AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
PHONETEL TECHNOLOGIES, INC
Name of Small Business Issuer in Its Charter
OHIO 4813 34-1462198
(State or Other (Primary Standard (I.R.S.Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification
Organization) Code Number)
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
(216) 241-2555
Address and Telephone Number of
Principal Executive Offices and
Principal Place of Business
TAMMY L. MARTIN, ESQ
EXECUTIVE VICE PRESIDENT
CHIEF ADMINISTRATIVE OFFICER
GENERAL COUNSEL AND SECRETARY
PHONETEL TECHNOLOGIES, INC
1127 EUCLID AVENUE, SUITE 650
CLEVELAND, OHIO 44115-1601
(216) 241-2555
Name, Address and Telephone
Number of Agent For Service
Copies to
Stephen M. Banker, Esq
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
(212) 735-3000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practica-
ble after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. (X)
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. ( )
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ( )
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. ( )
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM
OF SECURITIES OFFERING AGGREGATE AMOUNT OF
TO BE AMOUNT TO PRICE PER OFFERING REGISTRATION
REGISTERED BE REGISTERED SHARE (1) PRICE(1) FEE
COMMON STOCK, $.01
0 PAR VALUE . . . . . . 13,304,263 SHARES $2.875 $38,249,757 $11,591
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c) under the Securities Act of 1933, the regis-
tration fee applicable to the Common Stock is calculated based on the
average of the high and low sales prices of the Common Stock as
reported by The Nasdaq SmallCap Market on November 7, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGIS-
TRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1996
PROSPECTUS
13,304,263 SHARES
PHONETEL TECHNOLOGIES, INC
COMMON STOCK
________________
This Prospectus relates to the offer and sale from time to time
of up to 13,304,263 shares of common stock, par value $.01 per share
(the "Common Stock"), of PhoneTel Technologies, Inc. (the "Company")
by the Selling Shareholders (as defined herein). See "Selling Share-
holders." The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Shareholders.
The Common Stock is listed on The Nasdaq SmallCap Market
("Nasdaq") under the trading symbol "PNTL." On November 12, 1996, the
last reported sale price of the Common Stock on Nasdaq was $3 3/8 per
share. See "Price Range of Common Stock."
The Common Stock offered hereby may be sold from time to time
directly by the Selling Shareholders. Alternatively, the Common Stock
may be offered to or through broker-dealers or underwriters who may
act solely as agents, or who may acquire Common Stock as principals.
The distribution of the Common Stock being offered by the Selling
Shareholders may be effected in one or more transactions that may take
place on Nasdaq or on such other national securities exchange or
automated interdealer quotation system on which the shares of Common
Stock are then listed or in the over-the-counter market, including
block trades or ordinary broker's transactions, through privately
negotiated transactions, through an underwritten public offering or
through a combination of any such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The Selling Shareholders may
pay usual and customary or specifically negotiated brokerage fees or
commissions in connection with such sales. See "Plan of Distribu-
tion." The Company has agreed to pay all expenses (other than commis-
sions or discounts of underwriters, broker-dealers or agents, brokers'
fees, state and local transfer taxes and fees and any other expenses
that certain of the registration rights agreements have assigned to
particular Selling Shareholders) in connection with the registration
and sale of the Common Stock being offered by the Selling Sharehold-
ers.
To the extent required, the identity of, and certain other
information relating to the Selling Shareholders, the terms of each
sale of Common Stock offered hereby, including the initial public
offering price, the names of any underwriters, broker-dealers or
agents, the compensation, if any, of such underwriters, broker-dealers
or agents and the other terms in connection with the sale of the
Common Stock in respect of which this prospectus is delivered will be
set forth in an accompanying Prospectus Supplement (the "Prospectus
Supplement"). The aggregate proceeds to the Selling Shareholders from
the sale of the Common Stock so offered will be the purchase price of
the Common Stock sold less the aggregate agents' commissions and
underwriters' discounts, if any, and other expenses of issuance and
distribution not borne by the Company. For information concerning
indemnification arrangements between the Company and the Selling
Shareholder and indemnification arrangements for underwriters, see
"Plan of Distribution."
The Selling Shareholders and such broker-dealers, underwriters or
agents that participate with the Selling Shareholders in the distribu-
tion of the Common Stock may be deemed to be underwriters under the
Securities Act of 1933, as amended (the "Securities Act"), and any
commissions received by them and any profit on the resale of the
Common Stock purchased by them might be deemed to be underwriting
discounts and commissions under the Securities Act.
________________________
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
____________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
___________________________
The date of this Prospectus is , 1996.
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the
Company with the Commission may be inspected at the public
reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and should also be available for inspection and copying at the
regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048; and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers, such as the
Company, that file electronically with the Commission and the
address of such Web site is http://www.sec.gov. Additionally,
the Common Stock is listed on Nasdaq and such reports and other
information concerning the Company therefor are available for
inspection at the offices of the National Association of Securi-
ties Dealers, Inc. located at 1735 K Street, N.W., Washington,
D.C. 20006.
This Prospectus constitutes a part of a Registration State-
ment on Form SB-2 filed by the Company with the Commission under
the Securities Act. This Prospectus omits certain of the infor-
mation contained in the Registration Statement, and reference is
hereby made to the Registration Statement and to the exhibits
relating thereto for further information with respect to the
Company and the Common Stock offered hereby. Any statements
contained herein concerning the provisions of any document are
not necessarily complete, and, in each instance, reference is
made to such copy filed or incorporated by reference as an
exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by
such reference. The Registration Statement and the exhibits
thereto may be inspected without charge at the office of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washing-
ton, D.C. 20549, and copies thereof may be obtained from the
Commission at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed information
and financial statements and the notes thereto appearing else-
where in this Prospectus. Unless otherwise indicated, all
references in this Prospectus to the "Company" include PhoneTel
Technologies, Inc. and its subsidiaries, and the information in
this Prospectus (i) gives effect to a one-for-six reverse share
split of the Common Stock ("Stock Split") effected on December
26, 1995, (ii) does not give effect to the public underwritten
offering by the Company of ______ shares of Common Stock (the
"Company Equity Offering"), which is expected to be consummated
on or about ___________, 1996 or the public underwritten offering
by the Company of $110 million of its Senior Notes due 2006 (the
"Company Debt Offering"), which is expected to be consummated
simultaneously with, or shortly after, consummation of the
Company Debt Offering, and (iii) assumes no exercise of the
overallotment option for up to _____ shares of Common Stock
granted by the Company to the underwriters in the Company Equity
Offering. Terms used in this Prospectus but not otherwise
defined herein have the meanings set forth in the Glossary, which
begins on page A-1 of this Prospectus.
THE COMPANY
PhoneTel Technologies, Inc. is currently the third largest
independent public pay telephone operator and the eleventh
largest public pay telephone operator in the United States. Upon
consummation of the Cherokee Acquisition (as defined herein) and
the Texas Coinphone Acquisition (as defined herein) (the Cherokee
Acquisition and the Texas Coinphone Acquisition collectively
referred to herein as the "Pending Acquisitions") the Company
believes that it will be one of the two largest independent
public pay telephone operators in the United States. As of
September 30, 1996, after giving effect to the Pending Acquisi-
tions, the Company would have owned and operated 38,423 public
pay telephones in 43 states, the District of Columbia and Mexico,
of which approximately 96% are located in 21 states. After
giving effect to the Pending Acquisitions, approximately 44% of
the Company's public pay telephones will be located in Florida,
Texas and California, which are three of the four most populous
states. As of September 30, 1996, the Company owned and operated
24,732 public pay telephones, of which approximately 95% are
located in 17 states and approximately 46% are located in Flori-
da, Texas and California. Since September 1, 1995, the Company
has added 19,581 public pay telephones, primarily through a
series of acquisitions by the Company of 6 independent public pay
telephone companies. In addition, the Company maintains an
active program of installing public pay telephones.
The Company owns, operates, services and maintains a system
of microprocessor controlled "smart" public pay telephones. The
Company derives substantially all of its revenues from calls
placed from its public pay telephones through the deposit of
coins ("coin calls") and from calling card, credit card, collect,
third party billed and access code calls (collectively, "non-coin
calls"). The Company contracts with national, regional and local
accounts to operate public pay telephones at locations where
significant demand exists for public pay telephone service, such
as shopping malls, convenience stores, service stations, grocery
stores, restaurants, truck stops and bus terminals. As of Septem-
ber 30, 1996, the average remaining life of the Company's con-
tracts with its customers was 40.1 months (excluding the con-
tracts acquired in connection with the acquisition of POA (as
defined herein)).
On an actual basis, the Company had revenues and EBITDA (as
defined in footnote 8 on page 11) of $16.8 million and $3.0
million, respectively, for the six months ended June 30, 1996.
The Company's EBITDA margin has increased to 17.6% for the six
months ended June 30, 1996 from 3.0% for the six months ended
June 30, 1995. The increase in the EBITDA margin is primarily
due to the elimination of costs associated with the closing of
certain offices, the elimination of redundant executives and
administrative personnel in billing and other operational areas
and leveraging the Company's existing field technicians.
After giving pro forma effect to the 6 acquisitions com-
pleted from September 1, 1995 to September 30, 1996, the Company
would have achieved revenues of $59.6 million and $30.2 million
for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively, and EBITDA of $10.4 million and $6.5
million for the year ended December 31, 1995 and the six months
ended June 30, 1996, respectively. After giving pro forma
effect to such 6 acquisitions and the Pending Acquisitions
(collectively, the "Acquisitions"), the Company would have
achieved revenues of $91.5 million and $46.6 million for the year
ended December 31, 1995 and the six months ended June 30, 1996,
respectively, and EBITDA of $21.2 million and $10.2 million for
the year ended December 31, 1995 and the six months ended June
30, 1996, respectively. See "Pro Forma Financial Data." Manage-
ment believes that as a result of certain recent regulatory
changes implemented by the Federal Communications Commission
("FCC") relating to compensation for interstate dial-around
calls, the Company will generate significant additional revenues,
net of related expenses and processing fees, commencing November
6, 1996. See "--Recent Developments--Recent Regulatory Develop-
ment."
Public pay telephones are primarily owned or operated by
Bell Operating Companies ("BOCs"), other local exchange carriers
("LECs") and independent public pay telephone companies. Of the
approximately 2.54 million public pay telephones operated in the
United States in 1995, Multimedia Telecommunications Association
estimates that approximately 87% are operated by BOCs and other
LECs and approximately 13% (approximately 342,000 public pay
telephones) are operated by independent public pay telephone
companies. Management believes that the highly fragmented nature
of the independent public pay telephone industry presents a
significant number of attractive acquisition opportunities for
the Company.
In June 1995, Peter Graf was appointed Chairman of the Board
of Directors and in September 1995 was appointed Chief Executive
Officer of the Company. In September 1995, Stuart Hollander,
Joseph Abrams, Aron Katzman and Steven Richman were appointed to
the board of directors of the Company, and the majority of the
existing board resigned at that time. The new management team
identified and implemented the business strategy set forth under
"--Business Strategy" below.
The Company was incorporated under the laws of the State of
Ohio on December 24, 1984. The Company's executive offices are
located at 1127 Euclid Avenue, Suite 650, Cleveland, Ohio 44115-
1601 and its telephone number is (216) 241-2555.
BUSINESS STRATEGY
The Company's objective is to grow through additional
acquisitions and internally, thereby achieving economies of scale
and cost savings. The Company has implemented the following
strategy to meet its objective:
Grow through acquisitions. The Company believes that there
is a significant opportunity to consolidate the highly fragmented
independent segment of the public pay telephone industry.
Selective acquisitions enable the Company to expand its geograph-
ic presence and further its strategy of clustering its public pay
telephones more rapidly than with new installations. The Company
has been able to make acquisitions at attractive prices because
smaller companies typically are not able to achieve the economies
of scale realized by the Company. As a result, when acquisitions
are integrated, the Company can operate the public pay telephones
at significantly lower operating costs than the seller. Accord-
ingly, the Company maintains an active acquisition program to
acquire public pay telephones that are in, or contiguous to, its
existing markets or that can form the basis of a new cluster.
Management believes that the Company's experience in completing
acquisitions of companies in the public pay telephone industry is
instrumental in identifying and negotiating additional acquisi-
tions as well as integrating the Acquisitions. In addition, as
the Company grows to become the leading supplier of independent
public pay telephone services in an area, "fill-in" and contigu-
ous acquisitions become less attractive to other potential
acquirors as their ability to create significant clusters is
reduced. Moreover, the Company believes that such growth will
further enhance its ability to negotiate favorable rates with
long distance and operator service providers ("OSPs") as well as
suppliers of pay telephones and other related equipment.
Facilitate internal growth. The Company actively seeks to
install new public pay telephones and intends to enhance its
sales and marketing efforts to obtain additional contracts to own
and operate public pay telephones with new and existing national,
regional and local accounts. In evaluating locations for the
installation of public pay telephones, the Company generally
conducts a site survey to examine various factors, including
population density, traffic patterns, historical usage informa-
tion and other geographic factors. The installation of public
pay telephones is generally less expensive than acquiring public
pay telephones.
Reduce operating costs through geographically concentrated
clusters. The Company believes that in addition to facilitating
additional acquisitions, the clustering of public pay telephones
creates an opportunity to generate savings through reduced field
service and collection expenses, the closing of duplicate offic-
es, reduction in staff and general corporate overhead expenses
and reduced expenses associated with interLATA and intraLATA
traffic.
Form strong relationships with service providers and suppli-
ers. As part of its strategy to continue to reduce operating
costs, the Company outsources its long distance and operator
services to a number of subcontractors that are OSPs, principally
Intellicall, Inc. ("Intellicall"). The Company intends to
strengthen its relationships with Intellicall, together with
other OSPs, and the suppliers of its public pay telephone equip-
ment as its market presence increases. By achieving closer
working relationships with its OSPs and suppliers, the Company
believes that it will be in a position to negotiate lower cost
agreements with increasingly favorable terms.
Use of state-of-the-art technology. The Company's public
pay telephones are "smart" telephones and are operated by means
of advanced microprocessor technology that enables the telephones
to perform substantially all of the necessary coin-driven and
certain non coin-driven functions independent of the Company's
central office. Unlike "dumb" telephones used by most BOCs and
other LECs, smart telephones, in concert with the Company's
management information systems, enable the Company to determine
each telephone's operability and need for service as well as its
readiness for coin collection. In addition, rate changes and
other software-dependent functions can also be performed from the
central office without dispatching service technicians to indi-
vidual public pay telephones. As a result, the Company can
increase the number of public pay telephones it owns while
reducing the costs on a per phone basis of telephone service and
maintenance and coin collection.
Provide superior customer service. The Company strives to
maximize the number of its public pay telephones that are opera-
tional at any one time and thereby retain existing customers and
attract new ones. Accordingly, the Company employs both advanced
telecommunications technology and trained field technicians to
ensure superior customer service. This technology also enables
the Company to (i) maintain accurate records of telephone activi-
ty which can be verified by customers and (ii) respond quickly to
equipment malfunctions. The Company's standard of performance is
to repair malfunctions within 24 hours of their occurrence.
Achieve market recognition. With the greater financial
resources available to the Company following the Company Debt
Offering (as defined herein) and the Company Equity Offering, the
Company intends to promote actively its brand and customer
service capabilities. The Company seeks to promote and achieve
recognition of its products and services by posting on all of its
public pay telephones the "PhoneTel" label and through advertise-
ments in trade magazines. The Company believes that achieving
market recognition will facilitate its expansion strategy by
enhancing its ability to obtain additional accounts and encourag-
ing the use of its public pay telephones in locations where
consumers have multiple public pay telephone options.
RECENT DEVELOPMENTS
RECENT REGULATORY DEVELOPMENTS
On September 20, 1996, the FCC adopted new rules pursuant to
the Telecommunications Act (as defined herein) which require
certain providers of long distance services to pay to the Company
(and all other owners of public pay telephones) a flat fee of
$45.85 per month per telephone as compensation for interstate
dial-around calls from November 6, 1996 to October 1, 1997 (which
fee was established by the FCC by multiplying $0.35 per call
times the estimated industry average of 131 access code calls and
"800" calls per pay telephone per month). This replaces the
$6.00 flat fee per month per telephone in place since May 1992.
In October 1997, the flat fee will be replaced by a per-call
compensation mechanism, at a rate initially set at $0.35 per call
and for periods after October 1, 1998, at the local coin drop
rate. Management believes that as a result of these changes, the
Company will generate significant additional revenues, net of
related expenses and processing fees, commencing November 6,
1996. The FCC's new rules include other changes, the effect of
which on the Company's operations cannot be estimated by manage-
ment of the Company at this time. See "Business--Products and
Services--Operator Assisted Long Distance Services" and "Busi-
ness--Governmental Regulations--Federal."
RECENT ACQUISITIONS
In connection with its business strategy of growth through
acquisitions, the Company acquired 6,872 public pay telephones
(located primarily in California, Colorado and Washington) from
Amtel Communications Services, Inc. and certain of its affiliates
(collectively, "Amtel") as of September 13, 1996 (the "Amtel
Acquisition"). The Company acquired the public pay telephones in
the Amtel Acquisition for a purchase price of $13 million, in a
combination of cash and Common Stock. The Company acquired 3,115
public pay telephones (located primarily in Illinois, Florida,
Missouri and Virginia) from Payphones of America, Inc. ("POA") as
of August 1, 1996 (the "POA Acquisition"). The Company acquired
the public pay telephones in the POA Acquisition, for a purchase
price of approximately $13 million, in a combination of cash,
Common Stock and the assumption of certain liabilities.
