $ 1,530,663 $ 2,686,172 $ 3,287,247
Employee receivables................... 21,153 42,274 7,553
Other.................................. 73,632
----------- ----------- -----------
1,551,816 2,728,446 3,368,432
Less advances on receivables........... (1,159,969) (1,725,825) (1,950,705)
Less allowance for unbillable and
uncollectible chargebacks............. (134,000) (214,551) (345,464)
----------- ----------- -----------
$ 257,847 $ 788,070 $ 1,072,263
=========== =========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Leasehold improvements................. $ 2,000 $ 2,900 $ 50,194
Telephone systems equipment............ 3,789,729 5,429,727 6,567,000
Furniture and fixtures................. 292,005 449,175 542,676
----------- ----------- -----------
4,083,734 5,881,802 7,159,870
Less accumulated depreciation and
amortization.......................... (808,694) (1,668,390) (2,142,401)
----------- ----------- -----------
$ 3,275,040 $ 4,213,412 $ 5,017,469
=========== =========== ===========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Billing and collection fees............ $ 89,410 $ 66,240 $ 64,506
Facility commissions................... 227,730 323,889 527,870
Other.................................. 66,247 133,388 98,063
----------- ----------- -----------
$ 383,387 $ 523,517 $ 690,439
=========== =========== ===========
</TABLE>
F-54
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
The Company's long-term debt is composed of the following:
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
1996 1997
----------- -----------
<S> <C> <C>
Notes payable to Comerica Bank--Texas with interest
at 9.25%, payable in monthly principal installments
of $11,925, plus interest, through their maturity
at varying dates throughout 1997................... $ 382,428 $ 414,273
Notes payable to Lyon Credit with interest at
between 10.09% and 10.78%, payable in monthly
installments of $34,458, through their maturity on
April 1, 1999...................................... 826,377 705,581
Note payable to LDDS with interest at 9.5%, payable
in monthly installments of $21,538 through its
maturity on December 8, 1997....................... 245,630 105,177
Notes payable to Northern Trust Bank with interest
at between 10.25% and 10.76%, payable in monthly
installments of $11,429, through their maturity at
varying dates from May 21, 1997 through December
10, 1999........................................... 177,341 125,018
Note payable to North American Intelecom, Inc. with
interest at 8%, payable in monthly installments of
$25,430 through its maturity on August 1, 1998..... 340,770
Notes payable to shareholders:
Notes payable with interest at 5%, due at maturity
on November 28, 1997 and subordinated to
borrowings from Comerica Bank--Texas............. 515,451 1,265,451
Note payable with interest at 7.5%, payable in
monthly principal installments of $3,602, plus
interest, through December 6, 1999............... 140,000 118,792
Capital lease obligations and other................. 163,933 101,139
Less current portion of long-term debt.............. (1,692,647) (2,615,419)
----------- -----------
$ 758,513 $ 560,782
=========== ===========
</TABLE>
Substantially all of the Company's accounts receivable and equipment are
collateral for the above notes payable or the advances on accounts receivable
from third party billing services. In addition, the notes payable agreements
with Lyon Credit are subject to prepayment penalties of: 3% for prepayments
during the first twelve months of the loan; 2% for prepayments during the
second twelve months of the loan; and 1% for prepayments during the third
twelve months of the loan.
Future maturities of long-term debt as of June 30, 1997, including capital
lease obligations, for the six months ending December 31, 1997 and the years
ending December 31, 1998 and 1999 are as follows:
<TABLE>
<S> <C>
1997 (six months)............................................... $2,063,226
1998............................................................ 834,413
1999............................................................ 278,562
----------
Total......................................................... $3,176,201
==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain telephone systems equipment under capital
lease agreements with lease terms of two to six years and leases certain
operating facilities under operating lease agreements with lease terms of one
to seven years. Total rent expense under operating lease agreements for 1994,
1995 and 1996 was $33,520, $64,240 and $50,797, respectively, and rent expense
under operating lease agreements for the unaudited nine month period ended
September 30, 1996 and the audited six month period ended June 30, 1997 was
$43,299 and $24,387, respectively.
F-55
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital and operating leases with terms
greater than one year as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year Ending
1997 (six months)....................................... $34,263 $ 23,113
1998.................................................... 50,629 50,455
1999.................................................... 37,309 56,377
2000.................................................... 30,303
------- --------
Total minimum future rental payments.................... 122,201 $160,248
========
Less amounts representing imputed interest.............. (21,062)
-------
Total capital lease obligations......................... 101,139
Less current portion.................................... (49,514)
-------
Long-term portion....................................... $51,625
=======
</TABLE>
CONTINGENCIES--The Company is a party to various claims, legal actions, and
complaints arising in the ordinary course of business. In the opinion of
management, the amount of liability, if any, with respect to these actions,
would not have a material effect on the financial position of the Company or
its results of operations.
9. STOCKHOLDERS' EQUITY
The Company has outstanding options and warrants which allow certain
individuals the right to acquire up to a 14% ownership interest in the Company
for nominal exercise prices including an option to acquire up to a 10%
ownership interest issued in 1989 to a consultant in consideration for certain
facility contract proposals and a warrant issued in 1996 to a stockholder to
acquire up to a 4% ownership interest in connection with this stockholder's
sale of common stock to the Company discussed below.
