PROSPECTUS
PTC
PEOPLES TELEPHONE COMPANY, INC.
OFFER TO EXCHANGE
ITS
SERIES B 12 1/4% SENIOR NOTES DUE 2002
FOR ANY AND ALL OUTSTANDING
SERIES A 12 1/4% SENIOR NOTES DUE 2002
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THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 4:00 P.M., NEW YORK
CITY TIME, ON SEPTEMBER 29, 1995, UNLESS EXTENDED.
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Peoples Telephone Company, Inc., a New York corporation (the 'Company'),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the 'Letter of
Transmittal' and together with this Prospectus, the 'Exchange Offer'), to
exchange its Series B 12 1/4% Senior Notes due 2002 (the 'Exchange Notes'),
which have been registered under the Securities Act of 1933, as amended (the
'Securities Act'), pursuant to a Registration Statement (as defined herein) of
which this Prospectus is a part, for an equal principal amount of its
outstanding Series A 12 1/4% Senior Notes due 2002 issued on July 19, 1995 (the
'Old Notes'), of which $100,000,000 principal amount is outstanding. The
Exchange Notes and the Old Notes are collectively referred to herein as the
'Notes.' The Company will accept for exchange any and all Old Notes that are
validly tendered and not withdrawn on or prior to 4:00 P.M., New York City time,
on September 29, 1995, unless the Exchange Offer is extended (the 'Expiration
Date'). Tenders of Old Notes may be withdrawn at any time prior to 4:00 P.M.,
New York City time, on the Expiration Date. The Exchange Notes will be issued
and delivered promptly after the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
Exchange. Old Notes may be tendered only in integral multiples of $1,000. The
Exchange Notes will be obligations of the Company evidencing the same debt as
the Old Notes, and will be entitled to the benefits of the same Indenture dated
as of July 15, 1995 (the 'Indenture') between the Company and First Union
National Bank of North Carolina, as Trustee (the 'Trustee'). The form and terms
of the Exchange Notes are substantially the same as the form and terms of the
Old Notes except that the Exchange Notes have been registered under the
Securities Act. See 'The Exchange Offer,' 'Description of the Notes' and
'Exchange Offer; Registration Rights.'
Upon the occurrence of a Change of Control (as defined), each holder of
Notes may require the Company to purchase all or a portion of such holder's
Notes at 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See 'Description of the Notes--Change
of Control.' The Old Notes are, and the Exchange Notes will be, senior unsecured
obligations of the Company ranking senior in right of payment to all
indebtedness of the Company expressly subordinated to the Notes and pari passu
in right of payment with other senior indebtedness of the Company. However, the
Notes will be effectively subordinated to senior secured indebtedness of the
Company to the extent of the assets securing such indebtedness, including
indebtedness under the Company's $40.0 million revolving credit facility, which
is secured by substantially all of the assets of the Company. See 'Description
of the Credit Agreement' and 'Description of the Notes--Ranking.'
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such Exchange 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 Exchange Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities. The Company has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See 'The Exchange Offer,' 'Exchange
Offer; Registration Rights' and 'Plan of Distribution.'
There has been no public market for the Old Notes. If a market for the
Exchange Notes should develop, the Exchange Notes could trade at a discount from
their principal amount. The Company does not intend to list any Notes on a
national securities exchange or to apply for quotation of any Notes through the
National Association of Securities Dealers Automated Quotation System. There can
be no assurance that an active public market for the Exchange Notes will
develop. Holders of Old Notes eligible to participate in the Exchange Offer but
who do not tender their Old Notes will not have any further registration rights
and such Old Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old Notes could be
adversely affected. See 'Risk Factors' and 'The Exchange Offer.'
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FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
EXCHANGE NOTES, SEE 'RISK FACTORS' AT PAGE 16.
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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.
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THE DATE OF THIS PROSPECTUS IS AUGUST 11, 1995
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SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
References to the Company also include references to its subsidiaries, unless
the context otherwise requires. Except as otherwise indicated, certain technical
and other terms used in this Prospectus have the meanings assigned to them in
the Glossary appearing herein.
THE COMPANY
The Company believes that it is the largest independent operator of public
pay telephones in the United States on the basis of the number of public pay
telephones in service. Since installing its first public pay telephone in 1985,
the Company's core public pay telephone business has grown rapidly to an
installed base, as of March 31, 1995, of 40,040 public pay telephones in 41
states and the District of Columbia. The Company's nationwide presence in the
public pay telephone market makes it an attractive supplier of public pay
telephone services to national and regional accounts, as compared with small
competitors and local exchange carriers ('LECs').
The Company owns, operates, services and maintains a system of public pay
telephones. Its public pay telephone business generates revenues from coin calls
and non-coin calls, such as calling card, credit card, collect and third party
billed calls made from its telephones. Since January 1990, the Company has
acquired over 33,000 public pay telephones from 27 independent public pay
telephone providers. The Company also expands its base of public pay telephones
with its own marketing staff by obtaining contracts for new locations where it
believes there will be significant demand for public pay telephone service, such
as convenience stores, grocery stores, service stations, shopping centers,
hotels, restaurants, airports and truck stops. The Company has been able to
acquire and develop national corporate accounts which, as of March 31, 1995,
included 7-Eleven (2,528 telephones), Emro Marketing Company, a subsidiary of
Marathon Oil (2,058 telephones), Vons Supermarkets (761 telephones) and Safeway
Stores (420 telephones).
On April 21, 1995, the Company entered into an agreement (the 'AT&T
Agreement') with AT&T Corp. ('AT&T'), which established AT&T as the primary
operator services provider for the Company's public pay telephones. The Company
intends to direct substantially all of its long distance operator services
traffic to AT&T, use the AT&T brand name and adopt the AT&T rate structure. In
return, AT&T will pay commissions to the Company at a competitive rate
reflecting the large volume of calls involved. The AT&T Agreement has an initial
two-year term, subject to renewal, and provides that the Company may serve as a
nationwide reseller of AT&T operator services to other independent pay telephone
providers. While constituting a major new business alliance for the Company, the
AT&T Agreement also represents a continuation of prior working agreements
between AT&T and the Company, whereby AT&T and the Company jointly market and
provide public pay telephone services to national and regional accounts.
Examples of such accounts, as of March 31, 1995, included McDonald's Corporation
(1,226 telephones) and the Atlanta Hartsfield International Airport (417
telephones).
The Company believes that currently there are approximately 2.1 million
public pay telephones operated in the United States, of which approximately 1.8
million are owned by LECs and approximately 300,000 by independent public pay
telephone companies. The independent public pay telephone segment of the
industry is highly fragmented among many independent public pay telephone
providers and over the last several years has been undergoing and continues to
undergo a considerable amount of consolidation.
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BUSINESS STRATEGY
The Company's business objective is to focus on its core public pay
telephone business and grow operating cash flow by continuing to expand its
installed base of public pay telephones. The Company seeks to achieve this
objective through the following strategies:
Growth Through Selective Acquisitions. The Company believes that growth
through selective acquisitions is desirable because it increases the Company's
geographic presence and concentration and typically generates more predictable
revenues than new public pay telephone installations. In general, the Company
has been able to acquire public pay telephones at prices that it considers
attractive because smaller providers frequently lack the economies of scale that
the Company enjoys. When acquired telephones are integrated into the Company's
national system, the Company is often able to operate such telephones
profitably, or more profitably than the seller, because of its economies of
scale. The Company intends to utilize its size and experience in integrating
public pay telephone acquisitions in an effort to capitalize on the
consolidation trend in the industry.
Growth Through New Installations. The Company is seeking to increase its
internal growth by marketing its public pay telephones to new and existing
accounts within its current markets. The Company believes that its nationwide
presence makes it an attractive supplier of public pay telephone services for
national corporate accounts by offering these accounts a consistent level of
service and reducing the time, administration and costs associated with
utilizing multiple providers. The Company is attempting to balance its national
corporate account marketing efforts by expanding its regional and local sales
efforts, where competition for accounts tends to be less competitive. It has
hired or is in the process of hiring regional sales managers in New York, the
Mid-Atlantic region, Florida, Texas, the Mid-West region and California, where
the Company has significant concentrations of public pay telephones.
Superior Level of Customer Service. The Company attempts to provide the
highest quality service in the industry and establish strong relationships with
its customers. The Company provides quality service through the use of 'smart'
microprocessor-equipped telephones, a sophisticated management information
system and a highly trained service and support staff. The Company's advanced
telephone technology allows for exact records of telephone activity, tracking of
revenues which can be easily verified by its customers and rapid response
(typically within 24 hours) to repair malfunctions and service equipment.
Realize Economies of Scale and Maximize Operating Efficiencies. By growing
its public pay telephone business, the Company intends to benefit from the
realization of further economies of scale in field service, collection and other
selling, general and administrative activities. The Company's existing
infrastructure permits it to add new public pay telephones in its existing
markets without significant incremental operating costs. Furthermore, as a
high-volume consumer of long distance service (approximately 17 million minutes
per month), the Company has been able to negotiate favorable terms from AT&T and
other operator service providers and interexchange carriers. The Company's
'smart' public pay telephones, management information systems and trained
service and support staff have permitted it to achieve savings in the cost of
telephone repair and maintenance.
1994 OPERATIONAL RESTRUCTURING
In recent years, the Company entered into a variety of complementary niche
telecommunications businesses and attempted to vertically integrate its public
pay telephone business. The complementary businesses were the Company's inmate
telephone, prepaid calling card and international telephone center and cellular
telephone rental operations. The Company's efforts to vertically integrate
included providing long distance and operator services through its own dedicated
switching network and its own billing and collection operations. The Company
believed these actions would enhance its long-term growth, diversify and
vertically integrate its business and obtain benefits associated with adding to
the Company's total
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volume of long distance telephone calls. While increasing its long distance
minutes remains a key part of the Company's operating strategy, the capital
requirements and management attention required by these operations diverted the
Company from its core public pay telephone business and adversely affected its
operating results. During the second quarter of 1994, management of the Company
undertook a review of the Company's operations, management structure and
strategic objectives with a view toward reducing expenses and improving
operating efficiency. For a discussion of 1994 operating results, see
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
The principal actions taken by the Company as a result of management's
review included:
Renewed Focus on Core Business. In December 1994, the Company decided to
focus on the growth opportunities available in its core public pay telephone
business and to divest itself of its inmate telephone, prepaid calling card and
international telephone center and cellular telephone rental operations. For
financial accounting purposes, the inmate telephone and cellular telephone
rental operations (the 'Discontinued Operations') have been segregated and
reported as discontinued operations. The Company sold its prepaid calling card
business in February 1995 and is currently pursuing alternatives to divest the
Discontinued Operations and the international telephone center operations. This
offering is not conditioned upon the divestiture of any of the Discontinued
Operations or the international telephone center operations.
Reduced Size and Improved Quality of Work Force. In 1994, the Company
reduced its work force from continuing operations by approximately 100
employees. The annual compensation and fringe benefits associated with the
reduction in the continuing operations' work force is estimated by the Company
to be approximately $4.3 million (based on 1994 compensation and fringe benefit
expenses). The estimated compensation and fringe benefit expenses associated
with such work force reduction and included in the Company's 1994 results from
continuing operations is approximately $2.8 million. In addition, the Company
hired a new Chief Financial Officer and upgraded the caliber of its employees
performing certain key functions. As a result of these actions, the Company
reduced operating expenses, upgraded operating systems and strengthened its
accounting controls and internal reporting practices.
Management's decision to divest itself of the prepaid calling card and
international telephone center operations and the Discontinued Operations and
reduce the size of the Company's work force (collectively, the '1994 Operational
Restructuring'), together with its review of the Company's operations, resulted
in charges in 1994 (the '1994 Charges') of approximately $4.0 million to
earnings before interest, income taxes, depreciation and amortization ('EBITDA')
from continuing operations, which management believes are one-time charges,
although there can be no assurance that similar charges would not be taken in
the future. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations-- The 1994 Charges.'
As a result of operating losses in 1994, including losses from the prepaid
calling card and international telephone center operations and the Discontinued
Operations, the Company was not in compliance with certain financial covenants
in the Company's prior credit agreement (the 'Prior Credit Agreement'). The
lenders under the Prior Credit Agreement subsequently waived compliance with
such covenants and modified the covenants to provide the Company with greater
flexibility through 1995. However, as described under '--Recent Developments,'
the Company recently defaulted in making certain payments under $6.0 million in
principal amount of promissory notes issued in connection with a 1993
acquisition due, in part, to disputes regarding the indemnification obligations
of the holder of the notes and to conserve cash in light of the Company's
working capital requirements and amortization obligations under the Prior Credit
Agreement. The Company obtained temporary waivers in respect of defaults under
other indebtedness arising by reason of the payment defaults. For a discussion
of these defaults and waivers and recently settled litigation with the holder of
the promissory notes, see '--Recent Developments,' 'Risk Factors--Defaults under
Indebtedness' and 'Business--Legal Proceedings.' For a discussion of certain
liquidity issues being addressed by the Refinancing, see 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
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1995 REFINANCING PLAN
In order to extend its debt maturities and to provide increased operational
and financial flexibility to take advantage of growth opportunities in its core
public pay telephone business, simultaneously with the issuance of the Old Notes
the Company refinanced the Prior Credit Agreement and certain outstanding notes
payable with its new Credit Agreement (as defined below), the Notes and the
Preferred Stock Investment (as defined below) (collectively, the 'Refinancing').
See 'Description of Credit Agreement,' '--Recent Developments' and 'Use of
Proceeds.' As of July 26, 1995, the Company had not borrowed any of the total
$40.0 million of credit available under the Credit Agreement.
RECENT DEVELOPMENTS
PREFERRED STOCK INVESTMENT
On July 3, 1995, the Company entered into an agreement with UBS Capital
Corporation ('UBS Capital'), for the issuance by the Company of shares of
Cumulative Convertible Preferred Stock (the 'Preferred Stock') for gross
proceeds of $15.0 million (collectively, the 'Preferred Stock Investment'). UBS
Capital is a wholly-owned indirect merchant banking subsidiary of Union Bank of
Switzerland. The Preferred Stock Investment was consummated simultaneously with
the issuance of the Old Notes. In connection with the consummation of the
Preferred Stock Investment, UBS Capital assigned its rights under such agreement
to UBS Partners, Inc., also a wholly-owned subsidiary of Union Bank of
Switzerland ('UBS Partners'), and the Preferred Stock was acquired by UBS
Partners.
The Preferred Stock cumulates dividends initially at an annual rate of 7%,
which will be payable in cash or, at the Company's option during the first three
years after issuance, will continue to cumulate. The Preferred Stock is
immediately convertible, at the option of the holders, into 2,857,143 shares of
Common Stock of the Company (or 15.1% of the outstanding Common Stock as of June
30, 1995, determined in accordance with Rule 13d-3 under the Exchange Act) at a
conversion price of $5.25 per share, subject to certain antidilution
adjustments. The Preferred Stock is subject to (i) mandatory redemption by the
Company 10 years after issuance or, subject to the prior payment in full of the
Company's indebtedness under the Credit Agreement and the Notes, in the event of
certain bankruptcy or related events relating to the Company, (ii) redemption at
the Company's option, resulting in the exercisability of contingent warrants and
(iii) in the event of a Change of Control (as defined in the Indenture),
redemption, at the option of the holders thereof, in all cases, at its
liquidation preference ($15.0 million in the aggregate) plus accrued and unpaid
dividends.
Pursuant to the terms of the Preferred Stock, the holders of the Preferred
Stock are entitled to elect two members of the six member Board of Directors of
the Company. The two directors initially will be Charles J. Delaney, President
of UBS Capital Corporation, and Jeffrey J. Keenan, a Managing Director of UBS
Capital Corporation; however, only one such designee will serve until the
Company's 1995 Annual Meeting of Shareholders. One existing director will resign
to create a vacancy for such director and another existing director is expected
not to be renominated at such Annual Meeting. Such existing director has
objected to not being renominated. See 'Management--Directors and Executive
Officers' and 'Business--Legal Proceedings.'
CERTAIN REGULATORY DEVELOPMENTS
Reduction in Florida Access Fees. The Florida Legislature, during the 1995
General Session, passed a comprehensive rewrite of the State's
telecommunications law, which was enacted into law in June 1995. As its
cornerstone, the legislation provides for open competition in the Florida local
exchange markets, effective January 1, 1996. As one of the largest customers of
local exchange service in the State, the Company expects to benefit in terms of
price and service quality with the advent of local telephone service competition
permitted under this new legislation. In addition, the new law specifically
enables the Company
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and other independent public pay telephone providers, effective July 1, 1995, to
obtain flat rate business line interconnection from the LECs in lieu of the
mandatory measured rate structure previously in place. Based upon 1994 average
usage of Florida public pay telephones, the Company estimates that, if
implemented, these changes may result in an approximate average savings of
$25-$30/phone/month to the Company for its Florida operations.
Compensation for Access Code Calls. On May 23, 1995, the United States
Court of Appeals for the District of Columbia issued a decision overturning a
prior Federal Communications Commission ('FCC') ruling that applicable federal
law did not allow the FCC to prescribe compensation to pay telephone providers
on 'subscriber 1-800 calls' or 1-800 calls where the recipient of the call
selected the operator service provider (for example, calls to 1-800-FLOWERS or
1-800-USA-RAIL). The FCC made this earlier finding in the context of its initial
decision to prescribe compensation to public pay telephone providers on 'carrier
access code calls' (including 1-800 carrier access code calls, along with '950'
and '10XXX' access code calls) under the same federal law. The Court held that
there was no legal preclusion to establishment of a system for compensating
public pay telephone providers on subscriber 1-800 calls initiated from
independent public pay telephones. The Court remanded the case to the FCC for
further proceedings 'to consider the need to prescribe compensation for
subscriber 1-800 calls routed to providers of operator services that are other
than the prescribed provider of operator services.' The Company will participate
through the American Public Communications Council industry trade group in an
effort to have the FCC expeditiously adopt a compensation mechanism that
provides reasonable payment to providers of pay telephone equipment used in
making these 1-800 calls. There can be no assurance that a compensation scheme
for subscriber 1-800 calls will be adopted on a timely basis or at all.
CERTAIN LEGAL PROCEEDINGS
On May 9, 1995, a complaint (as amended on May 30, 1995) was filed in the
Supreme Court of the State of New York, New York County, against the Company by
Ascom Communications, Inc. ('ACI') and ACI's sole shareholder, Ascom Holding,
Inc. ('AHI'). The complaint alleged breach of contract by the Company for
failure to make certain principal and interest payments in respect of $6.0
million principal amount of promissory notes which were issued by the Company to
ACI in connection with the November 1993 purchase by the Company of
substantially all of ACI's assets. In addition, the complaint alleged that the
Company breached its agreement with ACI to register certain shares of Common
Stock of the Company under the Securities Act within an agreed upon time frame.
The Company did not make such payments due, in part, to disputes regarding the
indemnification obligations of ACI and to conserve cash in light of the
Company's working capital requirements and amortization requirements under the
Prior Credit Agreement. The complaint also alleged that the Company failed to
assume certain obligations and pay certain amounts under an equipment lease. The
Company settled such litigation in June 1995 for approximately $5.7 million. See
'Business--Legal Proceedings.'
DEFAULTS UNDER INDEBTEDNESS
The Company's payment defaults in respect of the promissory notes held by
ACI, as well as the litigation by ACI and AHI, resulted in defaults under the
Prior Credit Agreement and the Company's $2.5 million in mortgage indebtedness.
On May 31, 1995, the lenders under the Prior Credit Agreement waived the
defaults arising from the ACI litigation and the payment defaults in respect of
the ACI promissory notes, provided that by June 30, 1995 the Company either
consummated the refinancing of the Prior Credit Agreement or settled the ACI
litigation on terms that do not require payment by the Company of an amount in
excess of $6.0 million. The litigation was settled in June 1995 for
approximately $5.7 million. On May 31, 1995, the Company's mortgage lender
temporarily waived the defaults arising out of the payment defaults on the ACI
promissory notes provided that the mortgage indebtedness is repaid prior to
August 31, 1995. The Company used the net proceeds from the Refinancing to repay
all indebtedness under the Prior Credit Agreement, as well as repay certain
notes payable, including the mortgage, pending its planned refinancing. See
'Risk Factors--Defaults under Indebtedness' and 'Use of Proceeds.'
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THE EXCHANGE OFFER
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Old Notes.................................... The Old Notes were sold by the Company on July 19, 1995 (the
'Issue Date' or 'Closing Date'), pursuant to a Purchase Agreement,
dated as of July 12, 1995 (the 'Note Purchase Agreement'), by and
between the Company and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, the initial purchaser of the
Old Notes (the 'Initial Purchaser').
Registration Rights.......................... Pursuant to the Note Purchase Agreement, the Company and the
Initial Purchaser entered into a Registration Rights Agreement,
dated as of July 19, 1995 (the 'Registration Rights Agreement'),
which grants the holders of the Old Notes certain exchange and
registration rights. This Exchange Offer is intended to satisfy
such exchange rights which terminate upon consummation of the
Exchange Offer.
The Exchange Offer........................... The Company is offering to exchange $1,000 principal amount of its
Exchange Notes for each $1,000 principal amount of its outstanding
Old Notes that are properly tendered and accepted. As of the date
of this Prospectus, $100,000,000 in aggregate principal amount of
the Old Notes are outstanding. As of July 26, 1995, there were 5
registered holders of Old Notes. See 'The Exchange Offer.'
Based on interpretations by the staff of the Securities and
Exchange Commission (the 'Commission') set forth in certain
no-action letters issued by the Commission to third parties, the
Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any holder thereof
(other than any such holder which 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 Exchange
Notes are acquired in the ordinary course of such holder's
business and that such holder does not intend to participate and
has no arrangement or understanding with any person to participate
in the distribution of such Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal that accompanies this
Prospectus 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
Exchange Notes received in exchange for Old Notes where such Old
Notes
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were acquired by such broker-dealer as a result of market-making
activities or other trading activities.
Any holder of Old Notes who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes could not rely on the
position of the staff of the Commission enunciated in Exxon
Capital Holdings Corporation (available April 13, 1989) or similar
no-action letters and, in the absence of an exemption therefrom,
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction. Failure to comply with such requirements in such
instance may result in such holder incurring liability under the
Securities Act for which the holder is not indemnified by the
Company.
Expiration Date.............................. 4:00 p.m., New York City time, on September 29, 1995, unless
extended (the 'Expiration Date'). See 'The Exchange Offer--Terms
of the Exchange Offer; Expiration Date; Extensions; Amendments.'
Accrued Interest on the
Exchange Notes and Old Notes............... The Exchange Notes will bear interest from their respective
issuance dates at the same rate and upon the same terms as the Old
Notes. Holders whose Old Notes are accepted for exchange will
receive accrued and unpaid interest thereon to, but not including,
the issuance date of the Exchange Notes and will be deemed to have
waived the right to receive any payment in respect of interest on
the Old Notes accrued from and after the date of issuance of the
Exchange Notes. Such accrued but unpaid interest on the Old Notes
will be payable with the first interest payment on the Exchange
Notes.
Conditions of the Exchange Offer............. The Exchange Offer is subject to certain customary conditions,
including (i) no commencement of any action, legal or
governmental, with respect to the Exchange Offer or which the
Company reasonably determines would make it inadvisable to proceed
with the Exchange Offer, (ii) no banking moratorium or similar
event or international calamity involving the United States, and
(iii) no change in the business or prospects of the Company that
may have a material adverse effect on the Company. The Company
expects that the foregoing conditions will be satisfied. All such
conditions may be waived by the Company. Holders may have certain
rights and remedies against the Company under the Registration
Rights Agreement should the Company fail to consummate the
Exchange Offer. See 'The Exchange Offer--Conditions of the
Exchange Offer.'
Procedures for Tendering
Old Notes.................................. Each holder of Old Notes desiring to accept the Exchange Offer
must complete and sign the Letter of Transmittal or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or deliver the Letter of
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Transmittal, together with the Old Note and any other required
documents to the Exchange Agent (as defined herein) at the
address set forth herein and in the Letter of Transmittal on or
prior to the Expiration Date. By executing the Letter of
Transmittal, each holder will represent to the Company that, among
other things, the Exchange Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person
is the holder, that neither the holder nor any such other person
has any arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person is an 'affiliate,' as
defined under Rule 405 of the Securities Act.
Untendered Old Notes......................... Following the consummation of the Exchange Offer, holders of Old
Notes eligible to participate but who do not tender their Old
Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Old
Notes could be adversely affected.
Shelf Registration Statement................. In the event that applicable interpretations of the Staff of the
Commission do not permit the Company to effect the Exchange Offer,
or if for any other reason the Exchange Offer is not consummated
within 120 days of the Issue Date, or if a holder of the Notes is
not permitted to participate in the Exchange Offer or does not
receive freely tradeable Exchange Notes pursuant to the Exchange
Offer or, under certain circumstances, if the Initial Purchaser so
requests, the Company will use its best efforts to cause to become
effective a Shelf Registration Statement with respect to the
resale of the Notes and use its best efforts to keep such Shelf
Registration Statement continuously effective until three years
after the Issue Date (or until one year after the Issue Date if
such Shelf Registration Statement is filed solely at the request
of the Initial Purchaser).
Special Procedures for
Beneficial Owners.......................... Any beneficial owner whose Old Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such 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
its 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.
Guaranteed Delivery Procedures............... Holders of Old Notes who wish to tender their Old Notes and (i)
whose Old Notes are not immediately available or (ii) who
</TABLE>
10
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<TABLE>
<S> <C>
cannot deliver their Old Notes, the Letter of Transmittal and any
other documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for book-entry
transfers) prior to the Expiration Date, must tender their Old
Notes according to the guaranteed delivery procedures set
forth in 'The Exchange Offer--Guaranteed Delivery Procedures.'
Withdrawal of Tenders........................ Tenders of Old Notes may be withdrawn at any time prior to 4:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange Notes................. Subject to the satisfaction or waiver of all conditions of the
Exchange Offer, the Company will accept for exchange any and all
Old Notes that are properly tendered in the Exchange Offer prior
to 4:00 p.m., New York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange Offer will be
delivered in exchange for the applicable Old Notes accepted in the
Exchange Offer promptly following the Expiration Date. See 'The
Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of
Exchange Notes.'
Certain Federal Income Tax Consequences...... For a discussion of certain federal income tax consequences of the
exchange of the Old Notes, see 'Certain Federal Income Tax
Consequences.'
Exchange Agent............................... First Union National Bank of North Carolina is the exchange agent
(the 'Exchange Agent') for the Exchange Offer. The address and
telephone number of the Exchange Agent are set forth in 'The
Exchange Offer--Exchange Agent.'
</TABLE>
SUMMARY OF TERMS OF NOTES
The Exchange Offer constitutes an offer to exchange up to $100,000,000
aggregate principal amount of the Exchange Notes for up to an equal aggregate
principal amount of Old Notes. The Exchange Notes will be obligations of the
Company evidencing the same indebtedness as the Old Notes, and will be entitled
to the benefit of the same Indenture. The form and terms of the Exchange Notes
are substantially the same as the form and terms of the Old Notes except that
the Exchange Notes have been registered under the Securities Act. See
'Description of the Notes.'
<TABLE>
<S> <C>
Notes Offered................................ $100.0 million principal amount of 12 1/4% Senior Notes due 2002.
Maturity Date................................ July 15, 2002.
Interest Payment Dates....................... The Notes will bear interest at the rate of 12 1/4% per annum,
payable semiannually on each January 15 and July 15, commencing
January 15, 1996.
Optional Redemption.......................... The Notes will be redeemable at the Company's option, in whole or
in part, at any time on or after July 15, 2000, at the
</TABLE>
11
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<TABLE>
<S> <C>
redemption prices set forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In addition, prior to
July 15, 1998, the Company may redeem up to 20% of the principal
amount of the Notes originally issued with the net proceeds of one
or more Equity Offerings resulting in gross proceeds to the
Company of not less than $10.0 million at 111 1/4% of the principal
amount thereof, together with accrued and unpaid interest, if any,
to the date of redemption.
Change of Control............................ Upon the occurrence of a Change of Control, each holder of Notes
will have the right to require the Company to purchase all or a
portion of such holder's Notes at 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the
date of purchase. See 'Description of the Notes-- Change of
Control.'
Ranking...................................... The Notes will be senior unsecured obligations of the Company and
will rank senior in right of payment to all indebtedness of the
Company which is by its terms expressly subordinated in right of
payment to the Notes and pari passu in right of payment with all
other existing or future senior indebtedness of the Company. As of
March 31, 1995 and after giving effect to the Refinancing, there
was approximately $5.8 million of indebtedness which would have
ranked pari passu in right of payment with the Notes. In addition,
the Company has the ability to borrow additional indebtedness of
up to approximately $40.0 million under the Credit Agreement. The
Company's indebtedness under the Credit Agreement is secured by
substantially all of the assets of the Company. Any right of the
holders of the Notes to participate in the assets of the Company
will be subject to the prior claims of secured creditors, such as
the lenders under the Credit Agreement, with respect to those
assets securing such claims. As of the date of this Prospectus,
the Company has no indebtedness ranking junior in right of payment
to the Notes.
Restrictive Covenants........................ The indenture governing the Notes (the 'Indenture') contains
certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitations on additional
indebtedness; (ii) limitations on restricted payments; (iii)
limitations on the incurrence of liens; (iv) limitations on
transactions with affiliates; (v) the application of the proceeds
of certain asset sales; (vi) restrictions on the issuance of
preferred stock of Restricted Subsidiaries (as defined); (vii)
limitations on the creation of restrictions on the ability of
Restricted Subsidiaries to make certain distributions and payments
to the Company and other Restricted Subsidiaries; and (viii)
limitations on the merger, consolidation or transfer of all or
substantially all of the assets of the Company and the Restricted
Subsidiaries with or to another person. See 'Description of the
Notes--Certain Covenants.'
</TABLE>
12
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<TABLE>
<S> <C>
Exchange Offer; Registration Rights.......... Pursuant to the Registration Rights Agreement, the Company has
agreed to use its best efforts to file within 30 days and cause to
become effective within 90 days of the Issue Date a registration
statement (the 'Exchange Offer Registration Statement') with
respect to an offer to exchange the Notes for senior unsecured
debt securities of the Company with substantially identical terms
to the Notes. The Company has also agreed, under certain
circumstances, to file and cause to
become effective a Shelf Registration, as described above. As
described in the following paragraph, the interest rate on the
Notes will increase under certain circumstances if the Company is
not in compliance with its registration obligations. The filing of
the registration statement of which this Prospectus is a part is
intended to satisfy the requirement to file the Exchange Offer
Registration Statement.
In the event that (i) an Exchange Offer Registration Statement
with respect to the Exchange Offer is not filed with the
Commission on or prior to the 30th day following the Issue Date,
(ii) such Exchange Offer Registration Statement is not declared
effective on or prior to the 90th day following the Issue Date,
(iii) the Exchange Offer is not consummated on or prior to the
120th day following the Issue Date or (iv) a required Shelf
Registration Statement with respect to the Notes is not declared
effective on or prior to the 150th day following the Issue Date,
the interest rate borne by the Notes will be increased by 0.25%
per annum, which rate will be increased by an additional 0.25% per
annum for each 90-day period that any such additional interest
continues to accrue, with an aggregate maximum increase in the
interest rate per annum borne by the Notes of 1.0%. If applicable,
in the event a Shelf Registration Statement ceases to be effective
for a period in excess of 15 days, whether or not consecutive, in
any given year, the interest rate borne by the Notes will be
increased by an additional 0.25% per annum on the 16th day in the
applicable year such Shelf Registration Statement ceases to be
effective, which rate will be increased by an additional 0.25% per
annum for each additional 90 days that such Shelf Registration
Statement is not effective, subject to the same aggregate maximum
increase in interest rate referred to above. Upon the filing of
the Exchange Offer Registration Statement, the effectiveness of
the Exchange Offer Registration Statement or the consummation of
the Exchange Offer, as the case may be, the interest rate borne by
the Notes will be reduced by the full amount of any such increase
to the extent that such increase related to the failure of any
such event to have occurred. Upon the effectiveness of a Shelf
Registration Statement, the interest rate borne by the Notes will
be reduced to the original interest rate of the Notes unless and
until increased as described above. See 'Exchange Offer;
Registration Rights.'
</TABLE>
13
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<TABLE>
<S> <C>
Use of Proceeds.............................. No proceeds will be received by the Company from the Exchange
Offer. The Company's net proceeds from the sale of the Old Notes,
approximately $95.3 million, together with the net proceeds of the
Preferred Stock Investment, were used to repay the outstanding
balance under the Prior Credit Agreement, an existing mortgage and
certain notes payable. It is expected that, subject to the
conditions and borrowing base set forth in the Credit Agreement,
additional amounts will be borrowed under the Credit Agreement for
general corporate purposes, including funding expansion of the
Company's core public pay telephone business. See 'Use of Proceeds.'
Absence of a Public Market
for the Notes................................ Prior to this offering, there has not been any public market for
the Notes, however, the Old Notes are eligible for trading in the
PORTAL Market of the National Association of Securities Dealers,
Inc. The Notes are not listed on a national securities exchange
and are not authorized for trading on Nasdaq. Accordingly, there
can be no assurance as to the development or liquidity of any
market for the Old Notes or the Exchange Notes.
Transfer Restrictions........................ The Old Notes have not been registered under the Securities Act
and may not be offered or sold, except pursuant to an exemption
from, or in a transaction not subject to, the registration
requirements of the Securities Act.
</TABLE>
RISK FACTORS
An investment in the Notes involves a high degree of risk. Prior to making
an investment in the Exchange Notes, prospective purchasers should consider all
of the information contained in this Prospectus. In particular, prospective
purchasers should consider the risks set forth under 'Risk Factors.'
14
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ----------
1990 1991 1992 1993 1994 1994
-------- -------- -------- -------- ---------- ----------
(RESTATED) (RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues................................ $ 42,694 $ 55,876 $ 71,483 $ 79,401 $ 114,121 $ 25,126
Costs and expenses:
Telephone charges........................... 13,491 18,346 22,160 18,398 41,264 8,304
Commissions................................. 7,620 10,416 14,868 17,584 23,565 4,877
Field service and collection................ 5,982 6,386 9,818 11,994 18,608 4,916
Depreciation and amortization............... 5,242 7,867 9,900 12,958 19,185 4,112
Selling, general and administrative......... 7,841 7,233 7,188 7,368 13,043 2,672
Interest expense............................ 1,929 2,506 2,630 2,504 5,312 989
Loss from operations of prepaid calling card
and international telephone centers..... -- -- -- 1,730 1,816 730
Loss on disposal of prepaid calling card
and international telephone centers....... -- -- -- -- 3,690 --
Other....................................... -- -- -- -- -- --
-------- -------- -------- -------- ---------- ----------
Total costs and expenses.................. 42,105 52,754 66,564 72,536 126,483 26,600
Income (loss) from continuing operations
before taxes.............................. 589 3,122 4,919 6,865 (12,362) (1,474)
(Provision for) benefit from income
taxes(1)...................................... (289) (1,240) (1,774) (2,586) 4,722 465
-------- -------- -------- -------- ---------- ----------
Income (loss) from continuing operations...... 300 1,882 3,145 4,279 (7,640) (1,009)
Income (loss) from discontinued operations.... -- -- 109 1,063 (10,753) (1,048)
Extraordinary loss from extinguishment of
debt, net -- -- -- -- -- --
-------- -------- -------- -------- ---------- ----------
Net income (loss)......................... $ 300 $ 1,882 $ 3,254 $ 5,342 $ (18,393) $ (2,057)
-------- -------- -------- -------- ---------- ----------
-------- -------- -------- -------- ---------- ----------
Ratio of earnings to fixed charges............ 1.3x 2.1x 2.5x 2.8x --(2) --(2)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)..................... $ 331 $ (1,030) $ 690 $ 673 $ 16,402 --
Total assets.................................. 38,438 45,036 79,257 173,342 190,591 --
Total long-term debt (including current
maturities)................................... 22,600 25,933 38,021 79,782 115,325 --
Shareholders' equity.......................... 9,262 12,339 27,604 65,333 48,715 --
OTHER DATA:
Number of pay telephones at end of period..... 11,486 16,680 21,652 35,687 40,017 35,764
Capital expenditures.......................... $ 9,002 $ 7,914 $ 11,215 $ 8,676 $ 9,201 $ 4,459
EBITDA(3)..................................... $ 7,760 $ 13,495 $ 17,449 $ 22,327 $ 12,135 $ 3,627
Adjusted EBITDA(4)............................ 7,060(5) 13,495 17,449 21,189(6) 21,033(7) 3,987(8)
Pro forma interest expense(10)................ -- -- -- -- 8,267 --
Ratio of Adjusted EBITDA to pro forma interest
expense(4)(10)............................... -- -- -- -- 2.5x --
<CAPTION>
1995
----------
(RESTATED)
<S> <C>
OPERATING DATA:
Total revenues................................ $ 27,454
Costs and expenses:
Telephone charges........................... 8,491
Commissions................................. 6,297
Field service and collection................ 4,628
Depreciation and amortization............... 4,741
Selling, general and administrative......... 2,368
Interest expense............................ 1,479
Loss from operations of prepaid calling card
and international telephone centers..... --
Loss on disposal of prepaid calling card
and international telephone centers....... --
Other....................................... 27
----------
Total costs and expenses.................. 28,031
Income (loss) from continuing operations
before taxes.............................. (577)
(Provision for) benefit from income
taxes(1)...................................... 216
----------
Income (loss) from continuing operations...... (361)
Income (loss) from discontinued operations.... --
Extraordinary loss from extinguishment of
debt, net (2,894)
----------
Net income (loss)......................... $ (3,255)
----------
----------
Ratio of earnings to fixed charges............ --(2)
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)..................... $ 5,504
Total assets.................................. 184,857
Total long-term debt (including current
maturities)................................... 114,176
Shareholders' equity.......................... 45,396
OTHER DATA:
Number of pay telephones at end of period..... 40,040
Capital expenditures.......................... $ 1,272
EBITDA(3)..................................... $ 5,643
Adjusted EBITDA(4)............................ 4,295(9)
Pro forma interest expense(10)................ 1,960
Ratio of Adjusted EBITDA to pro forma interest
expense(4)(10)............................... 2.2x
<FN>
-------------
(1) In December 1987, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 96, Accounting for
Income Taxes. The Company adopted this Statement prospectively in 1988. In
February 1992, the FASB issued SFAS 109 which supersedes SFAS 96. The
Company adopted SFAS 109 prospectively in 1991.
(2) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income from continuing operations
plus total interest expense and one-third of rental expense) by fixed
charges. Fixed charges include interest costs from continuing operations
and Discontinued Operations, amortization of deferred financing costs and
one-third of rental expense. The Company has assumed that one-third of
rental expense is representative of the interest factor. On an historical
basis, the Company's earnings available for fixed charges in 1994 and in
the first quarters of 1994 and 1995 were insufficient to cover fixed
charges by approximately $12.4 million, $1.5 million and $0.6 million,
respectively. The Company's pro forma earnings available for fixed charges
in 1994 and the first quarter of 1995 would have been insufficient to cover
fixed charges by approximately $15.0 million and $1.2 million,
respectively.
(3) EBITDA consists of net earnings before interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent net income, cash flow
or any other measures of performance in accordance with generally accepted
accounting principles, but is included because management believes certain
investors find it to be a useful tool for evaluating creditworthiness.
(4) Adjusted EBITDA is EBITDA adjusted to eliminate one-time income and expense
items and the losses from the operations and disposition of the prepaid
calling card and international telephone center business, but does not
eliminate the compensation and fringe benefit expense included in 1994,
estimated at approximately $2.8 million, associated with the reduction of
the Company's work force by approximately 100 employees during 1994.
(5) Eliminates one-time income adjustments of approximately $0.7 million for
the buyout of certain of the Company's reseller agreements by one of the
Company's operator service providers.
(6) Eliminates one-time income adjustments of approximately $1.7 million
resulting from certain excise, state sales and use tax refund claims and
$1.2 million related to the reduction of validation, royalty and license
fees.
(7) Eliminates the 1994 Charges of approximately $4.0 million recorded for,
among other things, amounts reserved for settling disputes with service
providers, severance charges, lease termination charges and costs incurred
in connection with an abandoned merger transaction and eliminates a
one-time income adjustment of approximately $0.6 million for a contract
signing bonus and volume discounts credited to the Company by one of its
service providers. Does not eliminate the compensation and fringe benefit
expense, estimated at approximately $2.8 million, associated with the
reduction of the Company's work force by approximately 100 employees during
1994. There can be no assurance that charges similar to the 1994 Charges
will not be taken in the future. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--The 1994 Charges.'
(8) Eliminates one time-charges of approximately $0.2 million for additional
bad debt reserves and one-time income adjustments of approximately $0.6
million for a contract signing bonus and volume discounts credited to the
Company by certain of its service providers.
(9) Eliminates the reduction of telephone charges of approximately $1.3 million
recorded as a result of a settlement of a dispute regarding past periods
with one of the Company's operator service providers.
(10) Pro forma interest expense is presented after giving pro forma effect to
the Refinancing and the application of the proceeds therefrom as though it
had occurred on January 1, 1994. In accordance with generally accepted
accounting principles, interest expense is after allocation of
approximately $5.0 million and $1.0 million of interest expense to the
prepaid calling card and international telephone center business and the
Discontinued Operations for the year ended December 31, 1994 and the
quarter ended March 31, 1995, respectively. Pro forma interest expense is
net of interest income of $0.2 million and $0.2 million for the year ended
December 31, 1994 and the quarter ended March 31, 1995, respectively.
</FN>
</TABLE>
15
<PAGE>
RISK FACTORS
An investment in the Notes is highly speculative. Prior to making an
investment in the Exchange Notes, prospective purchasers should carefully
consider all of the information contained in this Prospectus and, in particular,
should evaluate the following risk factors.
IMPACT OF LEVERAGE
On a pro forma basis, after giving effect to the Refinancing, the Company
would have had, as of March 31, 1995, total long-term debt of approximately
$103.5 million and the ability to borrow, under the borrowing base formula of
the Credit Agreement, approximately an additional $40.0 million. In addition, on
a pro forma basis, after giving effect to the Refinancing, the Company's
earnings would have been insufficient to cover fixed charges by approximately
$15.0 million and $1.2 million for the year ended December 31, 1994 and the
quarter ended March 31, 1995, respectively. Although the Indenture will limit
the incurrence of additional indebtedness in the future, the Company may be
permitted to incur substantial additional indebtedness, which may bear interest
at variable rates and contain significant restrictions on the Company's
activities. Such indebtedness may be incurred in the ordinary course of business
or otherwise, including in connection with acquisitions.
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including, among other things, the
following: (i) the impairment of the Company's ability to obtain financing in
the future for working capital, capital expenditures, acquisitions, general
corporate or other purposes; (ii) the dedication of a substantial portion of the
Company's cash flow from operations for the payment of principal and interest on
its indebtedness; (iii) the vulnerability of the Company to economic downturns
and competitive pressures due to its high degree of leverage; and (iv)
difficulties in satisfying its obligations in respect of indebtedness, including
the Notes. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
DEFAULTS UNDER INDEBTEDNESS
As a result of the Company's losses in 1994, the Company was not in
compliance with various financial covenants contained in the Prior Credit
Agreement at June 30, 1994 and at December 31, 1994. In September 1994, the
senior lenders waived the Company's non-compliance at June 30, 1994 and the
Prior Credit Agreement was amended to make the covenants less restrictive for
the balance of 1994. In March 1995, the Company amended certain terms contained
in the Prior Credit Agreement. In connection with the amendment, the senior
lenders agreed to waive the Company's non-compliance for the fourth quarter of
1994 and amended the covenants for the remainder of 1995 making them less
restrictive. However, as described under 'Summary--Recent Developments' and
'Business--Legal Proceedings,' the Company recently defaulted in making certain
payments under $6.0 million in principal amount of promissory notes issued in
connection with a 1993 acquisition due, in part, to disputes regarding the
indemnification obligations of the holder of the notes and to conserve cash in
light of the Company's working capital requirements and amortization
requirements under the Prior Credit Agreement. The Company has obtained
temporary waivers in respect of defaults under other indebtedness principally
arising by reason of the payment defaults. The nonpayment of the ACI notes was
the subject of certain litigation, which has recently been settled. See
'Business--Legal Proceedings.'
The Company's payment defaults in respect of the promissory notes held by
ACI, as well as the litigation by ACI and the restatement of the Company's first
quarter 1994 financial statements, has resulted in defaults under the Prior
Credit Agreement and the Company's $2.5 million in mortgage indebtedness. On
May 31, 1995, the lenders under the Prior Credit Agreement waived the defaults
arising from the ACI litigation, such restatement and the payment defaults in
respect of the ACI promissory notes, provided that
16
<PAGE>
by June 30, 1995 the Company either consummated the Refinancing or settled the
ACI litigation on terms that do not require payment by the Company of an amount
in excess of $6.0 million. The ACI litigation was settled in June 1995 for
approximately $5.7 million. On May 31, 1995, the Company's mortgage lender
temporarily waived the defaults arising out of the payment defaults on the ACI
promissory notes provided that the mortgage indebtedness is repaid prior to
August 31, 1995. The Company used the net proceeds from the Refinancing to repay
all indebtedness under the Prior Credit Agreement, and to repay certain notes
payable, including the mortgage pending a planned new financing of the mortgaged
property. See 'Use of Proceeds.' While the Company believes that the Refinancing
will address the liquidity issues currently facing the Company, cure all
defaults in respect of indebtedness and improve its financial condition, there
can be no assurance that the Company will not default under its indebtedness in
the future or have future liquidity problems and that Noteholders will not be
materially adversely affected thereby.
RESTRICTIONS IMPOSED BY LENDERS; IMPACT OF ASSET ENCUMBRANCES
The Credit Agreement contains significant financial and operating
covenants, including, among other things, requirements that the Company maintain
minimum net worth and cash flow levels, and maintain certain financial ratios,
prohibitions on the ability of the Company to incur certain additional
indebtedness and restrictions on its ability to make capital expenditures, to
incur or suffer to exist certain liens, to pay dividends or to take certain
other corporate actions. Amounts will only be available under the Credit
Agreement if such financial maintenance and other covenants are satisfied and
the borrowing base calculation (which will be based upon the amount of eligible
accounts receivable and eligible installed public pay telephones) are satisfied.