PENDING ACQUISITIONS
On October 16, 1996, the Company entered into a letter of
intent to acquire Cherokee Communications, Inc. ("Cherokee"),
including approximately 14,000 public pay telephones (located
primarily in Texas, New Mexico, Colorado, Utah and Montana) and
certain other assets owned by Cherokee. The Company will acquire
Cherokee (the "Cherokee Acquisition") for a purchase price of $54
million plus related fees and expenses, subject to certain
purchase price adjustments, which may include an increase of up
to $6 million if certain new regulatory changes are not imple-
mented by the end of 1998. In addition, the Company will pay
$1.25 million in connection with certain non-competition agree-
ments. See "Pending Acquisitions--The Cherokee Acquisition." On
October 9, 1996, the Company entered into a letter of intent to
acquire 1,200 public pay telephones located in Texas from Texas
Coinphone ("Texas Coinphone"). The Company will acquire such
assets from Texas Coinphone for a purchase price of approximately
$3.7 million, subject to certain purchase price adjustments. See
"Pending Acquisitions--The Texas Coinphone Acquisition." The
closings of the Pending Acquisitions are expected to occur in
January 1997, although there can be no assurance that either
acquisition will be consummated or, if consummated, as to the
final terms thereof.
THE COMPANY EQUITY OFFERING AND THE COMPANY DEBT OFFERING
Shortly after the date of this Prospectus, the Company
expects to offer to the public (i) ____ shares of its Common
Stock (the "Company Equity Offering") for estimated net proceeds
to the Company therefrom of approximately $22.5 million and (ii)
$110.0 million of Senior Notes due 2006 (the "Notes"), which will
be guaranteed by all of the Company's subsidiaries (the "Company
Debt Offering"), for estimated net proceeds to the Company
therefrom of approximately $104.5 million. The Company intends
to use the net proceeds from the Company Equity Offering to repay
approximately $8.0 million of debt outstanding under the Credit
Agreement (as defined herein) and the balance for working capital
and other general corporate purposes. The Company intends to use
the net proceeds from the Company Debt Offering to finance the
Pending Acquisitions, to repay all of the remaining outstanding
debt under the Credit Agreement, to repay certain capital lease
obligations and other indebtedness and for working capital and
other general corporate purposes, including the possible redemp-
tion of approximately $5.5 million of its mandatorily redeemable
14% Preferred (as defined herein). The closings of the Company
Equity Offering and the Company Debt Offering are expected to
occur in December 1996, although there can be no assurance that
either offering will be consummated.
The consummation of the Company Debt Offering will be
conditioned upon the consummation of the Company Equity Offering
but will not be conditioned upon the consummation of the Cherokee
Acquisition or the Texas Coinphone Acquisition. However, the
Company will be required to make an offer to purchase $35.0
million aggregate principal amount of the Notes on the Special
Offer Date (as defined herein) at the Special Offer Price (as
defined herein) if the Cherokee Acquisition is not consummated
prior to ________, 1997. A portion of the net proceeds of the
Company Debt Offering equal to the amount sufficient to permit
the Company to purchase $35.0 million aggregate principal amount
of the Notes on the Special Offer Date at the Special Offer Price
(such amount referred to herein as the "Trust Funds") will be
held by and pledged to the Trustee (as defined herein) for the
benefit of the holders of the Notes. The Trust Funds will be
invested in cash, treasury securities and certain other cash
equivalents. See "Risk Factors--Possible Non-Consummation of the
Pending Acquisitions and the Public Offerings" and "Description
of Certain Indebtedness--The Notes."
The following table sets forth the estimated sources and
uses of the proceeds to be received by the Company from the
Company Debt Offering and the Company Equity Offering (determined
as of September 30, 1996):
In millions Amount
SOURCES OF FUNDS:
Company Equity Offering . . . . . . . . . . . $ 25.0
Company Debt Offering . . . . . . . . . . . . 110.0
------
Total sources of funds . . . . . . . . . . $135.0
======
USES OF FUNDS:
Cherokee Acquisition (1) . . . . . . . . . . . $ 55.8
Texas Coinphone Acquisition . . . . . . . . . . 3.7
Repay Credit Agreement . . . . . . . . . . . . 41.0
Repay capitalized lease obligations . . . . . . 7.8
Repay POA Notes (as defined herein) . . . . . . 3.6
Related fees and expenses (2) . . . . . . . . . 9.0
Working capital and general corporate purposes (3) 14.1
-----
Total uses of funds . . . . . . . . . . . . $135.0
======
___________________
(1) Represents the purchase price of $54 million plus related
fees and expenses of approximately $1.1 million and a
$625,000 initial payment for the non-competition agreements.
(2) Represents (i) estimated underwriting discount and other
expenses of the Company Equity Offering of $2.5 million,
(ii) estimated underwriting discount and other expenses of
the Company Debt Offering of $5.85 million, and (iii) fees
and expenses incurred in connection with the New Credit
Agreement of $650,000.
(3) If the Company Debt Offering and the Company Equity Offering
are consummated, the Company may elect, at its option, to
redeem approximately $5.5 million of 14% Preferred in lieu
of using such funds for working capital purposes.
<TABLE>
<CAPTION>
SUMMARY FINANCIAL AND OPERATING DATA
Year Ended December 31 Year Ended December 31, 1995 Six Months Ended Six Months Ended
June 30 June 30, 1996
-------------------------------------------------------------------------------------------------------------
Pro Forma
for 1996
Pro Forma Acquisi-
for 1995 tions,
Pro Forma and 1996 Pending
for 1995 Acquisi- Pro Forma Acquisi-
and 1996 tions, Pend- for 1996 tions,
Pro Forma Acquisi- ing Acquisi- Acquisi- the Com-
for 1995 tions, the tions, the Pro Forma tions, pany Eq-
and 1996 Company Company for 1996 the Com- quity Of-
Acquisi- Equity Equity Of- Acquisi- pany Eq- fering
tions and Offering fering and tions and uity Offer- and the
Company ing and the Com- Company ing and Company
Equity the Com- pany Debt Equity pany Debt Debt
Offer- pany Debt Offer- Offer- Offer- Offer-
1993 1994 1995 ing (1) fering(2) ing (3) 1995 1996 ing (4) ing (5) ing (6)
---- ---- ---- --------- --------- ----------- ---- ---- --------- ----------- -------
(In thousands, except
per share data)
STATEMENT OF OPERA-
TIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ...$ 11,070 $ 15,866 $ 18,718 $ 59,610 $ 59,610 $ 91,496 $ 7,878 $ 16,806 $ 30,240 $ 30,240 $ 46,566
Cost and expenses 11,683 17,180 24,007 68,892 68,892 101,132 9,077 24,497 38,042 38,042 56,008
Loss from opera-
tions .......... (613) (1,314) (5,289) (9,282) (9,282) (9,636) (1,199) (7,691) (7,802) (7,802) (9,442)
Interest expense . 175 388 837 8,960 12,253 15,403 220 2,091 2,900 5,872 6,922
Loss before extra-
ordinary item .. (779) (1,695) (6,110) (18,407) (21,174) (25,420) (1,413) (9,780) (10,763) (13,210) (16,442)
Net loss ......... (779) (1,695) (6,110) (1,413) (10.047)
Net loss appli-
cable to common
shareholders (7) (986) (1,987) (6,419) (19,060) (21,828) (26,703) (1,568) (12,185) (10,898) (13,345) (16,577)
Net loss per
common share (7) (0.96) (1.35) (3.29) (1.57) (1.80) (2.15) (0.99) (3.41) (0.85) (1.04) (1.29)
Weighted average
number of
common shares ....1,031,384 1,470,188 1,950,561 12,115,561 12,115,561 12,115,561 1,586,142 3,576,381 12,871,427 12,871,42712,871,427
Financial Ratios
and Operating
Data:
EBITDA (8) ........ 283 922 1,264 10,381 10,381 21,244 233 2,956 6,397 $6,397 $10,177
EBITDA margin (9) . 2.56% 5.81% 6.75% 17.42% 17.42% 23.22% 2.96% 17.59% 21.15% 21.15% 21.86%
Ratio of EBITDA
to interest
expense ......... 1.62 2.38 1.5 1.16 .85 1.38 1.06 1.41 2.21 1.09 1.47
Number of public
pay telephones
in service ...... 2,350 4,891 9,458 24,074 39,274 5,038 14,826 24,813 40,013
</TABLE>
As of June 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA FOR THE POA
FOR AND AMTEL
POA AND ACQUISI-
AMTEL TIONS, THE
ACQUISI- PENDING
TIONS, THE ACQUISI-
COMPANY TIONS, THE
PRO FORMA FOR DEBT OFFER- COMPANY
POA AND AMTEL ING DEBT OFFER-
ACQUISITIONS AND THE ING AND THE
AND THE COM- COMPANY COMPANY
PANY EQUITY EQUITY OF- EQUITY OF-
ACTUAL OFFERING (10) FERING (11) FERING (12)
---------- -------------- ----------- ------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Total assets ................ $ 52,043 $ 90,451 $115,571 $151,842
Long-term debt and ob-
ligations under capital
leases (including current
installments) (13) .......... 28,764 41,086 77,552 113,114
14% Redeemable Pre-
ferred Stock ................ 6,404 6,404 6,404 6,404
Non-mandatorily redeem-
able preferred stock,
common stock and other
shareholders' equity ........ 10,117 37,571 26,225 26,225
Working capital (defi-
cit) (14) ................... (8,984) 4,637 34,027 10,928
</TABLE>
(1) Gives effect to the acquisitions of International Pay Phones, Inc. of
Tennessee and of International Pay Phones, Inc. of South Carolina (herein
collectively referred to as "IPP"), Paramount Communications Systems, Inc.
("Paramount"), POA and Amtel (collectively, the "1996 Acquisitions") and
the acquisitions of World Communications, Inc. ("World") and Public
Telephone Corporation ("Public Telephone") (together, the "1995
Acquisitions") and the Company Equity Offering, as if such transactions had
occurred on January 1, 1995. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions,
the Company Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1995, and assuming $35 million is
escrowed for 3 months and then utilized to purchase Notes from the
bondholders. Such unaudited pro forma financial data is not necessarily
indicative of the results of operations that might have occurred if the
transactions had taken place on such date or which might occur in any
future period. (3) Gives effect to the 1995 Acquisitions, the 1996
Acquisitions, and the Pending Acquisitions (collectively, the
"Acquisitions."), the Company Equity Offering and the Company Debt
Offering, as if such transactions had occurred on January 1, 1995. Such
unaudited pro forma financial data is not necessarily indicative of the
results of operations that might have occurred if the transactions had
taken place on such date or which might occur in any future period. (4)
Gives effect to the 1996 Acquisitions and the Company Equity Offering, as
if such transactions had occurred on January 1, 1996. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken place on
such date or which might occur in any future period. (5) Gives effect to
the 1996 Acquisitions, the Company Equity Offering and the Company Debt
Offering, as if such transactions had occurred on January 1, 1996, and
assuming $35 million is escrowed for 3 months and then utilized to purchase
Notes from the bondholders. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period. (6) Gives effect to the 1996 Acquisitions, the
Pending Acquisitions, the Company Equity Offering and the Company Debt
Offering, as if such transactions had occurred on January 1, 1996. Such
unaudited pro forma financial data is not necessarily indicative of the
results of operations that might have occurred if the transactions had
taken place on such date or which might occur in any future period. (7) Pro
forma net loss applicable to common shareholders excludes the extraordinary
loss on debt restructuring and the loss on redemption of 10% Preferred (as
defined herein), 8% Preferred (as defined herein) and 7% Preferred (as
defined herein) realized in March 1996. (8) EBITDA represents earnings
before interest income, interest expense, income taxes, depreciation,
amortization and other unusual charges and settlements of employment
contracts. EBITDA is not intended to represent an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance, or as
an alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a measure of
liquidity. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the public pay telephone
industry to analyze comparable public pay telephone companies on the basis
of operating performance, leverage and liquidity. (9) EBITDA margin is
calculated by dividing (a) EBITDA by (b) total revenues. EBITDA margin is a
measure commonly used in the Company's industry as an indicator of the
efficiency of the Company's operations. (10) Gives effect to the
acquisitions of POA and Amtel and the Company Equity Offering, as if such
transactions had occurred on June 30, 1996. (11) Gives effect to the
acquisitions of POA and Amtel, the Company Debt Offering and the Company
Equity Offering, as if such transactions had occurred on June 30, 1996 and
assuming the $35 million escrowed for 3 months is then utilized to purchase
Notes from the bondholders. (12) Gives effect to the acquisitions of POA
and Amtel and the Pending Acquisitions, and the Company Debt Offering and
the Company Equity Offering, as if such transactions had occurred on June
30, 1996. (13) Excludes $5,850 constituting the unamortized portion of
long-term debt discount, which arose from the original allocation of
proceeds to warrants issued to the Lenders (as defined herein) in
connection with the Credit Agreement. (14) Working capital (deficit) is
calculated by subtracting the Company's current liabilities from its
current assets.
RISK FACTORS
Investment in the Common Stock offered hereby involves a
high degree of risk. In addition to the other information
contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating the
Company and its business before purchasing any of the shares of
Common Stock offered hereby.
SUBSTANTIAL LEVERAGE AND EFFECT ON ABILITY TO PAY INDEBTEDNESS
The Company will have substantial indebtedness upon the
consummation of the Company Debt Offering. As of June 30, 1996
on a pro forma basis after giving effect to the Acquisitions, the
Company Debt Offering and the Company Equity Offering, the
Company's total indebtedness was $118.9 million, its total assets
were $157.5 million and its mandatorily redeemable preferred
stock and other equity was $32.3 million, with the ability,
subject to certain limitations described herein, to incur approx-
imately $50 million of additional indebtedness under a new senior
credit facility expected to be entered into by the Company upon
consummation of the Company Debt Offering (the "New Credit
Agreement"). In addition, earnings were insufficient to cover
fixed charges by approximately $6.1 million and $9.8 million for
the year ended December 31, 1995 and the six months ended June
30, 1996, respectively.
The Company's high degree of leverage could have important
consequences for the Company, including: (i) the ability of the
Company to obtain additional financing for acquisitions, working
capital, capital expenditures or other purposes, if necessary,
may be impaired or such financing may not be on terms favorable
to the Company; (ii) a substantial portion of the Company's cash
flow will be used to pay the Company's interest expense, which
will reduce the funds that would otherwise be available to the
Company for its operations and future business opportunities;
(iii) a decrease in net operating cash flows or an increase in
expenses of the Company could make it difficult for the Company
to meet its debt service requirements and force it to modify its
operations; (iv) the Company may be more highly leveraged than
some of its competitors which may place it at a competitive
disadvantage; and (v) the Company's high degree of leverage may
make it more vulnerable to a downturn in its business or the
economy generally. Any inability of the Company to service its
indebtedness or obtain additional financing as needed would have
a material adverse effect on the Company's business, results of
operations or financial condition. See "--Risks of Growth Strate-
gy."
The ability of the Company to make cash payments to satisfy
its substantial indebtedness, including the Notes, will depend
upon its future operating performance, which is subject to
prevailing economic conditions, and to financial, business and
other factors beyond the Company's control. Based upon the
Company's cash flow from operations and the proceeds to the
Company from the Company Debt Offering and the Company Equity
Offering, the Company believes that it will have the funds
necessary to meet the principal and interest payments on its debt
as they become due and to operate its business. However, there
can be no assurance that the Company will be able to do so or
that the Company Equity Offering and the Company Debt Offering
will be consummated. If the Company is unable to generate
sufficient earnings and cash flow to meet its obligations with
respect to its outstanding indebtedness, including the Notes,
refinancing of certain of the debt obligations or asset disposi-
tions might be required. In the event debt refinancing is
required, there can be no assurance that the Company can effect
such refinancing on satisfactory terms or that the refinancing
will be permitted by the lenders under the New Credit Agreement,
the other creditors of the Company or by the terms of the Inden-
ture pursuant to which the Notes will be issued. In addition,
asset dispositions may be made under circumstances which might
not be favorable to realizing the best price for such assets.
Moreover, there can be no assurance that assets can be sold
promptly enough, or for amounts sufficient to satisfy outstanding
debt obligations. The New Credit Agreement is expected to
contain certain restrictions on the Company's ability to sell
assets and on the use of proceeds from permitted assets sales.
See "Description of Certain Indebtedness--The New Credit Agree-
ment." For restrictions on debt refinancing and asset disposi-
tions under the Indenture, see "Description of Certain Indebted-
ness--The Notes."
GOVERNMENT REGULATION
The operations of the public pay telephone industry are
regulated by the public service or utility commissions of the
various states and, to a lesser extent, by the FCC. In particu-
lar, the Company must obtain approvals to operate public pay
telephones from the public utility commissions of most states in
which the Company operates. In addition, from time to time
legislation is enacted by Congress or the various state legisla-
tures that affects the telecommunications industry generally and
the public pay telephone industry specifically. Court decisions
interpreting laws applicable to the telecommunications industry
may also have a significant effect on the public pay telephone
industry. Changes in existing laws and regulations as well as
the creation of new ones, applicable to the activities of the
Company or other telecommunication businesses (including the
extent of competition, the charges of providers of interexchange
and operator services and the implementation of new technolo-
gies), particularly in the states of Florida, Texas and Califor-
nia, may have a material adverse effect on the Company's busi-
ness, results of operations or financial condition.