During 1996, the Company acquired 35 shares of common stock from a
stockholder for $118,311, which was retired by the Company resulting in a
reduction of common stock of $952 and retained earnings of $117,359.
10. INCOME TAXES
As discussed in Note 1, STC is organized as an S corporation and does not
pay tax at the corporate level, however, the Company's subsidiary, LETI, is
subject to income taxes at the corporate level. There are no material
permanent differences for LETI, and principal temporary differences between
book income and taxable income include capital leases which are reported on
the cash basis for tax purposes and capitalized software costs which are
expensed for tax purposes as research and development costs. The Company has
provided income tax expense during the nine months ended September 30, 1996
using the effective tax rates for each of its taxing jurisdictions which have
been allocated between current income taxes payable and deferred income taxes
based on 1996 anticipated temporary differences. The composition of deferred
income tax liabilities as of December 31, 1995 and 1996, and June 30, 1997,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Capital leases................................ $ 68,617 $ 50,616 36,444
Capitalized software.......................... 39,129 66,634 84,704
Other......................................... (20,621) (10,335) (7,752)
-------- -------- --------
Total....................................... $ 87,125 $106,915 $113,396
======== ======== ========
</TABLE>
F-56
<PAGE>
SECURITY TELECOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
On June 27, 1997 substantially all of the net assets of the Company were
sold to Talton Holdings, Inc. for cash of $11.2 million and 900 shares of
Talton Holdings, Inc. common stock.
* * * * * *
F-57
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors of
Correctional Communications Corporation
We have audited the accompanying balance sheets of Correctional
Communications Corporation (the "Company") as of December 31, 1995 and 1996,
and the related statements of income, stockholders' equity and cash flows for
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Correctional
Communications Corporation at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Ginsberg, Weiss & Company
Pearl River, New York
June 27, 1997
(October 6, 1997 as to Note 10)
F-58
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JULY 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................. $ 693,918 $ 643,742 $ 304,529
Accounts receivable, net................... 648,519 924,249 1,109,019
Inventories................................ 10,148 15,075 16,038
Other assets............................... 14,378 32,067
---------- ---------- ----------
Total current assets..................... 1,366,963 1,615,133 1,429,586
PROPERTY AND EQUIPMENT....................... 491,100 550,263 569,497
LOANS RECEIVABLE--STOCKHOLDER................ 95,289 96,569
OTHER ASSETS................................. 150,067 274,584 741,523
---------- ---------- ----------
TOTAL........................................ $2,008,130 $2,535,269 $2,837,175
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................... $ 684,915 $ 783,794 $1,561,712
Accrued expenses........................... 441,738 787,883 182,659
Current portion of long-term debt.......... 24,504 5,602
---------- ---------- ----------
Total current liabilities................ 1,126,653 1,596,181 1,749,973
LONG-TERM DEBT-- STOCKHOLDERS................ 442,880 442,880 442,880
LONG-TERM DEBT-- OTHER....................... 19,343 3,273
MINORITY INTEREST............................ 93,033 58,701 75,675
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000
shares authorized, 18,750 shares issued
and outstanding........................... 138,333 138,333 138,333
Retained earnings.......................... 207,231 279,831 427,041
---------- ---------- ----------
Total stockholders' equity............... 345,564 418,164 565,374
---------- ---------- ----------
TOTAL.................................... $2,008,130 $2,535,269 $2,837,175
========== ========== ==========
</TABLE>
See notes to financial statements.
F-59
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JULY 31,
-------------------------------- ------------- ------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE....... $4,190,994 $7,372,233 $9,563,648 $6,788,841 $6,339,001
OPERATING EXPENSES:
Telecommunication
costs................ 1,575,480 2,429,046 2,921,990 2,142,036 1,761,493
Facility commissions.. 1,533,120 2,761,862 3,668,035 2,563,565 2,579,699
Field operations and
maintenance.......... 171,460 174,676 289,173 227,328 222,455
Selling, general and
administrative....... 651,780 1,292,219 1,972,112 1,359,288 1,197,993
Depreciation and
amortization......... 156,704 242,500 332,938 254,333 243,815
---------- ---------- ---------- ---------- ----------
Total operating
expense............ 4,088,544 6,900,303 9,184,248 6,546,550 6,005,455
---------- ---------- ---------- ---------- ----------
OPERATING INCOME........ 102,450 471,930 379,400 242,291 333,546
OTHER (INCOME) EXPENSE:
Interest expense,
net.................. 74,940 51,631 39,564 32,500 21,946
Minority interest..... 23 73,298 117,236 69,079 64,390
---------- ---------- ---------- ---------- ----------
Total other (income)
expense............ 74,963 124,929 156,800 101,579 86,336
---------- ---------- ---------- ---------- ----------
NET INCOME.............. $ 27,487 $ 347,001 $ 222,600 $ 140,712 $ 247,210
========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-60
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ -------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................. 15,000 $ 38,333 $(167,257) $(128,924)
Net income............................. 27,487 27,487
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1994............... 15,000 38,333 (139,770) (101,437)
Issuance of common stock............... 3,750 100,000 100,000
Net income............................. 347,001 347,001
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1995............... 18,750 138,333 207,231 345,564
Net income............................. 222,600 222,600
Dividends.............................. (150,000) (150,000)
------ -------- --------- ---------
BALANCE, DECEMBER 31, 1996............... 18,750 $138,333 $ 279,831 $ 418,164
Net income (unaudited)................. 247,210 247,210
Dividends (unaudited).................. (100,000) (100,000)
------ -------- --------- ---------
BALANCE, JULY 31, 1997 (UNAUDITED)....... 18,750 $138,333 $ 427,041 $ 565,374
====== ======== ========= =========
</TABLE>
See notes to financial statements.