There can be no assurance that the Company will be able to comply with such
covenants or that such covenants will not adversely affect the Company's ability
to conduct its operations, finance its capital needs or successfully pursue its
business strategies. As described above under '--Defaults under Indebtedness,'
the Company has failed to comply with its covenants under the Prior Credit
Agreement and other indebtedness and there can be no assurance that it will do
so in the future. Any such non-compliance may have a material adverse effect on
Noteholders.
Although the Company believes that the terms of the Credit Agreement
provide it with adequate liquidity and flexibility to comply with the financial
and other covenants contained therein and to pursue its business strategies,
there can be no assurance that the Company will comply with such covenants or
not be materially restricted by the terms of the Credit Agreement. In addition,
changes in economic or business conditions or other factors beyond the Company's
control may adversely affect the Company's ability to comply with such covenants
or pursue its business strategies. A failure to satisfy any financial or other
covenant in the Credit Agreement could permit the lenders under the Credit
Agreement to accelerate the indebtedness under the Credit Agreement, which would
materially adversely affect holders of the Notes.
The Notes are senior obligations of the Company ranking pari passu in right
of payment with all existing and future senior obligations of the Company,
including indebtedness under the Credit Agreement and any refinancing thereof.
However, the Notes are unsecured obligations while substantially all of the
assets of the Company will be pledged to secure the Company's obligations under
the Credit Agreement. Indebtedness under the Credit Agreement and any other
secured indebtedness of the Company will effectively rank prior to the 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 available
proceeds or other assets for holders of the Notes to recover all or any portion
of their claims against the Company under the Notes and the Indenture.
See '--Defaults under Indebtedness,' 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources' and 'Description of the Credit Agreement.'
17
<PAGE>
RECENT LOSSES
The Company incurred a loss from continuing operations in 1994 and the
first quarter of 1995 of approximately $7.6 million and $0.4 million,
respectively, including losses from the Company's prepaid calling card business
and international telephone center operations of approximately $5.5 million in
1994. In addition, the Company had a loss from discontinued operations in 1994
of approximately $10.8 million. Losses from continuing operations were primarily
the result of increased operating expenses attributable to the Company's
vertical integration strategy, the integration of an acquisition of a
significant number of public pay telephones in the latter half of 1993 and
approximately $2.7 million of 1994 Charges to net income after taxes taken
during 1994, which management believes are one-time charges. These charges
included, among other things, amounts reserved for settling disputes with
service providers, severance charges, lease termination charges and costs
incurred in connection with an abandoned merger transaction. Despite the 1994
Operational Restructuring, there can be no assurance as to the future
profitability of the Company's continuing or Discontinued Operations or as to
the Company's ability to dispose of the Discontinued Operations or the
international telephone center operations on favorable terms or on the terms
contemplated by the Company's consolidated financial statements. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations.'
RISKS ASSOCIATED WITH BUSINESS STRATEGIES AND DISCONTINUED OPERATIONS
In recent years, the Company attempted to vertically integrate its public
pay telephone business and entered into a variety of complementary niche
telecommunications businesses, including its inmate telephone, prepaid calling
card and international telephone centers and cellular telephone rental
operations. The capital requirements and management attention required by these
businesses diverted the Company from its core public pay telephone business.
Accordingly, in December 1994, the Company decided to focus on its core public
pay telephone business and divest itself of the prepaid calling card and
international telephone center operations and the Discontinued Operations. The
Company's business strategies for growing its public pay telephone business
include growth through acquisitions and new installations. In general, the
Company has been able to integrate acquired public pay telephones without
significant costs or management issues; however, in 1994, it experienced
difficulties in integrating one of its large acquisitions, which were
exacerbated by management's focus on the prepaid calling card and international
telephone center operations and the Discontinued Operations. While the Company
has undertaken the 1994 Operational Restructuring and made efforts to improve
the quality of its management infrastructure and systems, there can be no
assurance that the 1994 Operational Restructuring will be a successful strategy
or that the Company will be able to expand its core public pay telephone
business either through acquisitions or through internal growth, successfully
integrate acquired public pay telephones, hire qualified new employees to meet
the requirements of its business or obtain the capital necessary to permit it to
pursue its business strategies.
In connection with the Preferred Stock Investment, the Company has agreed
to certain affirmative and negative covenants with respect to the conduct of its
business, among other matters. In particular, absent approval of 75% of the
members of the Board of Directors of the Company (which would effectively
require the approval of a director elected by the holders of the Preferred
Stock), the Company will be restricted from entering into a number of
transactions outside of the ordinary course of business (including acquisitions
and dispositions of assets (other than the sale of the Discontinued Operations
or the international telephone center operations) involving aggregate
consideration of more than $5.0 million). The foregoing restriction may prevent
the Company from entering into certain acquisitions in furtherance of its
business strategy. See 'Preferred Stock Investment.'
In order to focus on the Company's core public pay telephone business, it
will be necessary to complete the divestiture of the Discontinued Operations and
the international telephone center operations.
18
<PAGE>
The Company's cellular telephone rental operations are not currently profitable
and its inmate telephone business is subject to increasing competitive pressures
and the risks attendant to having a significant number of its contracts subject
to renewal in the next 24 months. There can be no assurance as to whether the
Company will be successful in renewing existing inmate telephone contracts or
that the inmate telephone business will not be adversely affected by the
Company's announcement of its decision to divest the inmate telephone business.
As such, there can be no assurance as to the Company's future profitability or
as to the Company's ability to dispose of the Discontinued Operations or the
international telephone center operations on favorable terms or on the terms
contemplated by the Company's consolidated financial statements. If the Company
disposes of any of the Discontinued Operations for consideration that is less
than the book value of such operation, then the Company will have to take a
charge against net income for any such difference. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Discontinued
Operations' and 'Business--Discontinued Operations.'
REGULATORY FACTORS
Most aspects of the Company's business are subject to regulation by the
FCC, the agency that administers the interstate common carriage of
telecommunications, and by the state public utility commissions, or both.
Changes in existing laws and regulations, as well as new laws and regulations,
applicable to the activities of the Company or other telecommunications
businesses, may materially adversely impact the operations, revenues and
expenses of the Company (including the extent of competition, the charges of
providers of interexchange and operator services and the implementation of new
technologies).
State regulatory commissions are primarily responsible for regulating the
rates, terms and conditions for intrastate public pay telephone and inmate
telephone services. Neither state nor federal regulation focuses on the
competitive aspects of the business environment in which the Company operates.
The Company is also subject to state regulation of operator services and, to a
limited extent, cellular resale services. Such regulations may include notice
and identification requirements, maximum price limitations, interconnection
rates, reporting requirements and prohibitions on handling certain local and
long distance calls. Public pay telephones in the United States are owned and
operated by LECs or by independent operators such as the Company. A LEC is
traditionally the exclusive line service provider in a given geographical region
(for example, Southern Bell and Pacific Bell are LECs owned by RBOCs). However,
alternative competitive providers of local and intrastate services are beginning
to emerge. There are four states in which it is illegal to provide certain
intrastate services using non-LEC public pay telephones: Alaska, Connecticut,
Hawaii and Oklahoma. Connecticut, however, has proceedings underway to implement
public pay telephone competition within the state.
The Company's operations are significantly influenced by the regulation of
public pay telephone, inmate telephone, long distance reseller services and
other telecommunication services. Authority for regulation of these services is
concurrently vested in the FCC and the various state public service commissions.
Regulatory jurisdiction is determined by the interstate or intrastate character
of the subject service and the degree of regulatory oversight exercised varies
among jurisdictions. While most matters affecting the Company's operations fall
within the administrative purview of these regulatory agencies, state and
federal legislatures and the federal district court administering the
divestiture consent decree for AT&T are also involved in establishing certain
rules and requirements governing aspects of these services.
On April 9, 1992, the FCC proposed a new access plan for operator assisted
interstate calls dialed on 0+ basis. Currently 0+ calls are sent directly by the
LEC to the operator service provider selected by the host location. Under the
proposed access plan, known as Billed Party Preference, 0+ calls would be sent
instead to the operator service provider chosen by the party paying for the
call. Billed Party Preference allows a telephone user to bill a call to the
user's pre-established carrier at the user's home or office, thereby
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bypassing the opportunity for the pre-subscribed carrier of the public pay
telephone provider to handle and receive revenues from the call. The FCC has
tentatively concluded that a nationwide Billed Party Preference system for
interstate operator assisted calls is in the public interest. Under a Billed
Party Preference system, the billed party could bypass the Company entirely,
allowing 0+ calls to be made on the Company's telephones without the payment of
any compensation to the Company. If the Company does not receive revenue for 0+
calls, the Company will be unable to pay commissions for such calls to owners of
locations at which public pay telephones are installed, correctional facilities
at which inmate telephones are located, and potentially, car rental companies at
which cellular telephones are rented. The FCC has requested and received public
comment on the question of compensation to public pay telephone companies under
Billed Party Preference. The entire Billed Party Preference proposal remains
under consideration at present and the outcome is uncertain. If implemented,
Billed Party Preference could have a significant adverse impact on the Company.
For additional information concerning certain regulations affecting the
Company, see 'Recent Developments--Certain Regulatory Developments' and
'Business--Regulation.'
GOING CONCERN OPINION; RESTATEMENT OF FINANCIAL STATEMENTS; AUDIT COMMITTEE
REPORT
The report of the Company's independent accountants on the Company's
consolidated financial statements appearing in this Prospectus contains an
explanatory paragraph relating to the Company's ability to continue as a going
concern, as described in Note 18 to the Company's consolidated financial
statements appearing elsewhere herein. Management believes that, as a result of
the Company's receipt of the proceeds of the offering of Notes and the use of
such proceeds as described herein to repay outstanding indebtedness, the bases
for the explanatory paragraph relating to the Company's ability to continue as a
going concern should no longer exist. However, no assurance has been or can be
given by the Company or by its independent accountants that such explanatory
paragraph will be removed from the independent accountant's report.
In May 1995, the Company received a comment letter from the Securities and
Exchange Commission (the 'SEC') on a registration statement on Form S-3 relating
to common stock, issued in connection with certain acquisitions, containing
comments on the Company's prior filings under the Securities Exchange Act of
1934, among other things. In the course of formulating its responses to the
comment letter, the Company discovered that its interest in Global Link Teleco
Corporation ('Global Link') was 28.8% instead of the intended 19.99%. To correct
this error, the Company reduced its share ownership to the 19.99% level. These
events caused the Company and its independent accountants to reevaluate the
accounting for its interest in Global Link (formerly known as Phone Zone Teleco
Corporation). Such review resulted in a determination that the equity method of
accounting for its Global Link investment was appropriate. Consequently, the
Company has restated its consolidated financial statements for fiscal 1994 and
the first quarter of fiscal 1995 to reflect the revision in accounting treatment
for the Global Link investment.
The Company has also restated its financial statements for the quarters
ended March 31 and June 30, 1994, as set forth in Form 10-Q's for such periods,
to reflect the timing of approximately $2.7 million in adjustments. These
adjustments, which include additional reserves for changes in estimates of
uncollectible receivables and vendor claims and the write-off of certain
acquisition costs, were originally recorded during the quarter ended June 30,
1994 and have now been reflected in the quarter ended March 31, 1994 to more
accurately reflect the timing of such adjustments. The restated quarterly
financial statements also reflect the $2.0 million gain on the March 31, 1994
sale of the Company's two telecommunications centers in New York to Phone Zone
Teleco Corporation in the second quarter of 1994 (when initial payment for the
centers was received) rather than the first quarter (when Phone Zone Teleco
Corporation took control of the centers on the basis of an agreement in
principle). These changes had no impact on net income or cash flow for the
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year ended December 31, 1994. While the Company believes that it has
substantially addressed all material SEC comments on the Form S-3 registration
statement, there can be no assurance that further comments will not be received.
In connection with their 1993 and 1994 audits of the Company, Price
Waterhouse issued letters to the Company's Audit Committee indicating a number
of reportable conditions in the Company's system of internal accounting
procedures, one of which constituted a material weakness relating to the proper
cut-off of quarterly financial information. Management believes that it
adequately addressed this material weakness prior to the end of fiscal 1994.
There were no disagreements with Price Waterhouse as of the date of Price
Waterhouse's audit report contained in this Prospectus on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to Price Waterhouse's satisfaction,
would have caused them to make reference to the subject matter of the
disagreement in connection with their report. The report contains explanatory
paragraphs relating to the Company's ability to continue as a going concern and
for litigation matters as described above.
COMPETITION
The Company's businesses are, and can be expected to remain, highly
competitive. The markets in which the Company operates are fragmented, but
include certain large, well-capitalized providers of telecommunications services
with substantially greater resources than the Company. The Company's principal
competition in its public pay telephone business comes from LECs operated by the
RBOCs, GTE Corporation ('GTE'), a number of independent providers of public pay
telephone services, major operator service providers and interexchange carriers.
The Company's competition in its inmate telephone business is from LECs,
interexchange carriers and independent providers of public pay telephone
systems. In the cellular telephone rental business, the Company competes with
GTE and other providers that contract cellular telephone rental services through
hotels and auto rental agencies. The Company also competes with many other
non-LEC telecommunication companies which offer products and services similar to
those of the Company. Increased competition from these sources is causing the
Company to pay higher commissions on revenues generated by the public pay
telephones to Property Owners. Such higher commissions could have a material
adverse effect on the Company by increasing its expenses without a corresponding
increase in revenue and by preventing the Company from obtaining or maintaining
desirable locations for its public pay telephones. Traditional regulatory
actions have not addressed issues involving competitive disputes. See
'Business--Public Pay Telephones--Competition.'
The Company's public pay telephone business is also materially affected by
competition in other segments of the telecommunications industry and related
regulatory issues. For example, since 1992, AT&T and MCI Communications, Inc.
('MCI') have aggressively promoted the use of access codes to encourage callers
to 'dial around' the selected operator service provider at public pay
telephones. Dial around calls are attractive to the caller because the caller
pays the long distance rates of the operator service provider selected by the
caller as opposed to the often inflated per minute rates and surcharges imposed
by many operator service providers selected at public pay telephones. Prior to
January 1, 1995, the Company only received a fixed amount per telephone as
compensation for all interstate and, in some cases, intrastate dial around calls
placed at its public pay telephones regardless of how many dial around calls
were actually placed at such telephones. Effective January 1, 1995, the Company
will receive from AT&T a fixed amount per telephone call for each interstate and
interLATA intrastate AT&T dial around call placed at its public pay telephones
while it continues to receive the fixed amount per telephone from other
carriers. The amount for which the Company is compensated for dial around calls
is substantially below the amount it is compensated for 0+ calls made at its
public pay telephones through its selected operator service providers. The
Company has seen a steady decline in the number of 0+ calls completed at its
public pay telephones which has adversely affected the Company's non-coin
revenues.
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In order to address the impact of dial around calls, as well as pursue new
business opportunities, the Company entered into the AT&T Agreement which
provides for the Company to receive competitive commission payments for all 0+
and AT&T dial around calls. There can be no assurance that the AT&T Agreement
will be a financially beneficial means of addressing dial around issues given
the dynamic nature of the domestic telecommunications industry and the evolving
regulatory framework, or, if successful, it can be renewed. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview.' In addition, there can be no assurance that there are not
or will not be other competitive trends in other segments of the
telecommunications industry that may materially adversely affect 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. The Company's business could be impacted by the introduction
of new technology, such as improved wireless communications, cellular telephone
service and other personal communications systems. The Company believes that its
future success will depend on its ability to anticipate and respond to 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.
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES
The Company's long distance operations require that its equipment and the
equipment of its long distance service providers be operational 24 hours per
day, 365 days per year. As is the case with other telecommunications companies,
the Company's long distance operations may experience temporary service
interruptions or equipment failures, which may result from causes beyond the
Company's control. Any such event could have a material adverse effect on the
Company.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of certain of its officers and
other management personnel, including: Jeffrey Hanft, the Company's Chief
Executive Officer; Robert D. Rubin, the Company's President; Richard F.
Militello, the Company's Chief Operating Officer; Bonnie Biumi, the Company's
Chief Financial Officer; Lawrence T. Ellman, the Company's President, Public Pay
Telephone Division; and Bruce W. Renard, the Company's Vice President of
Regulatory Affairs and General Counsel. The loss of the services of one or more
of these individuals could have a material adverse effect on the Company. In
addition, the failure of the Company to attract and retain additional management
to support its business strategy could also have a material adverse effect on
the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of Old Notes set forth in the legend thereon as a consequence of the
issuance of the Old Notes pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. In general, the
Old Notes may not be offered or sold, unless registered under the Securities
Act, 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
currently anticipate that it will register the sale of any Old Notes under the
Securities Act.
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COMPANY'S RIGHT TO TERMINATE EXCHANGE OFFER
The Company will not be required to accept Old Notes for exchange, and may
terminate the Exchange Offer, upon the occurrence of a number of events,
including (i) the commencement of any action, legal or governmental, with
respect to the Exchange Offer or which the Company reasonably determines would
make it inadvisable to proceed with the Exchange Offer, (ii) a banking
moratorium or similar event or international calamity involving the United
States, and (iii) a change in the business or prospects of the Company that may
have a material adverse effect on the Company. Holders of Old Notes may have
certain rights and remedies against the Company under the Registration Rights
Agreement should the Company fail to consummate the Exchange Offer, including
the right to receive certain additional interest on the Old Notes. See 'The
Exchange Offer--Conditions of the Exchange Offer.'
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Old Notes are currently owned by a relatively small number of
beneficial owners. Prior to the Exchange Offer, there has not been any public
market for the Notes, however, the Old Notes are eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages ('PORTAL')
Market. The holders of Old Notes who are not eligible to participate in the
Exchange Offer are entitled to certain rights to have the Company file the Shelf
Registration Statement with respect to resales of such Notes. The Old Notes have
not been registered under the Securities Act and are subject to restrictions on
transferability. See '--Consequences of Failure to Exchange.' The Company does
not intend to list the Exchange Notes or Old Notes on any national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation System. Accordingly, no assurance can
be given that an active public or other market will develop for the Notes or as
to liquidity of or the trading market for the Notes. If a trading market does
not develop or is not maintained, holders of the Notes may experience difficulty
in reselling the Notes or may be unable to sell them at all. If a market for the
Notes develops, any such market may be discontinued at any time. If a public
trading market develops for the Notes, future trading prices of the Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities. Depending on prevailing interest rates, the market for similar
securities and other factors, including the financial condition of the Company,
the Notes may trade at a discount from their principal amount.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for Exchange Notes should allow sufficient
time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer certain registration rights under the
Registration Rights Agreement will terminate with respect to such Notes. In
addition, any holder of Old Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange 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 Exchange Notes. See 'Plan of
Distribution.' 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. See 'The Exchange Offer.'
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on July 19, 1995 to the Initial
Purchaser pursuant to the Note Purchase Agreement. The Initial Purchaser
subsequently placed the Old Notes with 'qualified institutional buyers' in
reliance on Rule 144A under the Securities Act. Pursuant to the Registration
Rights Agreement executed in connection with the Company's sale of the Old Notes
to the Initial Purchaser, the Company agreed (i) to file with the Commission a
registration statement under the Securities Act with respect to the Exchange
Offer within 30 days of the Closing Date, (ii) use its best efforts to cause
such Exchange Offer Registration Statement to become effective under the
Securities Act no later than 90 days after the Closing Date, and (iii) unless
the Exchange Offer would not be permitted by law or a policy of the Commission,
to consummate the Exchange Offer on or prior to 120 days after the Closing Date.
This Prospectus and the Registration Statement to which it relates are intended
to satisfy such Company obligations under the Registration Rights Agreement. 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 term 'Holder' for
purposes of the Exchange Offer means any person in whose name Old Notes are
registered on the books of the Company. See 'Exchange Offer; Registration
Rights.'
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that Exchange
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
Exchange Notes (other than any such holder which 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 Exchange Notes are acquired in the ordinary
course of such holder's business and such holder does not intend to participate
and has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any Holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes could not rely on the position of the staff
of the Commission enumerated in Exxon Capital Holdings Corporation (available
April 13, 1989) or similar no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. In
addition, any such resale transaction should be covered by an effective
registration statement containing the selling securityholders information
required by Item 507 of Regulation S-K. Each broker-dealer that receives
Exchange 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 Exchange Notes. See '--Resales
of the the Exchange Notes.'
By tendering in the Exchange Offer, each Holder will represent to the
Company that, among other things, (i) the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the Holder,
(ii) neither the Holder nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes, (iii) neither the Holder nor any such other person is an
'affiliate,' as defined under Rule 405 of the Securities Act, of the Company,
and (iv) the Holder and such other person acknowledge that (a) any person
participating in the Exchange Offer for the purpose of distributing the Exchange
Notes must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on the
no-action letters referenced above and (b) failure to comply with such
requirements in such instance could result in such Holder incurring liability
under the Securities Act for which such Holder is not indemnified by the
Company.
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As a result of the filing and the effectiveness of the Exchange Offer
Registration Statement of which this Prospectus is a part, certain prospective
increases in the interest rate on the Old Notes provided for in the Registration
Rights Agreement will not occur. See 'Exchange Offer; Registration Rights.'
Following the consummation of the Exchange Offer, Holders of Old Notes not
tendered will generally not have any further registration rights and the Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for the Old Notes could be adversely
affected. See 'Consequences of Failure to Exchange.'
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of Exchange Notes for each $1,000 in principal amount of its
outstanding Old Notes. Exchange Notes will be issued only in integral multiples
of $1,000 to each tendering Holder whose Old Notes are accepted in the Exchange
Offer. The Company will accept any Old Notes validly tendered and not withdrawn
prior to 4:00 p.m., New York City time, on the Expiration Date. Old Notes that
are not accepted for exchange will be returned as promptly as practicable after
the Expiration Date. Holders may tender all or a portion of their Old Notes
pursuant to the Exchange Offer.
The form and terms of the Exchange Notes under the Indenture will be
identical in all material respects to the form and terms of the Old Notes,
except that (i) the offering of the Exchange Notes will have been registered
under the Securities Act and hence the Exchange Notes will not bear legends
restricting the transfer thereof, and (ii) holders of Exchange Notes will not be
entitled to certain rights intended for holders of unregistered securities under
the Registration Rights Agreement which will terminate upon the consummation of
the Exchange Offer. The Exchange Notes evidence the same debt as the Old Notes
(which they replace) and will be issued under, and be entitled to the benefits
of, the Indenture governing the Old Notes. The Exchange Notes will bear interest
from their date of issuance at the same rate and upon the same terms as the Old
Notes. See 'Description of the Notes.' Accrued and unpaid interest on the Old
Notes accepted for exchange for the period to but not including the date of
issuance of the Exchange Notes (the 'Exchange Date') will be paid to the holders
of Exchange Notes with the first interest payment on the Exchange Notes. Holders
whose Old Notes are accepted for exchange will be deemed to have waived the
right to receive any payment in respect of interest on the Old Notes accrued on
and after the Exchange Date.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes was outstanding. Approximately $98.0 million principal amount
of the Old Notes are registered in the name of Cede & Co., as nominee for The
Depository Trust Company (the 'Depository'), and the remainder of the Old Notes
are registered in the respective names of the four holders thereof. See
'Description of the Notes--Book Entry; Delivery and Form.' Solely for reasons of
administration (and for no other purpose) the Company has fixed the close of
business on July 31, 1995, as the record date for the Exchange Offer for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only a registered holder of Old Notes (or
such holder's legal representative or attorney-in-fact) as reflected on the
records of the Trustee under the Indenture may participate in the Exchange
Offer. There will be no fixed record date for determining registered holders of
Old Notes entitled to participate in the Exchange Offer.
Holders of Old Notes do not have appraisal or dissenters' rights under the
New York Business Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Securities Act and the rules and
regulations of the Commission thereunder.
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The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for tendering holders of
Old Notes for the purposes of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Tendering Holders will not be required to pay brokerage commissions or fees
or, subject to the instructions of the Letter of Transmittal, transfer taxes
with respect to the exchange of Old Notes for Exchange Notes pursuant to the
Exchange Offer. The Company will pay all charges and expenses, other than
certain taxes which may be levied in the event of any transfer of ownership, in
connection with the Exchange Offer. See '--Fees and Expenses'.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term 'Expiration Date' shall mean 4:00 p.m. New York City time, on
September 29, 1995, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term 'Expiration Date' shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 10:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under 'Conditions of the Exchange Offer' shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendments by means of a prospectus
supplement that will be distributed to the registered holders of Old Notes, and
the Company will extend the Exchange Offer for a period of five to ten business
days following such distribution, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to 10 business day
period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination, or amendment of the Exchange
Offer, the Company shall not have an obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to any news agency customarily used by the Company for public
announcements.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment of the
Exchange Notes. Interest on the Old Notes accepted for exchange will cease to
accrue on the date of issuance of the Exchange Notes.
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The Exchange Notes bear interest (as do the Old Notes) at a rate equal to
12 1/4% per annum. Interest on the Exchange Notes is payable semiannually on
January 15 and July 15 of each year, commencing on January 15, 1996.
PROCEDURES FOR TENDERING OLD NOTES
The tender by a Holder as set forth below and the acceptance thereof by the
Company will constitute a binding agreement between the tendering Holder and the
Company upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal. Except as set forth
below, a Holder who wishes to tender Old Notes for exchange pursuant to the
Exchange Offer must transmit such Old Notes, together with a properly completed
and duly executed Letter of Transmittal, including all other documents required
by such Letter of Transmittal, to the Exchange Agent at the address set forth
below under '--Exchange Agent' on or prior to 4:00 p.m. New York City time, on
the Expiration Date.
By executing the Letter of Transmittal, each holder will make to the
Company the representations set forth above in the third paragraph under the
heading '--Purpose and Effect of the Exchange Offer.'
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed either the box entitled 'Special Exchange Instructions' or the
box entitled 'Special Delivery Instructions' on the Letter of Transmittal or
(ii) by an Eligible Institution (as defined below). In the event that a
signature on a Letter of Transmittal or a notice of withdrawal, as the case may
be, is required to be guaranteed, such guarantee must be by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or is otherwise an
'eligible institution' within the meaning of Rule 17AD-15 under the Exchange Act
(collectively, 'Eligible Institutions').
If Old Notes are registered in the name of a person other than a signer of
the Letter of Transmittal, the Old Notes surrendered for exchange must either
(i) be endorsed by the registered holder, with the signature thereon guaranteed
by an Eligible Institution or (ii) be accompanied by a bond power, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder, with the signature thereon guaranteed by an
Eligible Institution along with the other documents required upon transfer by
the Note Purchase Agreement. The term 'registered holders' as used herein with
respect to the Old Notes means any person in whose name the Old Notes are
registered on the books of the Registrar for the Old Notes.
Tenders may be made only in principal amounts of $1,000 and integral
multiples thereof. Subject to the foregoing, Holders may tender less than the
aggregate principal amounts represented by the Old Notes deposited with the
Exchange Agent provided they appropriately indicate this fact in the Letter of
Transmittal accompanying the tendered Old Notes.
27
<PAGE>
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
(the 'Book-Entry Transfer Facility'), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such book-entry transfer
facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or 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. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole, reasonable discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Old Notes not properly
tendered or to reject any particular Old Notes which acceptance might, in the
judgment of the Company or its counsel, be unlawful. The Company also reserves
the absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Notes either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the Exchange Offer). The interpretation of the
terms and conditions of the Exchange Offer (including the Letter of Transmittal
and the instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes for exchange must be cured within such reasonable period of time as
the Company shall determine. The Company will use reasonable efforts to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange but shall not incur any liability for failure to give such
notification. Tenders of the Old Notes will not be deemed to have been made
until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, such person
should so indicate when signing, and, unless waived by the Company, proper
evidence satisfactory to the Company of such person's authority to so act must
be submitted.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Old Notes in the Exchange Offer should contact such registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender directly, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal and tendering Old Notes, make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's name. Beneficial owners
should be aware that the transfer of registered ownership may take considerable
time.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes and Letter of
Transmittal or any other documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date, or (iii) who cannot complete the
28
<PAGE>
procedures for book-entry transfer on a timely basis must tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution and a
Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be
signed by such Holder;
(ii) prior to the Expiration Date, the Exchange Agent must have received
from the Holder and the Eligible Institution a properly completed and duly
executed Letter of Transmittal and a Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Holder, the certificate number or numbers of the tendered Old Notes, and the
principal amount of tendered Old Notes, stating that the tender is being made
thereby and guaranteeing that, within five business days after the date of
delivery of the Notice of Guaranteed Delivery, the tendered Old Notes and any
other required documents will be deposited by the Eligible Institution with the
Exchange Agent; and
(iii) such properly completed and executed documents required by the Letter
of Transmittal and the tendered Old Notes in proper form for transfer must be
received by the Exchange Agent within five business days after the Expiration
Date.
Any Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent received
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 4:00 p.m. New York City time, on the Expiration Date. Failure to
complete the guaranteed delivery procedures outlined above will not, of itself,
affect the validity or effect a revocation of any Letter of Transmittal form
properly completed and executed by a Holder who attempted to use the guaranteed
delivery process.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Old Notes. See '--Conditions of the Exchange Offer.' For purposes of the
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as, and if the Company has given oral or written
notice thereof to the Exchange Agent.
In all cases, issuances of Exchange 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
non-exchanged Old Notes or substitute Old Notes evidencing the unaccepted
portion, as appropriate, will be returned without expense to the tendering
Holder thereof as promptly as practicable after the expiration or termination of
the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of Old Notes that have not been accepted for exchange by the
Company may be withdrawn at any time prior to 4:00 p.m. New York City time on
the Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent at its address set forth below
(see '--Exchange Agent'). Any such notice of withdrawal must (i) specify the
name of the person having deposited 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
29
<PAGE>
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 a bond power in the name of the person
withdrawing the tender, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution along with the other
documents required upon transfer by the Registration Rights Agreement or Note
Purchase Agreement, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the Depositor, pursuant to such documents to
transfer. All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. The Old Notes so
withdrawn, if any, will be deemed not to have been validly tendered for exchange
for purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are withdrawn will be returned to the Holder thereof without
cost to such Holder as soon as practicable after withdrawal. Properly withdrawn
Old Notes may be retendered by following one of the procedures described under
'Procedures for Tending Old Notes' above at any time on or prior to the
Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue the Exchange Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer if,
any time before the acceptance of the Old Notes for exchange or the exchange of
the Exchange Notes for the Old Notes, any of the following events shall occur,
which occurrence, in the sole judgment of the Company and regardless of the
circumstances (including any action by the Company) giving rise to any such
events, make it inadvisable to proceed with the Exchange Offer:
(i) there shall be threatened, instituted, or pending any action or
proceeding before, or any injunction, order, or decree shall have been issued
by, any court or governmental agency or other governmental regulatory or
administrative agency or commission (a) seeking to restrain or prohibit the
making or consummation of the Exchange Offer or any other transaction
contemplated by the Exchange Offer, or assessing or seeking any damages as a
result thereof or (b) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Old Notes pursuant
to the Exchange Offer; or any statute, rule, regulation, order or injunction
shall be sought, proposed, introduced, enacted, promulgated or deemed applicable
to the Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any domestic or foreign government or governmental authority or any
action shall have been taken, proposed or threatened by any domestic or foreign
government or governmental authority that, in the reasonable judgment of the
Company, might directly or indirectly result in any of the consequences referred
to in clauses (a) or (b) above or, in the reasonable judgment of the Company,
might result in the holders of the Exchange Notes having obligations with
respect to resales and transfer of Exchange Notes that are greater than those
described in this Prospectus or would otherwise in the reasonable judgment of
the Company make it inadvisable to proceed with the Exchange Offer; provided,
however, that the Company will use reasonable efforts to modify or amend the
Exchange Offer or to take such other reasonable steps as to make the provisions
of this section inapplicable;
(ii) there shall have occurred (a) a declaration of a banking moratorium or
any suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects the
extension of credit or (b) a commencement of wars, armed hostilities, or other
similar international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof;
(iii) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets, liabilities,
financial condition, operations, results of operation
30
<PAGE>
or prospects of the Company that, in the reasonable judgment of the Company, is
or may be adverse to the Company, or the Company shall have become aware of
facts that, in the sole judgment of the Company, have or may have adverse
significance with respect to the value of the Exchange Notes or the Old Notes;
or
(iv) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation of
the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the Expiration Date, subject,
however, to the rights of Holders to withdraw such Old Notes (see '--Withdrawal
Rights'), or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all validly tendered Old Notes which have not been
withdrawn. If such waiver constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer for a period of five to 10 business days
following such distribution, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such five to 10 business day period.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be asserted
by the Company regardless of the circumstances giving rise to any such condition
or may be waived by the Company in whole or in part at any time and from time to
time in its reasonable discretion. The failure by the Company at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Exchange Offer Registration Statement or the qualification of the
Indenture under the Trust Indenture Act of 1939.
Holders of Old Notes may have certain rights and remedies against the
Company under the Registration Rights Agreement should the Company fail to
consummate the Exchange Offer, notwithstanding any nonfulfillment of the above
conditions. Such conditions are not intended to modify such rights and remedies
in any respect.
TERMINATION OF CERTAIN RIGHTS
Holders of the Old Notes to whom this Exchange Offer is made have special
rights under the Registration Rights Agreement that will terminate upon the
consummation of the Exchange Offer. The Registration Rights Agreement provides
that certain rights under such agreement (including the right to receive
prospective increases in the interest rate on the Old Notes) shall terminate
upon the occurrence of (i) the filing with the Commission of the Exchange Offer
Registration Statement, (ii) the effectiveness under the Securities Act of the
Exchange Offer Registration Statement, and (iii) the consummation of the
Exchange Offer.
31
<PAGE>
EXCHANGE AGENT
First Union National Bank of North Carolina has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of the Prospectus, the Letter of Transmittal, and other
related documents should be addressed to the Exchange Agent as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail,
Overnight Courier or Hand: By Facsimile:
First Union National Bank of North Carolina (704) 383-7316
230 South Tryon Street, 8th Floor Attention: Corporate Trust Division
Charlotte, North Carolina 28288-1179 Confirmed by Telephone: (704) 374-2080
Attention: Corporate Trust Division (Originals of all documents submitted by
facsimile should be sent promptly by hand,
overnight courier or registered or certified mail.)
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees 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 acceptance 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 in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$40,000. 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, 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 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
The Old Notes which are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A, to
a person whom the seller reasonably believes is a qualified institutional buyer
within the meaning of Rule 144A under the Securities Act, purchasing for its own
account or for the account of a qualified institutional buyer to whom notice is
given that the resale, pledge or other transfer is being made in reliance on
Rule 144A, (iii) in an offshore transaction in accordance with Regulation S
under the Securities Act, but only in the case of a transfer that is effected by
the delivery to the transferee of Old Notes registered in its name (or its
nominee's name) on the books maintained by the registrar of the Old Notes, (iv)
pursuant to an exemption from registration in accordance with Rule 144 (if
available) or Rule 145 under the Securities Act,
32
<PAGE>
(v) in reliance on another exemption from
the registration requirements of the Securities Act, but only in the case of
a transfer that is effected by the delivery to the transferee of Old Notes
registered in its name (or its nominee's name) on the books maintained by
the registrar of the Old Notes, and subject to the receipt by the registrar or
co-registrar of a certification of the transferor and an opinion of counsel
(satisfactory to the Company) to the effect that such transfer is in compliance
with the Securities Act, or (vi) pursuant to an effective registration statement
under the Securities Act, in each case in accordance with any applicable
securities laws of any state of the United States. Following the consummation of
the Exchange Offer, holders of Old Notes will have limited rights under the
Registration Rights Agreement. See '--Termination of Certain Rights; The Shelf
Registration Statement.'
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Exchange Notes.
RESALES OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on an interpretation by
the staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a Holder (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act) who exchanges Old Notes for Exchange Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 thereof. However, if any Holder acquires Exchange
Notes in the Exchange Offer for the purpose of distributing or participating in
a distribution of the Exchange Notes, such Holder cannot rely on the position of
the staff of the Commission enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989) or similar no-action letters or any similar
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Further, each broker-dealer that receives Exchange 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 Exchange Notes.
As contemplated by the no-action letters referenced above and the
Registration Rights Agreement, each Holder accepting the Exchange Offer is
required to represent to the Company in the Letter of Transmittal that (i) the
Exchange Notes are to be acquired by the Holder or the person receiving such
Exchange Notes, whether or not such person is the Holder, in the ordinary course
of business, (ii) the Holder or any such other person (other than a
broker-dealer referred to in the next sentence) is not engaging and does not
intend to engage, in the distribution of the Exchange Notes, (iii) the Holder or
any such other person has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes, (iv) neither the Holder
nor any such other person is an 'affiliate' of the Company within the meaning of
Rule 405 under the Securities Act, and (v) the Holder or any such other person
acknowledges that if such Holder or other person participates in the Exchange
Offer for the purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those no-
action letters. As indicated above, each broker-dealer that receives Exchange
Notes for its own account in
33
<PAGE>
exchange for Old Notes must also acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. See 'Plan of
Distribution.'
THE SHELF REGISTRATION STATEMENT
In the event that applicable interpretations of the Staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 120 days of the Issue Date,
or if a holder of the Notes is not permitted to participate in the Exchange
Offer or does not receive freely tradeable Exchange Notes pursuant to the
Exchange Offer or, under certain circumstances, if the Initial Purchaser so
requests, the Company will use its best efforts to cause to become effective a
Shelf Registration Statement with respect to the resale of the Notes and use its
best efforts to keep such Shelf Registration Statement continuously effective
until three years after the Issue Date (or until one year after the Issue Date
if such Shelf Registration Statement is filed solely at the request of the
Initial Purchaser). See 'Exchange Offer; Registration Rights' for additional
information regarding the Shelf Registration Statement.
ADDITIONAL INTEREST
The Registration Rights Agreement provides that in the event that the
Company does not satisfy certain requirements under the Registration Rights
Agreement regarding the Exchange Offer and the Shelf Registration Statement,
certain holders of Notes will be entitled to receive certain increases in the
interest rate on their Notes. See 'Exchange Offer; Registration Rights.'
34
<PAGE>
THE COMPANY
The Company believes that it is the largest independent operator of public
pay telephones in the United States on the basis of the number of public pay
telephones in service. Since installing its first public pay telephone in 1985,
the Company's core public pay telephone business has grown rapidly to an
installed base, as of March 31, 1995, of 40,040 public pay telephones in 41
states and the District of Columbia. The Company's nationwide presence in the
public pay telephone market makes it an attractive supplier of public pay
telephone services to national and regional accounts, as compared with small
competitors and LECs.
The Company owns, operates, services and maintains a system of independent
public pay telephones. Its public pay telephone business generates revenues from
coin calls and non-coin calls, such as calling card, credit card, collect and
third party billed calls made from its telephones. Since January 1990, the
Company has acquired over 33,000 public pay telephones from 27 independent
public pay telephone providers. The Company also expands its base of public pay
telephones with its own marketing staff by obtaining contracts for new locations
where it believes there will be significant demand for public pay telephone
service, such as convenience stores, grocery stores, service stations, shopping
centers, hotels, restaurants, airports and truck stops. The Company has been
able to acquire and develop national corporate accounts which, as of March 31,
1995, included 7-Eleven (2,528 telephones), Emro Marketing Company, a subsidiary
of Marathon Oil (2,058 telephones), Vons Supermarkets (761 telephones) and
Safeway Stores (420 telephones).
The Company's principal executive office is located at 2300 N.W. 89th
Place, Miami, Florida 33172, and the telephone number of the Company is (305)
593-9667.
35
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds or incur any additional
indebtedness as a result of the issuance of the Exchange Notes pursuant to the
Exchange Offer.
The net proceeds to the Company from the sale of the Old Notes was
approximately $95.3 million. The Company used such net proceeds, together with
the net proceeds from the Preferred Stock Investment ($14.3 million), (i) to
repay all outstanding balances under the Prior Credit Agreement ($95.5 million),
and (ii) to repay certain notes payable issued in connection with various
acquisitions, including a note payable issued in connection with a recently
settled litigation against the Company, and the mortgage note payable on the
Company's headquarters facility pending its planned refinancing ($9.7 million).
The Prior Credit Agreement would have matured on May 31, 1996, and required
monthly principal installments of $1.5 million until maturity and bore interest
at prime plus two percent. It is expected that, subject to the conditions and
borrowing base set forth in the Credit Agreement, additional amounts will be
borrowed under the Credit Agreement for general corporate purposes, including
funding expansion of the Company's core public pay telephone business both
through acquisitions and internally through new installations. The net proceeds
from the Preferred Stock Investment not used in the Refinancing will also be
used for such general corporate purposes. The notes payable that were repaid
from the net proceeds from the sale of the Old Notes would have matured at
various dates from currently payable or payable upon demand to November 1998 and
bore interest at rates ranging from 5% to 12 1/2% per annum. See
'Business--Legal Proceedings.'
In the ordinary course of business, the Company considers acquisitions of
public pay telephone businesses and related assets from time to time and is not
currently engaged in negotiations with respect to any material acquisitions of
public pay telephones and related assets. There can be no assurance that any
such acquisitions will be consummated or, if consummated, that such acquisitions
will be on terms favorable to the Company.
36
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1995 and (ii) as adjusted to give effect to the Refinancing. See 'Use
of Proceeds.' This table should be read in conjunction with the selected
financial information and the consolidated financial statements and notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
---------------------------
AS ADJUSTED FOR
ACTUAL THE REFINANCING
-------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Notes payable and current maturities of long-term debt............................. $ 24,902 $ --
Current portion of obligations under capital leases................................ 2,314 2,314
-------- ---------------
Total short-term debt......................................................... 27,216 2,314
-------- ---------------
-------- ---------------
Long-term debt:
Prior Credit Agreement............................................................. 83,500(1) --
Credit Agreement................................................................... -- --
Senior Notes offered hereby........................................................ -- 100,000
Obligations under capital leases................................................... 3,460 3,460
-------- ---------------
Total long-term debt.......................................................... 86,960 103,460
-------- ---------------
Preferred stock, $.01 par value, mandatorily redeemable;
5,000,000 shares authorized; none issued and outstanding actual;
150,000 issued and outstanding as adjusted for the Refinancing..................... -- 14,501(2)
Shareholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 15,850,000 shares
issued and outstanding............................................................. 159 159
Capital in excess of par value..................................................... 58,078 58,577
Accumulated deficit................................................................ (12,841) (12,841)
-------- ---------------
Total shareholders' equity.................................................... 45,396 45,895
-------- ---------------
Total capitalization....................................................... $132,356 $ 163,856
-------- ---------------
-------- ---------------
<FN>
-------------
(1) The Company made a principal payment of $1.5 million under the Prior Credit
Agreement on each of May 1, 1995, June 1, 1995 and July 3, 1995.
(2) Represents $15.0 million of gross proceeds from the sale of the Preferred
Stock less $0.5 million of value assigned to warrants to purchase shares of
Common Stock sold in connection with the Preferred Stock Investment. In
accordance with Regulation S-X under the Securities Act, the Preferred
Stock, which is mandatorily redeemable ten years after issuance, is not
included in shareholders' equity. See 'Preferred Stock Investment.'
</FN>
</TABLE>
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<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information and statistical data set forth below
should be read in conjunction with the consolidated financial statements of the
Company and the notes thereto and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' included elsewhere in this
Prospectus. The selected financial information presented as of and for each of
the years in the five-year period ended December 31, 1994 have been derived from
the consolidated financial statements of the Company, which have been audited by
Price Waterhouse LLP, independent certified public accountants, whose report
contains explanatory paragraphs relating to the Company's ability to continue as
a going concern and relating to the ultimate outcome of certain litigation,
except as they relate to Ram Telephone and Communications, Inc. and affiliates
('Ram') for the year ended December 31, 1990 which was audited by another
independent certified public accounting firm. Amounts for 1990 have been
restated to reflect pooling accounting with Ram. The financial information
presented as of and for the quarters ended March 31, 1994 and 1995 are unaudited
and, in the opinion of management, include all adjustments necessary for a fair
presentation of such information. The interim results are not necessarily
indicative of the results to be expected for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ---------------------------
1990 1991 1992 1993 1994 1994 1995
-------- -------- -------- -------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Coin calls........................ $ 23,387 $ 32,326 $ 44,203 $ 56,604 $ 79,392 $ 17,857 $ 19,061
Non-coin calls.................... 18,496 23,130 26,828 22,245 33,054 6,968 8,271
Service and other................. 811 420 452 552 1,675 301 122
-------- -------- -------- -------- ---------- ---------- ----------
Total revenues.................. 42,694 55,876 71,483 79,401 114,121 25,126 27,454
Costs and expenses:
Telephone charges................. 13,491 18,346 22,160 18,398 41,264 8,304 8,491
Commissions....................... 7,620 10,416 14,868 17,584 23,565 4,877 6,297
Field service and collection...... 5,982 6,386 9,818 11,994 18,608 4,916 4,628
Depreciation and amortization..... 5,242 7,867 9,900 12,958 19,185 4,112 4,741
Selling, general and
administrative.................. 7,841 7,233 7,188 7,368 13,043 2,672 2,368
Interest expense.................. 1,929 2,506 2,630 2,504 5,312 989 1,479
Loss from operations of prepaid
calling card and international
telephone centers............... -- -- -- 1,730 1,816 730 --
Loss on disposal of prepaid
calling card and international
telephone centers............... -- -- -- -- 3,690 -- --
Other............................. -- -- -- -- -- -- 27
-------- -------- -------- -------- ---------- ---------- ----------
Total costs and expenses........ 42,105 52,754 66,564 72,536 126,483 26,600 28,031
Income (loss) from continuing
operations before taxes............ 589 3,122 4,919 6,865 (12,362) (1,474) (577)
(Provision for) benefit from
income taxes(1).................... (289) (1,240) (1,774) (2,586) 4,722 465 216
-------- -------- -------- -------- ---------- ---------- ----------
Income (loss) from continuing
operations......................... 300 1,882 3,145 4,279 (7,640) (1,009) (361)
Income (loss) from discontinued
operations......................... -- -- 109 1,063 (10,753) (1,048) --
Extraordinary loss from
extinguishment of debt, net........ -- -- -- -- -- -- (2,894)
-------- -------- -------- -------- ---------- ---------- ----------
Net income (loss)............... $ 300 $ 1,882 $ 3,254 $ 5,342 $ (18,393) $ (2,057) $ (3,255)
-------- -------- -------- -------- ---------- ---------- ----------
-------- -------- -------- -------- ---------- ---------- ----------
Ratio of earnings to fixed
charges............................ 1.3x 2.1x 2.5x 2.8x --(2) --(2) --(2)
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital (deficit)........... $ 331 $ (1,030) $ 690 $ 673 $ 16,402 -- $ 5,504
Total assets........................ 38,438 45,036 79,257 173,342 190,591 -- 184,857
Total long-term debt (including
current maturities)................ 22,600 25,933 38,021 79,782 115,325 -- 114,176
Shareholders' equity................ 9,262 12,339 27,604 65,333 48,715 -- 45,396
OTHER DATA:
Number of pay telephones at
end of period...................... 11,486 16,680 21,652 35,687 40,017 35,764 40,040
Capital expenditures................ $ 9,002 $ 7,914 $ 11,215 $ 8,676 $ 9,201 $ 4,459 $ 1,272
EBITDA(3)........................... $ 7,760 $ 13,495 $ 17,449 $ 22,327 $ 12,135 $ 3,627 $ 5,643
Adjusted EBITDA(4).................. 7,060(5) 13,495 17,449 21,189(6) 21,033(7) 3,987(8) 4,295(9)
Pro forma interest expense(10)...... -- -- -- -- 8,267 -- 1,960
Ratio of Adjusted EBITDA to pro
forma interest expense(4)(10)...... -- -- -- -- 2.5x -- 2.2x
(Footnotes on following page)
38
<PAGE>
<FN>
-------------
(1) In December 1987, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 96, Accounting for
Income Taxes. The Company adopted this Statement prospectively in 1988. In
February 1992, the FASB issued SFAS 109 which supersedes SFAS 96. The
Company adopted SFAS 109 prospectively in 1991.