The recently enacted Section 276 ("Section 276") of the
Telecommunications Act of 1996 (the "Telecommunications Act") and
the implementing rules adopted by the FCC pursuant to Section 276
are expected to have a significant effect on the public pay
telephone industry. For a discussion of the potential effects of
Section 276 on the public pay telephone industry and competition
within this industry, including the FCC's rules to implement
Section 276, see "Business--Governmental Regulations" and "--Compe-
tition." Since neither Section 276 nor the FCC rules have yet
been interpreted by the courts, there can be no assurance that
the rules and policies ultimately adopted thereunder will not
adversely affect the Company.
HISTORY OF LOSSES
The Company was incorporated in 1984 and began providing
commercial public pay telephone services in 1986. Although the
Company has experienced revenue growth since the beginning of its
operation, the Company has operated at a loss since its incep-
tion. For the year ended December 31, 1995 and for the six
months ended June 30, 1996, the Company has incurred losses
before taxes and extraordinary item of approximately $6,109,697
and $10,047,417, respectively, and on a pro forma basis after
giving effect to the Acquisitions, the Company Debt Offering and
the Company Equity Offering would have incurred losses before
taxes and extraordinary items of $25,271,191 and $16,913,519,
respectively. There can be no assurance that revenue growth will
continue or that the Company will ever achieve or sustain profit-
ability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated finan-
cial statements of the Company and notes thereto contained
elsewhere in this Prospectus.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the New Credit Agreement and the
Indenture expected to be entered into by the Company will impose
restrictions that affect, among other things, the ability of the
Company to incur debt, pay dividends, merge, dispose of assets,
create liens and make investments and capital expenditures. See
"Description of Certain Indebtedness." The New Credit Agreement
is expected to be secured and guaranteed by all of the Company's
subsidiaries. The Credit Agreement requires, and the New Credit
Agreement is expected to require, the Company to satisfy certain
financial covenants on a quarterly basis. The Company was not in
compliance with various financial covenants contained in the
Credit Agreement at June 30, 1996 and subsequently received a
waiver of such non-compliance from the Lenders. The Credit
Agreement was amended on October 8, 1996 to make the covenants
less restrictive and, although there can be no assurance, the
Company expects to be in compliance with such covenants as of
September 30, 1996. The ability of the Company to comply with
such financial covenants can be affected by events beyond the
Company's control, and there can be no assurance that the Company
will achieve operating results that comply with such covenants.
A breach of any of these covenants could result in a default
under the New Credit Agreement and other indebtedness of the
Company. In the event of any such default, the lenders could
elect to declare all amounts borrowed under the New Credit
Agreement, together with accrued interest, to be due and payable.
If the Company were unable to pay such amounts, the lenders could
proceed against their collateral. If the New Credit Agreement
indebtedness were to be accelerated, there can be no assurance
that the assets of the Company would be sufficient to repay in
full such indebtedness and the other indebtedness of the Company.
POSSIBLE NON-CONSUMMATION OF THE PENDING ACQUISITIONS AND THE
PUBLIC OFFERINGS
The consummation of the Cherokee Acquisition, which is
anticipated to occur in January 1997, is subject to certain
closing conditions, including the negotiation and execution of a
definitive purchase agreement by November 30, 1996 and the
receipt of approval from the board of directors and stockholders
of Cherokee. The consummation of the Texas Coinphone Acquisi-
tion, which is also anticipated to occur in January 1997, is
subject to similar closing conditions. The Company expects to
use a portion of the net proceeds from the Company Debt Offering
to finance the Pending Acquisitions. Although management be-
lieves that all such conditions to consummate the Pending Acqui-
sitions will be satisfied, including the consummation of the
Company Debt Offering, there can be no assurance that such
conditions will be satisfied or waived or that the closings will
occur. A portion of the Notes will be subject to an offer to
repurchase by the Company to be made on the Special Offer Date at
the Special Offer Price if the Cherokee Acquisition is not
consummated prior to ________ __, 1997. See "Description of
Certain Indebtedness The Notes."
The closing of the Company Equity Offering is expected to
occur in December 1996 and the closing of the Company Debt
Offering is expected to occur simultaneously with, or shortly
after, consummation of the Company Equity Offering, although
there can be no assurance that either offering will be consummat-
ed. If the Company Debt Offering is not consummated, there can
be no assurance that the Company will be able to raise the
additional funds necessary to pay the purchase price for the
Pending Acquisitions.
RISKS OF GROWTH STRATEGY
The Company is subject to various risks associated with an
acquisition growth strategy, including the risk that the Company
will be unable to integrate successfully and manage the acquired
companies or to identify and acquire suitable companies in the
future or to integrate successfully and manage any additional
acquired companies. Since September 1, 1995, the Company has
acquired 19,053 public pay telephones, which represent approxi-
mately 77% of the Company's public pay telephones in operation
after giving effect to such completed acquisitions. Accordingly,
prospective investors have a limited basis for evaluating the
performance of these assets under the Company's management.
There can be no assurance that companies acquired or to be
acquired will be beneficial to the successful implementation of
the Company's overall strategy or will ultimately produce returns
that justify the Company's investment, or that the Company will
be successful in integrating and managing the acquired companies
or achieving meaningful economies of scale. The Company may also
be required to hire additional personnel and senior management in
order to continue its acquisition program. The dedication of
management resources to such efforts may detract attention from
the day-to-day business of the Company. There can be no assur-
ance that there will not be substantial costs associated with
such activities or that there will not be other material adverse
effects of these integration efforts, which could have a material
adverse effect on the Company's business, results of operations
or financial condition. Furthermore, there can be no assurance
that competition for acquisitions will not grow, thereby increas-
ing the costs of making acquisitions. While management believes
that pursuing its growth strategy will improve its overall market
position and, ultimately, its profitability, there can be no
assurance that this will occur. The Company's ability to grow
internally by installing additional public pay telephones depends
on numerous factors, including locating satisfactory sites for
public pay telephones, hiring qualified employees to service the
sites and raising additional capital or otherwise financing such
expansion. See "Business Business Strategy."
The Company's growth strategy requires substantial capital
investment. Capital is needed not only for acquisitions, but
also for the effective integration, operation and expansion of
such businesses. The Company may incur additional debt to
finance its expansion strategy which may cause an increase in its
interest expense and divert cash flow which would otherwise be
available to the Company for its operations and future business
opportunities. The Company may issue shares of Common Stock or
other equity-related securities to finance future acquisitions,
which may result in the dilution of the Company's shareholders.
In the event that the Company chooses to issue Common Stock as
acquisition consideration and the Common Stock does not maintain
a sufficient valuation, or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company may be required to
utilize more of its cash resources, if available, in order to
continue its acquisition program. There can be no assurance that
acceptable financing for future acquisitions or for the integra-
tion and expansion of existing businesses can be obtained when it
is needed or that, if available, it will be on terms the Company
deems acceptable. As a result, the Company might be unable to
implement successfully its growth strategy.
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon
the contributions of its executive officers and other key person-
nel. The loss of services of one or more of its executive
officers or key personnel could have a material adverse effect on
the Company's business, results of operations or financial
condition. The Company's success also will depend in part on its
ability to attract and retain other qualified and skilled employ-
ees. There can be no assurance that the Company will be able to
identify, hire or retain such employees. The Company's inability
to identify, hire or retain qualified personnel could have a
material adverse effect on the Company's business, results of
operations or financial condition. See "Management" and "Busi-
ness--Employees."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURE
The Company outsources its long distance service and opera-
tor service operations to a number of subcontractors, including
Intellicall, the Company's primary provider of such services,
American Telephone & Telegraph Company ("AT&T"), Bell South
Telecommunications, Inc. ("Bell South"), Opticom, a division of
One Call Communications, Inc. ("Opticom"), and Conquest Telecom-
munications Service Company ("Conquest"). Such operations
require that the switching equipment and the equipment of its
long distance service and operator providers be operational 24
hours per day, 365 days per year. The Company's long distance
and OSPs may experience temporary service interruptions or
equipment failure which may result from causes beyond the
Company's control. In addition, the Company's public pay tele-
phones may experience line interruptions in their connections to
the LECs due to weather conditions or other natural occurrences
such as earthquakes or floods which are beyond the Company's
control. Any such event could have a material adverse effect on
the Company.
DEPENDENCE UPON THIRD-PARTY PROVIDERS
The Company's ability to complete operator service and
direct dial long distance calls is dependent upon third party
carriers for the transmission of calls, with providers of opera-
tor support, validation of credit card and calling card billing
information and with billing and collection services. While the
Company believes that it has access to several providers of these
services at competitive rates and expects to continue to have
such access in the foreseeable future, the continuing availabili-
ty of these resources cannot be assured.
COMPETITION
The public pay telephone industry is, and can be expected to
remain, highly competitive. While the Company's principal
competition comes from BOCs and other LECs, the Company also
competes for locations with other independent public pay tele-
phone companies, some of which may have greater financial re-
sources than the Company. Competition from these sources could
prevent the Company from obtaining or maintaining desirable
locations for its public pay telephones, could cause the Company
to pay higher commissions on the revenues generated by its public
pay telephones or could affect the Company's ability to complete
future acquisitions thereby reducing the Company's profits. The
Company also competes with long distance companies that provide
operator services to owners of property on which LEC-owned public
pay telephones are located and to hotels, motels and similar
locations. In addition, the Company competes with providers of
cellular communications services and personal communications
services (wireless), which provide an alternative to the use of
public pay telephones.
Furthermore, pursuant to the recently enacted Sec-
tion 271 of the Telecommunications Act and the FCC's implementing
regulations, BOCs may now seek FCC approval to offer interLATA
long distance service to their customers, including interLATA
service originating from public pay telephones. The FCC may
grant such approval on a state-by-state basis once a BOC has (1)
met the requirements of the Telecommunications Act's fourteen
point competitive checklist and (2) entered into an approved
interconnection agreement with at least one unaffiliated, facili-
ties-based competitor in some portion of the state pursuant to
which such competitor provides both business and residential
service (or that by a certain date no such competitors have
"requested" interconnection as defined in the Telecommunications
Act). Certain BOCs may receive permission from the FCC to offer
interLATA long distance service as early as 1997, although the
timing of the FCC's approval depends in part on the outcome of
pending federal appeals court litigation concerning related FCC
regulations. Once it has received FCC approval for a particular
state, a BOC will be able to generate revenues from this new
interLATA long distance service. In addition, the BOC may be
better able to compete with independent public pay telephone
providers for locations to install its public pay telephones
because it will be able to offer location providers higher
commissions for long distance calls than those currently offered
by independent public pay telephone providers. This potential
competition for locations may have a material adverse effect on
the Company's business, results of operation or financial condi-
tion.
TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by
steady technological change, frequent new service introductions
and evolving industry standards. The Company believes that its
future success will depend on its ability to anticipate and
respond to such changes on a timely basis. There can be no
assurance that the Company will have sufficient resources to make
the investments necessary to acquire new technology or to intro-
duce new services that would satisfy an expanded range of custom-
er needs.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorpora-
tion could, together or separately, discourage potential acquisi-
tion proposals, delay or prevent a change in control of the
Company and limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common
Stock. These provisions include the authority of the Board of
Directors to issue shares of preferred stock with rights and
privileges which could be senior to the Common Stock, without
obtaining shareholder approval. The issuance of preferred stock,
while providing flexibility in connection with possible acquisi-
tions and other corporate transactions, could have the effect of
making it more difficult for a third party to acquire, or dis-
courage a third party from acquiring, a significant percentage of
the outstanding voting stock of the Company. Although the
Company has the ability to use such provisions as anti-takeover
measures, the Company currently has no intention to issue such
preferred stock in the future. See "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON
FUTURE MARKET PRICES
The Company can make no prediction as to the effect, if any,
that sales of additional shares of Common Stock or the availabil-
ity of shares for future sale will have on the market price of
the Common Stock. Sales in the public market of substantial
amounts of the Common Stock (including shares issued upon the
exercise of outstanding options or warrants), or the perception
that such sales could occur, could depress prevailing market
prices for the Common Stock. Such sales also may make it more
difficult for the Company to sell equity securities or equity-
related securities in the future at a time and price that the
Company deems appropriate.
After giving effect to the Company Equity Offering, the
Company would have _______ shares of Common Stock outstanding as
of September 30, 1996. In addition, at September 30, 1996, an
aggregate of 12,557,876 shares of Common Stock have been reserved
for issuance pursuant to (i) the exercise of options and warrants
to purchase 2,464,902 shares of Common Stock, all of which were
immediately exercisable, and (ii) the conversion of shares of the
Company's Series A Preferred (as defined herein), Series B
Preferred (as defined herein) and 14% Preferred (as defined
herein). All of the 13,304,263 shares of Common Stock, when sold
hereby, together with approximately ________ shares (consisting
of shares sold in the Company Equity Offering and shares of
Common Stock sold pursuant to Rule 144 as described below) will
be freely transferable without restriction under the Securities
Act, unless held by an affiliate of the Company. The remaining
outstanding shares of Common Stock held by existing stockholders
are "restricted securities" of the Company within the meaning of
Rule 144 under the Securities Act and may not be sold unless they
are registered under the Securities Act or sold pursuant to an
exemption from registration thereunder, including the exemption
contained in Rule 144, which contains certain volume and other
resale limitations. Pursuant to Rule 144(k), however, a person
(or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at the time of sale and has
not been an affiliate during the three months immediately preced-
ing the sale may sell such shares without regard to such volume
and other resale limitations of Rule 144 provided that a period
of at least three years has elapsed since the later of the date
the securities were acquired from the issuer or from an affiliate
of the issuer.
In connection with the Company Equity Offering,
Internationale Nederlanden (U.S.) Capital Corporation ("ING") and
Cerberus Partners, L.P. ("Cerberus" and, together with ING, the
"Lenders"), who are both Selling Shareholders and hold approxi-
mately 67% of the shares of Common Stock being registered hereby,
have agreed not to transfer, sell or otherwise dispose of shares
of Common Stock (except for 250,000 shares which may be sold by
each of ING and Cerberus as part of the Company Equity Offering or
otherwise) prior to the expiration of 360 days after the effective
date of the registration statement relating to the Company Equity
Offering (the "Effective Date") without the consent of Southcoast
Capital Corporation except as follows: (i) up to 900,000 shares
in the aggregate may be transferred, sold or otherwise disposed of
by each of ING and Cerberus during the period commencing on the 181st
day following the Effective Date and ending on the 270th day
following the Effective Date and (ii) up to 1,150,000 shares in the
aggregate (including any shares sold pursuant to clause (i)) may
be transferred, sold or otherwise disposed of by each of ING and
Cerberus during the period commencing on the 271st day following the
Effective Date and ending on the 360th day following the Effective
Date. In addition, other Selling Shareholders who hold approximately
25% of the shares of Common Stock being registered hereby have agreed
not to transfer, sell or otherwise dispose of such shares for a period
of 180 days commencing on the date of the consummation of the Company
Equity Offering without the consent of Southcoast Capital Corporation.
In connection with the Company Equity Offering, the Company
and its executive officers and directors have agreed pursuant to
lock-up agreements that they will not offer or sell any shares of
Common Stock of the Company beneficially owned by them during a
period of 180 days (the "Lock-up Period") following the Effective
Date without the prior written consent of Southcoast Capital
Corporation, except that the Company may issue shares of Common
Stock upon the exercise of options or in connection with acquisi-
tions. After the Lock-up Period, all such shares may be sold in
accordance with Rule 144 under the Securities Act.
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for
the Company's Common Stock. Quarterly operating results of the
Company, changes in general conditions in the economy, the
financial markets of the telecommunications industry or other
developments affecting the Company or its competitors, could
cause the market price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years, the stock market
and, in particular, the telecommunications industry segment, has
experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by
many companies for reasons unrelated to their operating perfor-
mance.
SEASONALITY
The Company's revenues have fluctuated seasonally on a
historical basis. The Company's public pay telephones in the
northern and western states, some of which are located outdoors,
typically experience reduced revenues in the first quarter due to
weather conditions, which may have a material adverse effect on
the Company's operating performance. Revenues are typically
highest in the fourth quarter because of the increased volume of
calls made during the holiday season.
DEPENDENCE ON SIGNIFICANT CUSTOMER
The Company's public pay telephone operations are diversi-
fied on both a geographical and customer account basis. Current-
ly, it owns and operates public pay telephones in 41 states and
the District of Columbia (approximately 95% of which public pay
telephones are located in 17 states) through agreements with both
multi-station customers such as shopping malls, convenience
stores, service stations and grocery stores as well as with
single station customers. After giving effect to the consumma-
tion of the Pending Acquisitions, the Company will own and
operate public pay telephones in 43 states, the District of
Columbia and Mexico (approximately 96% of which public pay
telephones are located in 21 states).
The Company owns and operates the public pay telephones for
certain properties owned by The Edward J. DeBartolo Corporation
and its affiliates (which merged with Simon Property Group L.P.
in 1996 and is now known as Simon DeBartolo Group ("Simon
DeBartolo")). The Company derived approximately 15% and 8% of
its total revenue for the year ended December 31, 1995 and the
six months ended June 30, 1996, respectively, from the operation
of these public pay telephones. As the Company expands its
installed public pay telephone base through additional acquisi-
tions and internal growth, it expects that the percentage of
total revenue derived from Simon DeBartolo will continue to
decline. There can be no assurance that the agreements will be
renewed upon expiration. Other than Simon DeBartolo, no single
customer generated more than 5% of the Company's total revenue
for the year ended December 31, 1995 or the six months ended June
30, 1996. On a pro forma basis after giving effect to the
Pending Acquisitions, no single customer would have accounted for
more than 5% of the Company's total revenue for the year ended
December 31, 1995 or the six months ended June 30, 1996.