F-61
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS SEVEN MONTHS
ENDED ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, JULY 31,
------------------------------- ------------- ------------
1994 1995 1996 1996 1997
--------- --------- --------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income........... $ 27,487 $ 347,001 $ 222,600 $140,712 $247,210
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization...... 156,704 242,500 332,938 254,333 243,815
Minority interest.. 23 73,298 117,236 69,078 64,391
Changes in operating
assets and
liabilities:
Accounts
receivable........ (262,027) (126,460) (275,730) (388,153) (184,770)
Accounts payable... 146,981 91,097 98,879 218,803 777,918
Accrued expenses... 78,597 336,997 346,145 104,253 (605,224)
Other assets....... (10,857) (26,500) (26,143) 7,869 31,104
--------- --------- --------- -------- --------
Net cash provided
by operating
activities...... 136,908 937,933 815,925 406,895 574,444
--------- --------- --------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property
and equipment....... (335,899) (170,705) (267,555) (224,951) (149,887)
Increase in
investments......... 75,000
Increase in note
receivable.......... (95,289) (49,739) (1,280)
Additions to
intangibles......... (133,568) (55,321) (244,470) (280,170) (479,758)
Increase in
restricted cash..... (20,789) (1,066) (389) (100,343)
--------- --------- --------- -------- --------
Net cash used in
investing
activities...... (394,467) (246,815) (608,380) (555,249) (731,268)
--------- --------- --------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Dividends paid....... (150,000) (150,000) (100,000)
Investments of
(distributions to)
limited partners.... (22,609) (96,146) (151,568) (95,482) (47,417)
Issuance of common
stock............... 100,000
Proceeds from
issuance of long-
term debt........... 408,000 61,654 19,642
Payments of long-term
debt................ (145,500) (17,807) (34,972)
--------- --------- --------- -------- --------
Net cash provided
by (used in)
financing
activities...... 385,391 (141,646) (257,721) (225,840) (182,389)
--------- --------- --------- -------- --------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 127,832 549,472 (50,176) (374,194) (339,213)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 16,614 144,446 693,918 693,918 643,742
--------- --------- --------- -------- --------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 144,446 $ 693,918 $ 643,742 $319,724 $304,529
========= ========= ========= ======== ========
SUPPLEMENTAL
INFORMATION:
Cash paid for
interest............ $ 75,284 $ 68,082 $ 67,427 $ 40,251 $ 36,218
========= ========= ========= ======== ========
Cash paid for income
taxes............... $ 2,475 $ 7,600 $ 5,560 $ -- $ --
========= ========= ========= ======== ========
</TABLE>
See notes to financial statements.
F-62
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--Correctional Communications Corporation and Subsidiaries (the
"Company") was incorporated on February 11, 1991, in the State of California.
The Company provides fully automated pay telephone services to jail inmates in
correctional facilities located in the western United States.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management of the Company to make estimates and assumptions that affect the
amount reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION--The Company owns 50%, and is the general
partner, of MCJ Telephone Partners LP ("MCJ") and KCJ Telephone Partners LP
("KCJ") Each partnership was formed to own, in conjunction with third party
investors, and operate contracts providing telephone service. The financial
statements presented reflect 100% of the assets, liabilities, revenue and
expenses of MCJ and KCJ. The limited partners' interests are reflected as
minority interests in the joint venture. All significant intercompany balances
and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to a concentration of credit risk consist of accounts
receivable. These receivables are generated by collect calls made by inmates
at the correctional facilities which have contracted with the Company. The
credit risk relates to funds not being collected from the third party
recipients. The credit risk is mitigated by the large number of customers and
the limit on the amount of credit extended to any billing number.
The Company also has concentration of credit risk involving cash. The
Company maintains multiple cash account s with one bank. The uninsured amount
at December 31, 1996, is due to cash balances in excess of FDIC insurance
limits in the amount of $819,521.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Accounts receivable at July 31, 1997 and December 31,
1996 and 1995, consists primarily of amounts due from billing and collection
clearing houses for non-coin calls placed through the Company's inmate pay
telephone systems. The amounts due are net of an allowance for uncollectible
accounts which is determined based upon rates established from historical
experience. The allowance for doubtful accounts was $806,425 as of July 31,
1997 and $246,940 and $144,438 as of December 31, 1996 and 1995. The balance
due from one billing and collection clearing house was $832,983, $515,555 and
$416,269 at July 31, 1997 December 31, 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT--The Company's property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from three to five years.
Expenditures for major renewals and betterments that extend the useful lives
of assets are capitalized. Expenditures for repairs and maintenance are
charged to operations in the period incurred. Depreciation expense at July 31,
1997, September 30, 1996, December 31, 1996, 1995 and 1994, is $130,653,
$164,885, $208,393, $181,214 and $122,524, respectively.