(2) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income from continuing operations
plus total interest expense and one-third of rental expense) by fixed
charges. Fixed charges include interest costs from continuing operations
and Discontinued Operations, amortization of deferred financing costs and
one-third of rental expense. The Company has assumed that one-third of
rental expense is representative of the interest factor. On an historical
basis, the Company's earnings available for fixed charges in 1994 and in
the first quarters of 1994 and 1995 were insufficient to cover fixed
charges by approximately $12.4 million, $1.5 million and $0.6 million,
respectively. The Company's pro forma earnings available for fixed charges
in 1994 and the first quarter of 1995 would have been insufficient to cover
fixed charges by approximately $15.0 million and $1.2 million,
respectively. The Company's pro forma earnings available for combined fixed
charges and preferred stock dividends in 1994 and the first quarter of 1995
would have been insufficient to cover fixed charges by approximately $16.1
million and $1.5 million, respectively.
(3) EBITDA consists of net earnings before interest, income taxes, depreciation
and amortization. EBITDA is not intended to represent net income, cash flow
or any other measures of performance in accordance with generally accepted
accounting principles, but is included because management believes certain
investors find it to be a useful tool for evaluating creditworthiness.
(4) Adjusted EBITDA is EBITDA adjusted to eliminate one-time income and expense
items and the losses from the operations and disposition of the prepaid
calling card and international telephone center business, but does not
eliminate the compensation and fringe benefit expense included in 1994,
estimated at approximately $2.8 million, associated with the reduction of
the Company's work force by approximately 100 employees during 1994.
(5) Eliminates one-time income adjustments of approximately $0.7 million for
the buyout of certain of the Company's reseller agreements by one of the
Company's operator service providers.
(6) Eliminates one-time income adjustments of approximately $1.7 million
resulting from certain excise, state sales and use tax refund claims and
$1.2 million related to the reduction of validation, royalty and license
fees.
(7) Eliminates the 1994 Charges of approximately $4.0 million recorded for,
among other things, amounts reserved for settling disputes with service
providers, severance charges, lease termination charges and costs incurred
in connection with an abandoned merger transaction and eliminates a
one-time income adjustment of approximately $0.6 million for a contract
signing bonus and volume discounts credited to the Company by one of its
service providers. Does not eliminate the compensation and fringe benefit
expense, estimated at approximately $2.8 million, associated with the
reduction of the Company's work force by approximately 100 employees during
1994. There can be no assurance that charges similar to the 1994 Charges
will not be taken in the future. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--The 1994 Charges.'
(8) Eliminates one time-charges of approximately $0.2 million for additional
bad debt reserves and one-time income adjustments of approximately $0.6
million for a contract signing bonus and volume discounts credited to the
Company by certain of its service providers.
(9) Eliminates the reduction of telephone charges of approximately $1.3 million
recorded as a result of a settlement of a dispute regarding past periods
with one of the Company's operator service providers.
(10) Pro forma interest expense is presented after giving pro forma effect to
the Refinancing and the application of the proceeds therefrom as though it
had occurred on January 1, 1994. In accordance with generally accepted
accounting principles, interest expense is after allocation of
approximately $5.0 million and $1.0 million of interest expense to the
prepaid calling card and international telephone center business and the
Discontinued Operations for the year ended December 31, 1994 and the
quarter ended March 31, 1995, respectively. Pro forma interest expense is
net of interest income of $0.2 million and $0.2 million for the year ended
December 31, 1994 and the quarter ended March 31, 1995, respectively.
</FN>
</TABLE>
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results from continuing operations have been affected by (i)
trends within the independent public pay telephone industry segment and the
telecommunications industry generally, (ii) changes in the degree to which the
Company has vertically integrated its public pay telephone business, (iii) the
impact of acquisitions and (iv) the Company's former diversification strategy.
In general, the independent public pay telephone industry segment operates in a
dynamic environment in terms of regulation and competition. This requires
management to adopt flexible approaches to industry and market trends while
attempting to grow and improve the basic operating efficiency of the public pay
telephone business. As a result, financial period-to-period comparisons are
difficult without the following overview.
Industry Trends
The independent public pay telephone industry segment is highly fragmented
and characterized by a large number of small providers, many of whom lack the
economies of scale of the major independent public pay telephone providers, such
as the Company. The industry has been consolidating as the larger providers are
competing to acquire the smaller, often less profitable, companies in the
industry. The Company expects this trend to continue and believes it is
important to have sufficient liquidity and appropriate operating and financial
flexibility to grow cash flow through acquisitions and compete in a
consolidating environment. Continuing consolidation will provide opportunities
to take advantage of the Company's economies of scale in its field service,
collection activities and other selling, general and administrative activities,
but may increase competitive pressures to pay higher commissions to Property
Owners.
Since 1992, the major operator service providers, such as AT&T and MCI,
have aggressively promoted the use of access codes to encourage callers to 'dial
around' the selected operator service provider at public pay telephones. Dial
around calls are attractive to the caller because the caller pays the long
distance rates of the operator service provider selected by the caller as
opposed to the often inflated per minute rates and surcharges imposed by many
operator service providers selected at public pay telephones. Prior to January
1, 1995, the Company only received a fixed amount per telephone as compensation
for all interstate and, in some cases, intrastate dial around calls placed at
its public pay telephones regardless of how many dial around calls were actually
placed at such telephones. Currently, the Company receives a commission from
AT&T on all carrier access calls accessing AT&T, including dial around calls,
placed at its public pay telephones, while it continues to receive the fixed
amount per telephone from other carriers. The amount for which the Company is
compensated for dial around calls is substantially below the amount it is
compensated for 0+ calls made at its public pay telephones. The Company has seen
a steady decline in the number of 0+ calls completed at its public pay
telephones which has adversely affected the Company's non-coin revenues.
In order to address the impact of dial around calls, as well as pursue new
business opportunities, the Company entered into the AT&T Agreement which
provides for the Company to receive competitive commission payments for all 0+
and AT&T dial around calls. See 'Business--Public Pay Telephones-- AT&T
Agreement.' As a result of the AT&T Agreement, the Company will have reduced
total revenues from 0+ and AT&T access code calls going forward because the
Company will receive compensation in the form of a commission from AT&T rather
than receiving as revenue the total amount a caller pays for the telephone call.
Similarly, there will be a reduction in the Company's telephone charges going
forward due to the elimination of transmission charges, billing, collection and
validation costs and bad debt expense which the Company incurred when it acted
as its own operator services provider. The Company believes
40
<PAGE>
that the AT&T Agreement represents a better financial alternative than it might
otherwise obtain in light of industry trends and also provides the benefits of a
business alliance with AT&T and a more simplified financial framework for
recording non-coin revenue. Furthermore, the Company believes the AT&T Agreement
will enhance the reputation of the Company's public pay telephone business, as
its telephones will be branded to advertise AT&T long distance service and
rates. Prior to the end of the two-year term of the AT&T Agreement, the Company
will evaluate whether to renew the AT&T Agreement based on market conditions and
opportunities that exist at the time. There can be no assurance that the trend
towards dial around calls will not continue to adversely affect the Company
notwithstanding the AT&T Agreement.
Significant trends with respect to local calls and basic
access/interconnection may affect the financial results of the Company in the
future. The Company expects its local access charges to decline over time as
increased competition among local providers, including such new entrants as MFS
Communications, compete for the large volume of local calls made through the
Company's installed base of public pay telephones. The Company also believes
that rates for local coin calls, which are regulated by state regulatory
authorities, may increase over time in certain of the Company's major markets.
The states of Illinois and Wisconsin have recently increased the maximum local
coin rate from $0.25 to $0.35. In addition to an increase in per call rates,
some regulatory authorities are considering timed local calls designed to place
a time limit on a local coin call that when reached would require additional
coins to be deposited to continue the call. Any such additional increases in
local coin call rates or further implementation of timed local calls would
immediately improve the profitability of local coin calls. There can be no
assurance as to the occurrence of any of the foregoing.
Impact of Vertical Integration
Commencing in the fourth quarter of 1992, the Company began a vertical
integration strategy to become its own operator service provider at a
significant portion of its public pay telephones. Initially, the Company
purchased the services necessary to provide its own operator services from one
provider. The vendor branded the call under the Company's name and remitted to
the Company a commission on each 0+ call. In order to increase the Company's
profitability from a call, the Company began to purchase various services from
other third party providers on more favorable terms. Commencing in the fourth
quarter of 1993, the Company continued its vertical integration strategy by
directly providing many of the services necessary to complete a call on its own
operator services, such as using its own dedicated switching network for
transmitting the call and using its own billing and collection agreements with
certain LECs. The Company believed such capabilities would allow the Company to
increase its profits from 0+ calls. The implementation of this vertical
integration strategy led to an increase in revenues because the Company recorded
the total amount the caller paid for the call rather than the commission payment
received from a third party provider. During the pursuit of this strategy, the
Company's expenses were also significantly higher because the Company built its
own infrastructure or purchased services from third parties to provide
transmission, operator time, billing, collection and validation. By mid-1994,
the Company determined that the vertical integration strategy was not as
profitable as expected. As a result, the Company gradually moved its long
distance and operator service traffic off of its own system and began purchasing
these, as well as billing and collection services, from third parties during the
remainder of 1994 and the first quarter of 1995. Commencing in the second
quarter of 1995, revenues and expenses for such calls will decline and will be
substantially replaced by commission payments from AT&T.
Impact of Acquisitions
The Company completed eight acquisitions which added approximately 4,300
public pay telephones in 1992, three acquisitions which added approximately
13,600 telephones in 1993 and four acquisitions representing approximately 7,100
telephones in 1994. The seasonality of the Company's operating results have been
affected by shifts in the geographic concentrations of its telephones resulting
from many of such acquisitions and expenses related to the integration of
acquisitions into its nationwide public pay telephone
41
<PAGE>
base. In recent years, the Company acquired a large number of telephones in the
Northeast and Mid-Atlantic regions of the United States which the Company
believes has affected the seasonality of its results. Prior to such
acquisitions, the Company's operating results were lower in the second and third
quarters. As a result of such acquisitions, the Company has more recently
experienced lower operating results in the first and fourth quarters due to the
effect of the cold weather in the Northeast and Mid-Atlantic regions on public
pay telephone usage. In addition, several large acquisitions of public pay
telephone assets in late 1993 and 1994 led to anticipated and unanticipated
expenses associated with integrating the acquired public pay telephones into the
Company's nationwide network. Examples of such expenses include costs associated
with merging and upgrading management information systems, costs of transferring
phones over to the Company's operations, additional and duplicative employee
costs during the transition period and the investment required for equipment
upgrades.
Impact of Former Diversification Strategy
In 1993 and 1994, the Company pursued a strategy of entering complementary
niche telecommunications businesses, such as prepaid calling card and
international telephone centers and cellular telephone rental operations, in an
effort to enhance its long-term growth opportunities and diversify its business.
The capital requirements and management attention required by these operations
diverted the Company from its core public pay telephone business and adversely
affected its operating results. These businesses were essentially start-up in
nature, required substantial investments of capital and devotion of management
and employee resources. Efforts to develop these businesses strained Company
resources, in particular in 1994 when the Company was integrating several
significant public pay telephone acquisitions. In December 1994, the Company
decided to divest itself of these businesses. The Company sold its prepaid
calling card business in February 1995 and is currently pursuing alternatives to
divest the Discontinued Operations and the international telephone center
operations. Management believes that results of continuing operations during
1994 were adversely affected by this diversification strategy. There can be no
assurances that the Company will be successful in divesting itself of the
Discontinued Operations and the international telephone center operations.
RESULTS OF OPERATIONS
The following discussion and analysis compares the year ended December 31,
1992 to the year ended December 31, 1993 and the year ended December 31, 1993 to
the year ended December 31, 1994, as well as the quarter ended March 31, 1994 to
the quarter ended March 31, 1995, and should be read in conjunction with the
restated consolidated financial statements and notes thereto appearing elsewhere
in this Prospectus. The financial results discussed below relate to continuing
operations which primarily consist of the public pay telephone business.
The Company primarily derives its revenues from coin and non-coin calls.
Coin revenue is generated exclusively from calls made by depositing coins in the
Company's public pay telephones. Non-coin revenue is derived from calling card
calls, credit card calls, collect calls and third party billed calls.
Operating expenses include telephone charges, commissions, field service
and collection expenses and selling, general and administrative expenses.
Telephone charges consist of local line charges to LECs which include costs of
basic service and transport of local coin calls, long distance transmission
charges and network costs and billing, collection and validation costs.
Commissions represent payments to Property Owners for revenues generated by
public pay telephones located on their properties. Field service and collection
expenses represent the costs of servicing and maintaining the telephones on an
ongoing basis, costs of collecting coin from the telephones, and other related
operational costs. Selling, general and administrative expenses primarily
consist of payroll and related costs, legal and other professional fees,
42
<PAGE>
promotion and advertising expenses, property, gross receipt and certain other
taxes, corporate travel and entertainment, and various other expenses.
Depreciation is based on the cost of the telephones, booths, pedestals, and
other enclosures, related installation costs and line interconnection charges
and is calculated on a straight-line method using a ten-year useful life.
Amortization is primarily based on acquisition costs including location
contracts, goodwill and non-competition provisions and is calculated on a
straight-line method using estimated useful lives ranging from five to 20 years.
The following table, which relates to the consolidated continuing
operations (which consist primarily of the public pay telephone business), sets
forth certain financial results as a percentage of total revenues for the
periods discussed below.
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------
1992 1993 1994 1994 1995
----- ----- ----- ----- -----
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
Revenues:
Coin calls.............................................. 61.9% 71.3% 69.5% 71.1% 69.4%
Non-coin calls.......................................... 37.5 28.0 29.0 27.7 30.1
Service and other....................................... 0.6 0.7 1.5 1.2 0.5
----- ----- ---------- ---------- ----------
Total revenues..................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ---------- ---------- ----------
Costs and expenses:
Telephone charges....................................... 31.0 23.2 36.2 33.1 31.0
Commissions............................................. 20.8 22.1 20.6 19.4 22.9
Field service and collection............................ 13.7 15.1 16.3 19.6 16.9
Depreciation and amortization........................... 13.8 16.3 16.8 16.4 17.3
Selling, general and administrative..................... 10.1 9.3 11.4 10.6 8.6
Interest expense........................................ 3.7 3.2 4.7 3.9 5.4
Loss from operations of prepaid calling card and
international telephone centers...................... -- 2.2 1.6 2.9 --
Loss on disposal of prepaid calling card and
international telephone centers...................... -- -- 3.2 -- --
----- ----- ---------- ---------- ----------
Total costs and expenses........................... 93.1 91.4 110.8 105.9 102.1
----- ----- ---------- ---------- ----------
Income (loss) from continuing operations before taxes..... 6.9 8.6 (10.8) (5.9) (2.1)
(Provision for) benefit from income taxes................. (2.5) (3.2) 4.1 1.9 0.8
----- ----- ---------- ---------- ----------
Income (loss) from continuing operations.................. 4.4% 5.4% (6.7)% (4.0)% (1.3)%
----- ----- ---------- ---------- ----------
----- ----- ---------- ---------- ----------
</TABLE>
Preliminary results for the first two months of the second quarter of 1995
indicate a decline in total shareholders' equity of approximately $403,000
attributable to losses from continuing operations before taxes of approximately
$531,000, offset by $128,000 in additional paid-in-capital from option exercises
and a change in the calculation of interest on notes payable from officers and
directors of the Company. The Company expects a decline in total shareholders'
equity for the last month of the second quarter attributable to continuing
losses from continuing operations before taxes. The Company believes the losses
from continuing operations before income taxes for the first two months of the
second quarter of 1994 to be approximately the same as that for 1995. At May 31,
1995, net current assets of the Company would have decreased by approximately
$80.9 million to approximately $(75.3) million as compared with March 31,
1995 reflecting the reclassification of debt which as of May 31, 1995 was due
within 12 months from long-term debt to short-term debt.
43
<PAGE>
QUARTER ENDED MARCH 31, 1995 COMPARED TO QUARTER ENDED MARCH 31, 1994
Revenues
Coin revenue represented approximately 69.4% and 71.1% of total revenues
from continuing operations for the quarters ended March 31, 1995 and 1994,
respectively. Coin revenue increased 6.7% to $19.1 million during the quarter
ended March 31, 1995 compared to the same period in 1994. This revenue growth
was primarily attributable to growth in the Company's installed base of public
pay telephones. The Company's installed public pay telephone base increased to
approximately 40,000 at March 31, 1995 from approximately 35,700 at March 31,
1994. The decline in coin revenues per telephone was primarily attributable to
the addition of telephones between periods having a lower average coin revenue
per telephone than did the Company's installed base during the first quarter of
1994. The Company believes that the number of coin calls made at its public pay
telephones may decrease over time. The Company believes, that among other
things, this decrease will be primarily attributable to more public pay
telephones in closer proximity to the Company's telephones, alternative methods
of calling such as wireless technologies and increased usage of prepaid calling
cards.
Non-coin revenue represented approximately 30.1% and 27.7% of total
revenues from continuing operations for the quarters ended March 31, 1995 and
1994, respectively. For the quarter ended March 31, 1995, revenues from non-coin
calls increased 18.7% to approximately $8.3 million, compared to the quarter
ended March 31, 1994. The increase was primarily attributable to the increase in
the Company's installed base of public pay telephones described above and the
increase in the number of calls completed through the Company's private label
operator service program during the quarter ended March 31, 1995, compared to
the same period in 1994.
The Company records the total amount the end user pays for the call (net of
taxes) as revenue when the call is completed through the Company's private label
operator service. In contrast, the Company records as revenue the amount it
receives from the third-party operator service provider which represents a
negotiated percentage of the total amount the caller pays for the call. The
Company used its private label operator service or a third party operator
service provider based on which service the Company believes netted it the
highest gross margin from the call. Operating Expenses
Total operating expenses were approximately 79.4% and 82.7% of total
revenues from continuing operations for the quarters ended March 31, 1995 and
1994, respectively. Telephone charges decreased as a percentage of total
revenues from continuing operations to 31.0% for the quarter ended March 31,
1995, compared to 33.1% for the same period in 1994. Telephone charges for the
1995 quarter include a reduction of interexchange carrier expenses related to a
settlement with a service provider for certain billing errors and underpayment
of operator service revenue of approximately $1.3 million. This reduction was
offset by an increase in telephone charges as a result of the increase in the
installed public pay telephone base and an increase in the number of calls
completed through the Company's private label operator service program during
the quarter ended March 31, 1995, compared to the same period in 1994. The
Company pays the costs incurred to transmit, bill, collect and validate the call
when the call is completed through its private label operator services. In
contrast, the Company incurs no such cost when a third party operator service
provider completes the call. Telephone charges for the 1994 quarter included
one-time income adjustments of approximately $0.6 million for a contract signing
bonus and volume discounts credited to the Company by certain of its service
providers.
Commissions as a percentage of total revenues from continuing operations
were approximately 22.9% and 19.4% for the quarters ended March 31, 1995 and
1994, respectively. The increase in commissions as a
44
<PAGE>
percentage of revenues was primarily attributable to higher commission rates
paid in connection with the recently obtained Atlanta Hartsfield International
Airport account.
Field service and collection expenses as a percentage of total revenues
from continuing operations was 16.9% and 19.6% for the first quarter of 1995 and
1994, respectively. The decrease in these expenses was primarily attributable to
the Company's efforts to reduce operating expenses which were commenced in June
1994 and included the downsizing of the Company's field personnel. Selling,
general and administrative expenses decreased to 8.6% of total revenues from
continuing operations in the 1995 first quarter versus 10.6% for the 1994 first
quarter. The decrease in selling, general and administrative expenses was
primarily attributable to the cost reduction plan and reengineering efforts
commenced by the Company in June 1994.
Depreciation and Amortization
Depreciation and amortization increased to $4.7 million for the quarter
ended March 31, 1995, compared to $4.1 million for the same period in 1994. The
increase in depreciation and amortization is primarily attributable to increases
in the number of installed public pay telephones that resulted from acquisitions
during 1994. Depreciation and amortization as a percentage of total revenues
from continuing operations increased to 17.3% during the first quarter of 1995
compared to 16.4% for the first quarter of 1994. This increase was primarily
attributable to the increase in the number of acquired public pay telephones and
the decrease in coin revenue noted above.
Interest Expense
In the first quarter of 1995, interest expense increased 49.5% to $1.5
million. The increase was primarily attributable to increased bank borrowings
under the Prior Credit Agreement. In addition, the Company experienced higher
interest rates under the Prior Credit Agreement during 1995 which is consistent
with overall increases in market interest rates.
Provision for Income Taxes
The Company's benefit from income taxes decreased approximately $0.2
million for the quarter ended March 31, 1995 from the 1994 period primarily due
to a loss from continuing operations before taxes of approximately $0.6 million
in the first quarter of 1995, compared to a loss from continued operations
before taxes of approximately $1.5 million for the first quarter of 1994.
Net Loss from Continuing Operations
The Company had a net loss from continuing operations of approximately $0.4
million for the quarter ended March 31, 1995 compared to a net loss from
continuing operations of approximately $1.0 million for the same period in 1994.
Extraordinary Item
The Company had an extraordinary loss from the write-off of deferred
financing costs associated with the early extinguishment of debt of
approximately $2.9 million, net of the related income tax benefit of $1.7
million.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA from continuing operations increased by approximately $2.0 million
to $5.6 million for the quarter ended March 31, 1995, compared to the same
period in 1994. This increase was primarily
45
<PAGE>
attributable to the growth in the Company's installed base of public pay
telephones and the decrease in telephone charges as a percentage of revenue
as a result of the settlement with a service provider mentioned above, which was
partially offset by the increase in commission expense noted above.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
Revenues
Coin revenue represented approximately 69.5%, 71.3% and 61.9% of total
revenues from continuing operations for the years ended December 31, 1994, 1993
and 1992, respectively. Coin revenue increased 40.3% to $79.4 million in 1994,
compared to 1993. This revenue growth was primarily attributable to growth in
the Company's installed base of public pay telephones. The Company's installed
public pay telephone base increased to approximately 40,000 in 1994 up from
approximately 35,700 in 1993. The increase in the Company's 1994 revenues was
also attributable to the inclusion of approximately 11,600 public pay telephones
from the asset acquisition of Ascom Communications, Inc. for a full year in 1994
versus approximately two months in 1993. Coin revenue increased 28.1% to $56.6
million in 1993, compared to 1992. This increase was primarily attributable to
the growth in the Company's installed base of public pay telephones which
increased to approximately 35,700 in 1993 from approximately 21,700 in 1992.
Non-coin revenue represented approximately 29.0%, 28.0% and 37.5% of total
revenues from continuing operations in 1994, 1993, and 1992, respectively. In
1994, revenues from non-coin calls increased by 48.6% to $33.1 million, compared
to 1993. The increase was primarily attributable to the increase in the
Company's installed base of public pay telephones described above.
Non-coin revenue decreased by 17.1% to $22.2 million in 1993, compared to
1992. This decrease was primarily attributable to a decrease in the percentage
of total non-coin calls completed through the Company's private label operator
service program. In 1993, the Company sent a substantially larger percentage of
its non-coin calls to third-party operator service providers compared to 1992.
In addition, in 1993, the Company experienced a significant decline in the
number of non-coin calls for which it received compensation compared to 1992.
The Company also experienced a similar decline in 1994 compared to 1993. The
Company primarily attributes the overall decline to the successful advertising
campaigns of the large operator service providers, such as AT&T and MCI, which
encourage public telephone users to dial access codes to 'dial around' the
selected operator service providers at public pay telephones.
Operating Expenses
Total operating expenses were approximately 84.5%, 69.7% and 75.6% of total
revenues from continuing operations for the years ended December 31, 1994, 1993
and 1992, respectively. Telephone charges increased by 124.3% to $41.3 million
in 1994. This increase was primarily attributable to (1) the increase in the
installed public pay telephone base and (2) the increase in the number of calls
completed through the Company's private label operator service program during
1994 compared to 1993. The Company pays the costs incurred to transmit, bill,
collect and validate the call when the call is completed through its private
label operator service program. In contrast, the Company incurs no such cost
when a third party operator service provider completes the call. In 1993, the
Company recorded a refund of telephone charges owed to the Company related to
overcharging of carrier costs and the underpayment of operator service revenues
by certain vendors. Despite its ongoing negotiations with such vendors, as of
December 31, 1994, due to the length of time elapsed since the original claims
and the uncertainty as to the realizability of these refund claims, the Company
fully reserved these amounts by a charge of approximately $1.2 million. In
addition, the Company recorded approximately $0.4 million of other
46
<PAGE>
reserves. Telephone charges in 1993 were reduced by approximately $1.7 million
for certain excise, state sales and use tax refunds. In addition, 1993 telephone
charges included a one-time reduction of validation, royalty and license fees,
among other things, of approximately $1.2 million related to the settlement of a
dispute with a service provider. The decrease in telephone charges of 17.0% in
1993 compared to 1992 was also attributable to an increase in the percentage of
total calls completed by third-party operator service providers.
Commissions as a percentage of total revenues from continuing operations
were approximately 20.6%, 22.1% and 20.8% for the years ended December 31, 1994,
1993 and 1992, respectively. Commissions have remained relatively consistent
despite the increased competition and increased commission rates for new or
renewal contracts. The Company has been able to maintain its commissions as a
percentage of revenue in part because it has balanced its growth in the national
account area where commission percentages are the most competitive with the
individual or smaller accounts where commission percentages are not as
competitive.
Field service and collection expenses as a percentage of total revenues
from continuing operations were approximately 16.3%, 15.1% and 13.7% for the
years ended December 31, 1994, 1993 and 1992, respectively. The amount of these
expenses increased primarily due to (1) additional operations personnel and
vehicle costs and rent expense associated with assimilating acquired public pay
telephones into the Company's existing network and (2) costs associated with
instituting a refurbishing program undertaken to improve the condition of the
Company's telephones. The Company currently expects that field service and
collection expenses as a percentage of revenue should remain relatively constant
over the next twelve months. Selling, general and administrative expenses
increased to 11.4% of total revenues from continuing operations (or $13.0
million) versus 9.3% in 1993 and 10.1% in 1992. As part of the 1994 Operational
Restructuring, the Company reduced its work force by approximately 100 people
during 1994. In 1994, selling, general and administrative expenses included
approximately $1.6 million in one-time charges which include, among other
things, amounts reserved for settling disputes with service providers, severance
charges, lease termination charges and costs incurred in connection with an
abandoned merger transaction.
Depreciation and Amortization
Depreciation and amortization increased to $19.2 million from $13.0 million
in 1993 and $9.9 million in 1992. The increases in depreciation and amortization
are primarily attributable to increases in the number of installed public pay
telephones that resulted from acquisitions during 1993 and 1994. Depreciation
and amortization as a percentage of total revenues from continuing operations
remained relatively consistent at 16.8% and 16.3% for 1994 and 1993,
respectively. A significant factor in the relative consistent percentage was the
change during the fourth quarter of 1993 in the Company's depreciation policy to
recognize the extended estimated service life of its public pay telephones from
seven to ten years offset by an increase in the number of acquired public pay
telephones. This change in estimate resulted in a decrease in depreciation
expense of approximately $3.8 million during 1994.
Interest Expense
In 1994, interest expense increased 112.1% to $5.3 million. The increase
was primarily attributable to increased bank borrowings under the Prior Credit
Agreement from $67.5 million at December 31, 1993 to $100.2 million at December
31, 1994. The additional borrowings in 1994 under the Company's line of credit
include approximately $16.6 million used for public pay telephone acquisitions
and $16.1 million used for working capital purposes, which included a portion
related to the funding of the prepaid calling card and international telephone
center operations and the Discontinued Operations. In addition, the Company
experienced higher interest rates under the Prior Credit Agreement during 1994
consistent with overall increases in market interest rates. Interest expense
decreased 4.8% in 1993 to $2.5 million, compared to 1992. This decrease is
primarily attributable to lower interest rates in 1993 compared to 1992
47
<PAGE>
and the temporary decrease in the Prior Credit Agreement resulting from the use
of approximately $14.0 million of proceeds from the Company's August 1993 common
stock offering. This was partially offset by the overall increase in the
Company's bank borrowings to $67.5 million at December 31, 1993 from $32.5
million at December 31, 1992.
Provision for Income Taxes
The Company's provision for income taxes increased $7.3 million in 1994
primarily due to a loss from continuing operations before taxes of approximately
$12.4 million, compared to income from continued operations before taxes of
approximately $6.9 million in 1993. The Company's provision for income taxes
increased $0.8 million in 1993 compared to 1992 due to an increase in the
Company's effective tax rate from 36.1% to 37.7% as a result of higher average
state and local tax rates resulting from increased earnings in jurisdictions
with higher taxes.
Income (loss) from Continuing Operations
The Company had a loss from continuing operations of approximately $7.6
million in 1994 compared to income from continuing operations of approximately
$4.3 million in 1993. The loss from continuing operations included approximately
$2.7 million of one-time charges. The 1994 net loss from continuing operations
also included a provision of approximately $2.3 million for the estimated
impairment of asset value and losses for January 1, 1995 through the divestiture
date for the prepaid calling card and international telephone center operations.
In 1993, income from continuing operations included approximately $1.8 million
in one-time income.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA from continuing operations decreased by $10.2 million to $12.1
million in 1994. The decrease was primarily attributable to approximately $4.0
million of one-time charges which includes the $1.6 million of one-time charges
in telephone charges, the $1.6 million of one-time charges in selling, general
and administrative expenses discussed above and $0.8 million of one-time charges
in various other categories. It was also attributable to those matters discussed
under '--Overview' above. In addition, 1993 continuing operations included
approximately $2.9 million of one-time income. EBITDA increased $4.9 million in
1993 to $22.3 million compared to 1992. This increase in EBITDA was primarily
attributable to the Company's growth of its installed public pay telephone base
and the one-time income discussed above.
THE 1994 CHARGES
The 1994 Charges are comprised of (1) approximately $0.6 million related to
a write-off of a receivable due from an operator services provider because of
the provider's overcharging of carrier costs and underpayment of operator
service revenues, (2) approximately $0.5 million related to write-off of a
receivable due from a LEC attributed to the underpayment of compensation under
various compensation plans, (3) approximately $0.3 million related to reserves
for commission payments resulting from differences in contract interpretations,
(4) approximately $0.3 million related to the settlement of an indemnifiable
claim in connection with a public pay telephone acquisition as a result of the
insolvency of a former shareholder of the acquired company, (5) approximately
$0.3 million related to severance costs incurred in connection with employee
lay-offs, (6) approximately $0.3 million of lease termination expenses, (7)
approximately $0.2 million for additional reserves related to the collection of
Dial Around Compensation, (8) approximately $0.2 million for additional
reserves related to the collection of certain excise, state and local sales and
use tax refunds, (9) approximately $0.2
48
<PAGE>
million of additional reserves related to the write-off of various receivables,
(10) approximately $0.2 million related to legal and other failed merger
costs incurred in connection with a proposed merger transaction, (11)
approximately $0.2 million as a result of a change in prepaid expense policy,
(12) approximately $0.2 million related to phone damage experienced in New York
during the fourth of July holiday, (13) approximately $0.1 million for estimated
liabilities related primarily to sales tax audits of prior years of which the
Company received notification in 1994, (14) approximately $0.1 million related
to shareholder litigation expenses, (15) approximately $0.2 million related to
the establishment of liabilities for miscellaneous items, and (16) approximately
$0.1 million of charges related to the write-off of costs incurred with prior
year acquisitions. Based upon the facts and circumstances surrounding each of
these items, management believes these charges are one-time charges, however,
there can be no assurance that similar charges will not occur again in the
future.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company financed its operations and growth primarily from
operating cash flow and borrowings under the Prior Credit Agreement. For the
year ended December 31, 1994, the Company's operating cash flow was $(2.2)
million as compared to $20.1 million in 1993 and $11.2 million in 1992. During
the first quarter of 1995, the Company financed its operations primarily from
operating cash flow. For the quarter ended March 31, 1995, the Company's
operating cash flow was $1.0 million.
The Company's working capital was approximately $5.5 million, with a
current ratio of 1.10 to 1, at March 31, 1995. This is compared to working
capital of $16.4 million and a current ratio of 1.38 to 1 at December 31, 1994.
The decrease in the Company's working capital and current ratio was primarily
attributable to an additional $10.9 million of debt repayments due within 12
months of March 31, 1995, as compared to December 31, 1994.
Capital expenditures decreased to approximately $1.3 million in the quarter
ended March 31, 1995 from approximately $4.5 million in the same period in 1994.
This decrease was a result of the Company's implementation of tighter controls
and the more efficient utilization of its existing inventory and the lack of
expenditures related to the vertical integration of the Company's public pay
telephone business as compared to the 1994 first quarter.
The net proceeds from the sale of the Old Notes in July 1995 were used,
together with the net proceeds of the Preferred Stock Investment, to fully repay
the Prior Credit Agreement, which required monthly principal reductions of $1.5
million through maturity on May 31, 1996. The purpose of the Refinancing is to
extend the maturity of the Company's long-term debt to reflect the long-term
nature of the Company's assets and provide the Company with greater financial
and operating flexibility. The Prior Credit Agreement has been amended
significantly since early 1994 as a result of the Company's financing
requirements and non-compliance with certain financial covenants contained
therein. As of February 1994, the Prior Credit Agreement was amended and
restated principally for the purpose of increasing availability thereunder from
$70.0 million to $125.0 million. The February 1994 amendment provided the
Company with additional borrowing capacity to take advantage of growth
opportunities in its industry. Borrowings under the Prior Credit Agreement bore
interest throughout 1994 at the rate of (i) 1.25% over the greater of prime or
the federal funds rate plus 0.5% or (ii) 2.5% over LIBOR, at the option of the
Company.
As a result of operating losses, including losses from the Discontinued
Operations, the Company was not in compliance with certain of the financial
covenants in the Prior Credit Agreement as of the end of the second quarter of
1994 and was required to obtain waivers from its lenders. As a result of further
operating losses, including further losses from the Discontinued Operations, the
Company was not in compliance with certain of the financial covenants in the
Prior Credit Agreement as of December 31, 1994. As a result of the restatement
of the March 31, 1994 quarterly financials, the Company was not in compliance
with certain restrictive covenants contained in the Prior Credit Agreement,
which non-compliance was waived by the lenders. The Prior Credit Agreement was
amended on March 22, 1995 to (i) reduce the size of the Prior
49
<PAGE>
Credit Agreement to $100.0 million, (ii) shorten the maturity of the Prior
Credit Agreement from February 17, 1998 to May 31, 1996 and provide for monthly
principal payments of $1.5 million commencing May 1, 1995 and (iii) amend the
covenants in the Prior Credit Agreement to make them less restrictive through
the end of 1995. During the second quarter of fiscal 1995, due in part to a
dispute regarding ACI's indemnification obligations to the Company and to
conserve cash in light of the Company's working capital requirements and
amortization obligations under the Prior Credit Agreement, the Company had not
made certain payments under notes payable issued in connection with the
acquisition of ACI. In May 1995, ACI and AHI commenced litigation in respect of
these and other matters. In June 1995, the Company entered into a settlement of
such litigation and used a portion of the net proceeds from the sale of the
Notes to repay a note payable owing to ACI issued in connection with the
settlement. See 'Business--Legal Proceedings' and 'Use of Proceeds.' As a result
of the foregoing, the report of the Company's independent accountants on the
Company's consolidated financial statements appearing in this Prospectus, which
was issued as of a date prior to the consummation of the Refinancing, contains
an explanatory paragraph relating to the Company's ability to continue as a
going concern, as described in Note 18 to the Company's consolidated financial
statements appearing elsewhere herein.
The Prior Credit Agreement was replaced by the Credit Agreement in
connection with the Refinancing. Borrowings under the Credit Agreement bear
interest at the rate of (i) 1.5% over the greater of prime or the federal funds
rate plus 0.5% or (ii) 3.0% over LIBOR, at the option of the Company, and will
be available under a borrowing base formula which takes into account the
Company's eligible accounts receivable and eligible installed pay telephones.
The Credit Agreement is secured by substantially all of the Company's assets and
contains various financial covenants. See 'Description of the Credit Agreement.'
The Company relies on the Credit Agreement to supplement its working
capital requirements. As a result of the Refinancing, the Company has
significant additional interest expense. Based upon current expectations, the
Company believes that cash flow from operations, together with amounts which may
be borrowed under the Credit Agreement, will be adequate for it to meet its
working capital requirements, pursue its business strategy and service its
obligations in respect of the Notes, although there can be no assurance that it
will be able to do so.
ASSETS HELD FOR SALE
Included in 'Assets Held for Sale' are the net assets of the prepaid
calling card and international telephone center operations. In December 1994,
the Company's Board of Directors approved a plan to sell the assets related to
these businesses.
During February 1995, the Company sold its prepaid calling card business to
Global Link for approximately $6.3 million. The Company received $1.0 million in
cash, a $5.3 million promissory note due February 1998, bearing interest at
8.5%, payable quarterly, and shares of common stock of Global Link. As a result
of the February 1995 transaction, and because of a drafting error discovered in
May 1995 that did not reflect the intentions of the parties, the Company's
interest in the outstanding common stock of Global Link was 28.8% instead of the
intended 19.99%. To correct this error, the Company has reduced its share
ownership to the intended 19.99% level. For financial accounting purposes, the
net gain of approximately $3.4 million will be deferred until cash on the
promissory note is received. The 1994 financial statements include losses before
income taxes of approximately $2.1 million for the period from January 1, 1994
through February 15, 1995, the divestiture date. The Global Link investment will
be accounted for under the equity method of accounting subsequent to the
divestiture date. Accordingly, the 1994 results of operations have been
segregated and are reported as a separate component of income from continuing
operations.
50
<PAGE>
Global Link was founded in March 1994 and is at an early stage of
development with limited operational history. As a result, Global Link's
business and operations are subject to all the risks associated with the
establishment or formation of a new business enterprise. It is anticipated that
Global Link will require significant capital resources, however, the Company has
no intention or obligations to fund any capital requirements. While the Company
believes it will recover all amounts due from Global Link there can be no
assurance that the Company will realize amounts due or realize significant value
from its equity investment.
The Company is in the process of divesting itself of its international
telephone center and has recorded a provision for the estimated impairment of
asset values of approximately $3.4 million. See Note 15 to the accompanying
consolidated financial statements included elsewhere in this Prospectus.
DISCONTINUED OPERATIONS
During December 1994, in an effort to return its focus to its core public
pay telephone business, the Company's Board of Directors approved the
divestiture of its inmate telephone and cellular telephone rental operations.
Accordingly, operating results and cash flows for those businesses have been
segregated and reported as discontinued operations.
The Company is in the process of divesting these business segments and has
recorded provisions for the estimated impairment of asset values and losses from
January 1, 1994 through the estimated divestiture date for its inmate telephone
and cellular telephone rental operations after income taxes of approximately
$2.0 million and $8.7 million, respectively. The inmate telephone industry has
become increasingly competitive. This increased competition could result in
increased commission rates and loss of market share which could have an adverse
effect on the operating results of the Company's inmate telephone business. See
'Business--Discontinued Operations' and Note 16 to the accompanying consolidated
financial statements included elsewhere in this Prospectus.
The following combining tables set forth the net assets and liabilities and
results of the Discontinued Operations (dollars in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- --------
<S> <C> <C> <C>
Current assets and liabilities, net......................................... $ 151 $ (2,969) $ (2,818)
Fixed assets, net........................................................... 11,379 6,667 18,046
Other long-term assets and liabilities, net................................. 7,441 3,111 10,552
------- -------------- --------
$18,971 $ 6,809 $ 25,780
------- -------------- --------
------- -------------- --------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1994
-------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- --------
<S> <C> <C> <C>
Revenues.................................................................... $42,428 $ 11,581 $ 54,009
------- -------------- --------
Income (loss) from discontinued operations before income taxes.............. 844 (6,253) (5,409)
Loss on disposal............................................................ (4,054) (1,380) (5,434)
------- -------------- --------
Total net loss on discontinued operations before income taxes............... (3,210) (7,633) (10,843)
Benefit from (provision for) income taxes................................... 1,204 (1,113) 91
------- -------------- --------
Net loss from discontinued operations....................................... $(2,006) $ (8,746) $(10,752)
------- -------------- --------
------- -------------- --------
EBITDA...................................................................... $ 5,097 $ (3,001) $ 2,096
------- -------------- --------
------- -------------- --------
</TABLE>
51
<PAGE>
BUSINESS
The Company believes that it is the largest independent operator of public
pay telephones in the United States on the basis of the number of public pay
telephones in service. Since installing its first public pay telephone in 1985,
the Company's core public pay telephone business has grown rapidly to an
installed base, as of March 31, 1995, of 40,040 public pay telephones in 41
states and the District of Columbia. The Company's nationwide presence in the
public pay telephone market makes it an attractive supplier of public pay
telephone services to national and regional accounts, as compared with small
competitors and LECs.
The Company owns, operates, services and maintains a system of independent
public pay telephones. Its public pay telephone business generates revenues from
coin calls and non-coin calls, such as calling card, credit card, collect and
third party billed calls made from its telephones. Since January 1990, the
Company has acquired over 33,000 public pay telephones from 27 independent
public pay telephone providers. The Company also expands its base of public pay
telephones with its own marketing staff by obtaining contracts for new locations
where it believes there will be significant demand for public pay telephone
service, such as convenience stores, grocery stores, service stations, shopping
centers, hotels, restaurants, airports and truck stops. The Company has been
able to acquire and develop national corporate accounts which, as of March 31,
1995, included 7-Eleven (2,528 telephones), Emro Marketing Company, a subsidiary
of Marathon Oil (2,058 telephones), Vons Supermarkets (761 telephones) and
Safeway Stores (420 telephones).
BUSINESS STRATEGY
The Company's business objective is to focus on its core public pay
telephone business and grow operating cash flow by continuing to expand its
installed base of public pay telephones. The Company seeks to achieve this
objective through the following strategies:
Growth Through Selective Acquisitions. The Company believes that growth
through selective acquisitions is desirable because it increases the Company's
geographic presence and concentration and typically generates more predictable
revenues than new public pay telephone installations. In general, the Company
has been able to acquire public pay telephones at prices that it considers
attractive because smaller providers frequently lack the economies of scale that
the Company enjoys. When acquired telephones are integrated into the Company's
national system, the Company is often able to operate such telephones
profitably, or more profitably than the seller, because of its economies of
scale. The Company intends to utilize its size and experience in integrating
public pay telephone acquisitions in an effort to capitalize on the
consolidation trend in the industry.
Growth Through New Installations. The Company is seeking to increase its
internal growth by marketing its public pay telephones to new and existing
accounts within its current markets. The Company believes that its nationwide
presence makes it an attractive supplier of public pay telephone services for
national corporate accounts by offering these accounts a consistent level of
service and reducing the time, administration and costs associated with
utilizing multiple providers. The Company is attempting to balance its national
corporate account marketing efforts by expanding its regional and local sales
efforts, where competition for accounts tends to be less competitive. It has
hired or is in the process of hiring regional sales managers in New York, the
Mid-Atlantic region, Florida, Texas, the Mid-West region and California, where
the Company has significant concentrations of public pay telephones.
Superior Level of Customer Service. The Company attempts to provide the
highest quality service in the industry and establish strong relationships with
its customers. The Company provides quality service through the use of 'smart'
microprocessor-equipped telephones, a sophisticated management information
system and a highly trained service and support staff. The Company's advanced
telephone technology
52
<PAGE>
allows for exact records of telephone activity, tracking of revenues which can
be easily verified by its customers and rapid response (typically within 24
hours) to repair malfunctions and service equipment.
Realize Economies of Scale and Maximize Operating Efficiencies. By growing
its public pay telephone business, the Company intends to benefit from the
realization of further economies of scale in field service, collection and other
selling, general and administrative activities. The Company's existing
infrastructure permits it to add new public pay telephones in its existing
markets without significant incremental operating costs. Furthermore, as a
high-volume consumer of long distance service (approximately 17 million minutes
per month), the Company has been able to negotiate favorable terms from AT&T and
other operator service providers and interexchange carriers. The Company's
'smart' public pay telephones, management information systems and trained
service and support staff have permitted it to achieve savings in the cost of
telephone repair and maintenance.
PUBLIC PAY TELEPHONE INDUSTRY OVERVIEW
According to a report by the North American Telecommunications Association
entitled 1993/1994 Telecommunications Market Review & Forecast, calls made from
public pay telephones are estimated to represent approximately seven billion
dollars in annual revenues to the United States telecommunications industry.
Public pay telephones may be owned or operated by LECs or by independent public
pay telephone operators. The Company believes that currently there are
approximately 2.1 million public pay telephones operated in the United States,
of which approximately 1.8 million are owned by LECs and approximately 300,000
by independent public pay telephone companies.
Today's telecommunications marketplace was principally shaped by the 1984
ruling of the United States District Court for the District of Columbia in the
well-documented Bell System antitrust divestiture case, United States v.
American Telephone & Telegraph Company. The AT&T divestiture created various
business opportunities in the telecommunications industry. In 1985, the FCC and
thereafter 45 state public service commissions followed this initiative by
authorizing the connection of competitive or independently-owned public pay
telephones to the public switched network. Prior to that time, the Bell System
and other monopoly LECs owned all public pay telephones in the United States.