DIVIDEND POLICY
The Company has never declared or paid any dividend on its
Common Stock. The Company currently intends to retain its
earnings to finance the growth and development of its business
and does not anticipate paying cash dividends in the foreseeable
future. The Credit Agreement restricts the Company's ability to
pay dividends, and the Company cannot pay dividends on the Common
Stock unless dividends are also paid on the Series A Preferred
and the Series B Preferred. See "Dividend Policy."
POSSIBLE CHANGE IN CONTROL
In connection with the Company's Credit Agreement dated
March 15, 1996, as amended (the "Credit Agreement"), with the
Lenders, ING and Cerberus received warrants to purchase a total
of 204,824 shares of Series A Special Convertible Preferred Stock
("Series A Preferred") which, in turn, are convertible into
4,096,480 shares of Common Stock. In addition, $29,000,000 of
the outstanding debt under the Credit Agreement is convertible
into 241,667 shares of Series B Special Convertible Preferred
Stock ("Series B Preferred") which, in turn, is convertible into
a total of 4,833,333 shares of Common Stock. Prior to the
consummation of the Company Equity Offering, ING and Cerberus
intend to exercise warrants in an amount sufficient to purchase
shares of Series A Preferred that are convertible into an aggre-
gate of 500,000 shares of Common Stock, which shares will be sold
in the Company Equity Offering. Upon consummation of the Company
Equity Offering, ING and Cerberus will still have the right to
acquire 3,596,480 shares of Common Stock upon exercise of the
remaining warrants and 4,833,333 shares of Common Stock assuming
conversion of the outstanding debt under the Credit Agreement,
which would result in ownership in the aggregate of ___% of the
Company's Common Stock (based on the amount outstanding as of
September 30, 1996 after giving effect to the Company Equity
Offering). Upon consummation of the Company Equity Offering and
the Company Debt Offering and the repayment of all outstanding
debt under the Credit Agreement, ING and Cerberus will still have
the right to acquire 3,596,480 shares of Common Stock upon
exercise of the remaining warrants, which would result in owner-
ship in the aggregate of % of the Company's Common Stock
(based on the amount outstanding as of September 30, 1996 after
giving effect to the Company Equity Offering).
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus that reflect projections or
expectations of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for
future operations, including those relating to the Company's
services and ability to generate additional revenues, are "for-
ward looking" statements, within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Such
statements include, but are not limited to, the anticipated
effects of Section 276 of the Telecommunications Act and the
FCC's implementing regulations, the achievement of cost savings
from the acquisitions described herein and the availability of
capital resources.
No assurance can be given that actual results or events will
not differ materially from those projected, estimated, assumed or
anticipated in any such forward looking statements. Important
factors that could result in such differences, in addition to the
risk factors identified above, include: general economic condi-
tions in the Company's markets, including recession, interest
rates and other economic factors; disruption of operations; and
other factors that generally affect businesses.
THE PENDING ACQUISITIONS
THE CHEROKEE ACQUISITION
The Company has entered into a letter of intent dated
October 16, 1996 (the "Cherokee Letter of Intent") to acquire all
of the capital stock of Cherokee for a purchase price of $54
million plus related fees and expenses, subject to certain
purchase price adjustments, which may include an increase of up
to $6 million in cash or common stock payable in two equal
installments due January 1998 and 1999 if the FCC fails to
implement certain rate caps, rate guidelines or third party
preferences during 1997 or 1998, as the case may be. In addi-
tion, the Company will pay $1.25 million in connection with
certain non-competition agreements. Cherokee, with corporate
headquarters in Jacksonville, Texas, is the fifth largest inde-
pendent public pay telephone operator in the United States. At
September 30, 1996, Cherokee owned and operated 12,344 public pay
telephones in 14 states, of which approximately 85% were located
in Texas, New Mexico, Colorado, Utah and Montana. Upon consumma-
tion of the Cherokee Acquisition, the Company expects to acquire
approximately 14,000 public pay telephones from Cherokee (of
which 13,500 will be installed), which include 300 public pay
telephones in Monterrey, Mexico which are owned by a joint
venture in which Cherokee has an approximate 50% interest. The
Company will also acquire Cherokee's public pay telephone enclo-
sure refurbishing and manufacturing facilities in Jacksonville.
Upon consummation of the Cherokee Acquisition and the Texas
Coinphone Acquisition, the Company believes that it will be one
of the two largest independent public pay telephone operators in
the United States. After giving effect to the Pending Acquisi-
tions, the Company will own and operate 38,423 public pay tele-
phones, approximately 44% of which will be located in Texas,
Florida and California.
The consummation of the Cherokee Acquisition is subject to
certain closing conditions, including the negotiation and execu-
tion of a purchase agreement by November 30, 1996 and the receipt
of approval from Cherokee's board of directors and stockholders.
The Cherokee Acquisition is currently expected to close in
January 1997; however, there can be no assurance that the
closing conditions will be satisfied or waived or that the
Cherokee Acquisition will be consummated or if consummated, as to
the final terms thereof. However, the Company will be required
to make an offer to repurchase approximately $35.0 million
aggregate principal amount of the Notes on the Special Offer Date
at the Special Offer Price if the Cherokee Acquisition is not
consummated prior to ________ __, 1997. See "Risk Fac-
tors--Possible Non-Consummation of the Pending Acquisitions and
the Public Offerings" and "Description of Certain Indebted-
ness--The Notes."
Pursuant to the Cherokee Letter of Intent, at the time of
execution of the purchase agreement, the Company will be required
to deposit $520,000 in escrow to be credited toward the purchase
price for the Cherokee Acquisition, which deposit will be for-
feited by the Company if the Company breaches its obligations
under the purchase agreement or the Cherokee Acquisition other-
wise fails to close by January 31, 1997. The Company and Chero-
kee have agreed that at the closing the Company will deposit an
additional $480,000 into an escrow account, representing an
aggregate of $1 million of the purchase price held in escrow to
fund certain indemnification arrangements and purchase price
adjustments. To the extent not utilized to fund such payments,
the escrowed funds will be released as follows: (i) $250,000 on
the 90th day after closing, (ii) $250,000 on the 180th day after
closing and (iii) the balance on the 270th day after closing.
Pursuant to the Cherokee Letter of Intent, the sellers in the
Cherokee Acquisition have each agreed to be personally liable for
any unrecorded expenses and liabilities in excess of $100,000, up
to a maximum of $2,000,000. There can be no assurance, however,
that the escrowed funds will be sufficient to satisfy such
unrecorded expenses and liabilities of Cherokee assumed by the
Company or that the sellers will satisfy their personal indemni-
fication obligations to the Company.
Pursuant to the Cherokee Letter of Intent, certain key
employees of Cherokee will enter into employment and/or non-
competition agreements with the Company upon consummation of the
Cherokee Acquisition.
The Cherokee Letter of Intent requires that the purchase
agreement to be entered into by the Company and Cherokee include
customary representations and warranties with respect to the
condition and operation of Cherokee's business.
The Indenture provides that the Trust Funds will be released
to the Company on the closing date for the Cherokee Acquisition.
THE TEXAS COINPHONE ACQUISITION
The Company has entered into a letter of intent dated
October 9, 1996 (the "Texas Coinphone Letter of Intent") to
acquire 1,200 installed public pay telephones from Texas
Coinphone for a purchase price of approximately $3.7 million,
subject to certain purchase price adjustments. Texas Coinphone,
with corporate headquarters in Bryan, Texas, owns and operates
1,200 public pay telephones in Texas, including Dallas, Houston,
San Antonio and the Bryan/College Station area. The Company
expects to realize significant costs savings in connection with
the integration of the Texas Coinphone business because all the
public pay telephones being acquired are located in Texas.
The consummation of the Texas Coinphone Acquisition is
subject to certain closing conditions, including the negotiation
and execution of a purchase agreement by November 30, 1996. The
Texas Coinphone Acquisition is currently expected to close in
January 1997; however, there can be no assurance that the closing
conditions will be satisfied or waived or that the Texas
Coinphone Acquisition will be consummated, or if consummated, as
to the final terms thereof.
Pursuant to the Texas Coinphone Letter of Intent, at the
time of execution of the purchase agreement the Company will be
required to deposit $150,000 in escrow to be credited toward the
purchase price for the Texas Coinphone Acquisition, which deposit
will be forfeited by the Company if the Texas Coinphone Acquisi-
tion is not consummated as a result of the Company's actions.
The Company and Texas Coinphone have agreed that at the closing
the Company will deposit an additional $180,000 into an escrow
account, representing an aggregate of $330,000 of the purchase
price held in escrow to fund certain indemnification arrangements
and purchase price adjustments. To the extent not utilized to
fund such payments, the escrowed funds will be released as
follows: (i) $150,000 on the 90th day after closing and (ii) the
balance on the first anniversary date of the closing. There can
be no assurance, however, that the escrowed funds will be suffi-
cient to satisfy such liabilities of Texas Coinphone assumed by
the Company.
Pursuant to the Texas Coinphone Letter of Intent, certain
key employees of Texas Coinphone will enter into non-competition
agreements with the Company upon consummation of the Texas
Coinphone Acquisition.
The Texas Coinphone Letter of Intent requires that the
purchase agreement to be entered into by the Company and Texas
Coinphone include customary representations and warranties.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the
sale of Common Stock offered by the Selling Shareholders.
CAPITALIZATION
The following table sets forth the capitalization of the
Company at June 30, 1996 (i) on an actual basis, (ii) on a pro
forma basis to give effect to the acquisitions of POA and Amtel,
and the Company Equity Offering as if such transactions had
occurred on June 30, 1996, (iii) on a pro forma basis to give
effect to the acquisitions of POA and Amtel, the Company Equity
Offering and the Company Debt Offering and assuming the $35.0
million held in escrow for three months is then utilized to
purchase Notes from the bondholders as if such transactions had
occurred on June 30, 1996 and (iv) on a pro forma basis as set
forth in the preceding clause (iii) (except for the repurchase by
the Company of the $35 million of Notes from the bondholders) and
as adjusted to reflect the Pending Acquisitions, as if such
transactions had occurred on June 30, 1996. The following table
should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro
Forma Financial Data" and the financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
As of June 30, 1996
Pro Forma
for the POA
Pro Forma and Amtel
for the POA Acquisitions,
Pro Forma and Amtel the Pending
for the POA Acquisitions, Acquisitions,
and Amtel the Company the Company
Acquisitions Debt Offering Debt Offering
and the Com- and the Com- and the Com-
pany Equity pany Equity pany Equity
Actual Offering Offering Offering
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total long-term debt (includ-
ing current installments):
Credit Agreement, net (1) . $26,372,962 $27,149,508 -- --
New Credit Agreement (2) . -- -- -- --
__% Senior Notes due 2006 . -- -- $75,000,000 $110,000,000
Notes payable (including
obligations under capital
leases) . . . . . . . . . . 2,391,276 13,936,463 2,552,349 3,113,915
--------- ---------- --------- ---------
Total long-term debt
(including current install-
ments) . . . . . . . . . . . 28,764,238 41,085,971 77,552,349 113,113,915
Redeemable preferred stock:
14% cumulative redeemable
convertible preferred
stock: $60 stated value;
200,000 shares authorized;
107,918.19 shares issued
and outstanding; 4,464.48
shares reserved for issu-
ance upon declaration of
dividends (3) . . . . . . 6,404,228 6,404,228 6,404,228 6,404,228
Non-mandatorily redeemable
preferred stock, common
stock and other
shareholders' equity:
Series A special convertible
preferred stock: $0.20 par
value; 250,000 shares au-
thorized; no shares issued . -- -- -- --
Series B special convertible
preferred stock: $0.20 par
value; 250,000 shares au-
thorized; no shares issued . -- -- -- --
Common stock: $.01 par val-
ue; 50,000,000 shares au-
thorized; 5,248,230 shares
issued and outstanding,
actual; 7,577,059 shares
issued and outstanding, pro
forma; 14,327,059 shares
issued and outstanding, pro
forma, as adjusted (4) . . 52,482 143,720 143,270 143,270
Additional paid-in capital 35,702,864 63,066,581 63,066,581 63,066,581
Accumulated deficit (5) . . (25,638,420) (25,638,420) (36,984,810) (36,984,810)
----------- ----------- ----------- -----------
Total non-mandatorily re-
deemable preferred stock,
common stock and other
shareholders' equity . . 10,116,926 37,571,431 26,225,041 26,225,041
----------- ---------- ---------- ----------
Total capitalization . . . . $45,285,392 85,061,630 $110,181,618 $145,743,184
=========== ========== ============ ============
</TABLE>
____________
(1) Excludes $5,850,492 constituting the unamortized portion of the
debt discount, which arose from the original allocation of
proceeds to warrants issued to the Lenders in connection with
the Credit Agreement. The total face amount of the Credit
Agreement outstanding as of June 30, 1996 was $32,223,454.
(2) Upon consummation of the Company Debt Offering and the Company
Equity Offering, the Company does not expect to have any
borrowings under the New Credit Agreement.
(3) The redemption amount of $6,742,980 (plus accrued dividends) is
due on June 30, 2000. If the Company Debt Offering and the
Company Equity Offering are consummated, the Company may elect,
at its option, to redeem approximately $5.5 million of 14%
Preferred.
(4) Does not reflect the issuance of any Common Stock pursuant to
options and warrants outstanding.
(5) Reflects a $2,002,386 reduction (of which $1,227,589 was a non-
cash item) resulting from the redemption of the Company's 10%
Cumulative Redeemable Preferred Stock (the "10% Preferred"), the
8% Cumulative Redeemable Preferred Stock (the "8% Preferred")
and 7% Cumulative Convertible Redeemable Preferred Stock (the
"7% Preferred") on March 15, 1996. See Note 15 to the audited
consolidated financial statements of the Company included
elsewhere in this Prospectus.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on Nasdaq under the symbol "PNTL."
The following table sets forth on a per share basis, for the
periods indicated, the high and low sales prices of the Common
Stock as reported by Nasdaq.
Price Range
High Low
Fiscal 1996:
First Quarter . . . . . . . . . . . . . . $7 7/8 $5
Second Quarter . . . . . . . . . . . . . 6 1/2 2 3/4
Third Quarter . . . . . . . . . . . . . . 5 2
Fourth Quarter (through November 12, 1996)
4 3/8 2 1/4
Fiscal 1995:
First Quarter . . . . . . . . . . . . . . $7 1/8 $4 7/8
Second Quarter . . . . . . . . . . . . . 8 1/4 4 7/8
Third Quarter . . . . . . . . . . . . . . 8 1/4 5 7/16
Fourth Quarter . . . . . . . . . . . . . 8 5/8 5 1/4
Fiscal 1994:
First Quarter . . . . . . . . . . . . . . $20 1/4 $14 1/4
Second Quarter . . . . . . . . . . . . . 15 3/4 8 5/8
Third Quarter . . . . . . . . . . . . . . 9 3/8 6
Fourth Quarter . . . . . . . . . . . . . 11 1/4 6 3/4
On November 12, 1996, the last sale price as reported by
Nasdaq was $3 3/8 per share.
As of September 30, 1996, there were approximately 313
shareholders of record of the Company's Common Stock. The number
of record holders does not take into account shares held in
nominee or "street" name for the account of beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its
Common Stock. The Company currently intends to retain its
earnings to finance the growth and development of its business
and does not anticipate paying cash dividends in the foreseeable
future. The payment of dividends by the Company is restricted by
the Credit Agreement and is expected to be restricted by the New
Credit Agreement, and the Company cannot pay any dividends on its
Common Stock unless dividends are paid to the holders of the
Series A Preferred and Series B Preferred in an amount equal to
that which such holders would have been entitled to receive if
such holders had converted their shares of Series A Preferred or
Series B Preferred, as applicable, into Common Stock prior to the
record date used by the Board of Directors for determining the
holders of Common Stock entitled to receive such dividends. Any
future declaration of dividends will be subject to the discretion
of the Board of Directors of the Company. The timing, amount and
form of dividends (other than with respect to the holders of 14%
Preferred which are only entitled to receive dividends payable in
additional shares of 14% Preferred), if any, will depend, among
other things, on the Company's financial condition, capital
requirements, cash flow, profitability, plans for expansion,
business outlook and other factors deemed relevant by the Board
of Directors of the Company.
SELECTED FINANCIAL DATA
The following tables present selected historical financial
data for the fiscal years ended December 31, 1993, 1994 and 1995
derived from, and which should be read in conjunction with, the
audited consolidated financial statements of the Company and
related notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included
elsewhere in this Prospectus. The following tables also present
selected historical financial data for the six months ended June
30, 1995 and 1996 derived from, and which should be read in
conjunction with, the unaudited consolidated financial statements
of the Company included elsewhere in this Prospectus which, in
the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the interim period financial data. The results
for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the full year.