INTANGIBLE ASSETS--Intangible assets consist of signing bonuses paid to
correctional facilities at the inception of the contract term. These signing
bonuses have been capitalized and are being amortized over the life of the
contracts which range from three to five years. Amortization expense at
December 31, 1996, 1995 and
F-63
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1994 is $124,115, $60,498 and $32,052, respectively and $113,162 and $89,448
for the seven months ended July 31, 1997 and 1996 and the nine months ended
September 30, 1996.
Organization expense has been capitalized and is being amortized over five
years using the straight-line method. Amortization expense at December 31,
1996, 1995 and 1994 is $430, $264 and $266, respectively.
INCOME TAXES--On February 11, 1991, the Company filed an election to be
taxed as an S Corporation under section 1361 of the Internal Revenue Code.
Taxes on income are payable by the individual stockholders. Accordingly, no
provision for federal corporation taxes based on income is recorded. The
Company, MCJ and KCJ file separate income tax returns and are all subject to
taxes in the State of California. Additionally, the Company is subject to tax
on income in the States of California and Arizona.
REVENUE RECOGNITION--Revenue is recognized when earned. Coin call and non-
coin call revenue is recognized at the time the call is made.
The Company occasionally requires certain customers to remit funds in
advance in order to guarantee payment of telephone service. Unearned advances
are recorded as a current liability in customer deposits. As calls are made by
these customers, the customer deposit account is reduced and revenue is
recognized.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with corrections facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
FINANCIAL INSTRUMENTS--The Company's financial instruments under Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," includes cash and cash equivalents, accounts
receivable, accounts payable and long-term debt. The Company believes that the
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and long-term debt are a reasonable estimate of their fair value
because of the short-term maturities of such instruments or, in the case of
long-term debt due after one year, because the Company believes that the
current interest rates on these notes approximates the rates which could be
currently negotiated with such lenders.
RESEARCH AND DEVELOPMENT--Costs related to research, design and development
of computer software are charged to operations as incurred, in accordance with
Statement of Financial Standards No. 86. For the seven months ended July 31,
1997 and for the year ended December 31, 1996, $0 and $193,339 was charged to
current operations as research and development.
RECLASSIFICATION--Certain amounts for the prior years have been reclassified
to conform with the current year presentation.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The Company's balance sheet as of
July 31, 1997 and statements of income and cash flows for the six months ended
September 30, 1996 and the seven months ended July 31, 1997 have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal, recurring adjustments) necessary to present fairly
the balance sheet of the Company as of July 31, 1997 and the results of
operations and cash flows of the Company for the nine months ended September
30, 1996 and the seven months ended July 31, 1997, have been made. The results
of operation for the interim period are not necessarily indicative of the
results to be expected for the full year.
2. RELATED PARTIES
Loans from stockholder of $95,289 and $96,569 as of December 31, 1996 and
July 31, 1997 reflects amounts advance at various times during 1996. These
notes are unsecured and non-interest bearing. Interest has been imputed at the
rate of prime plus 1% and totals $4,709 for the year ended December 31, 1996.
F-64
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
JULY 31,
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telephone systems equipment............. $ 796,926 $ 995,320 $1,165,778
Furniture and fixtures.................. 95,347 103,623 117,016
Vehicles................................ 61,655 26,190
--------- ---------- ----------
892,273 1,160,598 1,308,984
Less accumulated depreciation........... (401,173) (610,335) (739,487)
--------- ---------- ----------
$ 491,100 $ 550,263 $ 569,497
========= ========== ==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JULY 31,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Signing bonus............................ $218,891 $ 465,513 $ 858,081
Organization costs....................... 3,712 3,712 3,712
Restricted cash.......................... 20,789 21,855 122,198
Other.................................... 5,310 9,110 97,502
-------- --------- ---------
248,702 500,190 1,081,493
Less accumulation amortization........... (98,635) (225,606) (339,970)
-------- --------- ---------
$150,067 $ 274,584 $ 741,523
======== ========= =========
</TABLE>
Restricted cash consists of a certificate of deposit for $20,000 plus
accrued interest income of $343, $1,855 and $789 as of July 31, 1997, December
31, 1996 and December 31, 1995, respectively. By agreement with one of its
county facilities, the Company is obligated to maintain this certificate of
deposit in a segregated account for the duration of the contract period which
expires June 30, 1998.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JULY 31,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Billing and collection fees................. $ 17,932 $ 43,702 $ 94,811
Facility commissions........................ 267,154 343,756 15,050
Profit sharing plan......................... 110,000 0
Telephone charges........................... 109,663 101,419 9,881
Other....................................... 46,989 189,006 62,917
-------- -------- --------
$441,738 $787,883 $182,659
======== ======== ========
</TABLE>
F-65
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
The Company's long-term debt is composed of the following as of December 31,
1996 and July 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
8.75% note payable to Union Bank of California, due in
24 monthly installments of $1,091 including interest,
due March 15, 1998 secured by a vehicle.............. $15,466 $ 8,875
10.25% note payable to Patelco Credit Union, due in 36
monthly installments of $1,219 including interest,
due February 5, 1999, secured by a vehicle........... 28,381
------- -------
43,847 8,875
Less current portion of long-term debt................ 24,504 5,602
------- -------
$19,343 $ 3,273
======= =======
</TABLE>
Principal payments on long-term liabilities as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Years Ended December 31:
1997............................................................ $24,504
1998............................................................ 16,848
1999............................................................ 2,495
-------
$43,847
=======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain personal property under non-cancelable
operating leases. In addition, the Company has guaranteed certain monthly
commission payments to one of the counties that they contract with, which is
paid in addition to the contracted commission rate. The following is a
schedule by years of future minimum lease and contract payments at December
31, 1996.