As part of the AT&T divestiture, the United States was divided into
geographic areas known as Local Access and Transport Areas or LATAs. The larger
LECs (the ones owned by the RBOCs and GTE) provide telephone service that both
originates and terminates within the same LATA ('intraLATA traffic') pursuant to
tariffs filed with and approved by state regulatory authorities. These LECs are
generally prohibited from offering or deriving revenues or income from
interexchange services between LATAs. In addition, most state regulatory
authorities require LECs to provide local access line service to independent
public pay telephone companies. See '--Regulation.' Until recently, the Company
could only obtain local exchange services from the LECs, but this has begun to
change as various local and intraLATA competitors have been authorized to
provide local exchange service. The Company is beginning to test such local
service options. These options should result in lower costs and improved service
for the Company in the test markets.
Long distance companies such as AT&T, MCI and Sprint Corporation ('Sprint')
provide service between LATAs ('interLATA traffic') and, in some circumstances,
may also provide long distance service within LATAs. An interLATA long distance
telephone call generally begins with an originating LEC transmitting the call
from the originating telephone to a point of connection with a long distance
carrier. The long distance carrier, through its owned or leased switching and
transmission facilities, transmits the call across its long distance network to
the LEC serving the local area in which the recipient of the call is located.
This terminating LEC then delivers the call to the recipient.
53
<PAGE>
Prior to 1987, coin calls were the sole source of revenue for independent
public pay telephone operators. Long-distance calling card and collect calls
from these public pay telephones were handled exclusively by AT&T. All revenue,
except the coins deposited in public pay telephones, went to AT&T rather than
the owner of the public pay telephone. Beginning in 1987, a competitive operator
service system developed which allowed operator service providers, including
other long distance companies such as MCI and Sprint, to handle this traffic and
to offer independent public pay telephone companies commissions for directing
operator assisted or calling card calls to them.
PUBLIC PAY TELEPHONES
As of March 31, 1995, the Company's public pay telephone system consisted
of 40,040 public pay telephones located in 41 states and the District of
Columbia. The following chart sets forth certain approximate information with
respect to the locations of the Company's public pay telephones as of March 31,
1995:
<TABLE>
<CAPTION>
PUBLIC PAY PERCENTAGE
STATE TELEPHONES OF TOTAL
----- ---------- -----------
<S> <C> <C>
Florida.......................................................... 8,479 21.2%
New York......................................................... 6,723 16.8
California....................................................... 4,515 11.3
Texas............................................................ 2,463 6.2
Maryland......................................................... 2,039 5.1
Virginia......................................................... 1,874 4.7
Georgia.......................................................... 1,767 4.4
Pennsylvania..................................................... 1,486 3.7
Tennessee........................................................ 1,469 3.7
Louisiana........................................................ 1,372 3.4
North Carolina................................................... 1,097 2.7
Ohio............................................................. 926 2.3
South Carolina................................................... 840 2.1
Other states..................................................... 4,990 12.4
------- -----
Total.......................................................... 40,040 100.0%
------- -----
------- -----
</TABLE>
The Company's public pay telephone business primarily generates revenues
from coin and non-coin calls. Non-coin calls include calling card, credit card,
collect and third party billed calls made from its telephones.
Coin Calls
Substantially all of the Company's public pay telephones accept coins as
payment for local or long-distance calls and can also be used to place local or
long distance non-coin calls. The Company's public pay telephones generate coin
revenues primarily from local calls. In all of the territories in which the
Company's public pay telephones are located, the Company charges the same rates
for local coin calls as does the LEC; in most territories that charge is $0.25,
although a limited number of jurisdictions such as Illinois, Iowa and Wisconsin
have increased that charge to $0.35. Whereas local coin calls have traditionally
been provided for an unlimited call duration, some jurisdictions have begun to
allow call timing (i.e., deposit of an additional amount after a specified
period.) The maximum rate LECs and independent public pay telephone companies
may charge for local calls is typically set by state regulatory authorities. The
Company pays local line and usage charges to LECs for each of its installed
public pay telephones. These line charges cover basic service to the telephone
as well as the transport of local coin calls.
54
<PAGE>
Non-coin Calls
The Company receives revenues for non-coin calls made from its public pay
telephones. Non-coin calls include credit card calls, calling card calls,
collect calls and third-party billed calls. The services needed to complete a
non-coin call include providing an automated or live operator to answer a call,
verifying billing information, validating calling cards and credit cards,
routing and transmitting the call to its destination, monitoring the call's
duration, determining the charge for the call, and billing and collecting the
applicable charge. In most jurisdictions, the Company has the right to select
the operator service provider for its public pay telephones. The Company may
select a third-party operator service provider. The Company intends to
predominantly use the operator services of AT&T pursuant to the AT&T Agreement
and, in some cases, other operator service providers. To a limited extent, the
Company also sub-contracts operator service from other companies on a
private-label basis: customers are connected to the sub- contractors' operators,
who identify themselves as PTC Services. The Company considers a variety of
factors prior to deciding which operator service company to select. These
factors include contractual arrangements between the Company and the operator
service providers, the location of the telephones, the types of calls made from
the location, the profitability of each type of call under each calling
alternative, the requirements of the Property Owners and applicable regulatory
restrictions.
Except in jurisdictions where the Company is prohibited from selecting the
operator service provider, AT&T and other operator service providers pay the
Company a commission for each call completed by the selected operator service
provider. The Company may also install an automated operator system that allows
the telephones to collect and store billing information and forward calls to the
called party. At locations where the automated operator system is in operation,
the caller has the option to complete the call through the automated system, the
Company's selected operator service provider or an operator service provider
accessed by the caller. The FCC has the right to regulate the amount public pay
telephone operators may charge for interstate calls, however, while several
proposals are under consideration, no formal interstate rate caps currently
exist. See '--Regulation.'
The Company also receives additional revenue from long distance carriers
pursuant to FCC regulations as dial around compensation for non-coin calls made
from its public pay telephones. A 'dial around' call is made by using an access
code to reach a long distance carrier other than the one designated by the pay
telephone operator. Pursuant to an FCC ruling, independent public pay telephone
providers are entitled to dial around compensation on an interim basis at a
fixed rate of $6.00 per telephone per month for interstate dial around calls.
Similarly, state regulatory authorities in Florida, Georgia and South Carolina
have implemented intrastate dial around compensation programs for independent
public pay telephones. Other states are also currently considering intrastate
dial around compensation programs for independent public pay telephones.
Recently, AT&T agreed to begin providing its share of dial around compensation
through a $0.25 per call rate payment in lieu of AT&T's portion of the flat
monthly rate payment amounts. This handling was approved by the FCC, effective
January 1, 1995. The same treatment will be applied at the intrastate level once
any necessary state approvals are obtained. More recently, Sprint has requested
that a per call compensation system be applied to its interstate traffic as
well, which request was approved by the FCC, effective July 1, 1995. See
'--Regulation.'
AT&T Agreement
On April 21, 1995, the Company entered into the AT&T Agreement with AT&T
for a two-year term. Subject to the AT&T Agreement, AT&T was designated as the
primary operator services provider for the Company's public pay telephones. The
Company has agreed that AT&T's operator service systems will handle and AT&T's
network will carry all interLATA telephone calls made from the Company's public
pay telephones (subject to legal and contractual limitations) on a '0+ basis'
(such as collect calls, calls billed to a third party telephone number and calls
billed to telephone calling cards and commercial credit cards) that are not
directed to another operator services provider. To the extent permitted by law
and existing contract,
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the Company's public pay telephones will identify AT&T as the designated
operator services provider and adopt the AT&T rate structure.
Under the AT&T Agreement, in general and subject to certain exceptions,
AT&T will pay commissions to the Company which, in the first year of the
agreement, will be based upon a percentage of those 0+ and AT&T dial around
revenues originating from the Company's public pay telephones that is handled by
AT&T's operator services and carried on the AT&T network and, in the second year
of the AT&T Agreement, AT&T will continue to pay the Company commissions on 0+
revenue and will pay a specified per call amount for interLATA (800) dial around
calls. In addition, the AT&T Agreement contains certain incentive compensation
arrangements.
Under the AT&T Agreement, the Company may serve as a nationwide reseller of
AT&T operator services to other independent pay telephone providers. While
constituting a major new business alliance for the Company, the AT&T Agreement
also represents a continuation of prior working agreements between AT&T and the
Company, whereby AT&T and the Company jointly market and provide public pay
telephone services to national and regional accounts. Examples of such accounts,
as of March 31, 1995, included McDonald's Corporation (1,226 telephones) and the
Atlanta Hartsfield International Airport (417 telephones).
For a discussion of the background to the Company's decision to enter into
the AT&T Agreement, see 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview.'
Operating Expenses
The Company's principal operating expenses consist of (i) telephone
charges, (ii) commissions paid to Property Owners and (iii) field service and
collection costs. The Company pays monthly access charges to LECs for
interconnection to the Public Switched Network for local calls, which are
computed on either a flat monthly rate or a fixed monthly charge plus a per
message or per minute usage rate based on the time and duration of the call. The
Company also pays a fee to LECs and long distance carriers based on usage for
local (short haul) long distance coin calls. The Company also incurs billing,
collection, bad debt and validation costs when acting as an operator service
provider. Commissions, which are paid to Property Owners for the right to place
the Company's public pay telephones on their premises, are typically expressed
as a percentage of revenues and fixed over the term of the contract. Field
service and collection costs are principally comprised of the staff costs of
collecting coins from and maintaining the Company's public pay telephones.
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Growth in Installed Base
The following chart illustrates the growth of the Company's installed
public pay telephones:
NUMBER OF PUBLIC PAY TELEPHONES
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
Number of
Public Pay
Telephones 11,486 16,680 21,652 35,687 40,017
Acquisitions
The Company's core public pay telephone business has grown primarily
through acquisitions. In general, the Company has been able to acquire public
pay telephones at prices that it considers attractive due to the economies of
scale which the Company enjoys and smaller providers frequently lack. When
public pay telephones typically operated at a loss by smaller providers are
integrated into the Company's national system, the Company is frequently able to
operate the acquired telephones profitably, or more profitably than the seller,
because of economies of scale and the more favorable terms and conditions that
the Company's high use of long distance service permits it to negotiate from
long distance carriers. The Company believes that selective acquisitions are
desirable because acquired public pay telephones typically generate predictable
and immediate revenues in comparison to newly installed telephones.
In reviewing acquisition candidates, the Company considers the following:
Historical Financial Performance. The Company reviews the historical
revenues and cash flows from the public pay telephones to be acquired, including
the mix and volume of coin and non-coin revenue.
Pro Forma Financial Performance. The Company analyzes the prospective
profitability of the public pay telephones to be acquired without including
overhead of the seller and based on other pro forma considerations, such as the
Company's actual field service and collection and other administrative expenses
and the typically more favorable terms and conditions with operator and long
distance service providers the Company is able to obtain.
Location and Economies of Scale. The Company considers the geographic
proximity of the public pay telephones to be acquired to the Company's existing
markets, and the extent to which the acquisition would provide the Company with
economies of scale through, for example, more efficient operation and
maintenance of a greater number of public pay telephones within a geographic
region.
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Property Agreements and Condition of Equipment. The Company also reviews
the revenue sharing terms, expiration date and transferability of related site
location agreements with Property Owners, and the type and condition of the
proposed equipment to be purchased.
The following table lists the Company's acquisitions of public pay
telephones for consideration in excess of $500,000 since January 1, 1990.
NO. OF
DATE SELLER/ACQUIRED COMPANY TELEPHONES
---- ----------------------- ----------
February 1990 First Continental Communications, Inc. 725
June 1990 Advanced Telecom Systems, Inc. 396
August 1990 U.S. Commercial Telephone Corp. 1,808
August 1990 Emro Marketing Company 403
April 1991 Tele-America Communications Corporation 2,525
November 1991 RAM Telephone & Communications, Inc. 1,640
January 1992 Coin-Call Corporation 1,312
February 1992 Emro Marketing Company 449
June 1992 American Payphone, Inc. 1,489
September 1992 Millicom Services Company 238
October 1992 Alpha Pay Phones, Ltd. III 655
March 1993 U.S. Tele-Com, Inc. 2,015
November 1993 Ascom Communications, Inc. 11,600
March 1994 Emro Marketing Company 1,045
June 1994 Atlantic Telco Joint Venture 3,300
July 1994 Telecorp Funding, Inc. 600
October 1994 Telecoin Communications, Ltd. 2,155
Although the number of major independent public pay telephone providers
(operating in excess of 2,000 public pay telephones) that the Company could
potentially acquire has decreased as a result of industry consolidation, the
independent market is still substantially fragmented among many independent
public pay telephone providers, currently estimated by an independent source to
be approximately 600. The Company expects further consolidation in the
independent public pay telephone market. Accordingly, the Company intends to
utilize its size and experience in integrating public pay telephone acquisitions
to capitalize on the consolidation of the public pay telephone industry by
continued expansion of its core public pay telephone business through selective
acquisitions.
New Installations
Placement of Public Pay Telephones. The Company seeks to increase its
internal growth by marketing its public pay telephones to new and existing
accounts within its current markets. The Company expands its base of public pay
telephones with its own marketing staff by obtaining contracts for new locations
where it believes there will be significant demand for public telephone service,
such as convenience stores, grocery stores, service stations, shopping centers,
hotels, restaurants, airports and truck stops. In evaluating locations, the
Company generally conducts a site survey to examine geographical factors,
population density, traffic patterns, historical usage information (to the
extent available) and other factors in determining whether to install a public
pay telephone. The Company has focused its efforts to date on securing telephone
locations from large national corporate accounts which can provide a large
number of quality locations. In addition, the Company is attempting to balance
its national corporate account marketing efforts by expanding its regional and
local sales efforts where competition for accounts tends to be less competitive.
The Company installs its public pay telephone equipment pursuant to
agreements ('Property Agreements') with Property Owners. The Company's typical
Property Agreement has a five-year term and
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provides the Company with the option to renew for an additional five years and
typically provides for a revenue sharing arrangement between the Company and the
Property Owner based on the revenue generated from the telephone. The percentage
of revenue paid to a Property Owner is generally fixed for the period of the
contract. The Company estimates that the average cost of installing a new public
pay telephone including site selection, hardware and labor is approximately
$2,300.
The Company is obligated to repair, maintain and service the public pay
telephone equipment installed pursuant to the Property Agreements. Through daily
computerized polling of its public pay telephones, the Company generally is able
to determine possible malfunctions before they are reported and usually repairs
such malfunctions within 24 hours. Generally, the failure of the Company to
remedy a default within 30 days' after notice gives the Property Owner the right
to terminate the Property Agreement. The Company can generally terminate a
Property Agreement on 30 days' prior notice to the Property Owner if the public
pay telephone does not generate sufficient total revenue for two consecutive
months.
Marketing. Although the Company's growth in its core public pay telephone
business has been primarily attributable to acquisitions, the Company is also
seeking to achieve balanced internal growth by increasing the number of public
pay telephones with both large national corporate accounts and smaller regional
and local accounts. The Company believes that its nationwide presence makes it
an attractive supplier of public pay telephone services for national corporate
accounts by offering these accounts a consistent level of service and reducing
the time, administration and costs of utilizing multiple providers. The primary
focus of the Company's marketing efforts has been and continues to be the
acquisition and development of national corporate accounts, which included, as
of March 31, 1995, 7-Eleven (2,528 telephones), Emro Marketing Company, a
subsidiary of Marathon Oil (2,058 telephones), Vons Supermarkets (761
telephones) and Safeway Stores (420 telephones). In addition, through their
alliance, the Company and AT&T will jointly pursue national and regional
accounts which, as of March 31, 1995, included McDonald's Corporation (1,226
telephones) and the Atlanta Hartsfield International Airport (417 telephones).
As the country's largest independent public pay telephone provider, the Company
believes it is in a strong position to service national accounts, in contrast to
smaller competitors or LECs, which currently operate only in their specific
geographic regions. In contrast to the limited resources of the smaller
independent public pay telephone providers, the Company's 'smart' pay
telephones, sophisticated management information systems, and highly trained
national service and support staff allow the Company to maintain a high level of
service and react quickly to repair damaged equipment. The Company's size and
competitive cost structure allow it to offer attractive commissions to Property
Owners, frequently greater than the commissions offered by small independent
operators.
The Company is also expanding its marketing efforts with respect to smaller
regional and local accounts. In this regard, the Company has hired and is in the
process of hiring regional sales managers in New York, the Mid-Atlantic region,
Florida, Texas, the Mid-West region and California, where the Company has
significant concentrations of public pay telephones. Such regional managers will
focus on obtaining and servicing larger accounts within their regions as well as
recruiting independent sales agents who will market to and service smaller
regional and local accounts. The Company's sales efforts are being coordinated
by Lawrence T. Ellman, who joined the Company in June 1994 as President of its
public pay telephone division. See 'Management--Directors and Executive
Officers.'
Competition
The Company believes the principal competitive factors in the public pay
telephone business are (i) commission payments to Property Owners; (ii) the
ability to serve accounts with locations in several LATAs or states; and (iii)
the quality of service provided to Property Owners and the users of the
telephones.
In the public pay telephone business, the Company principally competes with
the LECs, a number of independent providers of public pay telephone services,
major operator service providers and interexchange
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carriers. Some of these independent companies have increased in size by
incorporating an acquisition strategy similar to that of the Company, and at
times, many of these companies compete for the most favorable public pay
telephone contracts and sites. Although the Company is the largest independent
provider of public pay telephones, most LECs and interexchange carriers with
which the Company competes and some independent public pay telephone companies
have substantially greater financial, marketing and other resources than the
Company. In addition, many LECs, faced with competition from independent public
pay telephone companies, have increased their compensation arrangements with
Property Owners by offering more favorable commission schedules. Moreover, it is
possible that in the future the LECs may begin providing services outside of
their traditional franchise territories, which could adversely affect the
Company's results of operations.
Telephone Systems Management and Service
The Company has internally developed a computer software system which
interfaces with microprocessors in the Company's public pay telephones. The
Company's computer system polls all of its public pay telephones each night to
determine the amount in each telephone and to diagnose possible operational
problems at the telephones. Polling enables the Company to reduce the number of
visits required at each public pay telephone to maintain their operation and to
collect coins.
Based on the results of each night's polling, the Company determines which
telephones require collection or service. Each of the Company's collectors can
remove on average from 35 to 40 coin boxes each day, depending upon the number
of telephones within the collector's specified collection route. Upon removing
the sealed coin box from the telephone, the collector is unaware of the number
of coins in the coin box, while management, through its software system, has an
exact count of the coins. Once the route is completed, the collector returns to
one of the Company's coin rooms located at its executive office or its regional
offices, where the coin boxes are automatically counted and the amount in each
coin box is recorded and compared to the amounts determined by polling the
telephones on the previous night. The Company reconciles variances at each
telephone on a daily basis, which variances have historically not been material.
The Company maintains a staff of approximately 360 field service telephone
technicians located throughout the states in which the Company's telephones are
installed. The Company has imposed a high standard of service and maintenance in
order to ensure that the telephones are operating properly and generating
maximum revenue. Through its computer system, the Company generally is able to
determine possible malfunctions before they are reported and usually repairs
such malfunctions within 24 hours. The Company's most typical malfunctions or
problems are caused by vandalism and theft. During 1994, on average, no more
than three percent of the Company's public pay telephones were out of service,
or were not operating properly, at any one time. Telephone repair costs are
expensed by the Company rather than capitalized. The Company is continuously
monitoring and testing the latest technology in the industry to prevent
tampering, vandalism and theft.
Telephone Equipment Suppliers
The Company purchases its public pay telephones from independent
manufacturers. As of March 31, 1995, approximately 32,700, or 81.7%, of the
public pay telephones that the Company operates were manufactured by
Intellicall, Inc. ('Intellicall'). The Company also operates telephones
manufactured by Protel, Inc. ('Protel') and Elcotel, Inc. ('Elcotel'). The
Company believes that it can purchase public telephones from Protel, Elcotel or
other public pay telephone manufacturers on terms similar to those in effect
with Intellicall. The Company has a non-exclusive arrangement with Intellicall
pursuant to which the software and engineering schematics to repair the
Intellicall telephones are held in escrow to protect the Company against the
bankruptcy of, the cessation of business operations by, or the failure to
provide system support maintenance by, Intellicall. Therefore, the Company
believes that the loss of Intellicall as a
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manufacturer of the Company's public pay telephones would not have a material
adverse effect on its business.
The Company's public pay telephones use microprocessors that provide voice
synthesized calling instructions and the capability to detect and count coins
deposited during each call. These 'smart' telephones also provide information to
the caller at certain intervals regarding the time remaining on each call and
the need for an additional deposit. Substantially all LEC public pay telephones
do not have such capabilities.
International
In January 1995, the Company executed an agreement with MasTec, Inc.
whereby the Company contributed its Latin American assets to a newly formed
corporation in exchange for a 10% equity interest in the corporation which will
be managed and funded by MasTec, Inc., the majority shareholder. The Company has
the right to provide pay telephone consulting services on an exclusive basis to
the new venture. The Company has no obligation to contribute funds to the
venture.
ASSETS HELD FOR SALE
Included in 'Assets Held for Sale' are the net assets of the prepaid
calling card and international telephone center operations. In December 1994,
the Company's Board of Directors approved a plan to sell the assets related to
these businesses.
Prepaid Calling Card Business
During February 1995, the Company sold its prepaid calling card business to
Global Link for approximately $6.3 million. The Company received $1.0 million in
cash, a $5.3 million promissory note due February 1998, bearing interest at
8.5%, payable quarterly, and shares of common stock of Global Link. As a result
of the February 1995 transaction, and because of a drafting error discovered in
May 1995 that did not reflect the intentions of the parties, the Company's
interest in the outstanding common stock of Global Link was 28.8% instead of the
intended 19.99%. To correct this error, the Company has reduced its share
ownership to the intended 19.99% level. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Assets Held for
Sale,' 'Certain Transactions' and Note 17 to the accompanying consolidated
financial statements included elsewhere in this Prospectus.
The Company's prepaid calling card, which was introduced in late 1992,
permits a customer to access the Company's long distance network to make both
domestic and international calls. The advantage to a customer in using a debit
type of calling card such as those offered by the Company is that the customer
is not charged the per-call service fee (typically $.80) applicable to other
calling cards and long distance coin calls, in addition to the toll charge. In
1993 and 1994, prepaid calling cards accounted for approximately $1.3 million
and $5.1 million of the Company's revenues, respectively. No revenue was
generated by the prepaid calling card business in 1992.
The card has the physical characteristics of a traditional credit card.
Printed on the back of each card, along with calling instructions, is a ten
digit account number. The user of a card prepays an initial amount of between $5
and $500. The user accesses the system through a toll-free (800) number. Upon
reaching the system, the caller receives instructions for use of the system. The
system checks the caller's account to determine if a sufficient amount exists in
the account to allow the caller to place a call. If a sufficient amount exists,
the system asks the caller to dial the destination number. Toll charges are
debited against the account as the customer uses the Company's long distance
telephone services. An account can be 're- loaded'--i.e., the customer can
increase the prepaid balance of the account at any time by charging the desired
amount to a credit card, or by paying in cash at a location where the Company's
cards are sold.
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The calling card is marketed primarily through airlines, phone stores,
check-cashing businesses, other retail establishments and foreign travel
agencies. The calling card is particularly attractive to lower-income
individuals who may lack access to long distance telephone service and to
foreign tourists and foreign business people traveling in the United States.
International Telephone Centers
The Company selectively sought international opportunities with
knowledgeable partners. Prior to the 1994 Operational Restructuring, the Company
had and continues to have an indirect 23.8% interest in Artel, an international
telecommunications joint venture in Russia which was established to provide
international telephone access and intercity service to selected cities in
Russia through public telephone calling centers in Moscow. As the Company does
not believe that this asset is strategic, it will seek to divest itself of its
interest in Artel, although it currently has no agreement to do so. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Assets Held for Sale' and Note 15 to the accompanying consolidated
financial statements included elsewhere in this Prospectus.
DISCONTINUED OPERATIONS
In recent years, the Company entered into a variety of complementary niche
telecommunications businesses, such as its inmate telephone, prepaid calling
card and international telephone center and cellular telephone rental
operations, in an effort to enhance its long-term growth opportunities and
diversify its business. The capital requirements and management attention
required by these operations diverted the Company from its core public pay
telephone business and adversely affected its operating results. During the
second quarter of 1994, management of the Company undertook a review of the
Company's operations, management structure and strategic objectives with a view
toward reducing expenses and improving operating efficiency. In December 1994,
the Company decided to focus exclusively on the growth opportunities available
in its core public pay telephone business and to divest itself of such
operations. For financial accounting purposes, the inmate telephone and cellular
telephone rental operations have been segregated and reported as discontinued
operations. The Company sold its prepaid calling card business in February 1995
and is currently pursuing alternatives to divest the remaining operations. This
offering is not conditioned upon the divesture of the remaining operations and
there can be no assurance as to the Company's ability to dispose of such
operations still held by the Company on favorable terms or on the terms
contemplated by the Company's consolidated financial statements. See 'Risk
Factors--Risks Associated with Business Strategies and Discontinued Operations'
and '--Assets Held for Sale.'
Inmate Telephones
General. In 1990, the Company began offering telephone services in
correctional facilities to inmates. As of March 31, 1995, the Company operated
approximately 3,199 telephone lines in 230 correctional facilities in 24 states.
In 1992, 1993 and 1994, the Company's inmate telephone business had
approximately $1.9 million, $35.2 million and $42.4 million of revenues,
respectively.
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The following chart sets forth certain information with respect to the
locations of the Company's inmate telephone lines as of March 31, 1995:
NO. OF
STATE LINES
----- ------
Texas........................................................... 1,111
Colorado........................................................ 312
Ohio............................................................ 270
Georgia......................................................... 257
Nevada.......................................................... 133
Missouri........................................................ 129
Idaho........................................................... 111
Other states.................................................... 876
-----
Total......................................................... 3,199
-----
-----
The inmate telephone market primarily consists of collect calls made from
various types of short-term and long-term incarceration facilities.
Historically, revenues for the average inmate telephone have been higher than
for a public pay telephone due to higher usage rates and the fact that inmates
may only make collect calls, which have the highest revenue per call after
person-to-person calls. 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 lack of coin collecting and coin mechanism
repairs. However, the inmate telephone market has been increasingly competitive
and margins have been declining due to increases in commissions payable to
correctional facilities.
The Company recently received a proposal from a non-affiliated third party
to purchase approximately one-third of the Company's inmate telephones. The
purchase price would be based on a multiple of average monthly revenue from the
inmate telephones and would be payable in a combination of cash and notes. The
sale would be contingent upon a number of conditions, including negotiation and
execution of a definitive agreement and obtaining all necessary consents and
approvals. The Company is currently evaluating the proposal. There can be no
assurance that the Company will find the proposal acceptable or that a
definitive agreement will be negotiated and executed or that the sale will be
consummated on the proposed or any other terms.
Contracts. The Company originally entered the inmate telephone market
through the acquisition of five separate companies which had entered into
agreements with local and county governments to provide pay telephone service to
prisons and other correctional facilities. New contracts are typically awarded
pursuant to a competitive bidding process. The Company markets its inmate
telephone services through staff who are responsible for both new contracts and
renewals of existing contracts. To date, the Company's primary focus has been on
retaining and renewing existing contracts.
As of March 31, 1995, approximately 17% of the Company's inmate telephone
contracts expire or are up for renewal during 1995. Another approximately 35%
expire during 1996 and approximately 48% of the Company's current inmate
telephone contracts expire or are up for renewal in 1997 or thereafter. There
can be no assurance as to whether the Company will be successful in renewing
existing inmate telephone contracts or that the Company's inmate telephone
business will not be adversely affected by the Company's announcement of its
decision to divest its inmate telephone business. In addition, the sale of the
inmate telephone business will require that correctional facilities consent to
the assignment of certain inmate telephone contracts which may affect the
ability of the Company to divest itself of such business on a timely basis.
Operations. Within correctional facilities, the Company currently utilizes
automated operator calling systems from a number of providers. All of these
systems limit inmates to collect calls. In facilities with
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more than 50 inmates, the Company generally installs its proprietary prison pay
telephone system. This calling system is a configuration of proprietary software
based on an integrated microcomputer platform and basic telecommunications
hardware consisting of dialers and storage modules.
All of these automated operator systems function in essentially the same
manner. The inmate removes the handset from the telephone and dials the
destination number. The system first confirms that the destination number has
not been blocked. Blocking is designed to prevent completion of calls for which
payment will not be collectible and generally occurs if the call is being made
to a person who has not previously paid for a call on the Company's system or
does not desire to receive calls from a facility or inmate. The system also
blocks numbers that do not allow collect call billing or a number previously
screened through the Line Information Data Base, a computerized record developed
by LECs containing all valid telephone and calling card numbers in their
territories for purposes of performing billing and validation. If the number 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 the call by saying yes or rejecting the call by hanging
up. Only calls that are positively accepted will be connected for completion.
The system is programmed to record the details of each call (i.e., the
number dialed, the bill to number and the length of call). The call detail is
polled (extracted) from each system on a daily basis into the system's
centralized billing center. The Company then rates the calls according to the
Company's state and federal tariffs and according to any contractually agreed
upon rates and then bills the calls in the manner described in '--Billing and
Collection.' The Company's proprietary prison pay telephone system provides
extensive anti-fraud, call monitoring and surveillance capabilities for the
correctional facilities where its inmate systems are installed. These include
reports of frequently called numbers, calls of longer than normal duration and
calls by more than one inmate to the same number. Upon request, the Company will
provide the facility with the specific call detail.
Service. The systems in each facility are provided and installed at no cost
to the government agency. The Company shares a percentage of the revenues it
receives with the government agency. The Company generally provides all
service-related activities. Service issues are reported to the Company's
Technical Support Center through a 24-hour, toll-free (800) number. Service is
typically restored on a major outage within 24 hours. Most problems are
corrected remotely and generally an on-site visit is not required.
Billing and Collection. The Company uses Zero Plus Dialing, Inc. ('ZPDI'),
a third party billing and collection clearinghouse, to process and collect
non-coin telephone revenues handled by the Company's contracted operator service
providers other than AT&T. The Company forwards the call records to ZPDI, which
sends the records to the appropriate LEC for billing and collection. The LEC
includes the rated calls on its customers' monthly telephone bills. The LEC
forwards the proceeds from the billed and collected call records to ZPDI, less
the billing and collection fee charged by the LEC and a reserve for
uncollectibles. ZPDI remits the proceeds to the Company, less the ZPDI
processing fee. The entire billing and collection cycle generally takes between
60 and 120 days after the call record is submitted to ZPDI.
Competition. In the inmate telephone business, the Company competes with
approximately 20 independent providers of inmate pay telephone systems, the LECs
and interexchange carriers. The Company believes that the principal competitive
factors in the inmate telephone market are rates of commissions paid to the
correctional facilities, system features and functionality, service and the
ability to customize inmate call processing systems to the specifications and
needs of the correctional facility. The Company competes for business on local,
county, state and federal levels. The cost of market entry and the complexity of
the bid process increases proportionally with respect to the size of the
correctional facility. While the local and county markets are somewhat
fragmented with many service providers, state correctional facilities are
generally bid on a single statewide contract basis. Depending on the type of
facility and the State, the Company must direct its marketing efforts to
municipal purchasing officers,
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enforcement or jail administrators, or to the independent contractors that
operate the facility. The Company currently provides no inmate services to
federal facilities.
Cellular Telephone Rentals
General. The Company's cellular telephone rental operations are conducted
by the Company's 90%-owned subsidiary, PTC Cellular, Inc. ('PTCC'). As of March
31, 1995, PTCC had 13,293 cellular telephones installed in rental cars and 644
hand-held portable cellular telephones. In 1992, 1993 and 1994, cellular
telephone operations had approximately $1.5 million, $6.3 million and $11.6
million of revenues, respectively. PTCC markets its cellular telephone services
principally through car rental agencies. PTCC has in-car distribution agreements
with Avis, Hayes Leasing (Avis Dallas), Avis Grand (Avis Los Angeles) and Budget
Rent-a-Car Corporation ('Budget'). PTCC is in the final stages of signing an
in-car distribution agreement with Alamo Rent-a-Car, Inc. PTCC provides portable
cellular phone rentals at select Avis and Budget locations.
Operations. PTCC's hand-held portable cellular telephones are
manufactured by Murata Technology and PTCC's in-car cellular phones have been
manufactured by Ericsson Mobile Communications, Inc. ('Ericsson'), incorporating
credit card and billing technology supplied by Cellular Technical Services
Company, Inc. ('CTS'). PTCC has experienced certain operational problems with
these cellular telephones. Many of the transceivers supplied by Ericsson have
malfunctioned and PTCC has been unable to detect inoperable equipment in a
timely fashion, thus negatively affecting PTCC's revenues and customer
relations. PTCC is in the process of developing new in-car cellular technology,
including a credit card swipe interface, and transceivers and handsets that will
be supplied by Motorola's OEM Data Products Group, eliminating PTCC's dependency
on the system previously supplied by CTS and Ericsson. The new Motorola
telephones will have internal diagnostics and be programmed to contact PTCC if
they detect a problem. PTCC anticipates that these new cellular telephones will
be introduced in the summer of 1995. PTCC has recently signed a termination
agreement with CTS which serves as a formal acceptance of PTCC's plans to deploy
its new technology and also provides for an orderly wind down of the services
CTS provides to PTCC through February 1996.
PTCC targets business travellers for both in-car and portable cellular
rentals. The hand-held units are rented at the time the vehicle is rented and
charges are applied to a credit card presented at the time a phone is returned.
Users of in-car cellular telephones do not separately rent the cellular
telephones at the time the vehicle is rented. Rather, each such telephone is
equipped with a credit-card 'swipe' device that permits the customer to activate
the telephone with a major credit card when needed. PTCC has elected to reduce
its emphasis on the portable cellular telephone industry and focus more
attention on its in-car cellular telephone market because of the following
factors: (i) the requirement to pay significant commissions to rental car
companies with respect to each portable cellular telephone available for rent to
the customers of the rental car companies; (ii) the high degree of competition
in the portable cellular telephone industry; and (iii) the lack of barriers to
the entry of competitors into this market. In addition, in-car cellular
telephones cater to the discretionary use of consumers who generally would not
rent a portable cellular telephone but will use a phone if it is readily
available. The in-car cellular rental telephones operate in a hands free mode
and also provide added safety to all rental car customers that rent a car with a
phone. Finally, many business travellers belong to preferred rental programs
that usually include easy and fast delivery of cars to these customers. In many
cases, these select customers who never enter a rental facility and would not
have an easy way to rent a portable phone, are usually among the highest users
of in-car phones.
Competition. PTCC's principal competitors are Quick-Call Corporation,
Shared Technologies Cellular, Inc., SIMS Communications, Inc., a number of local
providers of short term cellular services and cellular carriers. In addition,
other telecommunication companies such as carriers, including AT&T/McCaw
Cellular Communication, Inc. or any of the RBOCs, could enter the in-car
cellular telephone market and directly compete with PTCC. These carriers are
currently indirectly competing with PTCC by obtaining subscribers for their
cellular service and encouraging those subscribers to use their own cellular
phones in
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lieu of in-car cellular telephones. Other potential competitors include
manufacturers of cellular telephones and their components, including CELLNET
Corporation and Cell-Tel Data Services, Inc.
REGULATION
The Company's operations are significantly influenced by the regulation of
public pay telephone, inmate telephone, long distance reseller services and
other telecommunication services. Authority for regulation of these services is
concurrently vested in the FCC and the various state public utility commissions.
Regulatory jurisdiction is determined by the interstate or intrastate character
of the subject service, and the degree of regulatory oversight exercised varies
among jurisdictions. While most matters affecting the Company's operations fall
within the administrative purview of these regulatory agencies, state and
federal legislatures and the federal district court administering the AT&T
divestiture consent decree are also involved in establishing certain rules
governing aspects of these services.
State Regulation
State regulatory commissions are primarily responsible for regulating the
rates, terms and conditions for intrastate public pay telephone and inmate
telephone services. The degree to which states regulate the types of services
offered by the Company varies significantly, from some states which do not
require any certification or authorization to operate within the state, to other
states which prohibit non-LEC public pay telephone services. In most states
which permit such services, approval to operate in that state involves the
submission of a certification application and an agreement by the Company to
comply with the rules, regulations and reporting requirements of that state. The
Company has obtained the requisite regulatory approvals to provide the public
pay telephone and, where applicable, inmate telephone services, in all states in
which it currently provides such services. The Company does not anticipate any
significant difficulties in obtaining approval to operate in any additional
states on an intrastate basis, except in the four states in which it is illegal
to provide certain intrastate services using non-LEC public pay telephones:
Alaska, Connecticut, Hawaii and Oklahoma. Connecticut, however, has proceedings
underway to implement public pay telephone competition within that state.
The Company is also affected by state regulation of operator services. Many
state regulatory bodies have imposed regulations upon the provision of
intrastate operator services which are similar or identical to the regulations
adopted by the FCC pursuant to the Telephone Operator Consumer Services
Improvement Act of 1990 which was enacted on October 17, 1990 ('TOCSIA'). Most
states which permit intrastate operator services competition regulate its
provision. Such regulations may include notice and identification requirements,
maximum price limitations, reporting requirements and prohibitions on handling
certain local and long distance calls. Several states have not authorized
intraLATA operator competition because of the exclusive franchise granted to
LECs in such states. The Company has obtained, where necessary, the proper
intrastate operator service authorizations, including, where applicable,
certificates of public convenience and necessity and approval or acceptance of
its tariffs, in those states in which it provides intrastate operator services.
As of December 31, 1994, the Company was unable to derive revenue from
intraLATA and local non-coin calls for telephones located in Arkansas, Maine and
Massachusetts. In 1993, the Company entered into agreements with two RBOCs for
their LECs to pay the Company a commission on local and/or intraLATA calls.
These agreements remain in place, with similar agreements currently under
negotiation with other LECs.
On January 14, 1993, the Florida Public Service Commission, as the first
state regulatory body to address the issue, ruled that a $3.00 per telephone/per
month intrastate dial around compensation should be paid to the Company and
other competitive public pay telephone providers. Only two other states, Georgia
and South Carolina, have implemented any intrastate dial around compensation
program. However, the Company expects to receive intrastate dial around
compensation in 1995 for AT&T calls under a recent
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agreement between AT&T and the public pay telephone industry as described in
'--Federal Regulation' below.
The Company is a certified operator service provider and interexchange
carrier or has the right to provide operator and interexchange services under
its PTC Services brand in the following states: California, Colorado, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Jersey, New York, Pennsylvania, Rhode Island, South Carolina, Texas, Utah,
Virginia and Washington.
State regulation has generally not addressed the provision of cellular
rental services such as those provided by the Company. In limited cases, state
regulation may reach underlying cellular facilities-based carriers and, in even
more narrow instances, traditional resellers of cellular service. The Company is
certified as a cellular reseller in California and New York as per the specific
requirements of those states.
Federal Regulation
The FCC does not regulate the provision of public pay telephone and inmate
telephone services by competitive public pay telephone companies to the same
degree as do the states. However, the FCC has retained jurisdiction and agreed
to address instances where LECs or state public service commissions have
unreasonably interfered with a public pay telephone or inmate telephone owner's
right to interconnect to the interstate Public Switched Network. The FCC also
acts as a repository for customer complaints involving rates or improper
practices of public pay telephone providers. The competitive public pay
telephone and inmate telephone industries are involved with several proceedings
at the federal level which the Company believes may present significant
opportunities for advancing the interests of the competitive public pay
telephone and inmate telephone industries.
Despite the fact that the Company has selected an operator service company
and, in some cases, an automated operator system installed in each of the
Company's telephones, under TOCSIA, each user of the Company's public pay
telephones has the right to access any long distance operator service company or
interexchange carrier to make a non-coin interLATA call from the Company's
telephones. Previously, the Company received no commission or revenue if the
user for the Company's public pay telephone accessed an operator service
provider or interexchange carrier other than the operator service provider
selected by the Company at that telephone. However, pursuant to TOCSIA, the FCC
ruled that operator service providers and interexchange carriers must compensate
public pay telephone providers for interstate dial around calls placed through
such provider's telephones. The FCC ruled on May 8, 1992 that the Company, and
all other competitive public pay telephone providers, would receive, on an
interim basis, $6.00 per telephone/per month as compensation for interstate dial
around calls. This flat rate system was made effective in June 1992 and the
Company received its first payment under this system in the third quarter of
1992. Recently, AT&T has agreed to begin providing its share of dial around
compensation through a $0.25 per call flat rate payment in lieu of AT&T's
portion of the flat rate payment amounts. This handling was approved by the FCC,
effective January 1, 1995. The same treatment will be applied at the intrastate
level, once any necessary state approvals are obtained. More recently, Sprint
has requested that a per call compensation system be applied to its interstate
traffic as well, which request was approved by the FCC, effective July 1, 1995.
TOCSIA imposes certain rules and requirements on the Company. TOCSIA, and
the rules and regulations promulgated thereunder by the FCC, are designed to
improve consumer awareness through the standardization of certain procedures in
the provision of interstate operator services. The Company complies with
provisions of TOCSIA, both as a call aggregator (sending calls to operator
service companies) and an operator service provider (through the Company's
automated operator system and as a reseller). The requirements include call
branding (announcing the name of the operator service provider at the beginning
and end of each call), posting notices to users at telephone locations
identifying the designated operator service provider, quoting rates at the
user's request and filing informational tariffs.
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In January 1991, as required by TOCSIA, the Company filed with the FCC an
informational tariff consisting of a description of its services and the rates
it may charge. Subsequently, the FCC has advised Congress that the FCC would not
exercise its option under TOCSIA to seek to invoke more stringent rate
regulation for operator service providers. The Company has amended its tariff
from time to time as it adds additional services or adjusts rates. The Company
has also filed all periodic reports required by the FCC which include rate
compilations, complaints, lawsuits, investigations and inquiries, as well as
certain enumerated cost data. TOCSIA has also required the FCC to take such
action as is necessary to ensure that public pay telephone companies are not
exposed to undue risk of fraud. In response, the FCC has required the LECs to
file tariffs for the provision of international call blocking services, the
majority of which are now in effect. Under current FCC regulations, the
Company's services to inmates at correctional facilities are not subject to
TOCSIA, however, on February 8, 1995, the FCC issued a Notice of Proposed Rule
Making, raising the issues of (1) whether and to what extent TOCSIA should apply
to aggregators, including inmate providers and (2) whether carrier branding
should be required on the remote (receiving) end of a collect call. Adverse
rulings on these issues could negatively affect the inmate telephone business.
In addition, recent rulings by two federal courts raise questions under the
FCC's streamlined regulations applicable to the Company's business, which may
result in more stringent regulatory reporting requirements imposed. The Company
does not believe however that this will adversely affect its operations.
On April 9, 1992, the FCC proposed a new access plan for operator assisted
interstate calls dialed on 0+ basis. Currently, 0+ calls are sent directly by
the LEC to the operator service provider selected by the host location. Under
the proposed access plan, known as Billed Party Preference, 0+ calls would be
sent instead to the operator service provider chosen by the party paying for the
call. Billed Party Preference allows a telephone user to bill a call to the
user's pre-established carrier at the user's home or office, thereby bypassing
the opportunity for the pre-subscribed carrier of the public pay telephone
provider to handle and receive revenues from the call. The FCC has tentatively
concluded that a nationwide Billed Party Preference system for interstate
operator assisted calls is in the public interest. Under a Billed Party
Preference system, the billed party could bypass the Company entirely, allowing
0+ calls to be made on the Company's telephones without the payment of any
compensation to the Company. If the Company does not receive revenue for 0+
calls, the Company will be unable to pay commissions for such calls to Property
Owners. The FCC has requested and received public comment on the question of
compensation to public pay telephone companies under Billed Party Preference.
The entire Billed Party Preference proposal remains under consideration at
present and the outcome is uncertain. If implemented, Billed Party Preference
could have a significant adverse impact on the Company. In addition, the
American Public Communications Council (of which the Company is a member), along
with other telecommunications companies and associations, has filed a rate
ceiling alternative to Billed Party Preference with the FCC. The proposal is
pending and the outcome is uncertain.
The FCC does not regulate cellular resale service or its providers,
however, the FCC has considered whether to apply TOCSIA to cellular resale
service. A recent federal court decision overturning the FCC's forbearance
policy towards non-dominant telecommunications companies has caused the filing
of tariffs by certain facilities-based cellular carriers, however, the Company
has been advised that no traditional or rental resale cellular carrier has made,
or is expected to make, such a tariff filing.
Local Regulation
In addition to state and federal regulation of the Company's business,
local municipal and county authorities have begun to adopt ordinances addressing
the placement and operation of pay telephone equipment on or over the public
rights-of-way in their respective jurisdictions. These ordinances vary widely in
their specifics, but typically adopt a permitting process that includes issues
of placement, aesthetics, fees and other qualifications for the deployment of
public pay telephones on the public rights-of-way. The future potential adoption
of such local ordinances on a wide-scale basis poses an additional regulatory
burden that could adversely affect the Company's operations.
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EMPLOYEES
As of March 31, 1995, the Company had 633 employees, 236 of whom were
executive, administrative, accounting, sales or clerical personnel and 397 of
whom were installers, maintenance and repair personnel and coin collectors. Of
the 633 employees, 527 were employed in continuing operations. The Company has
no collective bargaining agreements with its employees and believes that its
employee relations are good.
FACILITIES
In 1993, the Company relocated its headquarters facility to an existing
68,000 square-foot building located at 2300 N.W. 89th Place, Miami, Florida,
which was purchased for $3.5 million. The facility was subject to a mortgage in
the amount of $2.5 million bearing interest at the rate of 7.38% per annum,
which mortgage was paid in full with a portion of the proceeds from the
Company's sale of the Notes. See 'Use of Proceeds.' The Company terminated its
lease for its former headquarters facility in 1994 for a payment of
approximately $75,000.
The Company maintains 28 service facilities, which are linked to the
Company's headquarters by computer modem. The Company considers its current
facilities adequate for its stated business purposes.
LEGAL PROCEEDINGS
On May 25, 1994, a complaint was filed in the United States District Court,
Southern District of Florida, naming the Company, Jeffrey Hanft, Chairman and
Chief Executive Officer, and Richard Militello, Chief Operating Officer, as
defendants. The case is identified as Albert Hirschensohn v. Peoples Telephone
Company, Inc., Jeffrey Hanft and Richard F. Militello, United States District
Court for the Southern District of Florida, Case No. 94-0976 CIV-UNGARO-BENAGES.