In addition, the following tables present unaudited pro
forma selected financial and operating data for the Company as of
and for the six months ended June 30, 1996 and the year ended
December 31, 1995, as adjusted to give pro forma effect to (i) in
the case of statement of operations data, (a) the 1995 Acquisi-
tions, the 1996 Acquisitions and the Company Equity Offering as
if such transactions had been consummated at the beginning of the
respective period, (b) the 1995 Acquisitions, the 1996 Acquisi-
tions, the Company Equity Offering and the Company Debt Offering
as if such transactions had been consummated at the beginning of
the respective period and assuming $35 million is escrowed for 3
months and then utilized to purchase Notes from the bondholders
and (c) the Acquisitions, the Company Debt Offering and the
Company Equity Offering as if such transactions had been consum-
mated at the beginning of the respective period and (ii) in the
case of balance sheet data, (a) the acquisitions of POA and Amtel
and the Company Equity Offering as if such transactions had been
consummated on June 30, 1996, (b) the acquisitions of POA and
Amtel, the Company Equity Offering and the Company Debt Offering
as if such transactions had been consummated on June 30, 1996 and
assuming $35 million is escrowed for 3 months and then utilized
to purchase Notes from bondholders and (c) the acquisitions of
POA and Amtel, the Pending Acquisitions, the Company Debt Offer-
ing and the Company Equity Offering as if such transactions had
been consummated on June 30, 1996. See "Pro Forma Financial
Data." The unaudited pro forma data give pro forma effect to the
acquisitions under the purchase method of accounting and certain
other operating assumptions. See "Pro Forma Financial Data."
The unaudited pro forma financial data do not purport to
represent what the Company's results of operations or financial
condition would have actually been or operations of the Company
in any future period would be if the transactions that give rise
to the pro forma adjustments had occurred on the dates assumed.
The following information is qualified by reference to and should
be read in conjunction with "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31 Year Ended December 31, 1995 June 30
---------------------- ---------------------------- ----------------
Pro
Forma
for
1995
and
1996
Acquisi-
Pro tions,
Forma Pend-
Pro for 1995 ing
Forma and 1996 Acquisi-
for Acquisi- tions,
1995 tions, the the
and Company Company
1996 Equity Equity
Acquisi- Offering Offering
tions and and the and the
Company Company Company
Equity Debt Debt
Offering Offering Offer-
1993 1994 1995 (1) (2) ing (3) 1995 1996
------- ------ ------- --------- --------- --------- ------- -------
(In thousands, except
per share data)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................. $11,070 $15,866 $18,718 $59,610 $ 59,610 $91,496 $7,878 $16,806
Cost and expenses............... 11,683 17,180 24,007 68,892 68,892 101,132 9,077 24,497
Loss from operations............ (613) (1,314) (5,289) (9,282) ( 9,282) (9,636) (1,199) (7,691)
Interest expense................ 175 388 837 8,960 12,253 15,403 220 2,091
Loss before extraordinary item.. (779) (1,695) (6,110) (18,407) (21,174) (25,420) (1,413) (9,780)
Net loss........................ (779) (1,695) (6,110) (1,413) (10,047)
Net loss applicable to common
shareholders (7)................ (986) (1,987) (6,419) (19,060) (21,828) (26,073) (1,568) (12,185)
Net loss per common share (7)... (0.96) (1.35) (3.29) (1.57) (1.80) (2.15) (0.99) (3.41)
Weighted average number of
common shares................... 1,031,384 1,470,188 1,950,561 12,115,561 12,115,561 12,115,561 1,586,142 3,576,381
</TABLE>
Six Months Ended
June 30, 1996
--------------------------------
Pro
Forma
for
1996
Acquisi-
Pro tions,
Forma Pend-
for ing
1996 Acquisi-
Pro Acquisi- tions,
Forma tions, the
for the Company
1996 Company Equity
Acquisi- Equity Offering
tions and Offering and the
Com- and the Company
pany Compa- Debt
Equity ny Debt Of-
Offering Offering fering
(4) (5) (6)
------- ------- -------
(In thousands, except
per share data)
Statement of Operations Data:
Total revenues.................. $30,240 $30,240 $46,566
Cost and expenses............... 38,042 38,042 56,008
Loss from operations............ (7,802) (7,802) (9,442)
Interest expense................ 2,900 5,872 6,922
Loss before extraordinary item.. (10,763) (13,210) (16,442)
Net loss........................
Net loss applicable to common
shareholders (7)................ (10,898) (13,345) (16,577)
Net loss per common share (7)... (0.85) (1.04) (1.29)
Weighted average number of
common shares................... 12,871,427 12,871,427 12,871,427
Financial Ratios and Operating
Data:
EBITDA (8)...................... $6,397 $6,397 $10,177
EBITDA margin (9)............... 21.15% 21.15% 21.86%
Ratio of EBITDA to interest
expense......................... 2.21 1.09 1.47
Number of public pay telephones
in service...................... 24,813 40,013
<TABLE>
<CAPTION>
Financial Ratios and Operating
Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA (8)...................... $283 $922 $1,264 $10,381 $10,381 $21,244 $233 $2,956
EBITDA margin (9)............... 2.56% 5.81% 6.75% 17.42% 17.42% 23.22% 2.96% 17.59%
Ratio of EBITDA to interest
expense......................... 1.62 2.38 1.51 1.16 .85 1.38 1.06 1.41
Number of public pay telephones
in service...................... 2,350 4,891 9,458 24,074 39,274 5,038 14,826
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1996
------------------------------------------------------------------------
Pro Forma for the
POA and
Amtel
Pro Forma for Acquisitions, the
POA and Amtel Pending
Acquisitions, Acquisitions, the
Pro Forma for POA the Company Debt Company Debt
and Amtel Offering Offering and
Acquisitions and and the Company the Company
the Company Equity Equity Offering Equity Offering
Actual Offering (10) (11) (12)
Balance Sheet Data: ---------------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total assets.................... $52,043 $90,451 $115,571 $151,842
Long-term debt and obligations
under capital leases
(including current
installments) (13).............. 28,764 41,086 77,552 113,114
14% Redeemable Preferred Stock.. 6,404 6,404 6,404 6,404
Non-mandatorily redeemable
preferred stock, common
stock and other shareholders'
equity.......................... 10,117 37,571 26,225 26,225
Working capital (deficit) (14).. (8,984) 4,637 34,027 10,928
</TABLE>
(1) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions and
the Company Equity Offering, as if such transactions had occurred on
January 1, 1995. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which
might occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, the
Company Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1995, and assuming $35 million
is escrowed for 3 months and then utilized to purchase Notes from the
bondholders. Such unaudited pro forma financial data is not necessarily
indicative of the results of operations that might have occurred if the
transactions had taken place on such date or which might occur in any
future period.
(3) Gives effect to the Acquisitions, the Company Equity Offering and
the Company Debt Offering, as if such transactions had occurred on
January 1, 1995. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which
might occur in any future period.
(4) Gives effect to the 1996 Acquisitions and the Company Equity
Offering, as if such transactions had occurred on January 1, 1996. Such
unaudited pro forma financial data is not necessarily indicative of the
results of operations that might have occurred if the transactions had
taken place on such date or which might occur in any future period.
(5) Gives effect to the 1996 Acquisitions, the Company Equity Offering
and the Company Debt Offering, as if such transactions had occurred on
January 1, 1996, and assuming $35 million is escrowed for 3 months and
then utilized to purchase Notes from the bondholders. Such unaudited
pro forma financial data is not necessarily indicative of the results
of operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period.
(6) Gives effect to the 1996 Acquisitions, the Pending Acquisitions,
the Company Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1996. Such unaudited pro forma
financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken place
on such date or which might occur in any future period.
(7) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption of
10% Preferred (as defined herein), 8% Preferred (as defined herein) and
7% Preferred (as defined herein) realized in March 1996.
(8) EBITDA represents earnings before interest income, interest
expense, income taxes, depreciation, amortization and other unusual
charges and settlements of employment contracts. EBITDA is not intended
to represent an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or as an alternative
to cash flows from operating activities (as determined in accordance
with generally accepted accounting principles) as a measure of
liquidity. The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the public pay telephone
industry to analyze comparable public pay telephone companies on the
basis of operating performance, leverage and liquidity.
(9) EBITDA margin is calculated by dividing (a) EBITDA by (b) total
revenues. EBITDA margin is a measure commonly used in the Company's
industry as an indicator of the efficiency of the Company's operations.
(10) Gives effect to the acquisitions of POA and Amtel and the Company
Equity Offering, as if such transactions had occurred on June 30, 1996.
(11) Gives effect to the acquisitions of POA and Amtel, the Company
Debt Offering and the Company Equity Offering, as if such transactions
had occurred on June 30, 1996 and assuming the $35 million escrowed for
3 months is then utilized to purchase Notes from the bondholders.
(12) Gives effect to the acquisitions of POA and Amtel and the Pending
Acquisitions, and the Company Debt Offering and the Company Equity
Offering, as if such transactions had occurred on June 30, 1996.
(13) Excludes $5,850 constituting the unamortized portion of long-term
debt discount, which arose from the original allocation of proceeds to
warrants issued to the Lenders (as defined herein) in connection with
the Credit Agreement.
(14) Working capital (deficit) is calculated by subtracting the
Company's current liabilities from its current assets.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined, condensed
financial statements adjust the historical statements of opera-
tions data for the year ended December 31, 1995 and the six
months ended June 30, 1996 and adjusts the historical balance
sheet data as of June 30, 1996 to give effect to (i) the acquisi-
tion of World on September 22, 1995, Public Telephone on October
15, 1995, IPP and Paramount on March 15, 1996, Amtel on September
13, 1996, and POA on September 16, 1996; (ii) the pending acqui-
sitions of Cherokee and Texas Coinphone; (iii) the funds borrowed
under the Credit Agreement; (iv) the sale by the Company of
$25,000,000 of Common Stock pursuant to the Company Equity
Offering and the application of the estimated net proceeds
therefrom as set forth under "Prospectus Summary The Company
Equity Offering and the Company Debt Offering"; and (v) the sale
by the Company of $110,000,000 of Notes pursuant to the Company
Debt Offering and the application of the estimated net proceeds
therefrom as set forth under "Prospectus Summary The Company
Equity Offering and the Company Debt Offering." All purchase
price allocations for the Acquisitions, are preliminary in nature
and are subject to change within the next twelve months of each
acquisition based on refinements as actual data becomes avail-
able. The pro forma adjustments are included in the unaudited
pro forma balance sheet as if the transactions had occurred on
June 30, 1996 and in the unaudited pro forma statements of
operations as if the transactions had occurred at the beginning
of each period presented. The unaudited pro forma combined
condensed financial data should be read in conjunction with the
historical financial statements and notes thereto included
elsewhere in this Prospectus, and are not necessarily indicative
of the results of operations that might have occurred if the
transactions had taken place on the dates indicated or which
might occur in any future period.
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
World, Pro Forma
Public Adjustments
PhoneTel Telephone, for 1995
Technolo- IPP and and 1996
gies Paramount a Amtel POA Acquisitions
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $12,130,189 $18,246,442 $9,689,179 $3,747,247 ($295,475)
Non-coin 3,776,501 - 5,459,411 4,418,667 (963,882)
Other 2,811,293 242,481 1,910,550 49,221 (1,612,090)
-----------------------------------------------------------------------------
18,717,983 18,488,923 17,059,140 8,215,135 (2,871,447) b
-----------------------------------------------------------------------------
Operating expenses:
Line and transmission charges 5,475,699 6,377,191 6,862,015 3,599,271 (1,694,515) c
Location commissions 3,467,626 2,361,157 3,921,741 1,178,156 (1,067,000) d
Other operating expenses 5,310,262 1,847,352 2,719,090 289,036 (3,027,295) e
Depreciation and amortization 4,383,049 2,059,628 1,621,029 1,218,095 8,686,142 f
Selling, general and administrative 3,200,742 5,229,060 15,103,091 1,911,624 (14,309,744) g
Other unusual charges and
contractual settlement 2,169,503 - - - -
-----------------------------------------------------------------------------
24,006,881 17,874,388 30,226,966 8,196,182 (11,412,412)
-----------------------------------------------------------------------------
Loss from operations (5,288,898) 614,535 (13,167,826) 18,953 8,540,965
Other income (expense)
Interest expense - related parties - - - - (7,198,404) h
Interest expense - others (836,911) (1,109,102) (7,429,502) (971,141) 7,524,624 i
Interest income 16,112 19,671 - 415 -
Reorganization expenses - - (539,942) - 539,942 j
Other - (405,505) (429,967) (68,517) 429,967 j
-----------------------------------------------------------------------------
Total other income (expense) (820,799) (1,494,936) (8,399,411) (1,039,243) 1,296,129
-----------------------------------------------------------------------------
Loss before income taxes
and extraordinary item (6,109,697) (880,401) (21,567,237) (1,020,290) 9,837,094
Income taxes - 38,100 4,000 (277,720) (38,100) k
-----------------------------------------------------------------------------
Loss before extraordinary item ($6,109,697) ($918,501) ($21,571,237) ($742,570) $9,875,194
=============================================================================
Earnings per share calculation:
Preferred dividend requirements (309,668) (343,567) - - -
-----------------------------------------------------------------------------
Loss before extraordinary item
applicable to common sharehold-
ers ($6,419,365) ($1,262,068) ($21,571,237) ($742,570) $9,875,194
=============================================================================
Loss per common share before
extraordinary item ($3.29)
===============
Weighted average number of shares 1,950,561 1,086,171 2,162,163 166,666
===============================================================
Pro Forma for 1995
Pro Forma for 1995 and 1996 Acquisi-
Pro Forma and 1996 Pro Forma tions, the Company
Adjustments for Acquisitions and Adjustments for Equity Offering and
Company Equity Company Equity the Company Debt the Company Debt
Offering Offering Offering Offering
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Coin calls - $43,517,582 - $43,517,582
Non-coin - 12,690,697 - 12,690,697
Other - 3,401,455 - 3,401,455
-------------- ----------------- --------------- ----------------------
- 59,609,734 - 59,609,734
-------------- ----------------- --------------- ----------------------
Operating expenses:
Line and transmission charges - 20,619,661 20,619,661
Location commissions - 9,861,680 9,861,680
Other operating expenses - 7,138,445 7,138,445
Depreciation and amortization - 17,967,943 17,967,943
Selling, general and administrative - 11,134,773 11,134,773
Other unusual charges and
contractual settlement - 2,169,503 - 2,169,503
-------------- ----------------- --------------- ----------------------
- 68,892,005 - 68,892,005
-------------- ----------------- --------------- ----------------------
Loss from operations - (9,282,271) (9,282,271)
Other income (expense)
Interest expense - related parties $1,060,000 l (6,138,404) $6.138.404 o -
Interest expense - others - (2,822,032) (9,430,876) p (12,252,908)
Interest income - 36,198 525,000 q 561,198
Reorganization expenses - - -
Other - (474,022) - (474,022)
-------------- ----------------- --------------- ----------------------
Total other income (expense) 1,060,000 (9,398,260) (2,767,472) (12,165,732)
-------------- ----------------- --------------- ----------------------
Loss before income taxes
and extraordinary item 1,060,000 (18,680,531) (2,767,472) (21,448,003)
Income taxes - (273,720) - (273,720)
-------------- ----------------- --------------- ----------------------
Loss before extraordinary item $1,060,000 ($18,406,811) ($2,767,472) ($21,174,283)
============== ================= =============== ======================
Earnings per share calculation:
Preferred dividend requirements - (653,235) - (653,235)
-------------- ----------------- --------------- ----------------------
Loss before extraordinary item
applicable to common sharehold-
ers $1,060,000 ($19,060,046) n ($2,767,472) ($21,827,518) r
============== ================= =============== ======================
Loss per common share before
extraordinary item ($1.57) ($1.80) r
================= =================
Weighted average number of shares 6,750,000 m 12,115,561 n 12,115,561
============== ================= =================
Pro Forma
for the 1995 and
1996
Acquisitions,
Pending Acqui-
sitions,
the Company
Pro Forma Pro Forma Equity Offering
Adjustments for Adjustments for and
Texas Pending the Company Debt the Company
Cherokee Coinphone Acquisitions Offering Debt Offering
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $14,036,665 $846,210 - - $58,400,457
Non-coin 15,944,498 553,337 - 29,188,532
Other 505,581 - - - 3,907,036
----------------------------------------------- --------------- ------------------
30,486,744 1,399,547 - - 91,496,025
----------------------------------------------- --------------- ------------------
Operating expenses:
Line and transmission charges 9,673,772 513,036 - - 30,806,469
Location commissions 4,909,445 135,746 - - 14,906,871
Other operating expenses 2,016,935 280,706 ($128,393) s - 9,307,693
Depreciation and amortization 4,298,090 151,926 5,641,393 t - 28,059,352
Selling, general and administrative 5,520,405 357,197 (1,129,896) u - 15,882,479
Other unusual charges and
contractual settlement - - - - 2,169,503
----------------------------------------------- --------------- ------------------
26,418,647 1,438,611 4,383,104 - 101,132,367
----------------------------------------------- --------------- ------------------
Loss from operations 4,068,097 (39,064) (4,383,104) - (9,636,342)
Other income (expense)
Interest expense - related parties - - - - -
Interest expense - others (1,631,416) (57,561) 1,688,977 v (3,150,000) y (15,402,908)
Interest income 57,278 21,563 (21,563) w (525,000) z 93,476
Reorganization expenses - - - - -
Other 1,125,630 281,501 (281,501) x - 651,608
----------------------------------------------- --------------- ------------------
Total other income (expense) (448,508) 245,503 1,385,913 (3,675,000) (14,657,824)
----------------------------------------------- --------------- ------------------
Loss before income taxes
and extraordinary item 3,619,589 206,439 (2,997,191) (24,294,166)
Income taxes 1,399,140 - - (3,675,000) 1,125,420
----------------------------------------------- --------------- ------------------
Loss before extraordinary item $2,220,449 $206,439 ($2,997,191) ($3,675,000) ($25,419,586)
=============================================== =============== ==================
Earnings per share calculation:
Preferred dividend requirements - - - - (653,235)
----------------------------------------------- --------------- ------------------
Loss before extraordinary item
applicable to common sharehold-
ers $2,220,449 $206,439 ($2,997,191) ($3,675,000) ($26,072,821)
=============================================== =============== ==================
Loss per common share before
extraordinary item ($2.15)
==================
Weighted average number of shares 12,115,561
==================
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations are an integral part of these financial statements
Footnotes to the Pro Forma Combined Condensed Statement of
Operations for the year ended December 31, 1995
----------------------------------------------------------
a Represents the operations of World, Public Telephone, IPP and
Paramount for the period from January 1, 1995 through December
31, 1995, or the date of acquisition, as appropriate.