<TABLE>
<S> <C>
Year Ending December 31,
1997.......................................................... $ 65,347
1998.......................................................... 68,101
1999.......................................................... 49,858
2000.......................................................... 22,619
--------
Total minimum future rental payments........................ $205,925
========
</TABLE>
RENT--The Company rents space for its administrative activities under a
lease which was signed effective June 1, 1995, for a two-year period. It calls
for monthly rent of $2,310. Effective October 1, 1996, the lease was extended
to September 30, 1999, at a monthly rent of $4,309. The future minimum rental
payments at December 31 are $51,705 for 1997, $51,705 for 1998 and $38,779 for
1999.
8. TRANSACTION WITH RELATED PARTY
The Company is indebted to its stockholders for loans aggregating $442,880.
The loans bear interest at rates that vary from 8% to 14%. Payments of
principal are determined as between the related parties. The loans are not
currently scheduled for repayment.
F-66
<PAGE>
CORRECTIONAL COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLAN
The Company has adopted a qualified profit sharing plan covering all its
employees. The eligibility requirements for employees are as follows: They
must attain the age of 21, have 12 month of service and perform at least 1,000
hours of work within a plan year. Contributions are made at the discretion of
the Board of Directors. For the years ended December 31, 1996 and 1995, the
Company has made contributions of $110,000 and $100,000, respectively.
10. SUBSEQUENT EVENT
Subsequent to the balance sheet date, the Board of Directors declared a
dividend of $5.33 per share, payable on April 1, 1997.
On July 31, 1997, the Company signed an agreement with Talton Holdings, Inc.
to sell substantially all of the assets of the Company for cash of $10.5
million, subject to certain adjustments to be determined based on future
results of operations of the Company. No effect of this transaction has been
reflected in the accompanying financial statements.
F-67
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of
Directors of InVision Telecom, Inc.:
We have audited the accompanying balance sheets of InVision Telecom, Inc.
(the "Company") as of December 31, 1996 and September 30, 1997, and the
related statements of operations, stockholder's equity (deficit) and cash
flows for each of the two years ended December 31, 1996 and 1995 and for the
nine months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December
31, 1996 and September 30, 1997, and the results of their operations and their
cash flows for each of the two years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
December 12, 1997
F-68
<PAGE>
INVISION TELECOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 48,450 $ 11,710
Accounts receivable............................... 4,841,516 5,648,797
Prepaid expenses and other assets................. 325,175 359,609
Refundable income taxes........................... 418,310 420,366
----------- ------------
Total current assets............................ 5,633,451 6,440,482
PROPERTY AND EQUIPMENT.............................. 9,235,782 9,126,405
INTANGIBLE AND OTHER ASSETS......................... 29,337,909 27,193,875
----------- ------------
TOTAL........................................... $44,207,142 $ 42,760,762
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................. $ 514,978 $ 3,358,643
Bank Overdraft.................................... 1,562,272 1,388,915
Accrued expenses.................................. 3,076,092 3,415,337
Current portion of long term debt................. 176,550
----------- ------------
Total current liabilities....................... 5,329,892 8,162,895
DEBT OWED TO RELATED PARTY.......................... 40,775,115 42,819,792
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $0.01 par value; 75,500 shares
authorized,
no shares issued and outstanding.................
Common stock, $0.01 par value; 124,500 shares
authorized,
124,500 shares issued and outstanding............ 1,254 1,254
Additional paid-in capital........................ 1,688,031 1,688,031
Retained earnings (deficit)....................... (3,587,150) (9,911,210)
----------- ------------
Total stockholder's equity (deficit)............ (1,897,865) (8,221,925)
----------- ------------
TOTAL........................................... $44,207,142 $ 42,760,762
=========== ============
</TABLE>
See notes to financial statements.