The complaint alleges the violation of certain federal securities laws through
the issuance of 'false and misleading' statements regarding the subsequently
terminated proposed merger with IDB Communications Group, Inc. and the Company's
first quarter results. The complaint seeks certification as a class action
including all persons who purchased shares of the Company's common stock between
April 21 and May 10, 1994 as well as unspecified compensatory damages. On May
26, 1995, plaintiff filed under seal a motion for leave to file an amended and
supplemental complaint, which motion was granted by the court on June 20, 1995.
Based upon management's assessment of the facts and the Company's public
disclosures at the time in question, as well as consultation with counsel, the
Company believes the complaint is without merit and intends to vigorously
contest and defend against the action. Because of the preliminary nature of the
litigation, the Company is unable to predict the outcome of such litigation at
this time.
On July 1, 1993, the Company filed a law suit against BellSouth
Telecommunications, Inc., a unit of BellSouth Corp. that does business as
Southern Bell Telephone and Telegraph ('BellSouth'), alleging, among other
things, violations of the federal and State of Florida antitrust laws based upon
alleged monopolization and misrepresentations in connection with BellSouth's
operation of its public pay telephone business in Florida. The case is
identified as Peoples Telephone Company, Inc. vs. BellSouth Telecommunications,
Inc., United States District Court for the Southern District of Florida, Case
No. 93-1260-CIV-KING. The suit seeks unspecified damages and other relief. The
case is still in the discovery phase, but BellSouth has attempted to stay
discovery pending the court's ruling on its defenses of state action and
immunity. In response, the court has limited discovery to the threshold defense
issues raised by BellSouth. BellSouth has also filed motions for summary
judgment which have been briefed by the parties and were argued on April 6,
1995. The parties are awaiting a decision by the court. Because of the
preliminary nature of the litigation, the Company is unable to predict the
outcome of such litigation.
On May 9, 1995, a complaint (as amended on May 30, 1995) was filed in the
Supreme Court of the State of New York, New York County, against the Company by
ACI and ACI's sole shareholder, AHI. The complaint alleged breach of contract by
the Company for failure to repay principal and interest on a $2.0 million one
year promissory note (the 'One Year Note') and interest on a $4.0 million five
year promissory note (the 'Five Year Note') which were issued by the Company to
ACI in connection with the
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November 1993 purchase by the Company of substantially all of ACI's assets. In
addition, the complaint alleged that the Company breached its agreement with ACI
to register certain shares of Common Stock issued to ACI in connection with the
acquisition under the Securities Act within an agreed upon time frame. The
complaint also alleged that the Company failed to assume certain obligations and
pay certain amounts under an equipment lease. The complaint sought damages of
approximately $2.1 million in principal and interest allegedly due under the One
Year Note, approximately $4.4 million in principal and interest allegedly due
under the Five Year Note, approximately $333,000 in connection with the
equipment lease and an unspecified amount of damages for failure to promptly
register the Common Stock under the Securities Act. On June 29, 1995, the
Company settled such litigation for approximately $5.7 million, of which
$500,000 was paid upon execution of the settlement agreement, and the remainder
was paid in full in connection with the consummation of the Refinancing.
Pursuant to the terms of the Preferred Stock Investment, UBS Partners is
entitled to designate two of the six members of the Board of Directors of the
Company. To effect the foregoing at the closing of the Preferred Stock
Investment, the Company had sought the resignation of two of its existing
directors to create the vacancies necessary to effect UBS Partners' designation
rights. Ronald Gelber agreed to resign from the Board while Richard Whitman,
another director, refused to resign. Consequently, only one of UBS Partners'
designees currently serves on the Board. The Nominating Committee of the Board
of Directors of the Company has not renominated Mr. Whitman for election as a
director at the Company's 1995 Annual Meeting of Shareholders to be held in
August 1995. Mr. Whitman, through his counsel, has objected in writing to not
being renominated and to having been asked to resign. Mr. Whitman has alleged
that the request that he resign in consideration of the grant of stock options
was taken without the approval, knowledge or consent of the Board of Directors
of the Company and that such actions were inappropriate and may violate
applicable laws. Mr. Whitman has, through his counsel, indicated that he
reserves all rights and legal remedies to which he is entitled as a member of
the Board and a significant shareholder of the Company.
In May 1995, the Company received a letter from Kayne Anderson Investment
Management, Inc. ('Kayne Anderson'), a general partner of certain investment
partnerships holding shares of Common Stock of the Company and the largest
shareholder of the Company, advising that it had become aware of the terms of
the Company's offering of the Notes and alleging that the inclusion in the
definition of 'Change of Control' of a change in the composition of the Board of
Directors over a two-year period would constitute a breach of the fiduciary
duties of the Company's directors. While the Company strongly believes that
inclusion of such provision in the 'Change of Control' definition is not a
breach of the directors' fiduciary duties, the Indenture and the Notes do not
now include such provision in the definition of 'Change of Control.' In 1994,
Kayne Anderson and the Company had preliminary discussions with respect to a
potential equity investment in the Company by partnerships managed by Kayne
Anderson on terms which the Company did not find attractive at the time.
On July 6, 1995, the Company was served with a complaint alleging a number
of contractual breaches and tort claims against Buckeye Communications, Inc.
('Buckeye') and certain of its associated companies, including a joint venture
in which Buckeye and the Company each have a 50% interest (the 'Buckeye
Venture'). Buckeye is not an affiliate of the Company. The plaintiffs are
parties to a development and marketing agreement with Buckeye pursuant to which
certain images were licensed to Buckeye for numerous marketing purposes. Buckeye
and the Company subsequently entered into the Buckeye Venture, pursuant to which
the licensed images were made available to the Buckeye Venture for use in
producing pre-paid calling cards that were to be distributed by the Company. The
plaintiffs are claiming $30.0 million in damages and seeking other equitable
relief. The Company has no knowledge of the merit of the allegations against the
other parties, has had no direct contact with the plaintiffs and believes that
the allegations against it are without merit.
The Company is also subject to various ordinary and routine legal
proceedings arising out of the conduct of its business. The Company does not
believe that the ultimate disposition of these proceedings will have a material
adverse effect on its financial position.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company as of the date of this
Prospectus. Richard Whitman, one of the Company's outside directors, was not
nominated for election as a director at the Company's 1995 Annual Meeting of
Shareholders, which will be held in August 1995. Jeffrey J. Keenan, who together
with Charles J. Delaney are the designees of UBS Partners, is expected to be
nominated in lieu of Mr. Whitman. Mr. Whitman has advised the Company in
writing, by his counsel, that he objects to being asked to resign from the Board
and has requested that he be renominated at the Company's upcoming 1995 Annual
Meeting of Shareholders. See 'Business--Legal Proceedings.'
NAME AGE POSITION
---- --- --------
Jeffrey Hanft 48 Chairman and Chief Executive Officer
Robert D. Rubin 36 President and Director
Richard F. Militello 45 Chief Operating Officer
Bonnie S. Biumi 33 Chief Financial Officer
Lawrence T. Ellman 43 President, Pay Telephone Division
F. J. Pollak 32 President, PTCC
Bruce W. Renard 41 Vice President--Regulatory Affairs/
General Counsel
Karen V. Garcia 38 Vice President--Customer Support
Jody Frank(1)(2) 43 Director
Robert E. Lund(1) 51 Director
Richard Whitman(2) 44 Director
Charles J. Delaney 35 Director
Jeffrey J. Keenan(3) 38 UBS Capital Designee to serve as Director
------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Expected to be nominated for election to the Board of Directors in
connection with the Preferred Stock Investment. See 'Preferred Stock
Investment.'
The principal occupation of each director and executive officer for at
least the last five years is set forth below:
JEFFREY HANFT has been the Chairman of the Board of Directors of the
Company and its predecessor since December 1983 and the Chief Executive Officer
of the Company since December 1988. He was also the President of the Company
from December 1983 until June 1990 and from September 1993 until June 1994. Mr.
Hanft was the chairman of the Florida Pay Telephone Association from 1987 to
December 1990 and the chairman of the American Public Communications Council
('APCC') from April 1988 to January 1992. Mr. Hanft is currently the chairman of
the Legal Committee of the APCC and chairman emeritus of the APCC.
ROBERT D. RUBIN joined the Company in August 1989 as Executive Vice
President and became President in June 1994 and a director in February 1995.
Mr. Rubin is also chairman of the Company's merger and acquisition committee.
Mr. Rubin was an attorney from August 1984 to August 1989 specializing in
mergers and acquisitions, securities laws and general corporate law.
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RICHARD F. MILITELLO has been employed by the Company since October 1986.
He served as Chief Financial Officer of the Company from October 1986 to October
1993, as Vice President--Finance from June 1988 to August 1993, and as Chief
Operating Officer since October 1993.
BONNIE S. BIUMI joined the Company in July 1994 as Chief Financial Officer.
Prior to joining the Company, Ms. Biumi was a Senior Manager with Price
Waterhouse LLP in Miami, Florida. Ms. Biumi is a certified public accountant.
LAWRENCE T. ELLMAN joined the Company in June 1994 as President of its Pay
Telephone Division. From 1990 until joining the Company, Mr. Ellman was
President of Atlantic Telco Joint Venture, an independent public pay telephone
operator acquired by the Company in June 1994. For approximately eight years
prior thereto, he was Executive Vice President and Chief Financial Officer of
American Potomac Distributing Company, a beverage distributor.
F. J. POLLAK has been employed by the Company since November 1993 as
President of PTCC. From September 1992 through October 1993, Mr. Pollak was
Marketing Director for Weisman Enterprises ('Weisman'), the holding company for
Intera Communications, Best Vendors and Mobile Merchandising, Inc. From January
1984 through September 1993, he was Executive Vice President of Nationwide
Vending Services, Inc., whose assets were sold to Weisman.
BRUCE W. RENARD joined the Company as Vice President--Regulatory
Affairs/General Counsel in January 1992. From September 1, 1991 to December 31,
1991, Mr. Renard was a sole practitioner specializing in legal and regulatory
consulting services to the telecommunications and utility industries. From
August 1984 to September 1991, Mr. Renard was a partner with the Florida law
firm of Messer, Vickers, et al., managing the utility and telecommunication law
sections of the firm. Prior to that time Mr. Renard served as Associate General
Counsel for the Florida Public Service Commission.
KAREN V. GARCIA joined the Company in October 1990 as National Sales
Manager. Ms. Garcia's previous employment included 13 years with the Bell
System, two of which were at New York Telephone Company and the remaining
eleven with Southern Bell Telephone Company. Ms. Garcia has been Vice
President of Sales and Customer Support since November 1993.
JODY FRANK has served as a Director of the Company and its predecessor
since September 1986. Since February 1990, he has been a vice president of
Shearson Lehman and, after Smith Barney acquired the assets of Shearson Lehman
in 1994, Smith Barney Shearson.
ROBERT E. LUND was elected as a Director of the Company in May 1994. From
September 1990 to December 1991, Mr. Lund was Chairman and Chief Executive
officer of International Telecharge, Inc., a telecommunications company. From
February 1993 until October 1994 (when Newtrend, L.P. was sold), Mr. Lund served
as Chief Operating Officer of Newtrend, L.P., a provider of software and
professional services. Since December 1994, Mr. Lund has served as President and
Chief Executive Officer of S2 Software, Inc., a Dallas, Texas software company.
RICHARD WHITMAN has been a Director of the Company since December 1991. In
October 1987, Mr. Whitman co-founded RAM Telephone & Communications, Inc., where
he served as the chief executive officer, president and a director until its
merger with the Company in December 1991. From December 1988 to December 1991,
Mr. Whitman was chief executive officer, president and a director of United
Tele-Services, Inc. ('UTS'), a long distance provider and reseller which he
co-founded. In December 1991, UTS was merged into Ram. From 1989 to December
1991, Mr. Whitman served as Vice Chairman of the APCC and from 1990 through 1991
he has served as Chairman of the California Pay Phone Association. Since 1981,
Mr. Whitman has served as a director of Holex Office Systems, Inc., a
diversified manufacturer
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of office products. Since May 1, 1995, Mr. Whitman has been Chairman of the
Board of Directors of Correctional Communications Corporation, Inc., a provider
of inmate telephone services.
CHARLES J. DELANEY was appointed as a Director of the Company in July 1995,
has been President of UBS Capital Corporation since January 1993 and Managing
Director in charge of the Leveraged Finance Group of the Corporate Banking
Division of Union Bank of Switzerland since May 1989. Prior to May 1989, Mr.
Delaney was Vice President of Marine Midland Bank, N.A. Mr. Delaney is also a
director of Specialty Foods Corporation, SDW Holding Corporation and RU
Corporation.
JEFFREY J. KEENAN has been a Vice President of UBS Partners since January
1995 and a director of UBS Partners since March 1995. Mr. Keenan joined UBS
Capital Corporation in June 1994 as a Managing Director. Prior to joining UBS
Capital Corporation, Mr. Keenan was Managing General Partner of the WSW Fund, a
$250 million equity investment fund. From 1988 until 1991, he was a General
Partner at Acadia Partners, L.P., a $1.8 billion investment fund and prior
thereto, a Managing Director of AEA Investors, Inc., a $500 million equity
investment fund. Mr. Keenan is also a director of Choctaw Maid Farms, Inc. and
United Building Materials Corporation.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the fiscal years ended December 31,
1994, 1993 and 1992, the compensation paid by the Company to its Chief Executive
Officer and each of the four most highly compensated executive officers for the
fiscal year ended December 31, 1994.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- ---- ------ ----- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Jeffrey Hanft, 1994 $ 417,000 $ 0 300,000 $ 2,000
CEO, Chairman 1993 361,000 0 68,000 2,000
of the Board 1992 282,000 120,000 75,000 2,000
Robert D. Rubin, 1994 263,000 0 240,000 2,000
President 1993 233,000 0 54,000 2,000
1992 179,000 80,000 60,000 1,000
Richard F. Militello, 1994 208,000 0 180,000 1,000
Chief Operating 1993 176,000 0 42,000 1,000
Officer 1992 135,000 57,000 83,000 1,000
Bruce W. Renard, 1994 150,000 0 20,000 2,000
V.P. Regulatory Affairs, 1993 164,000 25,000 15,000 2,000
General Counsel 1992 150,000 43,000 0 0
Lawrence T. Ellman 1994(2) 105,000 10,000 45,000 0
President, Pay Telephone
Division
<FN>
(1) The amounts disclosed in this column include the Company's contributions on
behalf of the named executive officer to the Company's 401(k) retirement
plan in amounts equal to 25% of the executive officer's yearly participation
in the plan.
(2) Mr. Ellman joined the Company in June 1994.
</FN>
</TABLE>
73
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to stock
options granted during the year ended December 31, 1994 to the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE OF
ASSUMED ANNUAL RATE OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED EXERCISE OR FOR
UNDERLYING TO EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM(2)
OPTIONS(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---------- ---------------- ------------ ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey Hanft 250,000 22.67% $ 8.50(3) 2/16/99 $ 588,000 $ 1,301,000
50,000(4) 4.53% $ 5.13 10/13/99 $ 71,000 $ 157,000
Robert D. Rubin 200,000 18.13% $ 8.50(3) 2/16/99 $ 470,000 $ 1,041,000
40,000(4) 3.63% $ 5.13 10/13/99 $ 57,000 $ 126,000
Richard F. Militello 150,000 13.60% $ 8.50(3) 2/16/99 $ 353,000 $ 780,000
30,000(4) 2.72% $ 5.13 10/13/99 $ 43,000 $ 94,000
Bruce W. Renard 20,000 1.81% $ 5.13 10/13/99 $ 28,000 $ 63,000
Lawrence T. Ellman 45,000 4.08% $ 5.69 7/11/99 $ 71,000 $ 157,000
<FN>
-----------------
(1) Options were granted for a term of five years, subject to earlier
termination in certain events related to termination of employment. Options
become exercisable in three equal annual installments.
(2) These amounts represent assumed rates of appreciation which may not
necessarily be achieved. The actual gains, if any, are dependent on the
market value of the Company's common stock at a future date as well as the
option holder's continued employment throughout the vesting period.
Appreciation reported is net of exercise price.
(3) In the event of a change in control of the Company, such exercise price will
be adjusted to $5.38.
(4) Vesting of options is contingent upon the Company meeting certain
performance levels during 1995.
</FN>
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information as to each exercise of
stock options during the year ended December 31, 1994 by the executive officers
named in the Summary Compensation Table and the fiscal year end value of
unexercised options:
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
SHARES ----------------------- ----------------------------
ACQUIRED ON VALUE
NAME EXERCISES(S) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jeffrey Hanft.......................... 0 $ 0 261,667/180,833 $ 0/0
Robert D. Rubin........................ 0 0 229,333/124,667 0/0
Richard F. Militello................... 0 0 173,000/94,000 0/0
Bruce W. Renard........................ 0 0 99,167/18,333 4,200/0
Lawrence T. Ellman..................... 0 0 15,000/30,000 0/0
</TABLE>
Employment Agreements
The Company is a party to an employment agreement with Jeffrey Hanft
commencing January 1, 1994 and ending on December 31, 1998. The agreement
provides for automatic one year extensions thereafter unless either party gives
notice that it is not to be extended. The employment agreement provides for
payment of a base salary currently fixed at the annual rate of $500,000 from
January 1, 1995 to December 31, 1995. Commencing January 1, 1996 and every
January 1st thereafter during the term of the agreement, the base salary will
increase by an amount equal to the previous year's base salary multiplied by
74
<PAGE>
10%. The base salary may also be increased annually by merit increases or at any
time at the discretion of the Board of Directors. Under certain circumstances
(e.g., if the Company's income is not at certain levels), no increase may be
granted. Mr. Hanft may also receive an incentive bonus for each of the Company's
fiscal years during the term of his agreement. The incentive bonus shall be
equal to 3% of the Company's pre-tax consolidated net income but shall not
exceed 60% of Mr. Hanft's base salary for such fiscal year. Mr. Hanft is also
entitled under the agreement to other employee benefits. Further, if the Company
terminates Mr. Hanft's employment agreement without cause or Mr. Hanft
terminates the agreement for certain defined reasons, the Company will pay Mr.
Hanft (a) his base salary through the termination date and (b) as severance pay
a lump sum amount equal to 200% of the sum of (i) the annual base salary at the
highest rate in effect during the 12 months immediately preceding termination
and (ii) the average of the three annual bonus payments paid with respect to the
preceding three years under the agreement. Upon termination due to a change in
control within one year after the change in control, Mr. Hanft shall receive (a)
his base salary through the termination date, (b) all other benefits provided in
the agreement and (c) severance pay equal to 299.99% of the average taxable
compensation of Mr. Hanft for the five taxable years prior to such termination.
Upon termination of his employment for disability, Mr. Hanft is entitled to 100%
of his base salary then in effect for one year and 50% of his base salary for
two additional years.
The Company is a party to an employment agreement with Robert D. Rubin, the
Company's President. The employment agreement is for a four year term commencing
January 1, 1994 and ending December 31, 1997. Mr. Rubin's base salary for 1994
and 1995 under such agreement is $315,000. The agreement provides for automatic
one year extensions thereafter unless either party gives notice that it is not
to be extended. Mr. Rubin's employment agreement is otherwise similar to Mr.
Hanft's, except that Mr. Rubin's incentive bonus is 1.85% of the Company's
pre-tax consolidated net income.
The Company is a party to an employment agreement with Richard P.
Militello, the Company's Chief Operating Officer. The employment agreement is
for a three year term commencing January 1, 1994 and ending December 31, 1996.
Mr. Militello's base salary for 1994 and 1995 under such agreement is $250,000.
The agreement provides for automatic one year extensions thereafter unless
either party gives notice that it is not to be extended. Mr. Militello's
employment agreement is otherwise similar to those of Messrs. Hanft and Rubin,
except that Mr. Militello's incentive bonus is 1.5% of the Company's pre-tax
consolidated net income.
As a result of losses incurred by the Company in the first quarter of 1994,
effective June 1, 1994 Messrs. Hanft, Rubin and Militello voluntarily reduced
their salaries by 50%. On October 1, 1994, their salaries were reinstated to
their contract amounts.
The Company is a party to an employment agreement with Bruce W. Renard, the
Company's Vice President--Regulatory Affairs/General Counsel. The employment
agreement is for a three year term commencing on January 1, 1995 and ending on
December 31, 1997. The agreement provides for payment of a base salary initially
fixed at the annual rate of $172,500 with an annual increase of 10%, provided
the Company has met certain income targets. The agreement provides for automatic
one year extensions thereafter unless either party gives notice that it is not
to be extended. Mr. Renard's employment agreement also provides for an incentive
bonus in the sole discretion of the Board of Directors and that upon termination
due to a change in control, Mr. Renard shall receive severance pay equal to 100%
of his highest annual base salary.
The Company is a party to an employment agreement with Lawrence T. Ellman,
the President of the Company's Pay Telephone Division. The employment agreement
is for a three year term commencing June 22, 1994 and ending June 22, 1997. The
agreement provides for a base salary at the annual rate of $150,000, increasing
10% each year with the approval of the Board of Directors, and a minimum annual
bonus of $25,000. Mr. Ellman's employment agreement is otherwise similar to
those of Messrs. Hanft,
75
<PAGE>
Rubin and Militello, except that the Company shall have no obligation to pay
benefits upon a termination for cause, disability or death, and no additional
benefits accrue to Mr. Ellman upon a change in control.
Each employment agreement above restricts the employee from competing with
the Company for one year in the areas in which the Company then operates
following termination of the agreement. Generally, except as set forth above,
the Company may terminate an employment agreement without further payment if the
employee materially breaches his or her obligations and duties under the
agreement or is convicted of a felony under certain circumstances or violates
the non-competition provision contained in the employment agreement or upon
death of the employee.
Directors' Compensation and Consulting Arrangements
Jody Frank has agreed to provide consulting services to the Company in the
areas of financial analysis and acquisitions. Mr. Frank received a fee of
$50,000 in 1994. In 1995, Mr. Frank will receive a monthly fee of $2,000 for
such consulting services. Mr. Frank also received a grant of options on 15,000
shares of Common Stock of the Company in 1994.
Bernard M. Frank, who was a director of the Company and a Compensation
Committee member in 1994, received a fee of $25,000 and a grant of options on
15,000 shares of Common Stock of the Company in 1994. Mr. Frank resigned from
the Board of Directors and the Compensation Committee in February 1995. Mr.
Frank is the father of Jody Frank.
Richard Whitman received $47,500 in 1994 for providing consulting
services to the Company. Mr. Whitman received a grant of options on 15,000
shares of Common Stock of the Company in 1994.
Ronald Gelber received fees of $50,000 in 1994 from the Company for
serving on its Board of Directors. In 1995, Mr. Gelber received a monthly fee
of $2,000 for serving as the Chairman of the Audit Committee. In 1994, Mr.
Gelber also received a grant of options on 15,000 shares of Common Stock of
the Company. Mr. Gelber resigned from the Board of Directors in July 1995.
Robert Lund received $32,500 from the Company in 1994 for consulting
services and for serving on its Board of Directors. Mr. Lund also received a
grant of options on 15,000 shares of Common Stock of the Company in 1994.
For 1995, all directors will receive as compensation for serving on the
Board of Directors, $500 per person for each meeting attended telephonically and
$1,000 per person for each meeting attended in person. Upon election, pursuant
to the terms of the Company's 1993 Non-Employee Director Stock Option Plan, each
non-employee director of the Company receives an option to purchase 15,000
shares of Common Stock of the Company. The exercise price of any option granted
to directors is the fair market value of the Common Stock of the Company on the
date the option is granted.
Compensation Committee Interlocks and Insider Participation
See '--Directors' Compensation and Consulting Arrangements' with regard to
Messrs. Bernard Frank and Ronald Gelber and 'Certain Transactions' with regard
to Mr. Frank. Mr. Bernard Frank resigned from the Board of Directors and the
Compensation Committee in February 1995. Mr. Ronald Gelber resigned from the
Board of Directors and the Audit Committee in July 1995.
76
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1994, the Company has engaged in the following
transactions with directors and/or executive officers of the Company,
shareholders listed in the security ownership table in 'Principal
Shareholders,' or with businesses with which they are associated:
1. The Company prepaid a deposit on a real property lease for its Russian
joint venture, Artel, to Robin Enterprises, Inc. ('Robin') in the amount of
$675,000. Such lease was canceled in June 1994 and the prepaid deposit returned
to the Company. Robin is a corporation which owns an approximately 32,000 square
foot building in Moscow. Jeffrey Hanft, Jody Frank, Bernard M. Frank, Robert D.
Rubin, Richard F. Militello and Richard Whitman are shareholders of Robin.
2. On March 31, 1994, the Company sold certain of its telephone calling
center assets to Global Link for a total of $2.5 million. In connection with the
transaction, Global Link delivered to the Company 10.0% of the issued and
outstanding common stock of Global Link and granted the Company the right to
designate two members on Global Link's Board of Directors. In February 1995,
after obtaining a fairness opinion indicating the proposed sale of the assets
for the agreed upon consideration was fair to the Company from a financial point
of view and after the transaction was approved by the disinterested members of
the Company's Board of Directors, the Company sold substantially all of the
assets of its prepaid calling card business to Global Link for approximately
$6.3 million. Upon the sale, the Company maintained the right to designate one
member on Global Link's Board of Directors. The Company received $1.0 million in
cash, a $5.3 million promissory note due February 1998, bearing interest at
8.5%, payable quarterly and shares of common stock of Global Link. As a result
of the February 1995 transaction, and because of a drafting error discovered in
May 1995 that did not reflect the intentions of the parties, the Company's
interest in the outstanding common stock of Global Link was 28.8% instead of the
intended 19.99%. To correct this error, the Company reduced its share ownership
to the intended 19.99% level. Jeffrey Hanft and Jody Frank are directors, and
Mr. Frank is a shareholder of Global Link as is Mr. Bernard M. Frank, a former
director of the Company.
3. On November 24, 1994, the Company entered into a Settlement Agreement
with Richard Whitman, a Director of the Company, to resolve claims arising under
an indemnity provision in connection with the November 1, 1991 merger of Ram
Telephone and Communications ('Ram') into the Company. Pursuant to the
Settlement Agreement, Mr. Whitman executed a promissory note in favor of the
Company, agreeing to pay $237,000, plus simple interest of eight percent (8%)
per annum, due and payable in full on December 31, 1997. Mr. Whitman also
executed a Security Agreement, providing a pledge of up to 150,000 shares of the
Company's common stock to collateralize payment of the promissory note. Mr.
Whitman was a shareholder of Ram.
4. Information concerning indebtedness of directors and/or executive
officers to the Company since January 1, 1994 is as follows: (a) largest
aggregate indebtedness outstanding: Jeffrey Hanft ($2,385,000); Robert D. Rubin
($735,000); Richard F. Militello ($907,000); Jody Frank ($309,000); and Ronald
Gelber ($47,000); (b) currently outstanding indebtedness: Jeffrey Hanft
($1,712,000); Robert D. Rubin ($574,000); Richard F. Militello ($734,000); Jody
Frank ($309,000); and Ronald Gelber ($47,000).
Since January 1, 1994, the Company has loaned (the 'Company Loans') certain
funds to Jeffrey Hanft, Robert D. Rubin, Richard F. Militello, Jody Frank and
Ronald Gelber (the 'Borrowers') for the reasons described below. Each of the
Company Loans is evidenced by a promissory note. Each such Company Loan is due
in full on March 28, 1996, and bears interest at the prime rate of interest set
by the Company's senior lender. Included in the currently outstanding loans for
these transactions are the following: Mr. Hanft $968,000; Mr. Rubin $435,000;
Mr. Militello $501,000; Mr. Frank $239,000; and Mr. Gelber $47,000.
77
<PAGE>
Each of the Company Loans was made following approval by the members of the
Board of Directors who were not parties to the transaction as a means to provide
the Borrowers with a vehicle to refinance certain commercial bank indebtedness
they had incurred to exercise Company stock options and pay related income
taxes. The Borrowers exercised the stock options in December 1993 to purchase
the Company's common stock for purposes of increasing the Company's
shareholders' equity without accessing external capital markets. The Borrowers
personally borrowed the funds to exercise the options from a commercial bank and
pledged the Company's common stock issued upon exercise as collateral for the
bank loans ('Bank Loans'). This equity increase in turn was a significant factor
in permitting the Company to increase its credit facility from $60.0 million to
$125.0 million in February 1994.
Commencing in May 1994, as the market price of the stock declined, the bank
on several occasions required the Borrowers to pay down the Bank Loans or
provide additional collateral. The Borrowers approached the disinterested
members of the Company's Board of Directors to seek the Company's assistance in
refinancing a portion of their Bank Loans. The Company then advanced the Company
Loans upon the repayment terms noted above.
Mr. Hanft, Mr. Militello and Mr. Frank also borrowed $535,000, $128,000 and
$70,000, respectively, from the Company in connection with the payment of
personal income taxes related to the phantom gain incurred upon the December
1993 exercise of the stock options mentioned above. The loans are due in 1995
and bear interest at a rate equal to the average annual borrowing rate of the
Company's senior debt (for the fiscal year ending on or immediately preceding
the date interest on the outstanding principal is payable).
In an unrelated transaction, in lieu of receiving payment of their earned
1993 bonus, Mr. Hanft, Mr. Rubin and Mr. Militello agreed to accept loans from
the Company which bear interest at a rate equal to the average annual borrowing
rate of the Company's senior debt (for the fiscal year ending on or immediately
preceding the date interest on the outstanding principal balance is payable)
which loans are payable within five years of the date of the loan. Included in
the currently outstanding loans for this transaction are the following: Mr.
Hanft $210,000; Mr. Rubin $140,000; and Mr. Militello $105,000.
5. On July 19, 1995, UBS Partners purchased 150,000 shares of the Preferred
Stock for gross proceeds of $15.0 million. See 'Preferred Stock Investment.'
Charles J. Delaney, a director of the Company, is the President of UBS Capital,
an affiliate of UBS Partners. Jeffrey J. Keenan, who is expected to be elected a
director of the Company by UBS Partners at or about the time of the Company's
1995 Annual Meeting of Shareholders to be held in August 1995, is a Managing
Director of UBS Capital and a director and vice president of UBS Partners. In
connection with the Preferred Stock Investment, the Company has agreed to
reimburse UBS Partners for its out of pocket expenses up to a maximum amount of
$350,000.
6. In connection with the resignations of former directors Bernard M. Frank
and Ronald Gelber, in February 1995 and July 1995 respectively, the Company
issued to each former director options to acquire 32,500 shares of Common Stock.
The exercise prices of the options, based on the market price of the Company's
Common Stock on the date of the grants, are $5.06 with regard to Mr. Frank's
options and $4.16 with regard to Mr. Gelber's options.
7. In February 1994, the Company amended a credit facility agreement with
Creditanstalt-Bankverein and certain other lenders in order to provide the
Company with a revolving line of credit of $125 million, and issued to
Creditanstalt American Corporation (a subsidiary of Creditanstalt-Bankverein)
250,000 Series D warrants to acquire Common Stock or Series B Preferred Stock of
the Company, with an exercise price of $9.00 per share. At the same time,
Creditanstalt American Corporation, as the assignee of Creditanstalt-Bankverein,
exercised 150,000 Series A warrants to acquire 150,000 shares of Common Stock at
an exercise price of $3.17 per share. In March 1995, the Company amended its
credit facility agreement with Creditanstalt-Bankverein and certain other
lenders by reducing the credit facility to $100 million. In May 1995, the
Company agreed to decrease to $5.25 the exercise price of a portion of the
Series D warrants in
78
<PAGE>
return for the cancellation of a demand registration right held by Creditanstalt
American Corporation. In July 1995, the Company repaid the approximately $95.5
million of indebtedness under the credit facility, amended the credit facility
to reduce the line of credit to $40 million, and paid Creditanstalt-Bankverein a
loan origination fee of $200,000. Between January 1, 1994 and June 30, 1995, the
Company paid approximately $5.3 million in interest and fees to
Creditanstalt-Bankverein as agent and as a lender in connection with the
Company's credit facilities. See 'Description of the Credit Agreement.'
In May 1995, in order to facilitate a $2.5 million loan to PTC Cellular,
Inc., a wholly-owned subsidiary of the Company, the Company entered into an
exchange agreement under which it granted to Creditanstalt Corporate Finance,
Inc. (an affiliate of Creditanstalt American Corporation) the right to exchange
indebtedness under the loan for shares of Common Stock of the Company, with an
exchange ratio based on the then current market price of the Common Stock.
Concurrently with the exchange agreement, PTC Cellular, Inc. issued warrants to
acquire 263,916 shares of Class A or Class B Common Stock of PTC Cellular, Inc.
to Creditanstalt Corporate Finance, Inc, at an exercise price of $.01 per share.
The warrants expire on May 3, 2005.
79
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock of the Company as of April 30, 1995 (or
July 19, 1995 with respect to Charles J. Delaney and UBS Partners) by (i) each
person known by the Company to beneficially own more than five percent of the
outstanding Common Stock of the Company, (ii) each director of the Company,
(iii) each of the executive officers named in the summary compensation table,
and (iv) all directors and executive officers of the Company as a group. Except
as otherwise indicated, the persons named in the table have the sole voting and
investment power with respect to the shares as beneficially owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) OF CLASS
----------------------------------------------------------------- --------
<S> <C> <C>
Jeffrey Hanft 781,529(2)(3) 4.79%
Robert D. Rubin 344,833(3) 2.12
Richard F. Militello 306,275(3)(4) 1.89
Richard Whitman 264,219(5) 1.64
Jody Frank 214,262(5)(6) 1.33
Bruce W. Renard 115,833(3) *
Lawrence T. Ellman 15,000(3) *
Robert E. Lund 31,350(5) *
Charles J. Delaney 0(7) -
UBS Partners, Inc. 2,857,143(8)/dagger/ 15.1
299 Park Avenue
New York, New York 10171
Kayne Anderson Investment 1,023,200 6.37
Management, Inc.
1800 Avenue of the Stars
Los Angeles, California 90067
Creditanstalt American Corp. 850,000(9) 5.07
245 Park Avenue
New York, New York 10167
All directors and executive officers 2,185,801(2)(3) 12.75
as a group (12 persons)(4)(5)(6)(7)
</TABLE>
------------------------
* Less than one percent.
/dagger/ Information provided by Schedule 13D and/or 13Gs filed by such persons.
The Company has not independently verified such information.
(1) Includes shares of Common Stock of the Company issuable upon the
exercise of stock options, which are exercisable within 60 days of the
date hereof.
(2) Includes 11,980 shares of Common Stock of the Company issued to Rikki
Hanft, the minor daughter of Jeffrey Hanft.
(3) Includes currently exercisable options to purchase 794,833 shares of
Common Stock of the Company granted under the Company's stock option
plans to the following executive officers: 261,667 to Jeffrey Hanft
(at an average exercise price of $8.30 per share); 229,333 to Robert D.
Rubin (at an average exercise price of $8.14 per share); 173,000 to
Richard F. Militello (at an average exercise price of $8.15 per share);
115,833 to Bruce W. Renard (at an average exercise price of $6.18 per
share); and 15,000 to Lawrence T. Ellman (at an average exercise price
of $5.69 per share).
(4) Includes 5,625 shares owned by Richard F. Militello as custodian for
Laura Militello, Sara Militello and Michael Militello, his minor
children.
(5) Includes currently exercisable options to purchase Common Stock of the
Company granted to the following directors: 60,000 to Richard Whitman
(at an average exercise price of $10.03 per share); 105,000 to Jody
Frank (at an average exercise price of $8.70 per share); and 30,000 to
Robert E. Lund (at an average exercise price of $8.00 per share).
(6) Includes 40,050 shares of Common Stock of the Company in a voting trust
of which Jody Frank is the beneficial owner. Also includes 3,812 shares
for which Jody Frank is custodian and as to which Aaron Frank, Rebekah
Frank and Lucy Frank, Mr. Frank's minor children, are the beneficial
owners of 1,812 shares, 1,000 shares and 1,000 shares, respectively.
(7) Excludes all shares of Common Stock beneficially owned by UBS Partners,
as to which Mr. Delaney disclaims beneficial ownership. See footnote 8.
(8) Represents 2,857,143 shares subject to issuance upon conversion of the
Preferred Stock held by UBS Partners. See 'Preferred Stock Investment.'
(9) Represents a currently exercisable warrant received in connection with
the Prior Credit Agreement and 150,000 shares of Common Stock of the
Company obtained upon the exercise of a warrant in connection with the
Prior Credit Agreement. The warrant expires on March 12, 2000 and is
exercisable into 700,000 shares of the Company's Series B Preferred
Stock at an average price of $7.17 per share. Each share of Series B
Preferred Stock is convertible into one share of Common Stock of the
Company.
80
<PAGE>
PREFERRED STOCK INVESTMENT
On July 3, 1995, the Company entered into an agreement with UBS Capital for
the issuance by the Company of the Preferred Stock for gross proceeds of $15.0
million, which agreement was assigned by UBS Capital to UBS Partners prior to
the consummation of the Preferred Stock Investment. UBS Capital is a
wholly-owned indirect merchant banking subsidiary of Union Bank of Switzerland,
and UBS Partners is also a wholly-owned subsidiary of Union Bank of Switzerland.
The Preferred Stock Investment was consummated simultaneously with the issuance
of the Old Notes and the Preferred Stock was acquired by UBS Partners.
The Preferred Stock cumulates dividends at an annual rate of 7%, subject to
increase up to 11% under certain circumstances, including accelerations of
indebtedness of the Company and material breaches of representations, warranties
and covenants, which will be payable in cash or, at the Company's option during
the first three years after issuance, will continue to cumulate. The Preferred
Stock is immediately convertible, at the option of the holders, into 2,857,143
shares of outstanding Common Stock of the Company (or approximately 15.1% of the
outstanding Common Stock as of July 19, 1995, determined in accordance with Rule
13d-3 under the Exchange Act) at a conversion price of $5.25 per share, subject
to reduction pursuant to antidilution adjustments in connection with, among
other things, certain issuances of shares of, or rights to acquire, Common Stock
at less than the then conversion price of the Preferred Stock. The Preferred
Stock is subject to (i) mandatory redemption by the Company 10 years after
issuance or, subject to the prior payment in full of the Company's indebtedness
under the Credit Agreement and the Notes, in the event of certain bankruptcy or
related events relating to the Company, (ii) redemption at the Company's option,
resulting in the exercisability of contingent warrants and (iii) in the event of
a Change of Control (as defined in the Indenture), redemption, at the option of
the holders thereof, in all cases at its liquidation preference ($15.0 million
in the aggregate) plus accrued and unpaid dividends.
Pursuant to the terms of the Preferred Stock, the holders of the Preferred
Stock are entitled to elect two members of the six member Board of Directors of
the Company. The two directors initially will be Charles J. Delaney, President
of UBS Capital Corporation, and Jeffrey J. Keenan, a Managing Director of UBS
Capital Corporation and a Vice President and director of UBS Partners. See
'Management--Directors and Executive Officers.' The Preferred Stock is also
entitled to vote on all other matters submitted to the stockholders for a vote
together with the holders of the Common Stock voting as a single class with each
share of Preferred Stock entitled to one vote for each share of Common Stock
issuable upon conversion.
In connection with the Preferred Stock Investment, the Company has agreed
to certain affirmative and negative covenants with respect to the conduct of its
business, among other matters. So long as 25% of the shares of Preferred Stock
or the Common Stock into which such Preferred Stock is convertible remain
outstanding and have not been sold publicly, the Company has agreed with UBS
Partners and Appian Capital Partners, L.L.C. ('Appian') to observe certain
negative covenants, including that the Company will not:
(a) (i) amend its Certificate of Incorporation or bylaws in a way which
would adversely affect the rights of holders of the Preferred Stock or
underlying Common Stock or subordinate the rights of the holders of the
Preferred Stock to the rights of other holders of capital stock of the
Company; (ii) except in an underwritten public offering, and except for
issuances in connection with pro rata distributions to holders of the
Common Stock, issuances of Common Stock pursuant to options, warrants and
other rights outstanding on the date of the purchase agreement relating to
the Preferred Stock or employee stock options, or issuances of Common Stock
in certain permitted acquisitions, sell capital stock of the Company unless
holders of the Preferred Stock, the underlying Common Stock or the Warrants
issued to Appian are given the right to purchase such capital stock to
maintain such holders' percentage interest in the Company's Common Stock;
or (iii) effect a Fundamental Change (as defined) including (A) the sale or
transfer of more than 40% of the consolidated assets of the Company and its
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subsidiaries and (B) mergers and consolidations other than those in which
the Preferred Stock is unaffected and the holders of the majority of the
voting power to elect the Board of Directors continue to own such majority
voting power unless such Fundamental Change provides that upon the
consummation thereof, the Company shall have purchased all shares of the
Preferred Stock tendered to the Company for purchase at a price per share
equal to its liquidation preference ($15.0 million in the aggregate) plus
accrued and unpaid dividends thereon pursuant to an offer to purchase given
to the holders of the Preferred Stock not less than 15 days prior to the
date such Fundamental Change is to be consummated; or
(b) Without the approval of 75% of the members of the Board of Directors:
(i) engage in transactions with stockholders, directors, officers,
employees or defined affiliates which transactions would require disclosure
under Rule 404 of Regulation S-K under the Securities Act;
(ii) issue (A) debt securities which are convertible into the Company's
Common Stock or with equity features such as warrants unless such equity
features meet certain tests or (B) capital stock or other equity securities
senior to or on a parity with the Preferred Stock or having a voting power
greater than one vote per share of Common Stock;
(iii) merge or consolidate or, except for certain permitted acquisitions
or dispositions, allow a subsidiary to merge or consolidate;
(iv) sell, lease or otherwise dispose of assets of the Company or its
subsidiaries involving aggregate consideration greater than $5.0 million;
(v) liquidate, dissolve or effect a recapitalization or reorganization;
(vi) acquire an interest in or assets of any other company involving
aggregate consideration greater than $5.0 million;
(vii) own, manage or operate any business other than the domestic pay
telephone business; or
(viii) hire, elect or replace the Company's Chief Executive Officer,
President, Chief Financial Officer or Chief Operating Officer or change the
terms of employment or compensation thereof.
Notwithstanding the foregoing, the Company may sell the Discontinued Operations,
sell the Notes and enter into and borrow under the Credit Agreement. So long as
any shares of the Preferred Stock remain outstanding, without the prior consent
of the holders of a majority of the then outstanding shares of Preferred Stock,
the Company is prohibited from paying or declaring any dividend or making any
distribution on any other capital stock of the Company (other than dividends
payable solely in the securities in respect of which such dividends are paid).
In connection with the Preferred Stock Investment, UBS Capital was issued a
contingent warrant, exercisable only if the Company redeems the Preferred Stock
pursuant to its optional redemption rights. Such warrant will be exercisable
initially for the same number of shares and at the same price as the Preferred
Stock being redeemed is convertible, all determined as of the redemption date of
such Preferred Stock. Such contingent warrant has anti-dilution provisions
comparable to the Preferred Stock. UBS Capital also has the right to have its
Preferred Stock and underlying Common Stock repurchased by the Company (at the
original purchase price thereof plus accrued and unpaid dividends thereon) if
the Company violates certain regulations regarding an investee of a Small
Business Investment Company.
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UBS Capital has also agreed, subject to certain limitations and
restrictions, that for up to 10 years from the date of the closing of the
purchase of the Preferred Stock, it will not, without the consent of the
Company's Board of Directors, acquire beneficial ownership (determined in
accordance with Rule 13d-3 under the Exchange Act) of more than 25% of the
Company's voting securities, offer or solicit any other person to acquire the
Company or conduct a proxy solicitation with respect to the Company.
Appian assisted the parties and provided financial consulting services in
connection with the Preferred Stock Investment. In connection with the Preferred
Stock Investment, Appian purchased from the Company, for $1.00, warrants to
purchase up to 275,000 shares of Common Stock of the Company at an exercise
price of $5.25 per share (the 'Warrants'). Appian also received a fee of
$400,000.
The Company has also agreed to register for resale under the Securities Act
the Common Stock issuable upon conversion of the Preferred Stock or upon
exercise of the Warrants.
DESCRIPTION OF THE CREDIT AGREEMENT
Simultaneous with the issuance and sale of the Old Notes, the Company
entered into an amendment and restatement of the Prior Credit Agreement (as
amended and restated, the 'Credit Agreement') with Creditanstalt-Bankverein (the
'Bank'), providing for a revolving credit facility for the benefit of the
Company in the aggregate amount of $40.0 million. The Credit Agreement has a
term of four years. The Bank has informed the Company that it intends to
syndicate a portion of the loan provided under the Credit Agreement. The
following is a description of the terms of the Credit Agreement. The following
summary of certain provisions of the Credit Agreement does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Credit Agreement. References to the Company in the
following summary refer to Peoples Telephone Company, Inc. only.
Borrowing Base. The Company may use borrowings under the Credit Agreement
for internal growth and to fund future acquisitions, although the Bank will have
the right to approve any acquisition for consideration in excess of $3.0
million. Borrowings under the Credit Agreement will not be permitted to exceed
the sum of (i) 75.0% of the Company's eligible accounts receivable plus (ii) an
amount equal to $1,200 multiplied by the number of eligible installed pay
telephones, in the aggregate up to the total limit of $40.0 million.
Interest. Interest on the principal balance outstanding under the Credit
Agreement accrues at the option of the Company at the rate of (i) 1.5% above the
greater of (a) the Bank's prime lending rate at its principal office in New
York, New York and (b) the federal funds rate plus 0.5% or (ii) 3.0% above the
rate quoted by the Bank as the average London interbank offered rate for one,
two, three and six-month Eurodollar deposits. In the event of a default under
the Credit Agreement, at the Bank's option, the interest rate on the borrowings
under the Credit Agreement would increase to 2.0% per annum above the then
applicable rate.
Security. As security for the indebtedness under the Credit Agreement, the
Company has granted to the Bank a first priority security interest in
substantially all existing and future assets of the Company, whether tangible or
intangible, including, without limitation, accounts receivable, inventory and
equipment.