<TABLE>
<CAPTION>
Public IPP and
World Telephone Paramount
January 1, January 1, January 1,
1995 - 1995 - 1995 -
September October December
21, 1995 14, 1995 31, 1995 Combined
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Coin calls $6,258,703 $1,757,054 $10,230,685 $18,246,442
Other 58,345 184,136 - 242,481
-----------------------------------------------------
6,317,048 1,941,190 10,230,685 18,488,923
Operating expenses:
Line & transmission charges 2,706,199 535,771 3,135,221 6,377,191
Location commissions 852,944 196,243 1,311,970 2,361,157
Other operating expenses 1,026,000 112,071 709,281 1,847,352
Depreciation & amortization 855,059 268,262 936,307 2,059,628
Selling, general, & administrative 1,276,056 594,588 3,358,416 5,229,060
-----------------------------------------------------
6,716,258 1,706,935 9,451,195 17,874,388
-----------------------------------------------------
Income from operations (399,210) 234,255 779,490 614,535
Other income (expense):
Interest expense (590,980) (304,664) (213,458) (1,109,102)
Interest income 834 3,371 15,466 19,671
Other - (321,923) (83,582) (405,505)
-----------------------------------------------------
(590,146) (623,216) (281,574) (1,494,936)
-----------------------------------------------------
Loss before income taxes (989,356) (388,961) 497,916 (880,401)
Income taxes - - 38,100 38,100
Net loss ($989,356) ($388,961) $459,816 ($918,501)
=====================================================
</TABLE>
b Represents the estimated reduction in revenues for assets not
acquired in the acquisition of the following:
1) Amtel $2,859,394
2) POA 12,053
---------------
$2,871,447
===============
c Represents estimated reduction in line and transmission charges
at Amtel to reflect lower volumes and better rates.
d Represents estimated lower location commission at:
Amtel $800,000
World, Public, IPP and Paramount 267,000
---------------
$1,067,000
===============
e Represents estimated reduction in other operating expenses
primarily resulting from eliminating certain offices, redundant
operating personnel, costs of operations not acquired
(principally Amtel) and elimination of costs associated with the
bankruptcy of Amtel, at:
1) World, Public, IPP and Paramount $800,000
2) Amtel 2,131,584
3) POA 95,711
---------------
$3,027,295
===============
f Represents additional depreciation and amortization associated
with the acquired tangible and intangible assets, as follows:
<TABLE>
<CAPTION>
Amount Lives
------ -----
Tangible Intangible
-------- ----------
<S> <C> <C> <C> <C>
1) World, Public, IPP and Paramount $6,116,925 60 36-60
2) Amtel 1,045,167 60 54
3) POA 1,524,050 60 72
--------------
$8,686,142
==============
</TABLE>
g Represents estimated reductions in selling, general and
administrative expenses resulting primarily from eliminating
certain offices, executives and administrative personnel, costs
of operations not acquired (principally Amtel), and elimination
of costs associated with the bankruptcy of Amtel, as follows:
1) World, Public, IPP and Paramount $2,004,051
2) Amtel 11,360,614
3) POA 945,079
-------------
$14,309,744
=============
h Represents additional interest expense for borrowings under the
Credit Agreement:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amount Interest Pro Forma
1) to fund the acquisition of World, Public Borowed Rate Expense
Telephone, IPP and Paramount as if the ------- -------- ---------
borrowings were outstanding from the
beginning of 1995 and the acquisitions
had been made at the beginning of 1995 $31,039,800 13.25% $4,112,776
2) to fund the acquisitions of Amtel and
POA and to pay related expenses and other
obligations 8,776,516 13.25% 1,162,892
3) Accretion of original issue debt discount 1,922,736
---------
$7,198,404
==========
</TABLE>
i Represents reduction in interest expense to reflect elimination
of separate company borrowings as all acquisition debt is
reflected in h) above, as follows:
1) World, Public, IPP and Paramount $650,249
2) Amtel 7,429,502
3) POA (555,125)
--------------
$7,524,624
==============
j Represents elimination of Amtel reorganization expenses
subsequent to filing of bankruptcy and elimination of
non-recurring loss on disposal of assets at Amtel.
k Represents elimination of income taxes.
l Represents elimination of interest expense on $8.0 million
repaid under the Credit Agreement.
m Represents 6,250,000 shares of Common Stock which may be sold
pursuant to the Company Equity Offering, and the exercise of
warrants to purchase, in the aggregate, 25,000 shares of Series
A Preferred and the immediate conversion of the Series A
Preferred into 500,000 shares of Common Stock.
n Loss per share excludes an increase of the loss to common
shareholders of (i) $2,002,386 which was realized on redemption
of the 10% Preferred, 8% Preferred, and 7% Preferred; and (ii)
an extraordinary loss of $267,281 realized on the restructuring
of the Company's debt on March 15, 1996.
o Represents elimination of interest expense incurred under the
Credit Agreement.
p Represents additional interest expense as follows:
<TABLE>
<CAPTION>
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt Offering
(during the period funds are held in
escrow) $110,000,000 12% 3 $3,300,000
Debt pursuant to the Company Debt Offering
assuming escrow amount is utilized to
purchase Notes. 75,000,000 12% 9 6,750,000
In addition, there is additional interest
expense on debt refinanced in the amount of
$650,240, offset by interest savings on the
POA Sellers' notes and repayment of capital
leases in the amount of $1,269,373. (619,124)
------------
$9,430,876
=============
</TABLE>
q Represents interest income estimated to be earned on the escrow
balance of $35,000,000, assuming the balance is retained in
escrow for 3 months and earns interest income at 6%.
r Loss per share excludes an increase of the loss to common
shareholders of an estimated extraordinary loss of $11,346,390
to be realized on the early repayment of the borrowings under
the Credit Agreement.
s Represents the estimated reduction in other operating expenses
primarily resulting from elimination of duplicate facilities and
certain field operations personnel, as follows:
1) Cherokee $40,339
2) Texas Coinphone 88,054
------------
$128,393
============
t Represents additional depreciation and amortization associated
with the acquired tangible and intangible assets for the pending
acquisitions, as follows:
Amount Lives
------ -----
Tangible Intangible
-------- ----------
1) Cherokee $5,243,005 60 82
2) Texas Coinphone 398,388 60 72
---------------
$5,641,393
===============
u Represents estimated reductions in selling, general and
administrative expenses to reflect the elimination of certain
offices, executives and administrative personnel.
1) Cherokee $1,000,000
2) Texas Coinphone 129,896
---------------
$1,129,896
===============
v Represents reduction in interest expense to reflect elimination
of separate company borrowings.
1) Cherokee $1,631,416
2) Texas Coinphone 57,561
---------------
$1,688,
977
===============
w Represents reduction to reflect elimination of Texas Coinphone
interest income.
x Represents elimination of Texas Coinphone other income.
y Represents additional interest expense assuming consummation of
the pending acquisitions and $110,000,000 is outstanding for
full year (additional $35,000,000 at 12% for 9 months).
z Represents elimination of interest income on escrow balance
assuming consummation of the Pending Acquisitions.
<TABLE>
<CAPTION>
PHONE TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Combined Condensed Statement of Operations for the Six Months Ended June 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Pro Forma
Adjustments Pro Forma Adjust-
PhoneTel IPP and for 1996 ments for Company
Technologies Paramount a Amtel POA Acquisitions Equity Offering
----------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C> <C> <C>
Coin calls $10,411,344 $2,473,567 $4,696,852 $1,516,506 - -
Non-coin 5,292,530 - 2,445,875 1,539,280 - -
Other 1,101,636 15,113 62,095 712,439 ($27,625) b -
-------------------------------------------------------------------- ---------------
16,805,510 2,488,680 7,204,822 3,768,225 (27,625) -
-------------------------------------------------------------------- ---------------
Operating expenses:
Line and transmission charges 3,866,207 585,463 2,428,704 698,365 - -
Location commissions 2,536,730 367,269 1,639,127 436,681 - -
Other operating expenses 5,047,451 356,816 321,947 1,060,772 (206,786) c -
Depreciation and amortization 5,312,885 183,931 777,823 596,134 2,062,209 d -
Selling, general and administrative 2,398,724 492,244 2,231,970 985,290 (1,481,569) e -
Other unusual charges and
contractual settlements 5,334,514 - - - - -
-------------------------------------------------------------------- ---------------
24,496,511 1,994,723 7,399,571 3,777,242 373,854 -
-------------------------------------------------------------------- ---------------
Loss from operations (7,691,001) 493,957 (194,749) (9,017) (401,479) -
Other income (expense):
Interest expense - related parties (1,816,890) - - - (581,446) f $530,000 j
Interest expense - others (274,221) (30,881) (6,077) (333,230) (387,311) g -
Interest income 1,976 - 1,606 4,111 - -
Reorganization expenses - - (789,888) - 789,888 h -
Other - (12,638) (959,011) (55,475) 959,011 h -
-------------------------------------------------------------------- ---------------
Total other income (expense) (2,089,135) (43,519) (1,753,370) (384,594) 780,142 530,000
-------------------------------------------------------------------- ---------------
Loss before income taxes
and extraordinary item (9,780,136) 450,438 (1,948,119) (393,611) 378,663 530,000
Income taxes - - 4,000 - (4,000) i -
-------------------------------------------------------------------- ---------------
Loss before extraordinary item ($9,780,136) $450,438 ($1,952,119)($393,611) $382,663 $530,000
==================================================================== ===============
Earnings per share calculation:
Preferred divided requirement (134,741) - - - - -
-------------------------------------------------------------------- ---------------
Loss before extraordinary
item applicable to
common shareholders ($9,914,877) $450,438 ($1,952,119)($393,611) $382,663 $530,000
==================================================================== ===============
Loss per common share before
extraordinary item ($2.77)
================
Weighted average number of shares 3,576,381 216,217 2,162,163 166,666 - 6,750,000 k
==================================================================== ===============
Pro Forma
for 1996
Acquisitions,
Pro Forma the Company
Pro Forma for Adjustments Equity Offering
1996 Acquisitions for and
and Company the Company the Company Texas
Equity Offering Debt Offering Debt Offering Cherokee Coinphone
------------------------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C> <C>
Coin calls $19,098,269 - $19,098,269 $8,249,881 $572,925
Non-coin 9,277,685 - 9,277,685 6,785,142 289,675
Other 1,863,658 - 1,863,658 428,537 -
--------------- --------------- --------------------------------------------
30,239,612 - 30,239,612 15,463,560 862,600
--------------- --------------- --------------------------------------------
Operating expenses:
Line and transmission charges 7,578,739 - 7,578,739 4,158,130 292,576
Location commissions 4,988,807 - 4,988,807 2,395,668 96,632
Other operating expenses 6,580,200 - 6,580,200 3,601,427 171,554
Depreciation and amortization 8,932,982 - 8,932,982 2,523,591 37,005
Selling, general and administrative 4,626,659 - 4,626,659 2,322,048 189,031
Other unusual charges and
contractual settlements 5,334,514 - 5,334,514 - -
--------------- --------------- --------------------------------------------
38,041,901 - 38,041,901 15,000,864 786,798
--------------- --------------- --------------- -------------------------
Loss from operations (7,802,289) - (7,802,289) 462,696 75,802
Other income (expense):
Interest expense - related parties (1,868,336) $1,851,297 m (17,039) - -
Interest expense - others (1,031,720) (4,823,382) n (5,855,102) (794,626) (28,214)
Interest income 7,693 525,000 o 532,693 - -
Reorganization expenses - - - - -
Other (68,113) - (68,113) - 83,073
--------------- --------------- --------------------------------------------
Total other income (expense) (2,960,476) (2,447,085) (5,407,561) (794,626) 54,859
--------------- --------------- --------------------------------------------
Loss before income taxes
and extraordinary item (10,762,765) (2,447,085) (13,209,850) (331,930) 130,661
Income taxes - - - 16,896 -
--------------- --------------- --------------------------------------------
Loss before extraordinary item ($10,762,765) ($2,447,085) ($13,209,850) ($348,826) $130,661
=============== =============== ============================================
Earnings per share calculation:
Preferred divided requirement (134,741) - (134,741) - -
--------------- --------------- --------------- -------------------------
Loss before extraordinary
item applicable to
common shareholders ($10,897,506) t ($2,447,085) ($13,344,591) p ($348,826) $130,661
=============== =============== ============================================
Loss per common share before
extraordinary item ($0,85) l ($1.04) p
===============
Weighted average number of shares 12,871,427 12,871,427
=============== ===============
Pro Forma
for 1996
Acquisitions,
Pending
Acquisi-
tions, the
Company
Pro Forma Pro Forma Equity
Adjustments Adjustments for Offering and
for Pending the Company the Company
Acquisitions Debt Offering Debt Offering
------------------------------------------------
Revenues
<S> <C> <C> <C>
Coin calls - - $27,921,075
Non-coin - - 16,352,502
Other - - 2,292,195
------------ ------------- ----------------
- - 46,565,772
------------ ------------- ----------------
Operating expenses:
Line and transmission charges - - 12,029,445
Location commissions - - 7,481,107
Other operating expenses ($116,056) q - 10,237,125
Depreciation and amortization 2,859,654 r - 14,353,232
Selling, general and administrative (564,948) s - 6,572,790
Other unusual charges and
contractual settlements - - 5,334,514
------------ ------------- ----------------
2,178,650 - 56,008,213
------------ ------------- ----------------
Loss from operations (2,178,650) - (9,442,441)
Other income (expense):
Interest expense - related parties - - (17,039)
Interest expense - others 822,840 t ($1,050,000)v (6,905,102)
Interest income - (525,000) w 7,693
Reorganization expenses - - -
Other (83,073) u - (68,113)
------------ ------------- ----------------
Total other income (expense) 739,767 (1,575,000) (6,982,561)
------------ ------------- ----------------
Loss before income taxes
and extraordinary item (1,438,883) (1,575,000) (16,425,002)
Income taxes - - 16,896
------------ ------------- ----------------
Loss before extraordinary item ($1,438,883) ($1,575,000) ($16,441,898)
============ ============= ================
Earnings per share calculation:
Preferred divided requirement - - (134,741)
------------ ------------- ----------------
Loss before extraordinary
item applicable to
common shareholders ($1,438,883) ($1,575,000) ($16,576,639)
============ ============= ================
Loss per common share before
extraordinary item ($1.29)
================
Weighted average number of shares 12,871,427
================
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed Statement of
Operations are an integral part of these financial statements.
</TABLE>
Footnotes to the Pro Forma Combined Condensed
Statement of Operations for the Six Months
Ended June 30, 1996
-----------------------------------------------
a Represents the operations of IPP and Paramount for the period from
January 1, 1996 through March 14, 1996.