F-69
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING REVENUE....................... $39,730,868 $48,892,806 $31,623,804
OPERATING EXPENSES:
Telecommunication costs............... 19,364,419 27,242,987 19,080,847
Facility commissions.................. 9,291,116 12,557,577 8,787,712
Field operations and maintenance...... 1,443,633 1,870,146 1,744,635
Selling, general and administrative... 2,610,347 4,504,908 2,994,535
Depreciation.......................... 956,703 1,336,017 1,123,162
Amortization of intangibles........... 2,398,024 3,499,344 2,594,801
----------- ----------- -----------
Total operating expense............. 36,064,242 51,010,979 36,325,692
----------- ----------- -----------
OPERATING INCOME (LOSS)................. 3,666,626 (2,118,173) (4,701,888)
OTHER (INCOME) EXPENSE:
Interest expense, related party....... 2,975,320 3,401,834 2,483,358
Other interest expense, net........... 8,950 13,965
Other, net............................ (3,933) (154,953) (859,130)
----------- ----------- -----------
Total other expense................. 2,980,337 3,260,846 1,624,228
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....... 686,289 (5,379,019) (6,326,116)
INCOME TAX EXPENSE (BENEFIT)............ 260,789 (284,841) (2,056)
----------- ----------- -----------
NET INCOME (LOSS)....................... $ 425,500 $(5,094,178) $(6,324,060)
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-70
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------- PAID IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995.. 125,400 $1,254 $1,688,031 $ 1,081,528 $ 2,770,813
Net income................ 425,500 425,500
------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1995..................... 125,400 1,254 1,688,031 1,507,028 3,196,313
Net loss.................. (5,094,178) (5,094,178)
------- ------ ---------- ----------- -----------
BALANCE, DECEMBER 31,
1996..................... 125,400 1,254 1,688,031 (3,587,150) (1,897,865)
Net loss.................. (6,324,060) (6,324,060)
------- ------ ---------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997..................... 125,400 $1,254 $1,688,031 $(9,911,210) $(8,221,925)
======= ====== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-71
<PAGE>
INVISION TELECOM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................... $ 425,500 $(5,094,178) $(6,324,060)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 3,354,727 4,835,361 3,717,963
Changes in operating assets and
liabilities:
Accounts receivable.................. (2,875,674) 1,257,696 (807,281)
Accounts payable..................... 132,922 344,506 2,843,665
Accrued expenses..................... (607,310) 917,845 339,245
Income taxes......................... (577,758) (284,881) (2,056)
Other assets......................... 4,805 (8,894) (34,434)
----------- ----------- -----------
Net cash (used in) provided by
operating activities.............. (142,788) 1,967,455 (266,958)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................. (5,657,389) (2,458,893) (1,464,552)
Cash Outflows for Acquisitions........ (18,776,716) -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (24,434,105) (2,458,893) (1,464,552)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft........................ 500,822 368,915 (173,357)
Proceeds from issuance of debt-related
party................................ 24,418,403 74,873 2,044,677
Proceeds from issuance of other debt.. -- 450,000 --
Payments of long-term debt............ (256,200) (443,700) (176,550)
----------- ----------- -----------
Net cash provided by financing
activities........................ 24,663,025 450,088 1,694,770
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
EQUIVALENTS........................... 86,132 (41,350) (36,740)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................ 3,668 89,800 48,450
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................ $ 89,800 $ 48,450 $ 11,710
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid......................... $ 8,950 $ 13,965 $ --
=========== =========== ===========
Taxes paid............................ $ -- $ -- $ --
=========== =========== ===========
NON-CASH TRANSACTIONS:
Note payable issued for acquisition of
assets............................... $ 212,400 $ -- $ --
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-72
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--InVision Telecom, Inc. (the "Company") was a wholly owned
subsidiary of Communications Central, Inc. (the "Parent Company"). The Company
provides fully automated pay telephone services to jail inmates in
correctional facilities located throughout the United States. The Company
accumulates call activity from its various installations and bills its
revenues related to this call activity through third-party billing services
which are granted credit in the normal course of business with terms of
between 30 and 60 days. The Company performs ongoing credit evaluations of its
customers and maintains allowances for unbillable and uncollectible losses
based on historical experience.
PREPARATION OF FINANCIAL STATEMENTS--The preparation of financial statements
in conformity with generally accepted accounting principles requires
management of the Company to make estimates and assumptions, such as estimate
of allowances and reserves for unbillable and uncollectible chargebacks, that
affect the amount reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--For purposes of the statement of cash flows, cash
and cash equivalents include cash on hand and cash investments with a
remaining maturity at the date of purchase of three months or less.
ACCOUNTS RECEIVABLE--Trade accounts receivable represent amounts billed for
calls placed through the Company's telephone systems to the various LECs or
third-party billing services and an allowance for unbillable and uncollectible
calls, based upon historical experience, for estimated chargebacks to be made
by the LECs.
PROPERTY AND EQUIPMENT--The Company's property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the related assets. The following is a summary of
useful lives for the major categories of property and equipment:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- ------------
<S> <C>
Telephone system............................................. 10 years
Vehicles..................................................... 3 years
Office equipment............................................. 3 to 5 years
Leasehold improvements....................................... 5 years
</TABLE>
Maintenance and repairs are expensed when incurred and major repairs which
extend an asset's useful life are capitalized. When items are retired or
disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts, and the net difference less any amount realized
from the disposition is reflected in earnings.
INTANGIBLE AND OTHER ASSETS--Intangible and other assets primarily include
amounts allocated to acquired facility contracts, noncompete agreements,
goodwill and other intangible assets, which are stated at cost. Amortization
of intangible assets is provided on a straight-line basis over the estimated
useful lives of the related assets. The following is a summary of useful lives
for the major categories of intangible assets:
<TABLE>
<CAPTION>
ASSET USEFUL LIFE
----- --------------
<S> <C>
Acquired facility contracts................................ Contract term
Noncompete agreements...................................... Agreement term
Goodwill................................................... 20 years
</TABLE>
Acquired facility contracts consist primarily of costs allocated to
locations acquired in acquisitions of facility contract rights from other
service providers, along with signing bonuses paid to the facilities under new
facility installations and other incremental direct costs paid to obtain the
facility contracts.