Certain Covenants. In addition to customary covenants, the Credit
Agreement contains various restrictive financial and other covenants including,
without limitation, (i) prohibitions on the incurrence of additional
indebtedness, (ii) restrictions on the creation of additional liens, (iii)
certain limitations on dividends and distributions by the Company, (iv)
restrictions on mergers and sales of assets, investments and transactions with
affiliates and (v) certain financial maintenance tests. Such financial
maintenance tests, include, among others, (i) a minimum EBITDA test of $5.0
million for the quarter ending June 30, 1995,
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$10.0 million for the two quarter period ending September 30, 1995 and $15.0
million for the three quarter period ending December 31, 1995, and, thereafter,
a minimum annual EBITDA test (tested quarterly for the prior four quarters)
beginning at $19.0 million for the quarter ended March 31, 1996 and increasing
over time to $26.0 million after December 31, 1997, (ii) a minimum ratio of
annual EBITDA to interest expense (tested quarterly) beginning at 1.5 to 1 and
increasing over time to 2.5 to 1 after December 31, 1997, (iii) a minimum net
worth test beginning at $47.0 million and increasing over time to $67.0 million
after December 31, 1998, (iv) a maximum ratio of debt to net worth of 3.25 to 1
for the first two years and decreasing to 3.0 to 1 for the remaining two years,
and (v) maximum ratio of bank debt to EBITDA of 2.0 to 1 (tested quarterly using
EBITDA from the prior four quarters). For purposes of the foregoing covenants,
EBITDA shall include EBITDA from the Discontinued Operations and net worth shall
include the Preferred Stock.
Events of Default. The events of default under the Credit Agreement are
customary for facilities of such nature and include payment and non-payment
defaults and certain events of bankruptcy or insolvency of the Company.
Fees. In connection with the execution of the Credit Agreement, the
Company paid a loan origination fee of $200,000. The Credit Agreement also
provides for a monthly fee based on the unused portion of the Credit Agreement
and an annual agency fee.
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DESCRIPTION OF THE NOTES
The Old Notes were and the Exchange Notes will be issued under an indenture
dated as of July 15, 1995 (the 'Indenture') between the Company and First Union
National Bank of North Carolina, as trustee (the 'Trustee'), a copy of which is
filed as an exhibit to the Exchange Offer Registration Statement. Upon the
issuance of the Exchange Notes, if any, or the effectiveness of a Shelf
Registration Statement (as defined below), the Indenture will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the 'Trust Indenture
Act'). The following summary of the material provisions of the Indenture does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the Trust Indenture Act and to all of the provisions of the
Indenture, including the definitions of certain terms contained therein and
including those terms made part of the Indenture by reference to the Trust
Indenture Act. The definitions of certain capitalized terms used in the
following summary are set forth below under '--Certain Definitions.' Unless the
context otherwise requires, references to the Notes shall include the Exchange
Notes. References to the Company in the following summary refer to Peoples
Telephone Company, Inc. only.
GENERAL
The Notes are unsecured senior obligations of the Company limited to $100.0
million aggregate principal amount. The Notes are issued only in fully
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof. Principal of, premium, if any, and interest on the Notes will
be payable, and the Notes will be transferable, at the corporate trust office or
agency of the Trustee in the City of New York maintained for such purposes in
New York, New York. In addition, interest may be paid at the option of the
Company by check mailed to the person entitled thereto as shown on the security
register. No service charge will be made for any transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on July 15, 2002. Interest on the Notes accrues at
the rate of 12 1/4% per annum and will be payable semi-annually on each January
15 and July 15, commencing January 15, 1996, to the holders of record of Notes
at the close of business on the January 1 and July 1 immediately preceding such
interest payment date. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
original date of issuance (the 'Issue Date'). Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
As discussed under 'Exchange Offer; Registration Rights,' pursuant to the
Registration Rights Agreement, the Company has agreed, at its expense, for the
benefit of the holders of the Notes, either (i) to effect a registered Exchange
Offer under the Securities Act to exchange the Old Notes for Exchange Notes,
which will have terms identical in all material respects to the Old Notes
(except that the Exchange Notes will not contain terms with respect to transfer
restrictions) or (ii) in the event that any changes in law or applicable
interpretations of the staff of the Commission do not permit the Company to
effect the Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 120 days of the Issue Date, or upon the request of the
Initial Purchaser (under certain circumstances), to register the Notes for
resale under the Securities Act through a shelf registration statement (a 'Shelf
Registration Statement'). In the event that either (a) the Exchange Offer
Registration Statement is not filed with the Commission on or prior to the 30th
calendar day following the Issue Date, (b) the Exchange Offer Registration
Statement has not been declared effective on or prior to the 90th calendar day
following the Issue Date, (c) the Exchange Offer is not consummated on or prior
to the 120th calendar day following the Issue Date or (d) a Shelf Registration
Statement is not declared effective on or prior to the 150th day following the
Issue Date, the interest rate borne by the Notes shall be increased by 0.25% per
annum following such 30-day period in the case of (a) above, such 90-day period
in the case of (b) above, such 120-day period in the case of (c) above
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or such 150-day period in the case of (d) above, which rate will be increased by
an additional 0.25% per annum for each 90-day period that any such additional
interest continues to accrue; provided that in no event shall the interest rate
borne by the Notes be increased by more than 1%. Upon (w) the filing of the
Exchange Offer Registration Statement in the case of clause (a) above, (x) the
effectiveness of the Exchange Offer Registration Statement in the case of clause
(b) above, (y) the consummation of the Exchange Offer in the case of clause (c)
above or (z) the effectiveness of a Shelf Registration Statement in the case of
clause (d) above, the interest rate borne by the Notes from the date of such
filing, effectiveness or consummation, as the case may be, will be reduced to
the interest rate which would otherwise apply. See 'Exchange Offer; Registration
Rights.'
Old Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after July 15, 2000, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest to the redemption date, if redeemed
during the 12-month period beginning July 15 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000................................................. 103.50%
2001................................................. 101.75%
2002................................................. 100.00%
</TABLE>
In addition, prior to July 15, 1998, in the event of one or more Equity
Offerings consummated after the Issue Date (other than the sale of the UBS
Partners Preferred Stock) for aggregate gross proceeds to the Company equal to
or exceeding $10.0 million, the Company may redeem in the aggregate up to a
maximum of 20% of the principal amount of Notes originally issued with the net
proceeds thereof at a redemption price equal to 111 1/4% of the principal amount
thereof plus accrued and unpaid interest to the redemption date.
Mandatory Redemption. There are no mandatory sinking fund payments for the
Notes. However, as described below, the Company may be obligated, under certain
circumstances, (a) to make an offer to purchase all outstanding Notes at a
redemption price of 101% of the principal amount thereof, plus accrued interest
to the date of purchase, upon a Change of Control and (b) to make an offer to
purchase Notes with a portion of the net cash proceeds of certain sales or other
dispositions of assets at a redemption price of 100% of principal amount, plus
accrued and unpaid interest to the date of purchase. See 'Change of Control' and
'Certain Covenants--Disposition of Proceeds of Asset Sales,' respectively.
Selection and Notice. In the event that less than all of the Notes are to
be redeemed at any time, selection of such 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 Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate; provided that
no Notes of a principal amount of $1,000 or less shall be redeemed in part;
provided, further, that any redemption pursuant to the provisions relating to a
sale of the Company's Common Stock pursuant to one or more Equity Offerings
shall be made on a pro rata basis or on as nearly a pro rata basis as
practicable (subject to any procedures of The Depository Trust Company). Notice
of redemption shall be mailed by first-class mail at least 30 but not more than
60 days before the redemption
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date to each holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. On and after the redemption date, if the Company does not
default in the payment of the redemption price, interest will cease to accrue on
Notes or portions thereof called for redemption.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company shall be obligated
to make an offer to purchase (a 'Change of Control Offer'), and shall, subject
to the provisions described below, purchase, on a business day (the 'Change of
Control Purchase Date') not more than 60 nor less than 30 days following the
occurrence of the Change of Control, all of the then outstanding Notes at a
purchase price (the 'Change of Control Purchase Price') equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the Change
of Control Purchase Date. The Company shall be required to purchase all Notes
properly tendered into the Change of Control Offer and not withdrawn. The Change
of Control Offer is required to remain open for at least 20 business days and
until the close of business on the Change of Control Purchase Date.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each holder of
Notes notice of the Change of Control Offer, which notice shall govern the terms
of the Change of Control Offer and shall state, among other things, the
procedures that holders of Notes must follow to accept the Change of Control
Offer.
The occurrence of the events constituting a Change of Control under the
Indenture may result in an event of default under the Credit Agreement and in
respect of other Indebtedness of the Company and the Restricted Subsidiaries
and, consequently, the lenders thereof will have the right to require repayment
of such Indebtedness in full. If a Change of Control Offer is made, there can be
no assurance that the Company will have available funds sufficient to pay the
Change of Control Purchase Price for all of the Notes that might be delivered by
holders of Notes seeking to accept the Change of Control Offer. The Company
shall 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 applicable to a Change of
Control Offer made by the Company and purchases all Notes validly tendered and
not withdrawn under such Change of Control Offer.
The Company will comply with 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 the event that a Change of Control occurs and the
Company is required to purchase Notes as described above.
RANKING
The indebtedness of the Company evidenced by the Notes ranks senior in
right of payment to all indebtedness of the Company expressly subordinated in
right of payment to the Notes and pari passu in right of payment with all other
existing and future indebtedness of the Company. As of the date of this
Prospectus, the Company has no outstanding indebtedness ranking junior in right
of payment to the Notes. Although the Notes and the obligations under the Credit
Agreement constitute senior obligations of the Company, the lenders under the
Credit Agreement (and any other indebtedness secured by assets of the Company)
will have a claim ranking prior to that of the holders of the Notes with respect
to the distribution of assets and the proceeds thereof securing the Company's
obligations thereunder. See 'Risk Factors-- Defaults under Indebtedness,' 'Risk
Factors--Restrictions Imposed by Lenders; Impact of Asset Encumbrances' and
'Description of the Credit Agreement.'
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CERTAIN COVENANTS
The Indenture contains the following covenants, among others;
Limitation on Indebtedness. The Indenture provides that the Company will
not, and will not permit any of the Restricted Subsidiaries to, create, incur,
issue, assume, guarantee or in any manner become directly or indirectly liable,
contingently or otherwise (in each case, to 'incur'), for the payment of any
Indebtedness (including any Acquired Indebtedness); provided that (i) the
Company (and not the Restricted Subsidiaries) will be permitted to incur
Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary
will be permitted to incur Acquired Indebtedness if, at the time of any such
incurrence and after giving pro forma effect thereto (including the application
of the net proceeds therefrom), the Consolidated Fixed Charge Coverage Ratio of
the Company is at least equal to 2.25:1.00 if such Indebtedness is incurred on
or prior to December 31, 1996 or 2.50:1.00 if such Indebtedness is incurred on
or after January 1, 1997.
Notwithstanding the foregoing, the Company and the Restricted Subsidiaries,
as applicable, may incur each and all of the following (each of which shall be
given independent effect):
(a) Indebtedness of the Company evidenced by the Notes and other
Indebtedness of the Company and the Restricted Subsidiaries outstanding on
the Issue Date;
(b) Indebtedness of the Company under the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the sum of
(1) 75% of the net amount of accounts receivable (as determined under GAAP)
of the Company and the Restricted Subsidiaries plus (2) an amount equal to
$1,200 multiplied by the number of Eligible Pay Telephones (as defined in
the Credit Agreement as in effect on the Issue Date), in each case as
determined in good faith by the Company at the time of each incurrence of
Indebtedness under the Credit Agreement; provided in no event shall the
aggregate principal amount of Indebtedness under the Credit Agreement
permitted pursuant to this clause (b) exceed $60.0 million at any time
outstanding;
(c) Indebtedness of the Company and/or any Restricted Subsidiary used to
finance the cost of acquiring public pay telephones (including in any Asset
Acquisition) in an aggregate principal amount incurred after the Issue Date
not to exceed $10.0 million; provided that, (x) at the time of and after
giving effect to any such incurrence under this clause (c), the aggregate
principal amount of Indebtedness incurred under this clause (c) after the
Issue Date shall not exceed the aggregate net cash proceeds (other than net
proceeds from the UBS Partners Preferred Stock) received by the Company
after the Issue Date from the issuance of Capital Stock (other than
Redeemable Capital Stock) of the Company and (y) the principal amount of
Indebtedness being incurred at any time under this clause (c) shall not
exceed the amount of Restricted Payments Availability at the date of
incurrence;
(d) Indebtedness of the Company and/or any Restricted Subsidiary
incurred in respect of performance bonds, bankers' acceptances, letters of
credit of the Company and any Restricted Subsidiary and surety bonds
provided by the Company or any Restricted Subsidiary in the ordinary course
of business not to exceed $5.0 million in the aggregate;
(e) (i) Interest Rate Protection Obligations of the Company and/or any
Restricted Subsidiary covering Indebtedness of the Company or any
Restricted Subsidiary; provided that (x) any Indebtedness to which any such
Interest Rate Protection Obligations relate bears interest at fluctuating
interest rates and is otherwise permitted to be incurred under this
covenant and (y) the notional principal amount of any such Interest Rate
Protection Obligations does not exceed the principal amount of the
Indebtedness to which such Interest Rate Protection Obligations relate and
(ii) Indebtedness under Currency Agreements of the Company or any
Restricted Subsidiary; provided
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that such Currency Agreements do not increase the Indebtedness of the
Company and the Restricted Subsidiaries in the aggregate other than as a
result of fluctuations in foreign currency exchange rates;
(f) (i) Indebtedness of a Restricted Subsidiary to the Company or to
another Restricted Subsidiary, in each case which is not subordinated in
right of payment to any Indebtedness of such Restricted Subsidiary, and
(ii) Indebtedness of the Company to a Restricted Subsidiary (but only for
so long as such Restricted Subsidiary continues to be a Restricted
Subsidiary) which is unsecured and subordinated in right of payment from
and after such time as the Notes shall become due and payable (whether at a
Stated Maturity, by acceleration or otherwise) to the payment and
performance of the Company's obligations under the Indenture and the Notes;
(g) Indebtedness of the Company to the extent the proceeds are used to
refinance (whether by amendment, renewal, extension or refunding)
Indebtedness of the Company or any of the Restricted Subsidiaries; provided
that (i) the principal amount of Indebtedness incurred pursuant to this
clause (g) (or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the original issue price of such
Indebtedness) shall not exceed the sum of the principal amount of
Indebtedness so refinanced, plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of such
Indebtedness or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated purchase, plus the amount of reasonable and
customary expenses incurred in connection therewith, and (ii) such
Indebtedness being incurred does not have a lower Average Life to Stated
Maturity than the Indebtedness being refinanced and, in the case of any
such refinancing of the Notes, does not have an earlier Stated Maturity for
any principal payment than the Notes; and
(h) additional Indebtedness of the Company and/or any of the Restricted
Subsidiaries not to exceed $10.0 million in aggregate principal amount at
any one time outstanding.
Limitation on Issuances and Sale of Preferred Stock by Restricted
Subsidiaries. The Indenture provides that the Company (i) will not permit any
of the Restricted Subsidiaries to issue any Preferred Stock (other than to the
Company or a Restricted Subsidiary) and (ii) will not permit any person (other
than the Company or a Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, do any of the following:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any payment to
the direct or indirect holders (in their capacities as such) of Capital
Stock of the Company (other than dividends or distributions payable solely
in Capital Stock of the Company (other than Redeemable Capital Stock) or in
options, warrants or other rights to purchase Capital Stock of the Company
(other than Redeemable Capital Stock) ),
(ii) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of the Company (other than any such Capital Stock owned
by a Restricted Subsidiary),
(iii) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness, or
(iv) make any Investment (other than any Permitted Investment) in any
person (other than in a Restricted Subsidiary or a person that becomes a
Restricted Subsidiary as a result of such Investment or a person that
merges into the Company or a Restricted Subsidiary)
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(such payments or Investments described in the preceding clauses (i), (ii),
(iii) and (iv) are collectively referred to as 'Restricted Payments'), unless,
at the time of and after giving effect to the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, shall be the Fair
Market Value of the asset(s) proposed to be transferred by the Company or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment),
(A) no Default shall have occurred and be continuing, (B) the Company would be
able to incur $1.00 of additional Indebtedness under the applicable provisions
of the proviso to the first paragraph of the 'Limitation on Indebtedness'
covenant and (C) the aggregate amount of all Restricted Payments declared or
made from and after the Issue Date (including any Designation Amount) would not
exceed (1) 50% of the aggregate Consolidated Net Income of the Company accrued
on a cumulative basis during the period beginning on April 1, 1995 and ending on
the last day of the fiscal quarter of the Company immediately preceding the date
of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income of the Company for such period shall be a deficit, minus
100% of such deficit) plus (2) the aggregate net cash proceeds received by the
Company from the issuance or sale of Capital Stock (excluding (x) any net cash
proceeds from the issuance of the UBS Partners Preferred Stock or any Capital
Stock issued upon conversion thereof and (y) any net cash proceeds from the
issuance of Redeemable Capital Stock, but including Capital Stock issued upon
the conversion of convertible Indebtedness, in exchange for outstanding
Indebtedness or from the exercise of options, warrants or rights to purchase
Capital Stock (other than Redeemable Capital Stock) ) of the Company to any
person (other than to a Restricted Subsidiary) after the Issue Date plus (3) in
the case of the disposition for cash or repayment in cash of any Investment
constituting a Restricted Payment made after the Issue Date (other than pursuant
to clause (v) of the next paragraph), an amount equal to the lesser of the
return of capital with respect to such Investment and the cost of such
Investment, in either case, less the cost of the disposition of such Investment
minus (4) the aggregate principal amount of Indebtedness incurred after the
Issue Date pursuant to clause (c) of the second paragraph of the covenant
'Limitation on Indebtedness.' For purposes of the preceding clause (C)(2), upon
the issuance of Capital Stock from either the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of
options, warrants or rights, the amount counted as net cash proceeds received
will be the cash amount received by the Company at the original issuance of the
Indebtedness that is so converted or exchanged or from the issuance of options,
warrants or rights, as the case may be, plus the incremental amount received by
the Company, if any, upon the conversion, exchange or exercise thereof.
None of the foregoing provisions will prohibit (i) the payment of any
dividend within 60 days after the date of its declaration, if at the date of
declaration such payment would be permitted by the foregoing paragraph; (ii) so
long as no Default shall have occurred and be continuing, the redemption,
repurchase or other acquisition or retirement of any shares of any class of
Capital Stock of the Company or any Restricted Subsidiary in exchange for, or
out of the net cash proceeds of, a substantially concurrent issue and sale of
other shares of Capital Stock (other than Redeemable Capital Stock) of the
Company to any person (other than to a Restricted Subsidiary); provided that
such net cash proceeds so used are excluded from clause (C)(2) of the preceding
paragraph; (iii) so long as no Default shall have occurred and be continuing,
any redemption, repurchase or other acquisition or retirement of Subordinated
Indebtedness in exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale of (1) Capital Stock (other than
Redeemable Capital Stock) of the Company; provided that any such net cash
proceeds so used are excluded from clause (C)(2) of the preceding paragraph, or
(2) Subordinated Indebtedness of the Company so long as such Subordinated
Indebtedness has no Stated Maturity earlier than the 91st day after the Stated
Maturity for the final scheduled principal payment of the Notes; (iv) so long as
no Default shall have occurred and be continuing, the making of Investments
constituting Restricted Payments made as a result of the receipt of non-cash
consideration from any Asset Sale made pursuant to and in compliance with the
covenant 'Disposition of Proceeds of Asset Sales'; (v) Investments constituting
Restricted Payments not to exceed $5.0 million in the aggregate at any one time
outstanding; (vi) subsequent to the third anniversary of the issuance of the UBS
Partners Preferred Stock, so long as no Default shall have occurred and be
continuing and the Consolidated Fixed Charge Coverage Ratio of the Company is at
least equal to 3.0:1.0, the payment of scheduled cash dividend payments on the
UBS Partners Preferred Stock in accordance with the terms of
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the UBS Partners Preferred Stock as in effect on the Issue Date; and (vii) the
redemption of the UBS Partners Preferred Stock upon a Change of Control if (1) a
Change of Control Offer has been made under the Indenture and all holders of
Notes validly tendering their Notes shall have had such Notes purchased by the
Company and (2) no payment default under the Indenture arising after the Change
of Control Offer shall have occurred or be continuing. In computing the amount
of Restricted Payments previously made for purposes of clause (C) of the
preceding paragraph, Restricted Payments under clauses (i), (iv), (v), (vi) and
(vii) of this paragraph shall be included without duplication and Restricted
Payments under clauses (ii) and (iii) of this paragraph shall be excluded.
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of the Restricted Subsidiaries to, create, incur, assume or
suffer to exist any Liens of any kind against or upon any of its property or
assets, or any proceeds therefrom, except for (a) Liens existing as of the Issue
Date; (b) Liens on property or assets of the Company securing the obligations
under the Credit Agreement; (c) Liens in favor of the Company or any Restricted
Subsidiary of the Company; (d) Liens on property or assets securing Subordinated
Indebtedness; provided that the Notes are secured by a Lien on such property or
assets that is senior in priority to such Liens; (e) Liens on property or assets
securing Indebtedness of the Company ranking pari passu in right of payment with
the Notes (other than pursuant to the preceding clause (b) ); provided that the
Notes are secured by a Lien on such property or assets that is equal and ratable
with such Liens; and (f) Permitted Liens.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Company will not, and will not permit any of the Restricted Subsidiaries to,
directly or indirectly, make any Asset Sale unless (a) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets or shares
subject to such Asset Sale and (b) at least 75% of such consideration consists
of any combination of (i) cash or Cash Equivalents or (ii) Indebtedness of the
Company or such Restricted Subsidiary assumed by the purchaser of the assets or
shares subject to such Asset Sale and the Company or such Restricted Subsidiary
is unconditionally released from such Indebtedness. The Company may (a) use no
more than the Other Senior Debt Pro Rata Share of such Net Cash Proceeds to
repay, and thereby permanently reduce the commitments or amounts available to be
reborrowed under, Other Senior Debt and/or (b) apply such Net Cash Proceeds to
acquire or construct property or assets in lines (whether based on product,
services or geography) of business related to the businesses of the Company and
the Restricted Subsidiaries as conducted on the Issue Date (after giving effect
to the sale of (i) the Capital Stock or assets of PTC Cellular, Inc. and (ii)
the Company's inmate telephone business) within 270 days after the consummation
of such Asset Sale. To the extent all or part of the Net Cash Proceeds of any
Asset Sale are not so applied, the Company or any Restricted Subsidiary shall,
within 270 days of such Asset Sale, make an offer to purchase (an 'Asset Sale
Offer') from all holders of Notes up to a maximum principal amount (expressed as
a multiple of $1,000) of Notes equal to such Net Cash Proceeds, at a purchase
price equal to 100% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided that the Company may
defer the Asset Sale Offer until there are an aggregate unutilized Net Cash
Proceeds from such Asset Sales equal to or in excess of $10.0 million, at which
time the entire unutilized amount of such Net Cash Proceeds, and not just the
amount in excess of $10.0 million, shall be applied as required pursuant to this
paragraph. The Asset Sale Offer shall remain open for a period of 20 business
days or such longer period as may be required by law. To the extent an Asset
Sale Offer is oversubscribed, Notes shall be purchased among holders on a
proportionate basis (based on the relative aggregate principal amounts validly
tendered for purchase by holders thereof). To the extent the Asset Sale Offer is
not fully subscribed to by the holders of the Notes, the Company may retain and
utilize any unutilized portion of the Net Cash Proceeds for any purpose
consistent with the other terms of the Indenture.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
will not be required to comply with clause (b) of the first sentence of the
immediately preceding paragraph with respect to Asset Sales by the Company or
any Restricted Subsidiary of (i) the Capital Stock or assets of PTC Cellular,
Inc.,
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(ii) the Company's 23.75% interest in Artel Business & Telecommunications, Inc.
('Artel') and (iii) the Company's inmate telephone business; provided that, in
the case of the inmate telephone business, such noncompliance will only be
permitted to the extent the Company delivers to the Trustee a written opinion
from an Independent Financial Advisor to the effect of clause (a) of the first
sentence of the immediately preceding paragraph. In addition to the foregoing,
the Company and any Restricted Subsidiary will not be required to comply with
the second sentence of the immediately preceding paragraph with respect to Net
Cash Proceeds from Asset Sales by the Company or any Restricted Subsidiary of
(i) the Capital Stock or assets of PTC Cellular, Inc., (ii) the Company's inmate
telephone business and (iii) the Company's 23.75% interest in Artel; provided
that the Net Cash Proceeds from any Asset Sale of Discontinued Operations shall
be required to be applied as follows: (A) the Company or any Restricted
Subsidiary may retain up to $5.0 million of such Net Cash Proceeds; (B) the
Company or any Restricted Subsidiary may apply up to 50% of any such Net Cash
Proceeds in excess of $5.0 million in the manner provided by clause (b) of the
second sentence of the preceding paragraph; and (C) up to 50% of any such Net
Cash Proceeds in excess of $5.0 million, together with any such excess Net Cash
Proceeds not applied as contemplated by the preceding clause (B) within the time
frame required by clause (b) of the second sentence of the preceding paragraph
(collectively, 'Discontinued Operations Excess Proceeds'), shall be used by the
Company to make an offer to purchase Notes at a purchase price equal to 100% of
the principal amount thereof plus accrued and unpaid interest to the date of
purchase; provided, further, that the Company may defer any such offer to
purchase contemplated by the preceding clause (C) until the aggregate
Discontinued Operations Excess Proceeds is in excess of $5.0 million, at which
time the entire Discontinued Operations Excess Proceeds, and not just the amount
in excess of such $5.0 million, shall be utilized to make an offer to purchase.
Such offer to purchase shall be made within 45 days after such threshold is
exceeded and shall comply with the same requirements for an Asset Sale Offer set
forth above and in the Indenture.
The Company will comply with 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 the event that an Asset Sale occurs and the
Company is required to purchase Notes as described above.
Limitation on Transactions with Interested Persons. The Indenture provides
that the Company will not, and will not permit any of the Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, transfer, disposition, purchase, exchange or lease of assets, property
or services) with, or for the benefit of, any Affiliate of the Company (other
than a Wholly-Owned Restricted Subsidiary), any officer or director of the
Company or any Restricted Subsidiary or any beneficial owner (determined in
accordance with the Indenture) of five percent or more of the Company's Common
Stock at any time outstanding (each of the foregoing persons being referred to
as an 'Interested Person') except (i) on terms that are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those which
could have been obtained in a comparable transaction at such time from a person
who is not an Interested Person and (ii) with respect to a transaction or series
of transactions involving aggregate payments or value equal to or greater than
$100,000, the Company shall have delivered an officers' certificate to the
Trustee certifying that such transaction or transactions comply with the
preceding clause (i) and that such transaction or transactions have been
approved by a majority of the Board of Directors of the Company including a
majority of the Independent Directors of the Board of Directors of the Company.
In addition to the foregoing, with respect to a transaction or series of
transactions with an Interested Person involving aggregate payments or value
equal to or greater than $1.5 million, the Company must deliver to the Trustee a
written opinion from an Independent Financial Advisor stating that such
transaction or series of transactions are fair from a financial point of view.
This covenant will not restrict the Company from (a) redeeming or paying
dividends in respect of its Capital Stock permitted under the covenant '--
Limitation on Restricted Payments,' (b) paying reasonable and customary regular
fees and other compensation, including interests in Common Stock of the Company,
to directors of the Company who are not employees of the Company, (c) paying any
amounts pursuant to agreements existing, and as in effect, on the Issue Date and
disclosed in this Prospectus, (d) paying loans or advances to officers of the
Company
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and the Restricted Subsidiaries for bona fide business purposes of the Company
not in excess of $500,000 in the aggregate at any one time outstanding and (e)
engaging in banking or other transactions with Creditanstalt-Bankverein and its
Affiliates and any other lender under the Credit Agreement relating to services
customarily provided by Creditanstalt-Bankverein or its Affiliates and any other
lender under the Credit Agreement in the ordinary course of its respective
commercial lending business.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
permit any of the 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 (a) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, (b) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (c) make loans or advances to the Company or any other Restricted
Subsidiary, (d) transfer any of its properties or assets to the Company or any
other Restricted Subsidiary (other than any customary restriction on transfers
of property subject to a Lien permitted under the Indenture which would not
materially adversely affect the Company's ability to satisfy its obligations
under the Notes and the Indenture) or (e) guarantee any Indebtedness of the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (i) applicable law, (ii) customary
non-assignment provisions of any contract or any licensing agreement entered
into by the Company or any of the Restricted Subsidiaries in the ordinary course
of business or any lease governing a leasehold interest of the Company or any
Restricted Subsidiary, (iii) the Credit Agreement as in effect on the Issue Date
and (iv) any agreement or other instrument of a person acquired by the Company
or any Restricted Subsidiary in existence at the time of such acquisition (but
not created in contemplation thereof), 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.
Reporting Requirements. The Indenture requires that the Company file with
the Commission the annual reports, quarterly reports and other documents
required to be filed with the Commission pursuant to Sections 13 and 15 of the
Exchange Act, whether or not the Company has a class of securities registered
under the Exchange Act, on the basis required by such Sections. The Company is
required to file with the Trustee within 15 days after it files them with the
Commission copies of such reports and documents.
Designation of Unrestricted Subsidiaries. The Indenture provides that the
Company may designate any Subsidiary of the Company as an 'Unrestricted
Subsidiary' under the Indenture (a 'Designation') if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) at the time of and after giving effect to such Designation, the
Company could incur $1.00 of additional Indebtedness under the applicable
provisions of the proviso to the first paragraph of the 'Limitation on
Indebtedness' covenant described above; and
(c) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the 'Designation Amount') equal to the Fair
Market Value of such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
'Limitation on Restricted Payments' for all purposes of the Indenture in the
Designation Amount. The Indenture further provides that (i) neither the Company
nor any Restricted Subsidiary shall at any time (x) provide credit support for,
subject any of its property or assets to the satisfaction of, or guarantee, any
Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
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indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent otherwise permitted under the terms of the
Indenture, including, without limitation, pursuant to the 'Limitation on
Restricted Payments' and the 'Limitation on Indebtedness' covenants, and (ii) no
Unrestricted Subsidiary shall at any time guarantee or otherwise provide credit
support for any obligation of the Company or any Restricted Subsidiary.
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary (a 'Revocation') if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
PTC Cellular, Inc. shall, for so long as it constitutes a Discontinued
Operation, be an Unrestricted Subsidiary and shall at all such times be subject
to the provisions of the Indenture applicable to Unrestricted Subsidiaries.
MERGER, SALE OF ASSETS, ETC.
The Company will not, in any transaction or series of transactions, merge
or consolidate with or into, or sell, assign, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets as an entirety
to, any person or persons, and the Company will not permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if
such transaction or series of transactions, in the aggregate, would result in a
sale, assignment, transfer, lease or other disposition of all or substantially
all of the properties and assets of the Company or the Company and the
Restricted Subsidiaries, taken as a whole, to any other person or persons,
unless at the time and after giving effect thereto (i) either (A) if the
transaction or transactions is a merger or consolidation, the Company shall be
the surviving person of such merger or consolidation, or (B) the person (if
other than the Company) formed by such consolidation or into which the Company
or such Restricted Subsidiary is merged or to which the properties and assets of
the Company or such Restricted Subsidiary, as the case may be, substantially as
an entirety, are transferred (any such surviving person or transferee person
being the 'Surviving Entity') shall be a corporation organized and existing
under the laws of the United States of America, any State thereof or the
District of Columbia and shall expressly assume by a supplemental indenture
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture, and in each
case, the Indenture shall remain in full force and effect; (ii) immediately
before and immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default shall have
occurred and be continuing; and (iii) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Company or the Surviving Entity, as the case may be, could incur $1.00 of
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additional Indebtedness under the applicable provisions of the proviso to the
first paragraph of the 'Limitation on Indebtedness' covenant described above.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall 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, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements under the
Indenture.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, in which the
Company is not the continuing corporation, the successor corporation formed by
such a consolidation or into which the Company is merged or to which such
transfer is made, shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named as the Company therein.
EVENTS OF DEFAULT
The following will be 'Events of Default' under the Indenture:
(i) default in the payment of the principal of or premium, if any, when
due and payable, on any of the Notes (whether at its Stated Maturity, upon
optional redemption or required purchase); or
(ii) default in the payment of an installment of interest on any of the
Notes, when due and payable, for 30 days or more; or
(iii) the Company shall fail to perform or observe any of the terms,
covenants or agreements described under '--Merger, Sales of Assets, Etc.'
or '--Certain Covenants--Limitation on Indebtedness,' '--Limitation on
Restricted Payments,' '--Disposition of Proceeds of Asset Sales' or
'--Change of Control'; or
(iv) the Company shall fail to perform or observe any term, covenant or
agreement contained in the Notes or the Indenture (other than a default
specified in (i), (ii) or (iii) above) for a period of 30 days after
written notice of such failure requiring the Company to remedy the same
shall have been given (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the holders of 25% in aggregate principal amount
of the Notes then outstanding; or
(v) either (a) default or defaults in the payment of any principal,
premium or interest under one or more agreements, instruments, mortgages,
bonds, debentures or other evidences of Indebtedness (a 'Debt Instrument')
under which the Company or one or more Restricted Subsidiaries or the
Company and one or more Restricted Subsidiaries then have outstanding
Indebtedness in excess of $5.0 million, individually or in the aggregate,
or (b) any other default or defaults under one or more Debt Instruments
under which the Company or one or more Restricted Subsidiaries or the
Company and one or more Restricted Subsidiaries then have outstanding
Indebtedness in excess of $5.0 million, individually or in the aggregate,
and in the case of this clause (b) either (x) such Indebtedness is already
due and payable in full or (y) such default or defaults have resulted in
the acceleration of the maturity of such Indebtedness; or
(vi) one or more judgments, orders or decrees of any court or regulatory
or administrative agency of competent jurisdiction for the payment of money
in excess of $5.0 million either individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary or any of their
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respective properties and shall not be discharged or fully bonded and there
shall have been a period of 60 days after the date on which any period for
appeal has expired and during which a stay of enforcement of such judgment,
order or decree shall not be in effect; or
(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 the Restricted Subsidiaries shall, 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, commence judicial
proceedings to foreclose upon assets of the Company or one or more of the
Restricted Subsidiaries having an aggregate Fair Market Value in excess of
$5.0 million or shall have exercised any right under applicable law or
applicable security documents to take ownership of any such assets in lieu
of foreclosure; or
(viii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or any Significant Subsidiary of the Company shall
have occurred.
If an Event of Default (other than as specified in clause (viii) with
respect to the Company) shall occur and be continuing, the Trustee, by notice to
the Company, or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice to the Trustee and the Company, may declare
the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration, all
amounts payable in respect of the Notes shall be immediately due and payable. If
an Event of Default specified in clause (viii) (with respect to the Company)
above occurs and is continuing, then the principal of, premium, if any, and
accrued interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may rescind
such declaration if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes,
(iii) the principal of and premium, if any, on any Notes which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate borne by the Notes, and (iv) to the extent that payment of such interest is
lawful, interest upon overdue interest and overdue principal at the rate borne
by the Notes which has become due otherwise than by such declaration of
acceleration; (b) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction; and (c) all Events of Default, other than
the non-payment of principal of, premium, if any, and interest on the Notes that
has become due solely by such declaration of acceleration, have been cured or
waived.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may on behalf of the holders of all the Notes waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the Trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for
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the enforcement of the payment of the principal of, premium, if any, or interest
on such Note on or after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indenture is not under any obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders
unless such holders shall have offered to the Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the Trustee,
the holders of a majority in aggregate principal amount of the outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee under the Indenture.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee shall mail to each holder of the Notes notice of the Default within 30
days after obtaining knowledge thereof. Except in the case of a Default in
payment of principal of, premium, if any, or interest on any Notes, the Trustee
may withhold the notice to the holders of such Notes if a committee of its trust
officers in good faith determines that withholding the notice is in the interest
of the holders of the Notes.
The Company will be required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within ten days of any event which is, or after
notice or lapse of time or both would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company with respect to the outstanding Notes ('defeasance'). Such
defeasance means that the Company shall be deemed to have paid and discharged
the entire Indebtedness represented by the outstanding Notes, except for (i) the
rights of holders of outstanding Notes to receive payment in respect of the
principal of, premium, if any, and interest on such Notes when such payments are
due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and (iv)
the defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to terminate its obligations with respect to
certain covenants that are set forth in the Indenture, some of which are
described under '--Certain Covenants' above, and any omission to comply with
such obligations shall not constitute a Default or an Event of Default with
respect to the Notes ('covenant defeasance').
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), 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 Notes to redemption or maturity; (ii) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance or 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 defeasance
or covenant defeasance had not occurred (in the case of defeasance, such opinion
must refer to and be based upon a ruling of the Internal Revenue Service or a
change in applicable federal income tax laws); (iii) no Default shall have
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occurred and be continuing on the date of such deposit or with respect to clause
(viii) under the first paragraph under '--Events of Default,' at any time during
the period ending on the 91st day after the date of deposit; (iv) such
defeasance or covenant defeasance shall not cause the Trustee to have a
conflicting interest with respect to any securities of the Company; (v) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a default under, any agreement or instrument to which the Company
is a party or by which it is bound; (vi) the Company shall have delivered to the
Trustee an opinion of counsel to the effect that (A) the trust funds will not be
subject to any rights of holders of Indebtedness and (B) after the 9lst 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; and (vii) the Company shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
all conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENTS AND WAIVERS
From time to time, the Company, when authorized by a resolution of its
Board of Directors, and the Trustee may, without the consent of the holders of
any outstanding Notes, amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, qualifying, or maintaining the qualification of, the
Indenture under the Trust Indenture Act, or making any change that does not
adversely affect the rights of any holder; provided that the Company has
delivered to the Trustee an opinion of counsel acceptable to the Trustee stating
that such change does not adversely affect the legal rights of any holder. Other
amendments and modifications of the Indenture or the Notes may be made by the
Company, and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided
that no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount of,
extend the fixed maturity of or alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or any premium or the interest
thereon is payable, (iii) reduce the percentage in principal amount of
outstanding Notes that must consent to an amendment, supplement or waiver or
consent to take any action under the Indenture or the Notes, (iv) impair the
right to institute suit for the enforcement of any payment on or with respect to
the Notes, (v) waive a default in payment with respect to the Notes, (vi) amend,
change or modify the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or make and consummate
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the offer with respect to any Asset Sale or modify any of the provisions or
definitions with respect thereto, (vii) adversely affect the ranking of the
Notes in a manner adverse to holders of the Notes or (viii) reduce or change the
rate or time for payment of interest on the Notes.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and, upon issuance of the Exchange Notes or effectiveness of
a Shelf Registration Statement, provisions of the Trust Indenture Act,
incorporated by reference therein contain 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 by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions with the Company or any Affiliate of the Company; provided
that if it acquires any conflicting interest (as defined in the Indenture or in
the Trust Indenture Act) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Notes are governed by the laws of the State of New
York, without regard to principles of conflicts of law.
CERTAIN DEFINITIONS
'Acquired Indebtedness' means Indebtedness of a person (a) assumed in
connection with an Asset Acquisition from such person or (b) existing at the
time such person becomes a Restricted Subsidiary which, in either case, was not
created or entered into in anticipation or contemplation of an Asset Acquisition
or such person becoming a Restricted Subsidiary.
'Affiliate' means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified person.
'Asset Acquisition' means (a) an Investment by the Company or any
Restricted Subsidiary in any other person pursuant to which such person shall
become a Restricted Subsidiary or shall be merged with or into the Company or
any Restricted Subsidiary, (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any person which constitute all or substantially all
of the assets of such person or any division or line (whether based on product
or geography) of business of such person or (c) the acquisition by the Company
or any Restricted Subsidiary of any public pay telephones, inmate telephones,
cellular telephones and/or telephone operating facility from any person other
than the manufacturer (or an Affiliate thereof or special purpose finance entity
related thereto) of such telephones in a transaction involving consideration
having a Fair Market Value equal to or greater than $500,000.
'Asset Sale' means any sale, issuance, conveyance, transfer, lease or other
disposition to any person other than the Company or a Wholly-Owned Restricted
Subsidiary, in one or a series of related transactions, of (a) any Capital Stock
of any Restricted Subsidiary; (b) all or substantially all of the properties and
assets of any division or line (whether based on product or geography) of
business of the Company or any Restricted Subsidiary; (c) any other properties
or assets of the Company or any Restricted Subsidiary other
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than in the ordinary course of business; or (d) any public pay telephones,
inmate telephones, cellular telephones and/or telephone operating facility by
the Company or any Restricted Subsidiary involving consideration having a Fair
Market Value equal to or greater than $500,000. For the purposes of this
definition, the term 'Asset Sale' shall not include (i) any sale, issuance,
conveyance, transfer, lease or other disposition of properties or assets that is
governed by the provisions described under '--Merger, Sale of Assets, Etc.,'
(ii) sales of obsolete equipment and (iii) any sale, issuance, conveyance,
transfer, lease or other disposition of properties or assets, whether in one
transaction or a series of related transactions, involving assets with a Fair
Market Value not in excess of $50,000.
'Average Life to Stated Maturity' means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (a) the sum
of the products of (i) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (ii) the
amount of each such principal payment by (b) the sum of all such principal
payments.
'Capital Stock' means, with respect to any person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock.
'Capitalized Lease Obligation' means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
'Cash Equivalents' means, at any time, (i) any evidence of Indebtedness
with a maturity of 365 days (or, for purposes of the 'Disposition of Proceeds of
Asset Sales' covenant, 270 days) or less issued or directly and fully guaranteed
or insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of America
is pledged in support thereof); (ii) certificates of deposit or acceptances with
a maturity of 365 days (or for purposes of the 'Disposition of Proceeds of Asset
Sales' covenant, 270 days) or less of any financial institution that is a member
of the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $250.0 million; (iii) commercial paper with a maturity
of 365 days (or for purposes of the 'Disposition of Proceeds of Asset Sales'
covenant, 270 days) or less issued by a corporation that is not an Affiliate of
the Company organized under the laws of any State of the United States or of the
District of Columbia and rated at least A-1 by Standard & Poor's Corporation or
at least P-1 by Moody's Investor's Service, Inc. or at least an equivalent
rating category of another nationally recognized securities rating agency; (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the government of the
United States of America or issued by any agency thereof and backed by the full
faith and credit of the United States of America, in each case maturing within
one year from the date of acquisition; and (v) money market accounts with a
financial institution of the type described in clause (ii) above which invest
substantially in instruments of the types described in clauses (i) through (iv)
above.
'Change of Control' is defined to mean the occurrence of any of the
following events: (a) any 'person' or 'group' (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than a Permitted Holder, is
or becomes the 'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have 'beneficial
ownership' of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Company; or (b) the Company consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers,
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leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting Stock
of the Company is converted into or exchanged for (1) Voting Stock (other than
Redeemable Capital Stock) of the surviving or transferee corporation or (2)
cash, securities and other property in an amount which could be paid by the
Company as a Restricted Payment under the Indenture and (ii) immediately after
such transaction no 'person' or 'group' (as such terms are used in Sections
13(d) and 14(d) of the Exchange Act), other than a Permitted Holder, is the
'beneficial owner' (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have 'beneficial ownership' of all
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total Voting Stock of the surviving or
transferee corporation.
'Common Stock' means, with respect to any person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
'Consolidated Cash Flow Available for Fixed Charges' means, with respect to
the Company and the Restricted Subsidiaries for any period, (i) the sum of,
without duplication, the amounts for such period, taken as a single accounting
period, of (a) Consolidated Net Income, (b) Consolidated Non-cash Charges, (c)
Consolidated Interest Expense to the extent reducing Consolidated Net Income,
(d) Consolidated Income Tax Expense to the extent reducing Consolidated Net
Income and (e) to the extent incurred in such period and not otherwise included
in clause (b) above, the 1994 Charges to the extent reducing Consolidated Net
Income less (ii) non-cash items increasing Consolidated Net Income.
'Consolidated Fixed Charge Coverage Ratio' means, with respect to the
Company, the ratio of the aggregate amount of Consolidated Cash Flow Available
for Fixed Charges of the Company and the Restricted Subsidiaries for the four
full fiscal quarters for which financial information in respect thereof is
available immediately preceding the date of the transaction (the 'Transaction
Date') giving rise to the need to calculate the Consolidated Fixed Charge
Coverage Ratio (such four full fiscal quarter period being referred to herein as
the 'Four Quarter Period') to the aggregate amount of Consolidated Fixed Charges
of the Company for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, 'Consolidated Cash
Flow Available for Fixed Charges' and 'Consolidated Fixed Charges' shall be
calculated after giving effect on a pro forma basis for the period of such
calculation to, without duplication, (a) the incurrence of any Indebtedness of
the Company or any Restricted Subsidiary during the period commencing on the
first day of the Four Quarter Period to and including the Transaction Date (the
'Reference Period'), including, without limitation, the incurrence of the
Indebtedness giving rise to the need to make such calculation, as if such
incurrence occurred on the first day of the Reference Period, (b) an adjustment
to eliminate or include, as the case may be, the Consolidated Cash Flow
Available for Fixed Charges and the Consolidated Fixed Charges of such person
directly attributable to assets which are the subject of any Asset Sales or
Asset Acquisitions occurring during the Reference Period, as if such Asset Sale
(after giving effect to any Designation of Unrestricted Subsidiaries) or Asset
Acquisition occurred on the first day of the Reference Period and (c) the
retirement of Indebtedness which cannot be reborrowed during the Reference
Period as if retired on the first day of the Reference Period. Furthermore, in
calculating 'Consolidated Fixed Charges' for purposes of determining the
denominator (but not the numerator) of this 'Consolidated Fixed Charge Coverage
Ratio,' (i) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Transaction Date and which will continue to be so determined
thereafter shall be deemed to have accrued at a fixed rate per annum equal to
the rate of interest on such Indebtedness in effect on the Transaction Date,
(ii) if interest on any Indebtedness actually incurred on the Transaction Date
may optionally be determined at an interest rate based upon a factor of a prime
or similar rate, a eurocurrency interbank offered rate, or other rates, then the
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interest rate in effect on the Transaction Date will be deemed to have been in
effect during the Reference Period; and (iii) notwithstanding clause (i) and
(ii) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, shall be deemed to have accrued at the rate per annum
resulting after giving effect to the operation of such agreements to the extent
then applicable.
'Consolidated Fixed Charges' means, with respect to the Company for any
period, the sum of, without duplication, the amounts for such period of (i)
Consolidated Interest Expense and (ii) the aggregate amount of dividends and
other distributions paid or accrued during such period in respect of Redeemable
Capital Stock (other than the shares of UBS Partners Preferred Stock) of the
Company and the Restricted Subsidiaries on a consolidated basis.