IPP Paramount Combined
--- --------- --------
Revenues:
Coin Calls $841,346 $1,632,221 $2,473,567
Other 15,113 - 15,113
--------------------------------------
856,459 1,632,221 2,488,680
Operating expenses:
Line & transmission charges 309,582 275,881 585,463
Location commissions 144,412 231,857 376,269
Other operating expenses 90,474 266,342 356,816
Depreciation & amortization 102,013 81,918 183,931
Selling, general, & admin. 296,181 196,063 492,244
--------------------------------------
942,662 1,052,061 1,994,723
--------------------------------------
Income (loss) from operations (86,203) 580,160 493,957
Other income (expense):
Interest expense (19,511) (11,370) (30,881)
Other - (12,638) (12,638)
--------------------------------------
(19,511) (24,008) (43,519)
--------------------------------------
Income (loss) before
income taxes (105,714) 556,152 450,438
Income taxes - - -
--------------------------------------
Net income (loss) ($105,714) $556,152 $450,438
--------------------------------------
b Represents the estimated reduction in revenues for assets not acquired
in the acquisition of POA.
c Represents estimated reduction in other operating expenses primarily
resulting from eliminating certain offices, redundant executives and
administrative personnel, costs of operations not acquired
(principally Amtel), as follows:
1) Amtel $25,000
2) POA 181,786
-------------
$206,786
=============
d Represents additional depreciation and amortization associated with
the acquired tangible and intangible assets, as follows:
Amount Lives
----------- --------------------
Tangible Intangible
(months)
1) IPP and Paramount $744,909 60 60
2) Amtel 555,275 60 36
3) POA $762,025 60 72
-------------
$2,062,209
=============
e Represents estimated reductions in selling, general and administrative
expenses principally resulting from elimination of pre-petition
expenses at Amtel and redundant personnel, as follows:
1) IPP and Paramount $238,761
2) Amtel 823,408
3) POA 419,400
-------------
$1,481,569
=============
f Represents additional interest expense for borrowings under the Credit
Agreement to fund the acquisitions of Amtel and POA, as follows:
Amount Interest Pro Forma
Borrowed Rate Expense
------------------------------------
$8,776,546 13.25% $581,446
====================================
g Represents reduction in interest expense to reflect elimination of
separate company borrowings as all acquisition debt is reflected in f)
above, as follows:
1) Amtel $6,077
2) POA (393,388)
-------------
($387,311)
=============
h Represents elimination of Amtel reorganization expenses subsequent to
filing of bankruptcy and elimination of non-recurring loss on disposal
of assets at Amtel.
i Represents elimination of income taxes.
j Represents elimination of interest expense on $8,000,000 repaid under
the Credit Agreement.
k Represents 6,250,000 shares of Common Stock (excluding the
Underwriters' over-allotment) sold pursuant to the Company Equity
Offering, and, the exercise of warrants to purchase, in the aggregate,
25,000 shares of Series A Preferred by the Selling Shareholders and
the immediate conversion by the Selling Shareholders of the shares of
Series A Preferred into 500,000 shares of Common Stock.
l Loss per share excludes an increase of the loss to common shareholders
of (i) $2,002,386 which was realized on redemption of the 10%
Preferred, 8% Preferred, and 7% Preferred; and (ii) an extraordinary
loss of $267,281 realized on the restructuring of the Company's debt
on March 15, 1996.
m Represents elimination of interest expense incurred under the Credit
Agreement.
n Represents increase in interest expense as follows:
<TABLE>
<CAPTION>
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
----------------------------------------------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt
Offering (during the period
funds are held in escrow) $110,000,000 12% 3 $3,300,000
Debt pursuant to the Company Debt
Offering assuming escrow amount
is utilized to purchase Notes 75,000,000 12% 3 2,250,000
-------------
This increase in interest is partially
offset by interest saved on the POA
sellers' note and capital leases in
the amount of $726,618. (726,618)
-------------
$4,823,382
-------------
</TABLE>
o Represents interest income estimated to be earned on the escrow
balance of $35,000,000, assuming the balance is retained in escrow for
3 months and earns interest income at 6%.
p Loss per share excludes an increase of the loss to common shareholders
of an estimated extraordinary loss of $11,346,390 to be realized on
the early repayment of the borrowings under the Credit Agreement.
q Represents the estimated reduction in other operating expenses to
eliminate redundancies and duplicate operational personnel, as
follows:
1) Cherokee $72,029
2) Texas Coinphone 44,027
-------------
$116,056
=============
r Represents additional depreciation and amortization associated with
the acquired tangible and intangible assets for the pending
acquisitions, as follows:
Amount Lives
----------- --------------------
Tangible Intangible
(months)
1) Cherokee $2,621,502 60 82
2) Texas Coinphone 238,152 60 72
-------------
$2,859,654
=============
s Represents estimated reductions in selling, general and administrative
expenses to reflect the elimination of certain offices and executives
and administrative personnel
1) Cherokee $500,000
2) Texas Coinphone 64,948
-------------
$564,948
=============
t Represents reduction in interest expense to reflect elimination of
separate company borrowings, as follows (all acquisition debt is
reflected in k.)
1) Cherokee 794,626
2) Texas Coinphone 28,214
-------------
822,840
=============
u Represents reduction to reflect elimination of Texas Coinphone other
income which relates to assets not acquired.
v Represents additional interest assuming consummation of the pending
acquisitions and $110,000,000 is outstanding for full 6 month period
(additional $35,000,000 at 12% for 3 months).
w Represents elimination of interest income on escrow balance assuming
consummation of the pending acquisitions.
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT JUNE 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
Pro Forma
Adjustments Pro Forma for
PhoneTel for Amtel Company Equity
Technologies Amtel POA and POA Offering
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $1,025,382 $422,566 - ($650,188) a $14,505,000 l
Accounts receivable, net 1,570,576 527,883 $372,558 (527,883) b -
Other current assets 302,469 137,553 79,456 (137,553) b -
-----------------------------------------------------------------------------------
Total current assets 2,898,427 1,088,002 452,014 (1,315,624) 14,505,000
Property and equipment, net 22,995,039 12,276,039 2,411,423 (5,440,371) c -
Intangible assets, net 24,286,302 - 2,709,697 13,243,660 d -
Other assets 1,863,716 294,619 - (1,817,425) e -
-----------------------------------------------------------------------------------
$52,043,484 $13,658,660 $5,573,134 $4,670,240 $14,505,000
===================================================================================
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related parties $3,548,454 - - $ 1,494,253 f -
Payable to others 1,502,653 - $ 979,823 (653,534) g -
Current portion capital leases 73,510 - - 656,947 h -
Accounts payable 2,039,122 $ 1,930,980 243,877 (2,932,980) i -
Accrued expenses 3,338,419 767,661 583,217 (1,961,959) i -
Pre-petition liabilities - 80,598,956 (80,598,956) j -
Deferred revenues 900,000 - - - -
Other unusual items and
contractual settlements 480,551 - - - -
-----------------------------------------------------------------------------------
Total current liabilities 11,882,709 83,297,597 1,806,917 (83,996,229) -
Long-term debt:
payable to related parties 23,149,508 - 568,090 6,714,203 f ($8,000,000) l
payable to others 287,556 - 3,468,898 g -
Capital leases 202,557 - 4,568,294 2,524,759 h -
Deferred taxes - - - - -
14% preferred mandatorily
redeemable at $6,742,960 6,404,228 - - - -
Other equity:
Preferred stock - - - -
Common stock 52,482 50,000 348,756 (375,468) k 67,500 m
Additional paid in capital 35,702,864 - - 4,926,217 k 22,437,500 m
Accumulated deficit (25,638,420) (69,688,937) (1,718,923) 71,407,860 k -
-----------------------------------------------------------------------------------
Total other equity 10,116,926 (69,638,937) (1,370,167) 75,958,609 22,505,000
-----------------------------------------------------------------------------------
$52,043,484 $13,658,660 $5,573,134 $4,670,240 $14,505,000
===================================================================================
Pro Forma
for Amtel
and POA
Pro Forma for Pro Forma Acquisitions,
Amtel and POA Adjustments the Company
Acquisitions for the Equity Offering
and Company Company Debt and the Company Texas
Equity Offering Offering Debt Offering Cherokee Coinphone
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $15,302,760 $24,015,886 n $39,318,646 $364,691 $106,812
Accounts receivable, net 1,943,134 - 1,943,134 3,712,950 167,311
Other current assets 381,925 - 381,925 210,439 -
--------------------------------------------------------------------------------------
Total current assets 17,627,819 24,015,886 41,288,080 4,288,080 274,123
Property and equipment, net 32,242,130 - 32,354,960 16,354,960 782,098
Intangible assets, net 40,239,659 1,104,102 0 41,343,761 4,048,701 -
Other assets 340,910 - 340,910 665,044 727,884
--------------------------------------------------------------------------------------
$90,450,518 $25,119,988 $115,570,506 $25,356,785 $1,784,105
======================================================================================
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related parties $5,042,707 ($4,717,707) p $325,000
Payable to others 1,828,942 - 1,828,942 $2,982,325 $151,851
Current portion capital leases 730,457 (656,947) q 73,510 977,433
Accounts payable 1,280,999 - 1,280,999 754,048 20,592
Accrued expenses 2,727,338 - 2,727,338 2,979,962 37,115
Pre-petition liabilities - - - - -
Deferred revenues 900,000 - 900,000 - -
Other unusual items and
contractual settlements 480,551 - - - -
--------------------------------------------------------------------------------------
Total current liabilities 12,990,994 (5,374,654) 7,616,340 7,693,768 209,558
Long-term debt:
payable to related parties 22,431,801 (22,431,801) p - - -
payable to others 3,756,454 71,365,886 r 75,122,340 10,636,237 565,222
Capital leases 7,295,610 (7,093,053) q 202,557 - 46,050
Deferred taxes - - - 342,359 -
14% preferred mandatorily
redeemable at $6,742,960 6,404,228 - 6,404,228 - -
Other equity:
Preferred stock - 2,400,000 -
Common stock 143,270 - 143,270 351,903 316,469
Additional paid in capital 63,066,581 - 63,066,581 1,097,630 -
Accumulated deficit (25,638,420) (11,346,390) s (36,984,810) 2,834,888 646,806
--------------------------------------------------------------------------------------
Total other equity 37,571,431 (11,346,390) 26,225,041 6,684,421 963,275
--------------------------------------------------------------------------------------
$90,450,518 $25,119,988 $115,570,506 $25,356,785 $1,784,105
======================================================================================
Pro Forma
for Amtel
and POA
Acquisitions,
Pending
Acquisitions,
the Company
Equity
Pro Forma Offering
Pro Forma Adjustments and the
Adjustments for the Company
for Pending Company Debt Debt
Acquisitions Offering Offering
-----------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash ($62,127,094) t $35,000,000 aa $12,663,055
Accounts receivable, net (167,311) u - 5,656,084
Other current assets - 592,364
---------------------------------- --------------
Total current assets (62,294,405) 35,000,000 18,911,503
Property and equipment, net 3,170,582 v - 52,549,770
Intangible assets, net 34,315,961 v - 79,708,423
Other assets (1,061,604) u - 672,234
---------------------------------- --------------
($25,869,466) $35,000,000 $151,841,930
================================== ==============
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related parties $325,000
Payable to others ($3,134,176) w - 1,828,942
Current portion capital leases (977,433) x - 73,510
Accounts payable (774,640) y - 1,280,999
Accrued expenses (2,649,578) y - 3,094,837
Pre-petition liabilities - -
Deferred revenues - - 900,000
Other unusual items and
contractual settlements - - 480,551
---------------------------------- --------------
Total current liabilities (7,535,827) - 7,983,839
Long-term debt:
payable to related parties - - -
payable to others (10,639,893) w $35,000,000 aa 110,683,906
Capital leases (46,050) x - 202,557
Deferred taxes - - 342,359
14% preferred mandatorily
redeemable at $6,742,960 - - 6,404,228
Other equity:
Preferred stock (2,400,000) z - -
Common stock (668,372) z - 143,270
Additional paid in capital (1,097,630) z - 63,066,581
Accumulated deficit (3,481,694) z - (36,984,810)
---------------------------------- --------------
Total other equity (7,647,696) - 26,225,041
---------------------------------- --------------
($25,869,466) $35,000,000 $151,841,930
================================== ==============
THE ACCOMPANYING FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET ARE AN INTEGRAL PART
OF THESE FINANCIAL STATEMENTS.
</TABLE>
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT JUNE 30, 1996
Pro Forma Adjustments for Amtel and POA Acquisitions
a. Adjustments to cash, are comprised of:
Purchase of Amtel, net of deposits previously made $ (5,700,000)
Amtel elimination of cash not acquired (422,566)
Sales tax on Amtel purchase (277,622)
Purchase of POA, net of deposit previously made (200,000)
Additional borrowings under the Credit Agreement 8,776,546
Fees associated with additional borrowings (60,000)
Payment of commissions and other payables
pursuant to the Credit Agreement (2,766,546)
-------------
$ (650,188)
=============
b. Adjustment for assets not acquired:
Amtel:
Accounts receivable $ 527,883
=============
Other current assets $ 137,553
=============
c. Adjustments to reflect purchase price allocations to
property and equipment, net, are comprised of:
Incremental increase (decrease) in telephones
and other fixed assets:
Amtel $ (8,566,221)
POA 3,125,850
-------------
$ (5,440,371)
=============
d. Adjustments to reflect purchase price allocations
to intangible assets, net, are comprised of:
Value of Amtel's telephone location contracts $ 8,525,949
Value of POA's telephone location contracts 5,185,274
Net increase in the value of non-compete agreements
resulting from the POA acquisition 265,843
Book value of intangibles not acquired from POA (793,406)
Fees relating to additional borrowings under
the Credit Agreement to fund the acquisitions 60,000
-------------
$ 13,243,660
=============
e. Adjustments to other assets, are comprised of:
Assets not acquired from Amtel $ (217,425)
Reclassification of cash deposits made for
the acquisition of:
Amtel (1,300,000)
POA (300,000)
-------------
$ (1,817,425)
=============
f. Adjustments to current long-term debt and long-term
debt payable to related parties, are comprised of:
Additional current borrowings under the Credit
Agreement to complete the Amtel and POA
acquisitions and to pay certain operating
expenses of the Company $ 1,494,253
=============
Long-term debt borrowed under the Credit Agreement $ 7,282,293
POA elimination of liabilities not assumed (568,090)
-------------
$6,714,203
=============
g. Adjustments to current long-term debt and long-term
debt payable to others, are comprised of:
Elimination of liabilities not assumed from POA $ (979,823)
To reflect additional current debt on POA
acquisition 228,889
Current portion of POA's non-compete agreements 97,400
-------------
$ (653,534)
=============
Long-term portion of POA's non-compete agreements $ 209,864
POA's sellers debt 3,634,114
Adjustment to seller's debt for assumed liabilities
exceeding current assets relating to the POA
acquisition (375,080)
-------------
$ 3,468,898
=============
h. Adjustments to current portion and long-term portions
of obligations under capital leases, are comprised of:
POA reclassification of current portion of capital
lease obligations assumed $ 656,947
=============
Increase in long-term obligations under capital
leases $ 2,524,759
=============
i. Adjustments to accounts payable and accrued expenses,
are comprised of:
Accounts payable
Liabilities not assumed from Amtel $ (1,930,980)
Payment of accounts payable from
borrowings under the Credit Agreement (1,002,000)
-------------
$ (2,932,980)
=============
Accrued expenses
Liabilities not assumed from Amtel $ (767,661)
Acquisitions costs:
Amtel 397,500
POA 172,748
Repayment of certain operating obligations
of the Company pursuant to the Credit Agreement (1,764,546)
-------------
$ (1,961,959)
=============
j. Adjustments to pre-petition liabilities, are
comprised of:
Amtel elimination of liabilities not assumed $(80,598,956)
=============
k. Adjustments to other equity, are comprised of:
Common Stock:
Par value of 2,162,163 shares of Common Stock
issued to the shareholders of Amtel $ 21,621
Par value of 166,666 shares of Common Stock
issued to the shareholders of POA 1,667
Elimination of common stock:
Amtel (50,000)
POA (348,756)
-------------
$ (375,468)
=============
Additional paid-in capital is comprised of:
Value of the unregistered 2,162,163 shares of
Common Stock issued to Amtel valued at the
average of the BID and ASK (as reported by
NASDAQ on September 13, 1996, less an
unregistered and block discount of 20.19%
as determined by an independent valuation
firm), or $2.15 per share $ 4,616,218
Value of the unregistered 166,166 shares of Common
Stock issued to POA valued at the average
of the BID and ASK (as reported by NASDAQ on
September 16, 1996, less an unregistered and
block discount of 30.42% as determined
by an independent valuation firm), or $1.87 per
share 309,999
-------------
$ 4,926,217
=============
To eliminate accumulated deficit of:
Amtel $ 69,688,937
POA 1,718,923
-------------
$ 71,407,860
=============
Pro Forma Adjustments for the Company Equity Offering
l. Adjustments to cash are comprised of:
Company Equity Offering proceeds, net of expenses $ 22,500,000
Proceeds from exercising Series A Preferred
warrants 5,000
Repayment of borrowings under Credit Agreement (8,000,000)
-------------
$ 14,505,000
=============
m. Adjustments to other equity are comprised of:
Common Stock
Issuance of 6,250,000 shares pursuant to the
Company Equity Offering $ 62,500
Issuance of 500,000 shares pursuant to the
exercise of Series A Preferred warrants
and the assumed immediate exercise thereof
into 500,000 shares of Common Stock 5,000
-------------
$ 67,500
=============
Additional paid in capital
Proceeds from the sale of 6,250,000 shares
of Common Stock at an offering price of
$4.00 per share, net of estimated
transaction fees of $2,500,000 $ 22,437,500
Pro Forma Adjustments for the Company Debt Offering
n. Adjustments to cash are comprised of:
Company Debt Offering proceeds, net of expenses $104,150,000
Fees to obtain working capital line of credit (750,000)
Repayment of borrowings under Credit Agreement (33,000,000)
Repayment of POA Seller's Notes (3,634,114)
Repayment of capital lease obligations (7,750,000)
Escrow of offering proceeds for Cherokee Acquisition (35,000,000)
-------------
$ 24,015,886
=============
o. Adjustments to the intangible assets are comprised of:
Working capital line of credit fees $ 750,000
Fees and expenses relating to the Company Debt
Offering 5,850,000
Write-off unamortized portion of fees pertaining to
the Credit Agreement (5,495,898)
-------------
$ 1,104,102
=============
p. Adjustments to current long-term debt and long-term
payable to related parties are comprised of:
Repay current portion of borrowings under
Credit Agreement $ (4,717,707)
=============
Repay long-term portion of borrowings under
Credit Agreement $(22,431,801)
=============
q. Adjustments to current portion of and long-term
obligations under capital leases are comprised of:
Repay obligations under capital leases
Current portion $ (656,947)
=============
Long-term obligations $ (7,093,053)
=============
r. Adjustments to long-term debt payable to others
is comprised of:
Repayment of POA's Seller's debt $ (3,634,114)
Gross proceeds from the Company Debt Offering 110,000,000
Funds placed in escrow for Cherokee Acquisition (35,000,000)
-------------
$ 71,365,886
=============
s. Adjustments to other equity are comprised of:
Accumulated deficit
Warrant accretion - extraordinary loss on
repayment of borrowings under the Credit
Agreement $ (5,850,492)
Write-off of unamortized debt costs relating
to the repayment of borrowings under the
Credit Agreement (5,495,898)
-------------
$ (11,346,390)
=============
Pro Forma Adjustments for Pending Acquisitions
t. Adjustments to cash are comprised of:
Purchase of Cherokee $(57,995,591)
Cash not acquired in Cherokee Acquisition (364,691)
Purchase of Texas Coinphone (3,660,000)
Texas Coinphone adjustment for assets not acquired (106,812)
-------------
$(62,127,094)
=============
u. Adjustments to accounts receivable, net and other
assets are comprised of the elimination of assets
not acquired:
Accounts receivable, net - Texas Coinphone $ (167,311)
=============
Other assets
Cherokee $ (336,159)
Texas Coinphone (725,445)
-------------
$ (1,061,604)
=============
v. Adjustments to property and equipment, net and
intangibles, net are comprised of the effect of
purchase price allocations:
Property and equipment
Incremental increase in telephones and other
fixed assets:
Cherokee $ 2,266,478
Texas Coinphone 904,104
-------------
$ 3,170,582
=============
Intangibles
Telephone location contracts - Cherokee $ 31,108,036
Non-compete agreements - Cherokee 1,186,567
Telephone location contracts - Texas Coinphone 2,021,358
-------------
$ 34,315,961
=============
w. Adjustments to current long-term debt and long-term debt
to others are comprised of:
Current long-term debt
Debt not acquired from Cherokee $ (2,982,325)
Debt not acquired from Texas Coinphone (151,851)
-------------
$ (3,134,176)
=============
Long term-debt not acquired:
Cherokee $ (10,636,237)
Texas Coinphone (565,222)
Long-term portion of the non-compete
liability for Cherokee 561,566
-------------
$ (10,639,893)
=============
x. Adjustments to current portion capital leases
and capital leases
are comprised of:
Current portion of capital leases of Cherokee
not acquired $ (977,433)
=============
Capital leases of Texas Coinphone not acquired $ (46,050)
=============
y. Adjustments to accounts payable and accrued expenses
are comprised of:
Accounts payable not assumed
Cherokee $ (754,048)
Texas Coinphone (20,592)
-------------
$ (774,640)
=============
Accrued expenses
Cherokee $ (2,979,962)
Texas Coinphone (37,115)
Acquisition expenses 367,499
-------------
$ (2,649,578)
=============
z. Adjustments to the other equity are comprised of:
Preferred stock of Cherokee redeemed prior to
acquisition completion date $ (2,400,000)
=============
Common Stock eliminated
Cherokee $ (351,903)
Texas Coinphone (316,469)
-------------
$ (668,372)
=============
Paid-in capital of Cherokee eliminated $ (1,097,630)
=============
Accumulated deficit eliminated
Cherokee $ (2,834,888)
Texas Coinphone (646,806)
-------------
$ (3,481,694)
=============
Pro Forma Adjustment for the Company Debt Offering
aa. The adjustments to cash and long-term debt payable
to others represents the release of funds, previously
held in escrow,upon completion of the Cherokee
Acquisition $ 35,000,000
=============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the consolidated financial statements of the
Company and the notes thereto which appear elsewhere in this
Prospectus.