F-73
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company periodically assesses the net realizable value of its intangible
assets, as well as all other assets, by comparing the expected future net
operating cash flow, undiscounted and without interest charges, to the
carrying amount of the underlying assets. The Company would evaluate a
potential impairment if the recorded value of these assets exceeded the
associated future net operating cash flows. Any potential impairment loss
would be measured as the amount by which the carrying value exceeds the fair
value of the asset. Fair value of assets would be measured by market value, if
an active market exists, or by a forecast of expected future net operating
cash flows, discounted at a rate commensurate with the risk involved.
REVENUE RECOGNITION--Revenues are recognized during the periods the calls
are made. In addition, during the same period, the Company accrues the related
telecommunications costs for validating, transmitting, billing and collection,
and line and long distance, along with commissions payable to the facilities.
FACILITY COMMISSIONS--Under the terms of the Company's telephone system
contracts with correctional facilities, the Company pays commissions to these
facilities generally based on call volume revenues which are accrued during
the period the revenues are generated.
INCOME TAXES--The Company accounts for income tax using the liability method
in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are provided for differences between
financial statement and tax bases of assets and liabilities using current tax
rates.
FINANCIAL INSTRUMENTS--The Company's financial instruments under Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," includes cash and cash equivalents, accounts
receivable, accounts payable and long-term debt. The Company believes that the
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and long-term debt are a reasonable estimate of their fair value
because of the short-term maturities of such instruments or, in the case of
debt owed to related parties, because such debt does not have repayment terms.
2. ACQUISITIONS
During the year ended December 31, 1995, the Company acquired facility
contracts and the related facility equipment from various other independent
inmate phone operators for purchase prices aggregating $18,989,116.
These acquisitions were each accounted for using the purchase method of
accounting as of their respective acquisition dates, and accordingly, only the
results of the operations of these facilities subsequent to their respective
acquisition dates are included in the financial statements of the Company. At
the acquisition dates, the purchase prices were allocated to the assets
acquired, including telephone system equipment, facility contracts and other
identifiable intangibles based on their fair market values. The excess of the
total purchase prices over the fair values of the assets acquired represented
goodwill. In connection with the acquisitions, assets were acquired and
liabilities were assumed as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Purchase prices:
Net cash paid............................................. $ 18,776,716
Amounts payable to sellers................................ 212,400
------------
Total purchase prices.................................... 18,989,116
Estimated fair value of tangible and identifiable intangi-
ble assets acquired....................................... (10,133,834)
------------
Goodwill................................................... $ 8,855,282
============
</TABLE>
F-74
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table presents unaudited pro forma results of operations of
the Company for the year ended December 31, 1995, as if the acquisitions had
occurred at the beginning of 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Net sales.................................................... $47,651,868
===========
Net loss..................................................... $ (448,500)
===========
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Trade accounts receivable, net of advance
payments at December 31, 1996 and September 30,
1997 of $0 and $1,250,000, respectively......... $8,433,152 $8,862,649
Other receivables................................ $ 404,887
---------- ----------
8,433,152 9,267,536
Less allowance for unbillable and uncollectible
chargebacks..................................... (3,591,636) (3,618,739)
---------- ----------
$4,841,516 $5,648,797
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Telephone systems equipment...................... $11,133,706 $11,954,363
Furniture and fixtures........................... 101,544 102,344
Computer system.................................. 620,505 778,459
Vehicles......................................... 7,500 41,875
Leasehold improvements........................... 672 672
----------- -----------
11,863,927 12,877,713
Less accumulated depreciation.................... (2,628,145) (3,751,308)
----------- -----------
$ 9,235,782 $ 9,126,405
=========== ===========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Intangible assets:
Acquired telephone contracts................... $10,803,166 $11,247,265
Noncompete agreements.......................... 163,600 163,600
Goodwill....................................... 24,512,287 24,512,287
----------- -----------
35,479,053 35,923,152
Less accumulation amortization................. (6,141,144) (8,729,277)
----------- -----------
Total intangible assets.......................... $29,337,909 $27,193,875
=========== ===========
</TABLE>
F-75
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Billing and collection fees....................... $ 683,980 $ 805,479
Facility commissions.............................. 960,514 1,419,679
Telephone charges................................. 944,923 745,729
Other............................................. 486,675 444,450
----------- -----------
$ 3,076,092 $ 3,415,337
=========== ===========
</TABLE>
7. LONG-TERM DEBT
The Company's long-term debt as of December 31, 1996 and September 30, 1997
is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Debt owed to related party....................... $40,775,115 $42,819,792
Other............................................ 176,550 --
----------- -----------
40,951,665 42,819,792
Less current portion of long-term debt........... (176,550) --
----------- -----------
40,775,115 42,819,792
=========== ===========
</TABLE>
DEBT OWED TO RELATED PARTY--The Company has borrowed from its Parent Company
to provide the necessary capital to fund acquisitions and to provide for its
working capital needs. The related party debt does not have repayment terms or
specific interest terms. The Company was charged an effective rate of interest
of approximately 8% for each of the two years ended December 31, 1995 and 1996
and for the nine months ended September 30, 1997.