'Consolidated Income Tax Expense' means, with respect to the Company for
any period, the provision for federal, state, local and foreign income taxes of
the Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
'Consolidated Interest Expense' means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount, (b) the net cost under Interest Rate Protection
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all accrued interest and, (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP. Notwithstanding
anything herein to the contrary, Consolidated Interest Expense shall include
amounts which would constitute Consolidated Interest Expense but for the
treatment of the Discontinued Operations under GAAP.
'Consolidated Net Income' means, with respect to the Company and the
Restricted Subsidiaries for any period, the consolidated net income (or loss)
from continued operations of the Company and the Restricted Subsidiaries for
such period as determined in accordance with GAAP, adjusted, to the extent
included in calculating such net income (or loss), by excluding, without
duplication, (i) all extraordinary gains and losses (net of fees and expenses
relating to the transaction giving rise thereto), (ii) the portion of net income
(or loss) of the Company and the Restricted Subsidiaries allocable to minority
interests in unconsolidated persons except to the extent that cash dividends or
distributions have actually been received by the Company or a Restricted
Subsidiary, (iii) net income (or loss) of any person combined with such person
or one of its Restricted Subsidiaries on a 'pooling of interests' basis
attributable to any period prior to the date of combination, (iv) any gain
realized upon the termination of any employee pension benefit plan, on an
after-tax basis, (v) gains in respect of any Asset Sales by the Company or a
Restricted Subsidiary (net of fees and expenses relating to the transaction
giving rise thereto), on an after-tax basis, (vi) the net income of any
Unrestricted Subsidiary, except to the extent that cash dividends or
distributions have been actually received by the Company or one of the
Restricted Subsidiaries, (vii) the cumulative non-cash effect of any change in
any accounting principle and (viii) the net income of any Restricted Subsidiary
to the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders.
'Consolidated Non-cash Charges' means, with respect to the Company for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries
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reducing Consolidated Net Income of such person and its Restricted Subsidiaries
for such period, determined on a consolidated basis in accordance with GAAP.
'Credit Agreement' means the Fourth Amended and Restated Loan and Security
Agreement dated as of July 19, 1995, by and among the Company, as borrower,
Creditanstalt-Bankverein, as lender, and any other lenders which become parties
from time to time thereto, together with the related documents thereto
(including, without limitation, any security documents), in each case as such
agreements may be amended (including any amendment and restatement thereof),
supplemented or otherwise modified from time to time, including any agreement
extending the maturity of, refinancing or otherwise restructuring all or any
portion of the Indebtedness under such agreement or any successor agreement in
compliance with the Indenture.
'Currency Agreement' means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of the Restricted Subsidiaries against fluctuations in currency
values.
'Default' means any event that is, or after notice or passage of time or
both would be, an Event of Default.
'Designation' has the meaning set forth under '--Certain
Covenants--Designation of Unrestricted Subsidiaries.'
'Designation Amount' has the meaning set forth under '--Certain
Covenants--Designation of Unrestricted Subsidiaries.'
'Discontinued Operations' means those business segments of the Company
segregated and accounted for as discontinued operations for financial accounting
purposes as of the Issue Date for so long as such operations constitute
discontinued operations.
'Equity Offering' means an offering, whether public or private, of Capital
Stock (other than Redeemable Capital Stock or Capital Stock requiring the
payment of dividends in cash or Redeemable Capital Stock at any time on or prior
to any Stated Maturity of the Notes) of the Company issued and sold directly by
the Company.
'Event of Default' has the meaning set forth under '--Events of Default'
herein.
'Fair Market Value' means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction; provided that, except with respect to
any Asset Sale which involves an asset or assets the value of which could
reasonably be expected to exceed $500,000, the Fair Market Value of any such
asset or assets shall be determined by the Board of Directors of the Company,
acting in good faith and shall be evidenced by resolutions of the Board of
Directors of the Company delivered to the Trustee.
'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 may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable as of the date
of determination and are consistently applied.
'guarantee' means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner,
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of any part or all of such obligation and (ii) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any way
the payment or performance (or payment of damages in the event of
non-performance) of all or any part of such obligation, including, without
limiting the foregoing, the payment of amounts drawn down by letters of credit.
A guarantee shall include, without limitation, any agreement to maintain or
preserve any other person's financial condition or to cause any other person to
achieve certain levels of operating results.
'Indebtedness' means, with respect to any person, without duplication, (a)
all liabilities of such person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such person in
connection with any letters of credit, banker's acceptance or other similar
credit transaction, (b) all obligations of such person evidenced by bonds,
notes, debentures or other similar instruments, (c) all Indebtedness created or
arising under any conditional sale or other title retention agreement with
respect to property acquired by such person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (d) all Capitalized Lease
Obligations of such person, (e) all Indebtedness referred to in the preceding
clauses of other persons and all dividends of other persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such person, even though such person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (f) all guarantees of Indebtedness referred to in this
definition by such person, (g) all Redeemable Capital Stock valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends, (h) all obligations under or in respect of foreign exchange
contracts, currency swap agreements or other similar agreements and Interest
Rate Protection Obligations of such person and (i) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any liability of the
types referred to in clauses (a) through (h) above. For purposes hereof, the
'maximum fixed repurchase price' of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
fair market value of such Redeemable Capital Stock, such fair market value shall
be determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock. When any person becomes a Restricted Subsidiary, there
shall be deemed to have been an incurrence by such Restricted Subsidiary of all
Indebtedness for which it is liable at the time it becomes a Restricted
Subsidiary. If the Company or any of the Restricted Subsidiaries, directly or
indirectly, guarantees Indebtedness of a third person, there shall be deemed to
be an incurrence of such guaranteed Indebtedness as if the Company or such
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
'Independent Director' means, with respect to any transaction or series of
transactions, a member of the Board of Directors of the Company who is not
employed by the Company (other than as a consultant) and who does not have, or
was not appointed to the Board of Directors of a shareholder which has, any
material direct or indirect financial interest in or with respect to such
transaction or series of transactions.
'Independent Financial Advisor' means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
'Interest Rate Protection Obligations' means the obligations of any person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to receive from
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time to time periodic payments calculated by applying either a floating or a
fixed rate of interest on a stated notional amount in exchange for periodic
payments made by such person calculated by applying a fixed or a floating rate
of interest on the same notional amount and shall include, without limitation,
interest rate swaps, caps, floors, collars and similar agreements.
'Interested Person' has the meaning set forth under '--Certain
Covenants--Limitation on Transactions with Interested Persons.'
'Investment' means, with respect to any person, any direct or indirect loan
or other extension of credit (including by way of a guarantee) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition by such person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued by, any other
person. 'Investments' shall exclude extensions of trade credit on commercially
reasonable terms in accordance with normal trade practices. In addition to the
foregoing, any foreign exchange contract, currency swap agreement or other
similar agreement shall constitute an Investment hereunder.
'Issue Date' means the original date of issuance of the Notes.
'Lien' means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
'Net Cash Proceeds' means, with respect to any Asset Sale, the sum of (a)
the proceeds thereof in the form of cash or Cash Equivalents (including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) ) and (b) the
aggregate principal amount (or, in the case of Indebtedness issued with original
issue discount, accreted value) of any Indebtedness of the Company assumed by
the purchaser of the assets or shares subject to such Asset Sale and as to which
the Company has been unconditionally released, net of (i) brokerage commissions
and other fees and expenses (including, without limitation, fees and expenses of
legal counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset Sale
(which, in the case of a Lien permitted under the Indenture, is being pledged or
used to permanently reduce Indebtedness secured by such Lien) and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP consistently
applied against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the Trustee; provided that
any amounts remaining after such adjustments, revaluations or liquidations of
such reserves shall also constitute Net Cash Proceeds.
'1994 Charges' means the one-time charges taken by the Company in the
fiscal year ended December 31, 1994 and reflected in the financial statements
included in this Prospectus.
'Other Senior Debt' means Indebtedness of the Company ranking pari passu in
right of payment with the Notes, the terms of which require that Net Cash
Proceeds be used to permanently reduce (and thereby also reduce commitments
relating to) such Indebtedness.
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'Other Senior Debt Pro Rata Share' means a fraction, (i) the numerator of
which is the aggregate principal amount of Other Senior Debt outstanding on the
date Net Cash Proceeds are received and (ii) the denominator of which is the sum
of (x) the aggregate principal amount of Notes outstanding on such date and (y)
the aggregate principal amount of any Other Senior Debt outstanding on such
date.
'Permitted Holders' mean any of the following individually or collectively:
(i) UBS Capital Corporation or its affiliates; (ii) Jeffrey Hanft, the Chairman
of the Board and Chief Executive Officer of the Company; (iii) Robert D. Rubin,
the President of the Company; and (iv) their respective controlled Affiliates.
'Permitted Investments' means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in prepaid expenses, negotiable instruments held
for collection and lease, utility and workers' compensation, performance and
other similar deposits; (iii) Interest Rate Protection Obligations and Currency
Agreements permitted under clause (e) of the second paragraph of the 'Limitation
on Indebtedness' covenant set forth above; (iv) any issuance of Capital Stock
(other than Redeemable Capital Stock) of the Company in exchange for Capital
Stock, property or assets of another person; and (v) Investments representing
Capital Stock or obligations issued to the Company or any of the Restricted
Subsidiaries in settlement of claims against any other person by reason of a
composition or readjustment of debt or a reorganization of any debtor of the
Company or such Restricted Subsidiary.
'Permitted Liens' means the following types of Liens:
(a) Liens for taxes, assessments or governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(b) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(c) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(d) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(e) easements, reservations, licenses, rights-of-way, zoning
restrictions and other similar charges or encumbrances in respect of real
property not interfering in any material respect with the ordinary conduct
of the business of the Company or any of the Restricted Subsidiaries;
(f) any interest or title of a lessor or sublessor under any Capitalized
Lease Obligation or operating lease;
(g) purchase money Liens incurred in the ordinary course of business;
provided that (i) the related purchase money Indebtedness shall not be
secured by any property or assets of the Company or
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any Restricted Subsidiary other than the property and assets so acquired
and (ii) the Lien securing such Indebtedness shall be created within 90
days of such acquisition;
(h) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(i) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(j) Liens securing Interest Rate Protection Obligations and Currency
Agreements, which Interest Rate Protection Obligations and Currency
Agreements relate to Indebtedness that is secured by Liens otherwise
permitted under the Indenture;
(k) Liens securing Indebtedness of the Company or any Restricted
Subsidiary incurred to purchase public pay telephones, which Indebtedness
is permitted to be incurred pursuant to the 'Limitation on Indebtedness'
covenant, is owed to a vendor or to a bank or other financial institution
and has financed the purchase of such public pay telephones; provided that
(i) the amount of such Indebtedness does not exceed, at the time of
incurrence, the lesser of the book value or the Fair Market Value of the
public pay telephones so acquired and (ii) the Indebtedness shall not be
secured by any property or assets of the Company or any Restricted
Subsidiary other than the public pay telephones so acquired;
(l) Liens securing Indebtedness under Capitalized Lease Obligations
incurred by the Company or a Restricted Subsidiary after the Issue Date in
the ordinary course of business to the extent relating to property and
assets subject to the applicable lease and which are securing solely the
lease rental of such property, plus reasonable fees and expenses incurred
in connection therewith; and
(m) Liens securing Acquired Indebtedness created prior to (and not
created in connection with or in contemplation of) the incurrence of such
Indebtedness by the Company or a Restricted Subsidiary; provided that such
Lien does not extend to any property or assets of the Company or any
Restricted Subsidiary other than the property and assets acquired in the
transaction resulting in such Acquired Indebtedness being incurred by the
Company or any Restricted Subsidiary; provided, further, that such Acquired
Indebtedness is permitted to be incurred by the Company or such Restricted
Subsidiary, as the case may be, pursuant to the 'Limitation on
Indebtedness' covenant.
'person' means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
'Preferred Stock' means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such person.
'Redeemable Capital Stock' means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is or upon the happening of an
event or passage of time would be, required to be redeemed on or prior to any
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time on or prior to any Stated Maturity of the Notes, or is
convertible into or exchangeable for debt securities at any time on or prior to
any Stated Maturity of the Notes.
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'Restricted Payments Availability' means, at any date, the amount available
as of such date for Restricted Payments as determined by reference to clauses
(C)(1), (2), (3) and (4) of the first paragraph of the 'Limitation on Restricted
Payments' covenant at such date, less the amount of all Restricted Payments
previously declared or made from and after the Issue Date to such date.
'Restricted Subsidiary' means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant 'Designation of Unrestricted Subsidiaries.' Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
'Revocation' has the meaning set forth under '--Certain
Covenants--Designation of Unrestricted Subsidiaries.'
'Significant Subsidiary' means, at any particular time, any Restricted
Subsidiary that, together with the Restricted Subsidiaries of such Restricted
Subsidiary, (a) accounted for more than 10% of the consolidated revenues of the
Company and the Restricted Subsidiaries for the most recently completed fiscal
year of the Company or (b) was the owner of more than 10% of the consolidated
assets of the Company and the Restricted Subsidiaries as at the end of such
fiscal year, all as shown on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such fiscal year.
'Stated Maturity' means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which any principal of such Note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness, means any
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
'Subordinated Indebtedness' means Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
'Subsidiary' means, with respect to any person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned by
such person, by one or more Subsidiaries of such person or by such person and
one or more Subsidiaries thereof and (ii) any other person (other than a
corporation), including, without limitation, a joint venture, in which such
person, one or more Subsidiaries thereof or such person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other person performing
similar functions). For purposes of this definition, any directors' qualifying
shares or investments by foreign nationals mandated by applicable law shall be
disregarded in determining the ownership of a Subsidiary.
'UBS Partners Preferred Stock' means the Company's Series C Cumulative
Convertible Preferred Stock, par value $.01 per share, issued pursuant to the
Securities Purchase Agreement dated as of July 3, 1995 among the Company, UBS
Capital Corporation (and assigned to UBS Partners) and Appian Capital Partners,
L.L.C.
'Unrestricted Subsidiary' means (i) PTC Cellular, Inc. and (ii) any other
Subsidiary of the Company designated as such pursuant to and in compliance with
the covenant 'Designation of Unrestricted Subsidiaries.' Any such designation
pursuant to clause (i) or (ii) may be revoked by a Board Resolution of the
Company delivered to the Trustee, subject to the provisions of such covenant;
provided that PTC Cellular, Inc. shall be an Unrestricted Subsidiary for so long
as it constitutes a Discontinued Operation.
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'Voting Stock' means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
'Wholly-Owned Restricted Subsidiary' means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company or another
Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form, without coupons. Except as described below, the Notes will be deposited
with, or on behalf of, The Depository Trust Company, New York, New York ('DTC'),
and registered in the name of Cede & Co. as DTC's nominee in the form of a
global Note certificate (the 'Global Certificate') or will remain in the custody
of the Trustee pursuant to the FAST Balance Certificate Agreement between DTC
and the Trustee.
Notes originally purchased by or transferred to (i) institutional
'accredited investors' (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not 'qualified institutional buyers' (as defined in Rule
144A under the Securities Act) ('QIBs'), (ii) except as described below, persons
outside the United States pursuant to sales in accordance with Regulation S
under the Securities Act or (iii) any other persons who are not QIBs
(collectively, 'Non-Global Purchasers') will be issued in registered form
without coupons (the 'Certificated Notes'). Upon the transfer to a QIB of
Certificated Notes initially issued to a Non-Global Purchaser, such Certificated
Notes will be exchanged for an interest in the Global Certificate or in the
Notes in the custody of the Trustee representing the principal amount at
maturity of Notes being transferred.
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EXCHANGE OFFER; REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement the Company will, at its
expense, for the benefit of the holders of the Notes, (i) use its best efforts
to file within 30 days after the Issue Date, a registration statement (the
'Exchange Offer Registration Statement') with the Commission with respect to a
registered offer to exchange the Old Notes for the Exchange Notes, which will
have terms identical in all material respects to the Old Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions) and
(ii) use its best efforts to cause the Exchange Offer Registration Statement to
be declared effective under the Securities Act within 90 days after the Issue
Date. The registration statement to which this Prospectus relates is the
Exchange Offer Registration Statement and was filed within the required period.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes in exchange for surrender of the Old
Notes. The Company will keep the Exchange Offer open for not less than 30 days
(or longer if required by applicable law) after the date notice of the Exchange
Offer is mailed to the holders of the Old Notes. For each Old Note surrendered
to the Company pursuant to the Exchange Offer, the holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note. Under existing interpretations of the staff of the
Commission, the Exchange Notes would in general be freely transferable after the
Exchange Offer without further registration under the Securities Act; provided
that broker-dealers ('Participating Broker-Dealers') receiving Exchange Notes in
the Exchange Offer will have a prospectus delivery requirement with respect to
resales of such Exchange Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of the Old Notes) with the prospectus contained in the
Exchange Offer Registration Statement. Under the Registration Rights Agreement,
the Company is required to allow Participating Broker-Dealers and other persons,
if any, with similar prospectus delivery requirements to use the prospectus
contained in the Exchange Offer Registration Statement in connection with the
resale of such Exchange Notes. For a period of at least 180 days after the
consummation of the Exchange Offer the Company will make available a prospectus
meeting the requirements of the Securities Act to any broker-dealer for use in
connection with any resale of any such Exchange Notes.
Each holder of Old Notes (other than certain specified holders) who wishes
to exchange such Old Notes for Exchange Notes in the Exchange Offer will be
required to make certain representations, including representations that any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business and that at the time of the commencement of the Exchange Offer it
has no arrangement with any person to participate in the distribution (within
the meaning of the Securities Act) of the Exchange Notes.
The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchaser against certain liabilities, including
liabilities under the Securities Act.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 120 days of the Issue Date,
or if a holder of the Notes is not permitted to participate in the Exchange
Offer or does not receive freely tradeable Exchange Notes pursuant to the
Exchange Offer or, under certain circumstances, if the Initial Purchaser or the
holders of a majority in aggregate principal amount of Notes so request, the
Company will, at its cost (a) as promptly as practicable and, in any event,
within 30 days thereafter, file a shelf registration statement (the 'Shelf
Registration Statement') covering resales of the Notes, (b) use its best efforts
to cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement for a period of three years after the Issue Date (or for
a period of one year after the Issue Date if such Shelf Registration Statement
is filed solely at the request of the Initial Purchaser). The Company will, in
the event a Shelf Registration Statement is declared effective, provide to each
holder of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales
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of the Notes. A holder of Notes that sells such Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification obligations).
If on or prior to 30 days following the Issue Date, an Exchange Offer
Registration Statement has not been filed with the Commission, additional
interest will accrue on the Notes from and including the 31st day following the
Issue Date until, but excluding, the date such registration statement is filed.
In addition, if on or prior to 90 days following the Issue Date, such Exchange
Offer Registration Statement is not declared effective, additional interest will
accrue on the Notes from and including the 91st day following the Issue Date
until, but excluding, the date such registration statement is declared
effective. Further, if on or prior to 120 days following the Issue Date the
Exchange Offer is not consummated, additional interest will accrue on the Notes
from and including the 121st day following the Issue Date until, but excluding,
the consummation of the Exchange Offer. If the law or applicable interpretations
of the Commission thereof prohibit a holder from participating in the Exchange
Offer or if such holder does not receive freely tradeable Exchange Notes
pursuant to the Exchange Offer or if for any reason the Exchange Offer is not
consummated within 120 days of the Issue Date, and if by 150 days after the
Issue Date a Shelf Registration Statement is not declared effective, additional
interest will accrue on the Notes not exchanged as a result of such law or
interpretation from and including the 151st day after the Issue Date, until the
effective date of the Shelf Registration Statement. In each case, additional
interest will be payable in cash semiannually in arrears, with the first
semiannual payment due on the first interest payment date in respect of the
Notes following the date from which additional interest begins to accrue, and
will accrue, under each circumstance set forth above at a rate per annum equal
to an additional one quarter of one percent (0.25%) of the principal amount of
the Notes upon the occurrence of each such circumstance, which rate will
increase by one quarter of one percent (0.25%) for each 90-day period that such
additional interest continues to accrue under any such circumstance, with an
aggregate maximum increase in the interest rate per annum equal to one percent
(1.00%).
If applicable, in the event that the Shelf Registration Statement ceases to
be effective prior to the third anniversary of the Issue Date (or the first
anniversary of the Issue Date if a Shelf Registration Statement was filed solely
at the request of the Initial Purchaser) for a period in excess of 15 days,
whether or not consecutive, in any given year, then, the interest rate borne by
the Notes shall increase by an additional one quarter of one percent (0.25%) per
annum on the 16th day in the applicable year such Shelf Registration Statement
ceases to be effective. Such interest rate will increase by an additional one
quarter of one percent (0.25%) per annum for each additional 90 days that such
Shelf Registration Statement is not effective, subject to the same aggregate
maximum increase in the interest rate per annum of one percent (1.00%) referred
to above. Upon the filing of the Exchange Offer Registration Statement, the
effectiveness of the Exchange Offer Registration Statement, or the consummation
of the Exchange Offer, as the case may be, the interest rate borne by the Notes
will be reduced by the full amount of any such increase to the extent that such
increase related to the failure of any such event to have occurred. Upon the
effectiveness of a Shelf Registration Statement, the interest rate borne by the
Notes shall be reduced to the original interest rate of the Notes unless and
until increased as described above.
Interest on each Exchange Note will accrue from July 19, 1995 or from the
most recent interest payment date to which interest was paid on the Note
surrendered in exchange therefor or on the Exchange Note, as the case may be.
The Exchange Notes will bear interest at 12 1/4% per annum, except that, if any
interest accrues on the Exchange Notes in respect of any period prior to their
issuance, such interest will accrue at the rate or rates borne by the Notes from
time to time during such period.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the
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Registration Rights Agreement, a copy of the form of which will be made
available to prospective purchasers of the Notes upon request to the Company.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange 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 Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. See 'The Exchange Offer' and 'Exchange
Offer; Registration Rights.'
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange 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 Exchange 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 concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
'underwriter' within the meaning of the Securities Act and any profit on any
such resale of Exchange 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.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay certain expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters regarding the Notes offered hereby will be passed
upon for the Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel,
P.A., Miami, Florida.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The financial statements of the Company as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994 included
in this Prospectus have been audited by Price Waterhouse LLP, independent
certified public accountants, as stated in their report appearing herein (which
contains an explanatory paragraph relating to the Company's ability to continue
as a going concern and relating to the ultimate outcome of certain litigation,
as described in Note 18 to the financial statements).
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the 'Registration
Statement') under the Securities Act with respect to the Exchange Notes offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company and the
Exchange Notes offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
filed as exhibits to the Registration Statement are not necessarily complete,
and, in each instance, reference is made to the copy of the document so filed.
Each such statement is qualified in its entirety by such reference. The Company
is subject to the informational requirements of the Exchange Act, and in
accordance therewith files periodic reports, proxy statements and other
information with the Commission. The Registration Statement and such other
materials can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549; and at the Commission's regional offices at Suite 1400, Northwestern
Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511, and at the
13th Floor, 7 World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Commission at prescribed rates through
its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
While any Notes remain outstanding, the Company will make available, upon
request, to any holder and any prospective purchaser of Notes the information
required pursuant to Rule 144A(d) (4) under the Securities Act during any period
in which the Company is not subject to Section 13 or 15(d) of the Exchange Act.
Any such request should be directed to the Chief Financial Officer, Peoples
Telephone Company, Inc., 2300 N.W. 89th Place, Miami, Florida 33172, (305)
593-9667.
The Indenture provides that the Company will furnish copies of the periodic
reports required to be filed with the Commission under the Exchange Act to the
holders of the Notes. If the Company is not subject to the periodic reporting
and informational requirements of the Exchange Act, it will, to the extent such
filings are accepted by the Commission, and whether or not the Company has a
class of securities registered under the Exchange Act, file with the Commission,
and provide the Trustee and the holders of the Notes within 15 days after such
filings with, annual reports containing the information required to be contained
in Form 10-K promulgated under the Exchange Act, quarterly reports containing
the information required to be contained in Form 10-Q promulgated under the
Exchange Act, and from time to time such other information as is required to be
contained in Form 8-K promulgated under the Exchange Act. If filing such reports
with the Commission is not accepted by the Commission or prohibited by the
Exchange Act, the Company will also provide copies of such reports, at its cost,
to prospective purchasers of the Notes promptly upon written request.
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GLOSSARY
Billed Party Preference is a plan that would automatically route long
distance non-coin calls at the pay telephone to the 'billed party's' preferred
carrier, thereby bypassing the opportunity for the pre-subscribed carrier of the
public pay telephone provider to handle and receive revenues from the call.
Dial Around Compensation is compensation paid to competitive public pay
telephone providers for the use of public pay telephones to access operator
service providers or interexchange carriers other than the primary operator
service providers selected by the owner of the public pay telephone. The FCC
ruled on May 8, 1992 that competitive public pay telephone providers would
receive $6.00 per telephone/per month as compensation for interstate dial around
calls. This flat rate system was made effective in June 1992. The per
telephone/per month system will remain in effect until replaced by a per call
compensation system, now under development. Recently AT&T has agreed to begin
providing its share of dial around compensation through a $.25 per call flat
rate payment in lieu of AT&T's portion of the flat monthly rate payment amounts.
This handling was approved by the FCC, effective January 1, 1995. The same
treatment will be applied for AT&T at the intrastate level, once any necessary
state approvals are obtained. Sprint has recently received FCC approval to begin
paying its dial around compensation on a flat rate basis of $0.25 per call in
lieu of its share of the $6.00 flat rate, effective July 1, 1995.
FCC is the Federal Communications Commission, which regulates the
interstate common carriage of telecommunications.
Interexchange carrier is a telecommunications provider of transmission
services between exchanges, typically referred to as long-distance or toll
telephone service.
InterLATA calls are calls between local access and transport areas
('LATAs').
IntraLATA calls are calls originated and terminated in the same LATA.
LEC is a local exchange carrier, which is a company providing local
telephone services.
Non-coin calls are calling card, credit card, collect and third party
billed calls, not paid for with coinage at the pay telephone.
Operator service provider is a company providing automatic and/or live
operator service related to long distance calls.
Property Owners are the owners of (i) the locations, such as convenience
stores, service stations, grocery stores, hospitals, hotels, shopping centers,
truck stops and airports, at which public pay telephones are installed; (ii)
correctional facilities at which telephones are located; and (iii) car rental
companies at which cellular telephones are rented.
Public Switched Network is the traditional telephone network, including
local, intraLATA and interLATA facilities used to carry, switch and connect
telephone calls between the calling and called parties.
RBOCs are the seven Regional Bell Operating Companies, which were formed as
a result of the AT&T divestiture.
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PEOPLES TELEPHONE COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994:
Report of Independent Certified Public Accountants.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994 (Restated)..................................... F-3
Consolidated Statements of Operations
for the years ended December 31, 1992, 1993 and 1994 (Restated)........................................... F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1992, 1993 and 1994 (Restated)........................................... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1992, 1993 and 1994 (Restated)........................................... F-6
Notes to Consolidated Financial Statements (Restated)....................................................... F-8
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1995 (UNAUDITED):
Consolidated Balance Sheets
as of December 31, 1994 and March 31, 1995 (Restated)..................................................... F-26
Consolidated Statements of Operations
for the First Quarters ended March 31, 1994 and 1995 (Restated)........................................... F-27
Consolidated Statements of Cash Flows
for the First Quarters ended March 31, 1994 and 1995 (Restated)........................................... F-28
Notes to Consolidated Financial Statements (Restated)....................................................... F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Peoples Telephone Company, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Peoples Telephone Company, Inc. and its subsidiaries at December 31,
1994 and 1993, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As more fully described in Note 18 to
the accompanying financial statements, the Company's failure to make an April
1995 payment due on a promissory note and the restatement of the Company's first
quarter 1994 financial statements on Form 10-Q has caused a default under the
Company's $100 million revolving line of credit and under the Company's mortgage
note agreement. The Company obtained from the lenders a waiver of default
related to its first quarter 1994 restatement and subject to certain conditions
being met by the Company by June 30, 1995, obtained a waiver of default arising
from its failure to make the April 1995 payment on a promissory note. With
respect to its mortgage note agreement, the Company obtained a waiver subject to
the condition that on or before the earlier of one day after the closing of the
Senior Note offering or August 31, 1995, the mortgage note and all other
obligations owed the mortgage lender be paid in full. In the event the
conditions are not satisfied by their prescribed dates, the waivers would be
withdrawn, an event of default under the revolving line of credit and the
mortgage note agreement would exist and the lenders would have the right to call
the loans. Also, should the Company satisfy the aforementioned conditions by the
prescribed dates, the Company's remaining balance of its revolving line of
credit is due in full on May 31, 1996. The Company is in the process of offering
under an exemption from the registration requirements of the Securities Act of
1933, $85 million of Senior Notes due 2002; the proceeds of which, if such
offering is successful, together with a proposed $40 million credit agreement,
will be used to repay the outstanding balance of the existing line of credit,
promissory notes and the mortgage note. As a result, a substantial doubt arises
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 14 and in Note 18 to the accompanying financial
statements, a complaint has been filed against the Company and certain officers.
Such complaint, filed May 25, 1994 and amended May 26, 1995, alleges violation
of certain federal securities laws through the issuance of false and misleading
statements regarding a failed merger. The complaint seeks class action
certification as well as compensatory damages. In addition, the aforementioned
promissory note holder has asserted certain other claims against the Company. At
the present time, the litigation matters are in the preliminary stages and
management, on the advice of legal counsel, is presently unable to predict the
ultimate outcome of the litigation. Accordingly, no provision for any liability
that may result upon adjudication has been made in the accompanying financial
statements.
PRICE WATERHOUSE LLP
Miami, Florida
March 28, 1995, except as to the second paragraph of Note 17 and
as to Note 18, which are as of May 31, 1995.
F-2
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEET (RESTATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 4,529 $ 7,663
Accounts receivable, net of allowance for doubtful accounts
of $2,115 and $6,035............................................................. 19,082 17,682
Inventory........................................................................... 1,955 2,981
Prepaid expenses and other current assets........................................... 3,878 3,276
Net assets of prepaid calling card and international telephone centers held for
sale........................................................................... -- 2,595
Net assets of discontinued operations............................................... -- 25,780
-------- --------
Total current assets............................................................. 29,444 59,977
Property and equipment, net........................................................... 89,703 76,379
Location contracts, net............................................................... 27,611 31,877
Goodwill, net......................................................................... 12,308 6,221
Intangible assets, net................................................................ 6,144 2,802
Other assets, net..................................................................... 8,132 11,882
Deferred income taxes................................................................. -- 1,453
-------- --------
Total assets..................................................................... $173,342 $190,591
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable and current maturities of long-term debt.............................. $ 2,876 $ 14,286
Current portion of obligations under capital leases................................. 1,644 2,738
Accounts payable and accrued expenses............................................... 22,831 21,942
Accrued interest payable............................................................ 533 1,061
Deferred revenue.................................................................... -- 857
Income and other taxes payable...................................................... 887 2,691
-------- --------
Total current liabilities........................................................ 28,771 43,575
Notes payable and long-term debt...................................................... 73,995 94,390
Obligations under capital leases...................................................... 1,267 3,911
Deferred income taxes................................................................. 3,701 --
-------- --------
Total liabilities................................................................ 107,734 141,876
-------- --------
Minority interest..................................................................... 275 --
Commitments and contingencies (Note 14)............................................... -- --
Shareholders' equity.................................................................. -- --
Preferred stock; $.01 par value; 4,300 shares authorized;
none issued and outstanding...................................................... -- --
Convertible preferred stock; Series A, $.01 par value;
100 shares authorized; none issued and outstanding............................... -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding............................... -- --
Common stock; $.01 par value; 25,000 shares authorized;
15,516 and 15,789 shares issued and outstanding.................................. 155 158
Capital in excess of par value...................................................... 56,371 58,143
Retained earnings (accumulated deficit)............................................. 8,807 (9,586)
-------- --------
Total shareholders' equity....................................................... 65,333 48,715
-------- --------
Total liabilities and shareholders' equity....................................... $173,342 $190,591
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
------- ------- --------
<S> <C> <C> <C>
Revenues
Coin calls................................................................... $44,203 $56,604 $ 79,392
Non-coin calls............................................................... 26,828 22,245 33,054
Service and other............................................................ 452 552 1,675
------- ------- --------
Total revenues............................................................ 71,483 79,401 114,121
------- ------- --------
Costs and expenses
Telephone charges............................................................ 22,160 18,398 41,264
Commissions.................................................................. 14,868 17,584 23,565
Field service and collection................................................. 9,818 11,994 18,608
Depreciation and amortization................................................ 9,900 12,958 19,185
Selling, general and administrative.......................................... 7,188 7,368 13,043
Interest..................................................................... 2,630 2,504 5,312
Loss from operations of prepaid calling card and international telephone
centers................................................................. -- 1,730 1,816
Loss on disposal of prepaid calling card and international
telephone centers......................................................... -- -- 3,690
------- ------- --------
Total costs and expenses.................................................. 66,564 72,536 126,483
------- ------- --------
Income (loss) from continuing operations before taxes.......................... 4,919 6,865 (12,362)
(Provision for) benefit from income taxes...................................... (1,774) (2,586) 4,722
------- ------- --------
Income (loss) from continuing operations....................................... 3,145 4,279 (7,640)
------- ------- --------
Discontinued operations
Income (loss) from operations, net of tax (provision) benefit of $(57),
$(445), and $1,976...................................................... 109 1,063 (3,433)
Loss on disposition, net of tax provision of $1,885.......................... -- -- (7,320)
------- ------- --------
Income (loss) from discontinued operations................................... 109 1,063 (10,753)
------- ------- --------
Net income (loss)......................................................... $ 3,254 $ 5,342 $(18,393)
------- ------- --------
------- ------- --------
Primary earnings per share
Income (loss) from continuing operations..................................... $ .27 $ .30 $ (.49)
Income (loss) from discontinued operations................................... .01 .07 (.68)
------- ------- --------
Net income (loss)......................................................... $ .28 $ .37 $ (1.17)
------- ------- --------
------- ------- --------
Fully diluted earnings per share
Income (loss) from continuing operations..................................... $ .27 $ .30 $ (.49)
Income (loss) from discontinued operations................................... .01 .07 (.68)
------- ------- --------
Net income (loss)......................................................... $ .28 $ .37 $ (1.17)
------- ------- --------
------- ------- --------
Weighted average common and common equivalent
shares outstanding........................................................... 11,633 14,479 15,713
------- ------- --------
------- ------- --------
Weighted average common shares outstanding
assuming full dilution....................................................... 11,686 14,517 15,713
------- ------- --------
------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (RESTATED)
FOR THE PERIOD FROM JANUARY 1, 1992 THROUGH DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
CAPITAL EARNINGS
PREFERRED COMMON IN EXCESS (ACCUMULATED
STOCK STOCK OF PAR VALUE DEFICIT) TOTAL
--------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1992................................. $ 1 $ 77 $ 11,961 $ 301 $ 12,340
Exercise of 782 warrants at $3.17-$4.67 per share.......... -- 8 3,191 -- 3,199
Exercise of 1,025 options at $1.33-$3.59 per share......... -- 10 2,323 -- 2,333
Issuance of 1,064 shares of common stock
for acquisitions......................................... -- 11 6,591 -- 6,602
Conversion of 20 shares of Series A preferred stock (1) 5 (4) -- --
Issuance costs in connection with acquisitions............. -- -- (34) -- (34)
Preferred stock dividends.................................. -- -- -- (90) (90)
Net income for the year.................................... -- -- -- 3,254 3,254
--------- ------- ------------ ------------ --------
Balance at December 31, 1992............................... $ -- $ 111 $ 24,028 $ 3,465 $ 27,604
--------- ------- ------------ ------------ --------
--------- ------- ------------ ------------ --------
Exercise of 540 warrants at $3.17-$4.67 per share.......... -- 5 1,721 -- 1,726
Exercise of 1,754 options at $2.00-$8.00 per share......... -- 18 6,245 -- 6,263
Issuance of 621 shares of common stock
for acquisitions......................................... -- 6 7,084 -- 7,090
Issuance of 1,500 shares of common stock in
public offering.......................................... -- 15 13,985 -- 14,000
Issuance costs associated with public offering of common
stock.................................................... -- -- (1,160) -- (1,160)
Tax adjustment related to exercising options............... -- -- 4,468 -- 4,468
Net income for the year.................................... -- -- -- 5,342 5,342
--------- ------- ------------ ------------ --------
Balance at December 31, 1993............................... $ -- $ 155 $ 56,371 $ 8,807 $ 65,333
--------- ------- ------------ ------------ --------
--------- ------- ------------ ------------ --------
Exercise of 150 warrants at $3.17 per share................ -- 2 473 -- 475
Exercise of 177 options at $2.67-$7.83 per share........... -- 2 829 -- 831
Cancellation of 54 shares relating to
prior acquisitions....................................... -- (1) (499) -- (500)
Tax adjustment related to exercising options............... -- -- 255 -- 255
Adjustment for issuance of warrants to a bank.............. -- -- 2,520 -- 2,520
Officer and director notes receivable...................... -- -- (1,806) -- (1,806)
Net loss for the year...................................... -- -- -- (18,393) (18,393)
--------- ------- ------------ ------------ --------
Balance at December 31, 1994............................... $ -- $ 158 $ 58,143 $ (9,586) $ 48,715
--------- ------- ------------ ------------ --------
--------- ------- ------------ ------------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $ 3,254 $ 5,342 $(18,393)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities
Depreciation and amortization........................................... 9,900 12,958 19,185
Deferred income taxes................................................... 1,625 3,192 (3,094)
Loss on disposition of assets........................................... -- -- 7,320
Gain on sale of assets.................................................. -- -- (2,426)
Changes in assets and liabilities, excluding the
effect of acquisitions
(Increase) decrease in accounts receivable............................ (3,206) (10,515) 1,400
Increase in inventory................................................. (735) (213) (110)
Increase in prepaid expenses and other current assets................. (62) (3,240) (97)
Increase in other assets.............................................. (852) (3,502) (4,015)
Increase (decrease) in accounts payable and accrued expenses.......... 2,033 12,691 (2,780)
Decrease in other payables............................................ (1,005) (288) --
Decrease in estimated refund due operator
service provider................................................... (653) -- --
Increase in accrued interest payable.................................. 91 333 528
Increase in deferred revenue.......................................... -- -- 824
Increase in income taxes payable...................................... 381 67 1,995
Increase (decrease) in other long term liabilities.................... 195 (194) --
Increase (decrease) in minority interest.............................. -- 275 (275)
Net effect of discontinued operations and assets held for sale........ 219 3,151 (2,234)
-------- -------- --------
Net cash provided by (used in) operating activities................ 11,185 20,057 (2,172)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions........................................... (9,677) (24,119) (9,590)
Proceeds from property and equipment sales................................. -- -- 3,050
Payments for acquisitions and certain contracts............................ (15,854) (46,653) (16,271)
Contributions to joint ventures............................................ -- (2,701) (211)
-------- -------- --------
Net cash used in investing activities.............................. (25,531) (73,473) (23,022)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt............................................ 10,500 49,360 31,252
Principal payments on long-term debt....................................... -- (11,761) (116)
Principal payments under capital lease obligations......................... (1,306) (2,761) (2,308)
Debt issuance costs........................................................ -- (643) --
Dividends paid on preferred stock.......................................... (90) -- --
Exercise of stock options.................................................. 2,333 6,263 831
Exercise of warrants....................................................... 3,199 1,727 475
Officer and director notes receivable...................................... -- -- (1,806)
Proceeds from stock offering............................................... -- 14,000 --
Issuance costs associated with public offering of common stock............. -- (1,160) --
-------- -------- --------
Net cash provided by financing activities.......................... 14,636 55,025 28,328
-------- -------- --------
Net increase in cash and cash equivalents.................................... 290 1,609 3,134
Cash and cash equivalents at beginning of year............................... 2,630 2,920 4,529
-------- -------- --------
Cash and cash equivalents at end of year..................................... $ 2,920 $ 4,529 $ 7,663
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest................................................................ $ 2,731 $ 2,711 $ 4,784
-------- -------- --------
-------- -------- --------
Income taxes............................................................ $ 70 $ 490 $ 201
-------- -------- --------
-------- -------- --------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1992, the Company purchased all of the stock of three corporations
for a combination of cash and the Company's common stock. During 1993 and 1994,
the Company purchased certain net assets of several corporations for a
combination of cash, the Company's common stock and the issuance of notes
payable. A summary of these acquisitions is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Fair value of net assets acquired........................................ $ 17,984 $ 60,631 $ 22,882
Fair value of common stock issued and issuable........................ (6,601) (7,090) (1,096)
Principal amount of note payables issued and other liabilities -- (7,868) (6,687)
-------- -------- --------
Net amount paid....................................................... $ 11,383 $ 45,673 $ 15,099
-------- -------- --------
-------- -------- --------
</TABLE>
During 1992, 13,210 shares of Series A convertible preferred stock were
converted to common stock.
During the three years ended December 31, 1992, 1993 and 1994, the Company
acquired fixed assets of $1,834,000, $1,211,000 and $2,456,000, respectively, by
incurring capital lease obligations for the same amounts.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NOTE 1--GENERAL
Description of business
Peoples Telephone Company, Inc. (the 'Company') owns, operates and
maintains public pay telephone systems, connected to the network of regulated
telephone companies, throughout the United States, at various third party
property owner locations. In connection with the pay telephone systems, the
Company also derives revenue from routing calls to operator service companies
through its own automated operator system installed in its telephones and
through its own dedicated network facilities.
Discontinued operations
In December 1994, in an effort to return the Company's focus to its core
public pay telephone business, the Company's Board of Directors approved the
divestiture of its inmate telephone and cellular telephone operations (see Note
16).
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The Global Link equity interest
will be accounted for under the equity method of accounting subsequent to the
divestiture date. Accordingly, the 1994 results of operations have been
segregated and are reported as a separate component of income from continuing
operations (see Note 15). The planned divestiture of the Company's inmate
telephone and cellular telephone operations has been accounted for as
discontinued operations. Accordingly, operating results and cash flows for these
businesses have been segregated and reported as discontinued operations in the
accompanying consolidated statements of operations and cash flows (see Note 16).
Acquisitions and joint ventures
During 1992, the Company acquired all of the outstanding shares and certain
assets of various corporations with operations similar to the Company for a
total of $12.9 million in cash and the Company's common stock.
During 1993, the Company acquired certain net assets of several
corporations with operations similar to the Company for a total of $60.6 million
in cash, common stock and notes payable. The most significant acquisition during
1993 was the purchase of substantially all assets of Ascom Communications, Inc.
('ACI') in November 1993 for $40 million which consisted of $28 million funded
by the Company's credit facilities, two promissory notes totalling $6 million
and $6 million of the Company's stock (see Note 6 for the terms of the notes).
The ACI acquisition added 11,600 public pay telephones and included dedicated
switched network facilities installed in five states.
During March 1994, the Company acquired certain assets of Emro Marketing
Company for a purchase price of $1.7 million in cash. The assets acquired
included approximately 1,045 pay telephones.
During June 1994, the Company acquired certain assets of the Atlantic Telco
Joint Venture for approximately $11.5 million in cash. The Atlantic Telco Joint
Venture owned and operated approximately
F-8
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL--(CONTINUED)
3,300 pay telephones and related location contracts. These phones are located
primarily in Maryland and Virginia.
During July 1994, the Company acquired certain assets of Telecorp Funding,
Inc. for approximately $1.9 million in cash and the Company's common stock. The
assets acquired included approximately 600 public pay phones and related
location contracts located primarily in New York City.
During October 1994, the Company acquired Telecoin Communications, Ltd. for
approximately $7.3 million in cash, assumption of liabilities and issuance of
the Company's common stock. The assets acquired included approximately 2,155 pay
telephones and their related location contracts. These phones are located
primarily in Ohio and Pennsylvania.
All 1992, 1993 and 1994 acquisitions were accounted for as purchases.
The following unaudited consolidated pro forma combined condensed
statements of operations for the years ended December 31, 1993 and 1994 has been
prepared to reflect 1994 acquisitions by the Company, as if they were
consummated as of January 1, 1993, after giving effect to certain pro forma
adjustments as described below (in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1993 1994
------- --------
<S> <C> <C>
Total revenue.............................................................. $98,560 $125,853
------- --------
------- --------
Net income (loss) from continuing operations............................... $ 4,785 $ (7,906)
------- --------
------- --------
Earnings (loss) per common and common equivalent share
Primary.................................................................. $ .33 $ (.50)
------- --------
------- --------
Fully diluted............................................................ $ .33 $ (.50)
------- --------
------- --------
</TABLE>
Pro forma adjustments reflect depreciation of fixed assets and amortization
of intangible assets acquired, accrual of interest expense on the cash paid for
the purchase and accrual for income taxes.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of revenue
Revenues are recognized when earned. Coin call and non-coin call (alternate
operator service and store and forward) revenues are recognized at the time the
call is made. Revenue from service contracts is recognized on a straight-line
basis over the term of the contract.
Cash and cash equivalents
The Company defines cash and cash equivalents as those highly liquid
investments purchased with an original maturity of three months or less.
F-9
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
commencing when the equipment is installed or placed in service. Installed
telephones and related equipment includes installation and other costs which are
capitalized and amortized over the estimated useful life of the equipment. The
costs associated with maintenance, repairs and refurbishment of telephone
equipment are charged to expense as incurred.
Effective October 1, 1993, the Company revised its depreciation policy to
recognize an extended estimated service life on its pay telephones from 7 to 10
years. The change in pay telephone depreciation reduced depreciation expense and
increased net income by approximately $470,000 and $3,766,000, or $.03 and $.24
per common share, for the years ended December 31, 1993 and 1994, respectively.
The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and included with depreciation expense in the statement of income.
Inventories
Inventories, which consist primarily of replacement parts, are carried at
the lower of cost or market, with cost being determined on the first-in,
first-out basis.
Intangible assets
Location contracts and intangible assets primarily result from business
combinations and include acquisition costs allocated to location owner
contracts, agreements not to compete, and other identifiable intangible assets.
These assets are being amortized on a straight-line basis over the estimated
life, assuming, in some instances, renewal of the underlying contracts (3 to 10
years). Accumulated amortization at December 31, 1992, 1993 and 1994 was
approximately $2,831,000, $5,505,000 and $8,486,000, respectively.