OTHER DEBT--Other debt at December 31, 1996 consists of two notes payable
issued in conjunction with acquisitions of telephone contracts in 1994 and
1995. This debt was paid off in 1997.
Because the Company's outstanding debt as of September 30, 1997 does not
have repayment terms and consists solely of debt owed to its Parent Company,
the debt is classified as long-term.
PARENT COMPANY DEBT--All of the Company's assets and stock serve as
collateral for long-term debt of the Parent Company.
8. STOCKHOLDER'S EQUITY
COMMON STOCK--The Company has 124,500 shares of common stock issued and
outstanding.
PREFERRED STOCK--The Company has authorized 75,500 shares of preferred stock
which may have voting rights as authorized by the Company's board of
directors. The preferred stock does not have any rights to cumulative
dividends and does not have any liquidation preferences. No preferred stock
has been issued as of September 30, 1997.
F-76
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The operating results of the Company are included in the consolidated income
tax return of its Parent Company. In the Company's financial statements,
income taxes have been calculated as if the Company was a stand-alone entity.
The provision for income taxes (benefit) for the years ended December 31,
1995, 1996, and the nine months ended September 30, 1997, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current taxes payable (refund):
Federal.......................... $1,542,207 $(1,803,136) $(2,326,333)
State............................ 181,436 (212,134) (273,686)
Deferred income taxes.............. (1,462,854) (28,757) 196,095
Deferred income tax asset valuation
allowance......................... 1,759,186 2,401,868
---------- ----------- -----------
$260,789 $(284,841) $ (2,056)
========== =========== ===========
</TABLE>
The provision for income taxes (benefit) differs from statutory rates
primarily as a result of state income taxes and permanent differences. The
following is a reconciliation of income taxes reported in the statement of
operations:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Tax at statutory rates.......... $233,338 $(1,828,866) $(2,150,879)
Effect of state income taxes.... 27,451 (215,161) (253,045)
Deferred income tax asset valua-
tion allowance................. 1,759,186 2,401,868
-------- ----------- -----------
$260,789 $(284,841) $ (2,056)
======== =========== ===========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Deferred income tax asset:
Allowance for unbillable and uncollectible
revenues................................... $1,364,822 $1,375,121
Depreciation and amortization............... 394,364 187,969
Net operating loss carryforward............. 2,597,963
Deferred tax asset valuation allowance...... (1,759,186) (4,161,053)
---------- ----------
-- --
========== ==========
</TABLE>
F-77
<PAGE>
INVISION TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases certain personal property under non-cancelable
operating leases.
Future minimum lease payments under operating leases with terms greater than
one year are as follows:
<TABLE>
<S> <C>
Year Ending September 30,
1997 (three months)........... $ 92,000
1998.......................... 309,000
1999.......................... 152,000
2000.......................... 42,000
--------
Total minimum future rental
payments....................... $595,000
========
</TABLE>
CONTINGENCIES--The Company is subject to various legal proceedings and
claims which arise in the ordinary course of business operations. In the
opinion of management, the amount of liability, if any, with respect to these
actions would not materially affect the financial position of the Company or
its results of operations.
11. SUBSEQUENT EVENTS
On October 6, 1997, the Company was sold to Talton Holdings, Inc. for a
purchase price of $42.0 million, subject to adjustment as provided in the
acquisition agreement and subject to a provision for working capital of
approximately $1.2 million provided to the purchaser pursuant to the purchase
agreement.
F-78
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHROIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE OR EXCHANGE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OF-
FER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................................. 3
Corporate Structure.................................................................... 3
Prospectus Summary..................................................................... 4
Risk Factors........................................................................... 17
The Exchange Offer..................................................................... 24
Use of Proceeds........................................................................ 31
Capitalization......................................................................... 32
Pro Forma Financial Data............................................................... 33
Selected Financial Data................................................................ 40
Selected Historical Predecessor Financial Data......................................... 42
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 45
Business............................................................................... 56
Management............................................................................. 69
Principal Stockholders................................................................. 73
Certain Relationships and Related Transactions......................................... 75
Description of Capital Stock........................................................... 81
Description of Other Indebtedness...................................................... 82
Description of Senior Notes............................................................ 85
Certain Federal Income Tax Considerations.............................................. 112
Plan of Distribution................................................................... 114
Legal Matters.......................................................................... 114
Experts................................................................................ 115
Special Note Regarding Forward-Looking Information..................................... 115
Index to Financial Statements.......................................................... F-1
Independent Auditors' Report........................................................... F-2
</TABLE>
---------------
UNTIL APRIL 12, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING NEW NOTES RE-
CEIVED IN EXCHANGE FOR ORIGINAL NOTES HELD FOR THEIR OWN ACCOUNT. SEE "PLAN OF
DISTRIBUTION."
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$115,000,000
TALTON HOLDINGS, INC.
11% SERIES B SENIOR NOTES DUE 2007
GUARANTEED BY:
AMERITEL PAY PHONES, INC.
TALTON TELECOMMUNICATIONS CORPORATION
TALTON TELECOMMUNICATIONS OF CAROLINA, INC.
TALTON STC, INC.
TALTON INVISION, INC.
ONE SOURCE TELECOMMUNICATIONS, INC.
---------------
PROSPECTUS
---------------
JANUARY 13, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