Goodwill primarily arising from acquisitions is being amortized on a
straight-line basis over periods to be benefitted, or 20 years, whichever is
less. Accumulated amortization at December 31, 1992, 1993 and 1994 was
approximately $260,000, $551,000 and $820,000, respectively.
The carrying value of intangible assets is periodically reviewed by the
Company and impairments, if any, are recognized when the expected future
undiscounted cash flows derived from such intangible assets are less than their
carrying value.
Investments
Investments in which the Company has an ownership interest of at least 20
percent but not more than 50 percent are accounted for under the equity method.
Investments of less than 20 percent are generally recorded at cost.
F-10
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Income taxes
Effective January 1, 1991, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. Deferred income taxes are recognized for temporary differences between
the tax and financial reporting bases of the Company's assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse.
Earnings per share
Primary per share amounts are computed based upon the weighted average
number of common and common equivalent shares outstanding, assuming proceeds
from the assumed exercise of options were used to purchase common shares
outstanding at the average market price during the period, unless such exercise
is antidilutive. Fully diluted earnings per share assumes that the proceeds were
used to purchase common shares outstanding at the higher of market value per
share at the end of each period or the average market value during the period,
unless such exercise is antidilutive (see Note 11).
Reclassification
Certain amounts for the prior years have been reclassified to conform with
the current year presentation.
NOTE 3--ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1993 and 1994 consist primarily of
amounts due from a billing and collection clearinghouse for non-coin calls
placed through the Company's public pay telephones, and to a lesser extent,
commissions from various operator service companies who have been selected to
handle non-coin calls not placed through the Company's automated operator
system. Pursuant to the Company's agreement with the billing and collection
clearinghouse, the collections from LECs are deposited into a trust account and
then distributed directly to the Company. The balance due from one billing and
collection clearinghouse was approximately $623,000 and $4,027,000 at December
31, 1993 and 1994, respectively.
Included in the December 31, 1993 and 1994 accounts receivable balance is
approximately $1,712,000 and $980,000, respectively, of net receivables relating
to the Company's refund claims for overpayment of excise taxes from the Internal
Revenue Service and certain state sales and use taxes from various local
exchange carriers. These refund claims have been reflected as a reduction of
telephone charges in the accompanying consolidated statements of income and were
recorded throughout 1993 as the refund claims were finalized.
The December 31, 1994 allowance for doubtful accounts includes
approximately $1.6 million representing additional receivables reserves related
to vendor disputes.
F-11
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
-------------------- USEFUL LIVES
1993 1994 (IN YEARS)
-------- -------- ------------
<S> <C> <C> <C>
Installed telephones and related equipment, including $659 and
$3,518 under capital leases.................................... $100,916 $ 93,769 10
Telephones and related equipment pending installation............ 7,337 7,388
Land............................................................. 950 950
Building and improvements........................................ 3,667 4,252 25
Furniture, fixtures and office equipment......................... 5,523 5,699 5-7
Vehicles under capital leases.................................... 3,512 4,902 4
Other............................................................ 1,286 1,178 5
-------- --------
123,191 118,138
Less accumulated depreciation and amortization, including $723
and $1,204 for capital leases.................................. (33,488) (41,759)
-------- --------
$ 89,703 $ 76,379
-------- --------
-------- --------
</TABLE>
The majority of the Company's installed telephones are security for
long-term bank debt (see Note 6).
The Company has entered into various noncancellable leases which are
classified as capital leases. Future minimum lease payments under the
capitalized lease obligations, including imputed interest, are as follows (in
thousands):
<TABLE>
<CAPTION>
INSTALLED
FOR THE YEAR ENDING TELEPHONES AND
DECEMBER 31, EQUIPMENT VEHICLES TOTAL
----------------------------------------------------------------- -------------- -------- -------
<S> <C> <C> <C>
1995............................................................. $ 1,381 $ 1,645 $ 3,026
1996............................................................. 1,021 1,227 2,248
1997............................................................. 841 652 1,493
1998............................................................. 734 86 820
1999............................................................. 36 -- 36
-------------- -------- -------
4,013 3,610 7,623
Less amount representing imputed interest........................ (495) (479) (974)
-------------- -------- -------
Present value of obligations under capital leases................ 3,518 3,131 6,649
Less current portion............................................. (1,380) (1,358) (2,738)
-------------- -------- -------
$ 2,138 $ 1,773 $ 3,911
-------------- -------- -------
-------------- -------- -------
</TABLE>
F-12
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994
------- -------
<S> <C> <C>
Telecommunication charges........................................................ $ 6,185 $ 8,569
Commissions...................................................................... 3,343 3,272
Telephone equipment purchased.................................................... 4,792 254
Due on acquisitions.............................................................. 1,831 3,077
Other............................................................................ 6,680 6,770
------- -------
$22,831 $21,942
------- -------
------- -------
</TABLE>
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1994
------- --------
<S> <C> <C>
$125 million revolving line of credit ($70 million as of December 31, 1993) with
interest rates ranging from the Bank's prime rate plus 1 1/4% to LIBOR plus
2 1/2%. At December 31, 1994, the Bank's prime rate was 8.5% and the LIBOR
rate ranged from 6.125% to 7%. See maturity dates below....................... $67,500 $100,240
Five-year promissory note to Ascom Communications, Inc. with interest rate at 7%
and entire principal due at maturity November 1998............................ 4,000 4,000
Mortgage note payable with interest rate at 7.38% and amortization over 15
years, due in March 1998...................................................... 2,599 2,513
One year promissory note to Ascom Communications, Inc. with interest rate at 5%
and principal due in installments in April 1995 and in June 1995.............. 2,000 1,232
Various notes payable acquired through the acquisition of Telecoin
Communications, Ltd. with interest rates ranging from prime plus 1.25% to
prime plus 1.5% and maturity dates ranging from due on demand to June 1996.... -- 669
Other........................................................................... 772 22
------- --------
76,871 108,676
Less current maturities......................................................... (2,876) (14,286)
------- --------
$73,995 $ 94,390
------- --------
------- --------
</TABLE>
Effective February 17, 1994, the Company amended and restated its loan
agreement with the Bank (the 'Third Amended Loan Agreement'). Under the terms of
the Third Amended Loan Agreement, the $30 million revolving line of credit was
increased to $125 million and the previous $30 million and $10 million
F-13
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT--(CONTINUED)
term loans were eliminated. All outstanding principal balances are due in full
on February 17, 1998 and interest is payable monthly for loans based on the
prime rate and quarterly for loans based on the LIBOR rate. A commitment fee of
3/8 of 1% is charged on the aggregate average daily amount not outstanding
under this agreement. The Third Amended Loan Agreement is secured by
substantially all of the Company's assets (see Notes 4 and 7).
The Third Amended Loan Agreement contains certain restrictive covenants
which, among other things, require the Company to maintain certain net worth and
cash flow levels and places certain restrictions on the payments of dividends.
At December 31, 1994, the Company was not in compliance with certain covenants
contained in its loan agreement. On March 22, 1995, the Company amended certain
terms contained in the Third Amended Loan Agreement (the 'Amendment'). In
connection with the Amendment, the Bank agreed to waive the Company's
non-compliance with certain covenants for the three month period ended December
31, 1994. Under the terms of the Amendment, the $125 million revolving line of
credit was reduced to $100 million, with monthly principal reductions of $1.5
million commencing on May 1, 1995 and all outstanding principal balances due in
full on May 31, 1996. The new facility bears interest at the Bank's prime rate
plus 2% beginning April 1, 1995 and reduces certain restrictive covenants for
1995 which, among other things, require the Company to maintain certain net
worth and cash flow levels and places certain restrictions on the payment of
dividends (see Note 18).
In March 1993, the Company purchased land and an office building which
became the principal offices of the Company. The purchase was financed with a
bank in the principal amount of $2.7 million. Principal and interest payments
are based on a 15 year amortization schedule, are payable monthly with a balloon
payment due March 1998 and bear interest at a rate of 7.38%.
Future maturities under the terms of the notes, based on amounts
outstanding as of December 31, 1994, are as follows (in thousands):
1995........................................................ $ 14,286
1996........................................................ 88,125
1997........................................................ 135
1998........................................................ 6,130
--------
$108,676
--------
--------
NOTE 7--SHAREHOLDERS' EQUITY
In 1990, 1992, 1993 and 1994 under the terms of the Company's loan
agreement, as amended, the Company granted its lender warrants to purchase
900,000, 150,000, 300,000 and 250,000 shares of common or preferred stock,
respectively. The exercise price of these shares is $3.17, $8.00, $9.33 and
$9.00 per share, respectively. The Company's lender exercised its right to
purchase 300,000, 450,000 and 150,000 shares of common stock at $3.17 per share
during 1992, 1993 and 1994, respectively. All warrants expire in the year 2000.
On August 31, 1993, the Company effected a 3 for 2 stock split effective
September 27, 1993. The consolidated financial statements and related financial
information have been retroactively adjusted to reflect the 3 for 2 split.
F-14
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 7--SHAREHOLDERS' EQUITY--(CONTINUED)
In August 1993, the Company completed the sale of 1,500,000 shares of its
common stock in a registered private placement. After the deduction of the
underwriting discount and other expenses of the private placement, the net
proceeds to the Company were $12.8 million.
The Company's preferred stock may be issued from time to time at the
discretion of the Board of Directors without shareholder approval. The Board of
Directors is authorized to issue these shares in different series and, with
respect to each series, to determine the dividend rate, provisions regarding
redemption, conversion, liquidation preference and other rights and privileges.
In August 1988, the Company sold 90,000 shares of its previously authorized
common stock. The sale consisted of 45,000 units at a price of $7.00 per unit.
Each unit consisted of two shares of common stock together with one warrant to
purchase a share of common stock at $4.33 and a share of common stock at $4.66.
The warrants were exercised during 1993.
NOTE 8--STOCK OPTION PLANS
The Company maintains three non-qualified stock option plans covering
primarily employees and directors. Options under the three plans are issuable at
the discretion of committees appointed by the Board of Directors. Certain
options under the plans vest at rates of 10% and 33% per year from the date of
issuance and may expire 30 days after the termination or resignation of the
employee or director.
Under the terms of the plans, the exercise price for options granted is
required to be at least the fair market value of the Company's common stock on
the date of grant.
The following summarizes pertinent information covering stock options
issued pursuant to the Company's stock option plans (in thousands, except per
share data):
<TABLE>
<CAPTION>
NUMBER OF SHARES
-------------------------------------------
1992 1993 1994
----------- ------------ ------------
<S> <C> <C> <C>
Outstanding, beginning of year........................ 3,136 2,797 1,803
Granted............................................... 697 776 1,198
Exercised............................................. (1,025) (1,754) (177)
Cancelled............................................. (11) (16) (30)
----------- ------------ ------------
Outstanding, end of year.............................. 2,797 1,803 2,794
----------- ------------ ------------
----------- ------------ ------------
Exercisable, end of the year.......................... 2,418 1,425 1,975
----------- ------------ ------------
----------- ------------ ------------
Option price per share of outstanding shares.......... $1.33-$6.00 $1.33-$11.38 $1.33-$11.38
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
F-15
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 9--EMPLOYEE SAVINGS PLAN
During November 1990, the Company established a savings plan under the
provisions of section 401(k) of the Internal Revenue Code (the 'Plan'), which
covers substantially all employees. The Company's contributions to the Plan are
discretionary. Employees participating in the Plan vest in amounts contributed
by the Company over a period of 7 years. The Company matches 25% of employee
contributions to a maximum of 6% of employee earnings each plan year. The
Company's contributions totalled approximately $50,000, $54,000 and $103,000 for
the years ended December 31, 1992, 1993 and 1994, respectively.
NOTE 10--INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1992, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
------ ------ -------
<S> <C> <C> <C>
Currently payable:
Federal............................................... $ 543 $ (230) $ --
State................................................. 97 86 63
Deferred................................................ 1,134 2,730 (4,785)
------ ------ -------
$1,774 $2,586 $(4,722)
------ ------ -------
------ ------ -------
</TABLE>
A tax benefit of $4.75 million and $680,000 attributable to the exercise of
employee stock options was credited to shareholders' equity during 1993 and
1994, respectively.
A reconciliation between the tax rates and tax at statutory rates for the
years ended December 31, 1992, 1993 and 1994 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------
1992 1993 1994
---- ---- -----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 35.0% (34.0)%
Non-deductible expenses.................................... -- 1.3 (2.7)
State taxes and other, net................................. 2.1 1.4 (1.5)
---- ---- -----
36.1% 37.7% (38.2)%
---- ---- -----
---- ---- -----
</TABLE>
F-16
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 10--INCOME TAXES--(CONTINUED)
The significant temporary differences included in the deferred tax asset
(liability) as of December 31, 1993 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1993 1994
------- -------
<S> <C> <C>
Net operating loss carryforward.................................................. $ 5,801 $11,166
Alternative Minimum Tax Credit carryforward...................................... 218 218
Other............................................................................ 872 972
------- -------
Total deferred tax asset......................................................... 6,891 12,356
------- -------
Difference between book and tax bases of fixed assets............................ 9,145 9,738
Other............................................................................ 1,447 1,165
------- -------
Total deferred tax liability..................................................... 10,592 10,903
------- -------
Net deferred tax asset (liability)............................................... $(3,701) $ 1,453
------- -------
------- -------
</TABLE>
At December 31, 1994, the Company has tax net operating loss carryforwards
of approximately $35 million, which expire in various amounts in the years 2002
to 2009. Approximately $3.2 million of these net operating loss carryforwards
relate to business acquisitions for which annual utilization will be limited to
approximately $330,000, with further limitation if future ownership changes
occur. In addition, these loss carryforwards can only be utilized against future
taxable income, if any, generated by acquired companies as if these companies
continued to file separate income tax returns.
NOTE 11--EARNINGS PER SHARE
For the year ended December 31, 1992, the number of shares of common stock
issuable upon exercise of outstanding options and warrants in the aggregate
exceeded 20% of the number of common shares outstanding. For the years ended
December 31, 1993 and 1994, the treasury stock method was used to determine the
dilutive effect of the options and warrants on earnings per share data.
Accordingly, the modified treasury stock method was used to determine the
dilutive effect of the options and warrants on earnings per share data, for
those years.
F-17
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 11--EARNINGS PER SHARE--(CONTINUED)
Net income (loss) from continuing operations per share and the weighted
average number of shares outstanding used in the computations are summarized as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994
--------------------- -------------------- --------------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS EARNINGS
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) from
continuing operations.......................... $ 3,145 $ 3,145 $ 4,279 $ 4,279 $ (7,640) $ (7,640)
Add:
Reduction of interest expense(1)............... 94 -- -- -- -- --
Deduct:
Cumulative preferred stock
dividend requirement........................ (90) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) for per share
computations................................ $ 3,149 $ 3,145 $ 4,279 $ 4,279 $ (7,640) $ (7,640)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Number of shares:
Weighted average common shares outstanding..... 9,671 9,671 12,700 12,700 15,713 15,713
Add:
Net additional shares issuable(2).............. 1,962 1,981 1,779 1,817 -- --
Conversion of preferred stock(3)............... -- 34 -- -- -- --
--------- --------- --------- --------- --------- ---------
Weighted average shares used in the
per share computations......................... 11,633 11,686 14,479 14,517 15,713 15,713
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
$ .27 $ .27 $ .30 $ .29 $ (.49) $ (.49)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
------------------------
(1) Reduction of interest expense assumes, in 1992, proceeds from the exercise
of stock options and warrants, after the assumed repurchase of 20% of the
weighted average common shares outstanding, were used to repay debt at the
beginning of the period.
(2) Assumes exercise of outstanding common stock equivalents (options and
warrants) at the beginning of the period, net of 20% limitation, if
applicable, on the assumed repurchase of stock.
(3) Assumes conversion of preferred stock into the underlying shares of common
stock at the beginning of the period.
</FN>
</TABLE>
NOTE 12--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's debt was estimated based upon the market
rates available to the Company for debt with the same remaining maturities. The
carrying amounts of the Company's debt closely approximates its fair value.
F-18
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 13--LEASES
The Company leases office and warehouse space under various noncancellable
operating lease agreements expiring through 1998. Rental expense under such
leases aggregated approximately $507,000, $417,000 and $585,000 for the years
ended December 31, 1992, 1993 and 1994, respectively.
Future minimum payments under the above rental agreements as of December
31, 1994 are as follows (in thousands):
FOR THE YEAR ENDING DECEMBER 31,
--------------------------------------------------------------
1995.......................................................... $ 685
1996.......................................................... 565
1997.......................................................... 135
1998.......................................................... 131
1999.......................................................... 39
------
$1,555
------
------
NOTE 14--COMMITMENTS AND CONTINGENCIES
On May 25, 1994, a complaint was filed in the United States District Court,
Southern District of Florida, naming the Company, Jeffrey Hanft, Chairman and
Chief Executive Officer, and Richard Militello, Chief Operating Officer, as
defendants. The complaint alleges the violation of certain federal securities
laws through the issuance of 'false and misleading' statements regarding the
subsequently terminated proposed merger with IDB Communications Group, Inc. and
the Company's first quarter results. The complaint seeks certification as a
class action including all persons who purchased shares of the Company's common
stock between April 12 and May 10, 1994 as well as unspecified compensatory
damages. Based upon management's assessment of the facts and the Company's
public disclosures at the time in question, as well as consultation with
counsel, the Company believes the complaint is without merit and intends to
vigorously contest and defend against the action. At the present time, the
litigation is in preliminary stages and management and legal counsel are
presently unable to predict the outcome. Accordingly, the financial statements
do not include any adjustments that might result from this uncertainty (see Note
18).
On July 1, 1993, the Company filed suit against Bell South
Telecommunications, Inc., a unit of Bell South Corp. that does business as
Southern Bell Telephone & Telegraph ('Bell South'), alleging, among other
things, violation of the federal and State of Florida antitrust laws based upon
alleged monopolization and misrepresentation in connection with Southern Bell's
operation of its pay telephone business in Florida. The suit seeks unspecified
damages and other relief. Counsel is unable to predict the outcome of the
litigation.
During 1993, the Company negotiated a settlement of various issues that
were in dispute with a major vendor. This agreement was finalized in 1994. As a
result, the Company terminated certain of its capital leases and was released
from certain obligations owed through October 31, 1993. This settlement has been
reflected as a reduction of telephone charges in 1993 and approximated
$1,156,000.
F-19
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 14--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company has employment contracts with certain officers which expire
through December 31, 1998. The contracts provide for increases in annual base
salary, contingent upon the profitability of the Company, as well as bonus and
stock option provisions.
Other than the aforementioned litigation, the Company is a party to certain
legal actions arising in the normal course of business. In the opinion of
management, the ultimate outcome of such litigation will not have a material
effect on the financial position of the Company.
NOTE 15--ASSETS HELD FOR SALE
In December 1994, in an effort to return its focus to its core public pay
telephone business, the Company's Board of Directors approved the sale of the
Company's prepaid calling card and international telephone center operations.
During February 1995, the Company sold its prepaid calling card business to
Global Link Teleco Corporation ('Global Link') for approximately $6.3 million.
The Company received $1.0 million in cash, a $5.3 million promissory note due
February 1998, bearing interest at 8.5%, payable quarterly, and shares of common
stock of Global Link (see Notes 17 and 18). For financial accounting purposes,
the net gain of approximately $3.4 million will be deferred until cash on the
notes is received. Accordingly, a provision for losses from January 1, 1995
through February 15, 1995, the divestiture date, of approximately $290,000 has
been included in loss on disposal.
The Company has also recorded a provision of approximately $3.4 million for
the estimated impairment of asset value for its international telephone center.
The following tables set forth the net assets held for sale and the results
of operations for the Company's prepaid calling card business and international
telephone center (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Current Assets, net...................................................................... $ 1,286
Fixed Assets, net........................................................................ 717
Other long-term assets, net.............................................................. 592
------------
$ 2,595
------------
------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1992 1993 1994
----- ------- -------
<S> <C> <C> <C>
Revenues........................................................... $-- $ 1,281 $ 5,149
----- ------- -------
Loss from operations............................................... -- (1,731) (1,816)
Loss on disposal................................................... -- -- (3,690)
----- ------- -------
Total loss from operations before income taxes..................... -- (1,731) (5,506)
Benefit from income taxes.......................................... -- 652 2,064
----- ------- -------
Net loss from operations........................................... $-- $(1,079) $(3,442)
----- ------- -------
----- ------- -------
</TABLE>
F-20
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 16--DISCONTINUED OPERATIONS
In December 1994, as part of the effort to return its focus to its core
public pay telephone business, the Company's Board of Directors also adopted a
formal plan to divest itself of its inmate telephone and cellular telephone
operations.
The Company is in the process of divesting these business segments and has
recorded a provision of approximately $4.0 million for the estimated impairment
of asset value for its inmate telephone business. In addition, the Company
recorded approximately $0.1 million and $1.4 million for the estimated losses
through the anticipated divestiture date for its inmate telephone and cellular
telephone operations, respectively. The Company has also recorded a valuation
allowance of approximately $3.3 million against deferred tax assets that may not
be realized upon the disposition of the cellular telephone operations. The
valuation allowance represents a 100% reserve against the deferred tax assets
and is partially offset by income tax benefits generated during 1994 and through
the anticipated divestiture date.
During July 1994, the Company completed the sale of certain inmate
telephone lines and related equipment for approximately $2.0 million and other
consideration. The telephone lines and related equipment sold were located
primarily in the mid-western United States. The Company has recorded a gain on
the sale of these assets of approximately $441,000.
The following combining tables set forth the net assets and liabilities and
results of operations of the discontinued business segments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- -------
<S> <C> <C> <C>
Current assets and liabilities, net......................... $ 151 $ (2,969) $(2,818)
Fixed assets, net........................................... 11,379 6,667 18,046
Other long-term assets and liabilities, net................. 7,441 3,111 10,552
------- -------------- -------
$18,971 $ 6,809 $25,780
------- -------------- -------
------- -------------- -------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED:
DECEMBER 31, 1992
---------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------ -------------- -------
<S> <C> <C> <C>
Revenues...................................................... $1,917 $ 1,499 $ 3,416
------ -------------- -------
Income (loss) from discontinued operations
before income taxes......................................... 471 (305) 166
Loss on disposal.............................................. -- -- --
------ -------------- -------
Total net income (loss) on discontinued operations
before income taxes......................................... 471 (305) 166
Benefit from (provision for) income taxes..................... (170) 113 (57)
------ -------------- -------
Net income (loss) from discontinued operations................ $ 301 $ (192) $ 109
------ -------------- -------
------ -------------- -------
</TABLE>
F-21
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 16--DISCONTINUED OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- -------
<S> <C> <C> <C>
Revenues.................................................... $35,217 $ 6,283 $41,500
------- -------------- -------
Income (loss) from discontinued operations
before income taxes....................................... 4,136 (2,954) 1,182
Loss on disposal............................................ -- -- --
------- -------------- -------
Total net income (loss) on discontinued operations
before income taxes....................................... 4,136 (2,954) 1,182
Benefit from (provisions) for income taxes.................. (1,558) 1,113 (445)
Minority interest, net...................................... -- 327 327
------- -------------- -------
Net income (loss) from discontinued operations.............. $ 2,578 $ (1,514) $ 1,064
------- -------------- -------
------- -------------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- --------
<S> <C> <C> <C>
Revenues.................................................... $42,428 $ 11,581 $ 54,009
------- -------------- --------
Income (loss) from discontinued operations
before income taxes....................................... 844 (6,253) (5,409)
Loss on disposal............................................ (4,054) (1,380) (5,434)
------- -------------- --------
Total net loss on discontinued operations
before income taxes....................................... (3,210) (7,633) (10,843)
Benefit from (provisions for) income taxes.................. 1,204 (1,113) 91
------- -------------- --------
Net loss from discontinued operations....................... $(2,006) $ (8,746) $(10,752)
------- -------------- --------
------- -------------- --------
</TABLE>
NOTE 17--RELATED PARTY TRANSACTIONS
In March 1994, the Company sold certain assets used in the operation of the
Company's two telephone centers located in New York City to Global Link. The
total purchase price for the transaction was $2.5 million and 10% of the issued
and outstanding capital stock of Global Link. The Company recorded a net gain on
the sale of approximately $2.0 million. At the time of the transaction Messrs.
Bernard M. Frank and Jody Frank, both directors of the Company, were directors
and shareholders of Global Link.
During February, 1995, the Company sold its prepaid calling card business
to Global Link for approximately $6.3 million. The Company received $1.0 million
in cash, a $5.3 million promissory note due February 1998, bearing interest at
8.5%, payable quarterly, and shares of common stock of Global Link. As a result
of the February 1995 transaction, and because of a drafting error discovered in
May 1995 that did not reflect the intentions of the parties, the Company's
interest in the outstanding common stock of Global Link was 28.8% instead of the
intended 19.99%. To correct this error, the Company has agreed with Global Link
to reduce its share ownership to the intended 19.99% level. Since the March 1994
transaction with Global Link, Mr. Bernard M. Frank resigned as a director of the
Company. Additionally, Mr. Jeffrey Hanft, a shareholder, director and officer of
the Company, was appointed as a director of Global Link (see Note 18).
F-22
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 17--RELATED PARTY TRANSACTIONS--(CONTINUED)
In 1994, the Company made loans in the amount of approximately $1.8 million
to certain officers and directors to refinance the officers and directors debt
previously incurred in connection with the exercise of stock options. The
outstanding balances of such loans have been reflected as a reduction from
capital in excess of par value in the consolidated statement of stockholders'
equity. The officers and directors executed promissory notes which bear interest
at prime rate and are due on March 28, 1996 and are secured by approximately
607,000 shares of Peoples Telephone Company, Inc. common stock.
NOTE 18--SUBSEQUENT EVENTS
During April 1995, the Company settled a dispute with one of its vendors
which resulted in a reduction of the amounts owed. Accounts payable and
telephone charges have been reduced by approximately $1.3 million as a credit
against amounts owed in the March 31, 1995 quarterly financial statements.
In early 1995, the Company commenced an offering under an exemption from
the registration requirements of the Securities Act of 1933 of approximately $85
million in Senior Notes due 2002. In connection with the completion of the
Senior Note offering, which is expected to close during June 1995, the Company
will enter into a $40 million revolving credit facility. Proceeds from the sale
of the Senior Notes together with borrowings under the new credit facility will
be used to refinance the existing $100 million credit facility (see Note 6). The
Senior Notes offered will not be registered under the Securities Act of 1933 and
may not be offered or resold in the United States absent registration or an
applicable exemption from the registration requirements. There can be no
assurance that the contemplated refinancing will be completed, or if completed,
that it will be on terms favorable to the Company.
In May of 1995, the Company reevaluated its accounting for its remaining
interest in Global Link and concluded that equity accounting would be
appropriate. The Company's interest in the outstanding common stock of Global
Link, after the disposition of the prepaid calling card business, was 28.8%
instead of the intended 19.99%. As a result, the Company has agreed with Global
Link to reduce its share ownership to the intended 19.99% level. This, together
with the significant related party associations and transactions between Global
Link and the Company, as described in Note 17, lead the Company to its
conclusion that the equity method of accounting for its Global Link investment
was appropriate. Accordingly, the segment amount which includes the prepaid
calling card business sold to Global Link and previously included in
discontinued operations has been reclassified to continuing operations from the
Company's financial statements previously issued for the 1994 year. In addition,
the Company also restated its financial statements for the quarter ended March
31, 1995 to reflect the revision in the accounting treatment for the Global Link
investment.
The Company has also restated its financial statements for the quarters
ended March 31 and June 30, 1994, as set forth in Form
10-Q's for such perio
to reflect the timing of approximately $2.7 million in adjustments. These
adjustments, which include additional reserves for changes in estimates of
uncollectible receivables and vendor claims and the write-off of certain
acquisition costs, were originally recorded during the quarter ended June 30,
1994 and have now been reflected in the quarter ended March 31, 1994 to more
accurately reflect the timing of such adjustments. The restated quarterly
financial statements also reflect the $2 million gain on the March 31, 1994 sale
of the Company's two telecommunication centers in New York to Phone Zone Teleco
Corporation (now known as Global Link) in the second quarter of 1994 (when
initial payment for the centers was received) rather than the first quarter
(when Phone Zone took control of the centers on the basis of an agreement in
principle). These changes had no impact on net income or cash flow
F-23
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 18--SUBSEQUENT EVENTS--(CONTINUED)
for the year ended December 31, 1994. As a result of the restatement of the
March 31, 1994 quarterly financial statements, the Company was not in compliance
with certain restrictive covenants contained in the existing credit agreement,
which was waived by the Bank.
On May 9, 1995, a complaint was filed against the Company by Ascom
Communications, Inc. ('ACI'), which complaint was amended on May 30, 1995. The
amended complaint purports to assert five causes of action against the Company
arising out of the Asset Purchase Agreement entered into among the plaintiffs
and the Company on October 13, 1993. The first cause of action asserts a claim
for breach of contract for failure to pay principal and interest due under a one
year promissory note (the 'One Year Note'), and seeks payment of principal and
interest of $2.2 million with respect to the note. The second cause of action
asserts a claim for breach of contract for failure to pay principal and interest
due under a five year promissory note (the 'Five Year Note'), and seeks payment
of principal and interest in the amount of $4.4 million with respect to the
note. The Company previously entered into a settlement agreement on March 10,
1995, thereby reducing the amount recorded under the One Year Note to $1.2
million. The amounts due under the settlement agreement and the Five Year Note
were fully accrued at December 31, 1994. The third cause of action asserts a
claim for breach of contract for failure by the Company to register common stock
issued to ACI, and seeks damages in an unspecified amount. The fourth cause of
action asserts a claim for breach of contract for the Company's failure to
assume an equipment lease with AT&T, and seeks damages in the amount of at least
$0.3 million. The fifth cause of action asserts a claim for declaratory relief
in connection with the Company's purported failure to register common stock, and
seeks a declaratory judgment that the Company must effect registration at the
earliest possible time. Based upon the preliminary stages of this case, the
Company is unable to predict the outcome of this matter and, accordingly, the
accompanying financial statements do not reflect any adjustment that might
result from this uncertainty.
The failure by the Company to make the April 1995 payment due on the $2.0
million promissory note has caused a cross default under the Company's $100
million revolving line of credit. The Company has obtained a waiver from its
bank subject to the Company's ability, by June 30, 1995, to (1) permanently
reduce the $100 million revolving line of credit (see Note 6) to not more than
$40 million or (2) settle the ACI litigation under specified terms. There can be
no assurance that the reduction in the revolving line of credit or settlement
will be completed, or if completed that it will be on terms favorable to the
Company. In the event these conditions are not satisfied, the waivers would be
withdrawn, an event of default under the loan agreement would exist and the
lenders would have a right to call the loan.
Additionally, the event of default under the Company's $100 million
revolving line of credit caused a cross default on the Company's mortgage note
payable. The Company received a waiver from the lender dated May 31, 1995
subject to the condition that on or before the earlier of (i) one day after the
closing of the proposed Senior Notes offering or (2) August 31, 1995, the
Company shall have paid in full the $2.5 million outstanding balance of the
mortgage note payable and all other obligations owed the mortgage lender.
As a result of the foregoing, a substantial doubt arises about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
In connection with the Complaint (as described in Note 14), the plaintiff
filed under seal a motion for leave to file an amended and supplemental
complaint on May 26, 1995. The Company continues to believe,
F-24
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 18--SUBSEQUENT EVENTS--(CONTINUED)
on the advice of legal counsel, the Complaint is without merit and intends to
vigorously contest and defend against the action. Because of the preliminary
nature of the litigation, the Company is unable to predict the outcome of such
litigation. Accordingly, the financial statements do not include any adjustments
that might result from this uncertainty.
F-25
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEET (RESTATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 7,663 $ 6,721
Accounts receivable, net of allowance for doubtful accounts
of $6,035 and $5,236........................................................... 17,682 16,550
Inventory......................................................................... 2,981 3,324
Prepaid expenses and other current assets......................................... 3,276 4,030
Net assets of prepaid calling card and international telephone
center business................................................................ 2,595 --
Net assets of discontinued operations............................................. 25,780 27,380
------------ -----------
Total current assets........................................................... 59,977 58,005
Property and equipment, net......................................................... 76,379 74,514
Location contracts, net............................................................. 31,877 31,075
Goodwill, net....................................................................... 6,221 6,020
Intangible assets, net.............................................................. 2,802 2,636
Other assets, net................................................................... 11,882 6,128
Deferred income taxes............................................................... 1,453 3,406
Investment in unconsolidated affiliate.............................................. -- 3,073
------------ -----------
Total assets................................................................... $ 190,591 $ 184,857
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable and current maturities of long-term debt............................ $ 14,286 $ 24,902
Current portion of obligations under capital leases............................... 2,738 2,314
Accounts payable and accrued expenses............................................. 22,799 22,039
Accrued interest payable.......................................................... 1,061 755
Income and other taxes payable.................................................... 2,691 2,491
------------ -----------
Total current liabilities...................................................... 43,575 52,501
Notes payable and long-term debt.................................................... 94,390 83,500
Obligations under capital leases.................................................... 3,911 3,460
------------ -----------
Total liabilities.............................................................. 141,876 139,461
------------ -----------
Commitments and contingencies....................................................... -- --
Shareholders' equity
Preferred stock; $.01 par value; 4,300 shares authorized;
none issued and outstanding.................................................... -- --
Convertible preferred stock; Series A, $.01 par value;
100 shares authorized; none issued and outstanding............................. -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding............................. -- --
Common stock; $.01 par value; 25,000 shares authorized;
15,789 and 15,850 shares issued and outstanding................................ 158 159
Capital in excess of par value.................................................... 58,143 58,078
Accumulated deficit............................................................... (9,586) (12,841)
------------ -----------
Total shareholders' equity..................................................... 48,715 45,396
------------ -----------
Total liabilities and shareholders' equity..................................... $ 190,591 $ 184,857
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------
1994 1995
------- -------
<S> <C> <C>
Revenues
Coin calls............................................................................... $17,857 $19,061
Non-coin calls........................................................................... 6,968 8,271
Service and other........................................................................ 301 122
------- -------
Total revenues........................................................................ 25,126 27,454
------- -------
Costs and expenses
Telephone charges........................................................................ 8,304 8,491
Commissions.............................................................................. 4,877 6,297
Field service and collection............................................................. 4,916 4,628
Depreciation and amortization............................................................ 4,112 4,741
Selling, general and administrative...................................................... 2,672 2,368
Interest, net............................................................................ 989 1,479
Income from operations of prepaid calling card and international
telephone centers..................................................................... 730 --
Loss on disposal of prepaid calling card and international
telephone centers..................................................................... -- --
Other.................................................................................... -- 27
------- -------
Total costs and expenses.............................................................. 26,600 28,031
------- -------
Loss from continuing operations before taxes............................................... (1,474) (577)
Benefit from income taxes.................................................................. 465 216
------- -------
Loss from continuing operations............................................................ (1,009) (361)
------- -------
Discontinued operations
Income from operations, net of tax provision of $629..................................... (1,048) --
(Loss) income on disposition............................................................. -- --
------- -------
Income from discontinued operations...................................................... (1,048) --
Extraordinary loss from extinguishment of debt, net........................................ -- (2,894)
------- -------
Net income (loss)..................................................................... $(2,057) $(3,255)
------- -------
------- -------
Earnings (loss) per common share
Loss from continuing operations.......................................................... $ (.06) $ (.02)
Income from discontinued operations...................................................... (.07) --
Extraordinary loss from extinguishment of debt, net...................................... -- (.18)
------- -------
Net income (loss)..................................................................... $ (.13) $ (.20)
------- -------
------- -------
Weighted average common and common equivalent shares outstanding........................... 15,611 15,829
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------
1994 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................................. $(2,057) $(3,255)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization.......................................................... 4,112 4,741
Deferred income taxes.................................................................. (465) (1,953)
Extraordinary loss from extinguishment of debt......................................... -- 2,894
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........................................... (3,209) 1,132
Increase in inventory................................................................ (2,254) (343)
Decrease (increase) in prepaid expenses and other current assets..................... 217 (754)
(Increase) decrease in other assets.................................................. (995) 2,860
Increase in investment in unconsolidated affiliate................................... -- (3,073)
Decrease in accounts payable and accrued expenses.................................... (4,550) (760)
Increase (decrease) in accrued interest.............................................. 103 (306)
Increase (decrease) in taxes payable................................................. 673 (200)
Net effect of discontinued operations and assets held for sale....................... 689 (5)
------- -------
Net cash (used in) provided by operating activities............................... (7,736) 978
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Payments of acquisitions and certain contracts............................................ (2,779) (435)
Property and equipment additions.......................................................... (3,640) (1,272)
Proceeds from sale of assets.............................................................. -- 1,000
Investment in joint ventures.............................................................. (1,085) --
------- -------
Net cash used in investing activities............................................. (7,504) (707)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net (payment) borrowings under note payable to bank....................................... 11,890 (274)
Debt issuance costs....................................................................... (1,318) --
Principal payments under capital lease obligations, net................................... 321 (875)
Officer loans............................................................................. -- (190)
Exercise of stock options and warrants.................................................... 1,029 126
------- -------
Net cash provided by (used in) financing activities............................... 11,922 (1,213)
------- -------
Net decrease in cash and cash equivalents................................................... (3,318) (942)
Cash and cash equivalents at beginning of period............................................ 4,529 7,663
------- -------
Cash and cash equivalents at end of period.................................................. $ 1,211 $ 6,721
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
MARCH 31, 1995 AND MARCH 31, 1994
(UNAUDITED)
NOTE 1--UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data is unaudited; however,
in the opinion of management, the interim data includes all adjustments,
necessary for a fair statement of the results for the interim periods. The
quarter ended March 31, 1994 included adjustments of approximately $2.1 million
for, among other things, amounts incurred for settling disputes and claims and
bad debt reserves.
The results of operations for the three months ended March 31, 1995 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1995.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ending December 31, 1994 as set forth elsewhere in this Prospectus.
NOTE 2--EARNINGS PER SHARE
The treasury stock method was used to determine the dilutive effect of the
options and warrants on earnings per share data. For 1995 and 1994, common stock
equivalents were excluded since the effect would be anti-dilutive. Therefore,
fully diluted earnings per share is not presented.
NOTE 3--LONG-TERM DEBT
On March 22, 1995, the Company amended certain terms contained in its Third
Amended Loan Agreement (the 'Amendment'). Under the Amendment, the $125.0
million revolving line of credit was reduced to $100.0 million, with monthly
principal reductions of $1.5 million commencing on May 1, 1995 and all
outstanding principal balances due in full on May 31, 1996. The new facility
bears interest at the Bank's prime rate plus 2% beginning April 1, 1995 and
reduces certain restrictive covenants for 1995 which, among other things require
the Company to maintain certain net worth and cash flow levels and places
certain restrictions on the payment of dividends (see Note 6).
As a result of the Amendment, the Company has recorded an extraordinary
loss of $4.6 million for the write-off of deferred financing costs, net of the
income tax benefit of approximately $1.7 million.
The Company has commenced an offering under an exemption from the
registration requirements of the Securities Act of 1933 of approximately $85
million in Senior Notes (the 'Notes') due 2002. In connection with the
completion of the Note offering, which is expected to close by early June 1995,
the Company will enter into a new $40.0 million revolving credit facility.
Proceeds from the sale of the Notes together with borrowings under the new
credit facility will be used to refinance the existing $100.0 million credit
facility, which will provide the Company with approximately $23.0 million
undrawn and available under the new credit facility. The Notes offered will not
be registered under the Securities Act and may not be offered or resold in the
United States absent registration or an applicable exemption from the
registration requirements. There can be no assurance that the contemplated
refinancing will be completed, or if completed, that it will be on terms
favorable to the Company (see Note 6).
F-29
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
MARCH 31, 1995 AND MARCH 31, 1994
(UNAUDITED)
NOTE 4--INVESTMENTS IN UNCONSOLIDATED AFFILIATE
During February 1995, the Company sold its prepaid calling card business to
Global Link Teleco Corporation ('Global Link') for approximately $6.3 million.
The Company received $1.0 million in cash, a $5.3 million promissory note due
February 1998, bearing interest at 8.5%, payable quarterly, and shares of common
stock of Global Link. For financial accounting purposes, the net gain of
approximately $3.4 million will be deferred until cash is received. As a result
of the February 1995 transaction, and because of a drafting error discovered in
May 1995 that did not reflect the intentions of the parties, the Company's
interest in the outstanding common stock of Global Link was 28.8% instead of the
intended 19.99%. To correct this error, the Company has agreed with Global Link
to reduce its share ownership to the intended 19.99% level.
The Company's investment in Global Link is accounted for using the equity
method. The Company's share of the results of operations of Global Link from the
divestiture date through March 31, 1995 are included in 'Other' in the Statement
of Operations. The 1994 results of operations of the prepaid calling card
business have been segregated and reported as a separate component of income
from continuing operations.
The Company's investment in Global Link represents $6.5 million of
outstanding notes receivable net of the $3.4 million deferred gain on the
February 1995 transaction and $27,000 representing the Company's share of Global
Link's first quarter 1995 operating results.
NOTE 5--DISCONTINUED OPERATIONS
In 1994, in connection with the planned divestiture of the inmate telephone
and cellular telephone operations, the Company recorded a provision for the
estimated impairment of asset value and losses through the anticipated
divestiture date, net of income taxes, of $2.5 million and $4.8 million,
respectively. The cellular telephone operations provision is net of an estimated
gain on disposition of approximately $1.1 million and includes a valuation
allowance of approximately $3.4 million against deferred tax assets that may not
be realized upon the disposition of the cellular telephone operations. This
provision included approximately $0.1 million and ($1.0) million for the
estimated operating income (losses) of the inmate telephone and cellular
telephone operations, respectively, for the quarter ended March 31, 1995.
The following combining tables set forth the results of operations of the
inmate telephone and cellular telephone operations for the quarters ended March
31, (in thousands):
<TABLE>
<CAPTION>
1995
---------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------ -------------- -------
<S> <C> <C> <C>
Revenues...................................................... $8,106 $ 2,504 $10,610
------ -------------- -------
Income (loss) from operations before income taxes............. 79 (1,162) (1,083)
(Provision for) benefit from income taxes..................... (30) -- (30)
------ -------------- -------
Net income (loss)............................................. $ 49 $ (1,162) $(1,113)
------ -------------- -------
------ -------------- -------
</TABLE>
F-30
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
MARCH 31, 1995 AND MARCH 31, 1994
(UNAUDITED)
NOTE 5--DISCONTINUED OPERATIONS--(CONTINUED)
<TABLE>
<CAPTION>
1994
----------------------------------------
PTC
INMATE CELLULAR, INC. TOTAL
------- -------------- -------
<S> <C> <C> <C>
Revenues.................................................... $10,380 $ 2,830 $13,210
------- -------------- -------
Income (loss) from operations before income taxes........... 200 (1,877) (1,677)
(Provision for) benefit from income taxes................... (75) 704 629
------- -------------- -------
Net income (loss)........................................... $ 125 $ (1,173) $(1,048)
------- -------------- -------
------- -------------- -------
</TABLE>
NOTE 6--SUBSEQUENT EVENTS
During April 1995, the Company settled a dispute with one of its vendors
which resulted in a reduction of the amounts owed. Accounts payable and
telephone charges have been reduced by approximately $1.3 million as a credit
against amounts owed in the accompanying financial statements to reflect this
settlement.
On May 9, 1995, a complaint was filed against the Company by Ascom
Communications, Inc. ('ACI'), which complaint was amended on May 30, 1995. The
amended complaint purports to assert five causes of action against the Company
arising out of the Asset Purchase Agreement entered into among the plaintiffs
and the Company on October 13, 1993. The first cause of action asserts a claim
for breach of contract for failure to pay principal and interest due under a one
year promissory note, and seeks payment of principal and interest of $2.2
million with respect to the note. The second cause of action asserts a claim for
breach of contract for failure to pay principal and interest due under a five
year promissory note, and seeks payment of principal and interest in the amount
of $4.4 million with respect to the note. The third cause of action asserts a
claim for breach of contract for failure by the Company to register common stock
issued to ACI, and seeks damages in an unspecified amount. The fourth cause of
action asserts a claim for breach of contract for the Company's failure to
assume an equipment lease with AT&T, and seeks damages in the amount of at least
$0.3 million. The fifth cause of action asserts a claim for declaratory relief
in connection with the Company's purported failure to register common stock, and
seeks a declaratory judgment that the Company must effect registration at the
earliest possible time. In June 1995, the Company settled this litigation for
approximately $5.7 million.
The failure by the Company to make the April 1995 payment due on the $2.0
million promissory note caused a cross default under the Company's $100 million
revolving line of credit. The Company obtained a waiver from its bank subject to
the Company's ability, by June 30, 1995, to (1) permanently reduce the $100
million revolving line of credit to not more than $40 million (see Note 3) or
(2) settle the ACI litigation for an amount not exceeding more than $6.0
million.
Additionally, the event of default under the Company's $100 million
revolving line of credit caused a cross default on the Company's mortgage note
payable. The Company received a waiver from the lender dated May 31, 1995
subject to the condition that on or before the earlier of (i) one day after the
closing of the proposed Note offering or (2) August 31, 1995, the Company shall
have paid in full the $2.5 million outstanding balance of the mortgage note
payable and all other obligations to the mortgage lender.
F-31
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE NOTES BY ANYONE IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
Summary........................................... 3
Risk Factors...................................... 16
The Exchange Offer................................ 24
The Company....................................... 35
Use of Proceeds................................... 36
Capitalization.................................... 37
Selected Financial Information.................... 38
Management's Discussion and Analysis of
Financial Condition and Results
of Operations................................... 40
Business.......................................... 52
Management........................................ 71
Certain Transactions.............................. 77
Principal Shareholders............................ 80
Preferred Stock Investment........................ 81
Description of the Credit Agreement............... 83
Description of the Notes.......................... 85
Exchange Offer; Registration Rights............... 110
Plan of Distribution.............................. 112
Legal Matters..................................... 112
Independent Certified Public Accountants.......... 112
Available Information............................. 113
Glossary.......................................... 114
Index to Consolidated Financial Statements........ F-1
PTC
PEOPLES TELEPHONE
COMPANY, INC.
OFFER TO EXCHANGE
ITS
SERIES B 12 1/4% SENIOR NOTES DUE 2002
FOR ANY AND ALL OUTSTANDING
SERIES A 12 1/4% SENIOR NOTES DUE 2002
------------------
PROSPECTUS
------------------
AUGUST 11, 1995
===============================================================================