OVERVIEW
The Company derives substantially all of its revenues from
coin calls and non-coin calls placed from its public pay tele-
phones. Coin revenue is generated from local and direct-dial
long-distance calls that are placed from the Company's public pay
telephones. Non-coin revenue is generated from calling card,
credit card, collect and third party billed calls. Typically,
each public pay telephone has a presubscribed (dedicated) provid-
er of long distance and operator services. The Company receives
revenues for non-coin calls placed from its public pay telephones
in the form of commissions from its presubscribed long distance
and OSPs based on the volume of calls made as well as the amount
generated per call. Pursuant to recently promulgated FCC regula-
tions, which regulations are currently subject to pending peti-
tions at the FCC seeking reconsideration, the Company is able to
derive additional revenues from access it provides callers to any
carrier other than the presubscribed carrier. This practice is
commonly referred to as "dial-around" access. The Company
believes that the rules and regulations recently promulgated by
the FCC under Section 276 of the Telecommunications Act will
result in additional revenues for the Company, net of related
expenses and processing fees, by (i) providing for dial-around
compensation of $45.85 per telephone per month from November 6,
1996 through October 1, 1997 (as compared with the flat fee of
$6.00 per telephone per month in place prior to November 6,
1996), and for per-call compensation thereafter, at a rate
initially set at $0.35 per call from October 1, 1997 to October
1, 1998 (as compared with the flat fee of $45.85 per telephone
per month) and thereafter, at a per-call rate equal to the local
coin call rate and (ii) requiring states to deregulate the price
of a local phone call, which the Company believes, may result in
an increase in the local coin drop rate thereby generating
additional revenues. However, there can be no assurance as to
the ultimate effect that the rules and policies adopted by the
FCC on its own or after any judicial review will have on the
Company's business, results of operations or financial condition.
See "Business--Governmental Regulations."
The Company's principal operating expenses consist of (i)
telephone line charges, (ii) commissions paid to location provid-
ers which are typically expressed as a percentage of revenues and
are fixed for the term of the agreements with the respective
location providers, and (iii) field service and collection costs
which are principally comprised of personnel costs of collecting
coins from and maintaining the Company's public pay telephones.
The Company pays monthly line and usage charges to BOCs and other
LECs for interconnection to the local network for local calls,
which are computed on a flat monthly charge plus either a per
message or per minute usage rate based on the time and duration
of the call. The Company also pays fees to BOCs and other LECs
and long distance carriers based on usage for local or long
distance coin calls. The Company believes that the rules and
regulations recently promulgated by the FCC under Section 276 of
the Telecommunications Act may result in lower tariffed rates
charged by BOCs and other LECs, since the FCC rules would re-
strict certain subsidies and discriminatory practices now engaged
in by BOCs and other LECs in favor of their own public pay
telephone services. However, there can be no assurance that the
rules and policies ultimately adopted by the FCC on its own or
after judicial review will not have a material adverse effect on
the Company's business, results of operations or financial
condition.
Notwithstanding the aforementioned anticipated benefits of
Section 276 and the implementing regulations, as a result of the
provisions permitting BOCs and other LECs to negotiate with
location owners and select interLATA long distance carriers for
their public pay telephones, it is anticipated that Section 276
and the implementing regulations may also result in increased
competition for public pay telephone locations and an accompany-
ing increase in the commissions payable to location owners.
Moreover, revenues may be diminished if the FCC prescribes lower
benchmark rates for interstate operator long distance calls. See
"Business Governmental Regulations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
certain information from the Company's Consolidated Statements of
Operations, included elsewhere in this Prospectus, expressed as a
percentage of total revenues. Certain of the following informa-
tion for the years ended December 31, 1993, 1994 and 1995 has
been reclassified to conform to the interim period presentation
based on management's belief that the revised presentation more
accurately reflects the Company's strategy of owning and managing
public pay telephones versus providing operator services. The
reclassifications have no impact on total revenues or total
expenses as previously reported.
Year Ended December Six Months Ended
31, June 30,
-------------------- ----------------
1993 1994 1995 1995 1996
Revenues:
Coin calls . . . . . 38.3% 53.1% 64.8% 63.4% 62.0%
Non-coin . . . . . . 54.9 33.5 20.2 29.3 31.5
Other . . . . . . . 6.8 13.4 15.0 7.3 6.5
---- ---- ---- ---- -----
100.0 100.0 100.0 100.0 100.0
---- ---- ---- ---- -----
Operating expenses:
Line and transmission
charges . . . . . . . 25.1 28.1 29.3 26.7 23.0
Location commissions . 23.4 21.4 18.5 19.2 15.1
Other operating ex-
penses . . . . . . . 27.2 26.9 28.4 34.0 30.0
Depreciation and amor-
tization . . . . . . 8.1 14.1 23.4 18.2 31.6
Selling, general and
administrative
expenses . . . . . 21.7 17.9 17.1 17.1 14.3
Other unusual charges
and contractual settle-
ments . . . . . . . . - - 11.6 - 31.8
---- ---- ---- ---- -----
Total operating ex-
penses . . . . . . . 105.5 108.4 128.3 115.2 145.8
Other expenses . . . . 1.5 2.4 4.5 2.7 12.4
---- ---- ---- ---- -----
Loss before extraordi-
nary item . . . . . . . (7.0) (10.8) (32.8) (17.9) (58.2)
Extraordinary item . . - - - - (1.6)
---- ---- ---- ---- -----
Net loss . . . . . . . (7.0) (10.8) (32.8) (17.9) (59.8)
===== ====== ====== ====== ======
EBITDA . . . . . . . . 2.6 5.8 6.8 3.0 17.6
===== ====== ====== ====== ======
Six Months Ended June 30, 1996 Compared to Six Months Ended June
30, 1995
Revenues. Revenues increased $8,927,448, or 113.3%, from
$7,878,062 for the six months ended June 30, 1995 to $16,805,510
for the six months ended June 30, 1996. This increase is attrib-
utable primarily to an increase in the number of installed public
pay telephones, which increased by 9,788, or 194.3%, from June
30, 1995 to June 30, 1996, with the majority of the increase
occurring in the fourth quarter of 1995 and the first quarter of
1996 due to the Company's recent acquisitions.
Revenues from coin calls increased $5,416,015 or 108.4%,
from $4,995,329 for the six months ended June 30, 1995 to
$10,411,344 for the six months ended June 30, 1996. Non-coin
revenues increased $2,987,035, or 129.6%, from $2,305,495 for the
six months ended June 30, 1995 to $5,292,530 for the six months
ended June 30, 1996. The increases were primarily due to the
acquisition and installation of public pay telephones producing
additional revenues and, to a lesser extent, to the increases in
coin calls resulting from the continuation of the 1994 program
which offered customers a three minute long distance call any-
where in the continental United States for $0.75 (the "$0.75 Long
Distance Call Program" subsequently changed to $1.00 for the
first three minutes in some locations). However, the increase in
non-coin revenues was offset in part by a reduction in operator
assisted calls as a result of aggressive dial-around advertising
by long distance carriers such as AT&T and MCI Communications
Corporation ("MCI").
Other revenues increased $524,398, or 90.8%, from $577,238
for the six months ended June 30, 1995 to $1,101,636 for the six
months ended June 30, 1996. This increase was primarily the
result of an increase in the number of public pay telephones and
increased revenues from dial-around calls.
Operating expenses. Total operating expenses increased
$15,419,091, or 169.9%, from $9,077,420 for the six months ended
June 30, 1995 to $24,496,511 for the six months ended June 30,
1996. Operating expenses represented 115.2% of total revenues
for the six months ended June 30, 1995 and 145.8% of total
revenues for the six months ended June 30, 1996. The percentage
increase was due to other unusual charges and contractual settle-
ments, offset in part by lower ongoing expenses.
Line and transmission charges increased $1,765,780, or
84.1%, from $2,100,427 for the six months ended June 30, 1995 to
$3,866,207 for the six months ended June 30, 1996. Line charges
represented 26.7% of total revenues for the six months ended June
30, 1995 and 23.0% of total revenues for the six months ended
June 30, 1996, a decrease of 3.7%. The dollar increase in line
charges was, in part, due to additional telephones acquired from
IPP and Paramount, the increases in coin calls resulting from the
$0.75 Long Distance Call Program, as well as increases in certain
local telephone company line charges. The percentage decrease
was due to lower line charges for the acquired companies.
Location commissions increased $1,020,365, or 67.3%, from
$1,516,365 for the six months ended June 30, 1995 to $2,536,730
for the six months ended June 30, 1996. Location commissions
represented 19.2% of total revenues for the six months ended June
30, 1995 and 15.1% of total revenues for the six months ended
June 30, 1996, a decrease of 4.1%. The dollar increase is due to
location agreements from public pay telephones acquired in the
acquisitions of World and Public Telephone, while the percentage
decrease is due to such location agreements having lower commis-
sion rates than those for the Company's existing public pay
telephones.
Other operating expenses (consisting of personnel costs,
rent, utilities, repair and maintenance of the phones, operator
services processing fees and property and sales taxes), increased
$2,364,741, or 88.1%, from $2,682,710 for the six months ended
June 30, 1995 to $5,047,451 for the six months ended June 30,
1996. Other operating expenses represented 34.0% of total
revenues for the six months ended June 30, 1995 and 30.0% of
total revenues for the six months ended June 30, 1996, a decrease
of 4.1%. The dollar increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses
attributable to the outsourcing of operator services and to the
acquisitions of World and Public Telephone completed in September
and October 1995, respectively, and to a lesser extent, the
acquisitions of IPP and Paramount completed in March 1996, the
increase in the Company's public pay telephone base, and the
additional field personnel to accommodate the increased business.
The percentage decrease reflects the economies of scale resulting
from these acquisitions that the Company has already realized.
Such economies of scale come primarily from the elimination of
costs associated with the closing of certain offices, the elimi-
nation of redundant executive and administrative personnel in
billing and other operations areas and leveraging the Company's
existing field technicians. Additional economies of scale are
expected to be realized from acquisitions made in September 1996,
resulting in the further decrease of other operating expenses as
a percentage of total revenues for the full year 1996.
Depreciation and amortization increased $3,880,394, or
270.9%, from $1,432,491 for the six months ended June 30, 1995 to
$5,312,885 for the six months ended June 30, 1996. Depreciation
and amortization represented 18.2% of total revenues for the six
months ended June 30, 1995 and 31.6% of total revenues for the
six months ended June 30, 1996, an increase of 13.4%. The dollar
and percentage increases were primarily due to the Company's
acquisitions and expansion of its public pay telephone base and
purchases of additional computer equipment, service vehicles and
software to accommodate the Company's growth.
Selling, general and administrative (SG&A) expenses in-
creased $1,053,297, or 78.3%, from $1,345,427 for the six months
ended June 30, 1995 to $2,398,724 for the six months ended June
30, 1996. SG&A represented 17.1% of total revenues for the six
months ended June 30, 1995 and 14.3% of total revenues for the
six months ended June 30, 1996, a decrease of 2.8%. The dollar
increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount, while the percentage de-
crease was due primarily to the additional revenues from these
acquisitions and the resulting economies of scale provided by
such acquisitions.
Other unusual charges and contractual settlements consist
primarily of: (i) the settlement of contractual obligations
under certain employment contracts with former officers,
$325,000; (ii) the settlement of other contractual obligations,
$210,599; (iii) the write-off of selected assets in connection
with the continued evaluation of the Company's operations and
certain one-time charges for changes to the operations of the
Company, $282,131; (iv) losses recognized on the early pay-off of
obligations under capital leases and other debt concurrent with
the debt restructuring completed on March 15, 1996, $630,645; and
(v) the estimated fair market value of the Nominal Value Warrants
charged to operations on March 15, 1996, $3,886,139. In the
aggregate, contractual settlements and other unusual charges were
$5,334,514, or 31.8% of total revenues, for the six months ended
June 30, 1996 and $0 for the six months ended June 30, 1995.
Other income (expense). Other income (expense) is comprised
of interest expense incurred on debt with related parties and
others and interest income. Total other expense (net of interest
income) increased $1,875,493, or 877.9%, from $213,642 for the
six months ended June 30, 1995 to $2,089,135 for the six months
ended June 30, 1996. Other expenses represented 2.7% of total
revenues for the six months ended June 30, 1995 and 12.4% of
total revenues for the six months ended June 30, 1996, an in-
crease of 9.7%. The dollar and percentage increases were due to
the financing obtained for the recent acquisitions. Related
party interest expense was $1,816,890 for the six months ended
June 30, 1996, representing 10.8% of total revenues. Included in
related party interest expense was non-cash interest expense of
$561,008, or 3.3% of revenues, for the six months ended June 30,
1996, representing the accretion of the debt under the Credit
Agreement to its maturity amount.
Extraordinary item. The Company recorded an extraordinary
loss of $267,281 representing 1.6% of total revenues for the six
months ended June 30, 1996. The extraordinary loss related to
one-time costs that were incurred in connection with the restruc-
turing of the Company's long-term debt. Concurrent with the
restructuring of the Company's debt and the redemption of the 10%
Preferred, 8% Preferred and 7% Preferred, the Company recorded
the difference between the carrying value of the 10% Preferred,
8% Preferred and 7% Preferred and the redemption price as reduc-
tions in earnings available to the common shareholders of
$2,002,386.
EBITDA. EBITDA increased $2,723,265 or 1,168.1%, from
$233,133 for the six months ended June 30, 1995 to $2,956,398 for
the six months ended June 30, 1996. For the reasons discussed
above, EBITDA represented 3.0% of total revenues for the six
months ended June 30, 1995 and 17.6% for the six months ended
June 30, 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994
Revenues. Revenues increased $2,851,896, or 18.0%, from
$15,866,087 for the year ended December 31, 1994 to $18,717,983
for the year ended December 31, 1995. This increase was attrib-
utable primarily to an increase in the number of installed public
pay telephones. The total installed public pay telephones
increased by 4,979 public pay telephones, or 105.0%, with the
majority of the increase occurring late in the third quarter and
in the fourth quarter of fiscal 1995 and attributable to the 1995
Acquisitions. In addition, revenues improved as a result of the
continuation of the $0.75 Long Distance Call Program.
Revenues from coin calls increased $3,708,952, or 44.0%,
from $8,421,237 for the year ended December 31, 1994 to
$12,130,189 for the year ended December 31, 1995. The increase
was due primarily to the 1995 Acquisitions. Non-coin revenues
decreased $1,542,637, or 29.0%, from $5,319,138 for the year
ended December 31, 1994 to $3,776,501 for the year ended December
31, 1995. The decrease was primarily the result of a decrease in
the number of public pay telephones to which the Company provided
operator services through pre-subscription arrangements and
aggressive dial-around advertising by AT&T, MCI and Sprint
Communications Company ("Sprint"). In December 1995, the Company
decided to focus on the ownership and maintenance of its public
pay telephone business and outsourced its operator service center
to Intellicall. A substantial portion of the transfer of such
service center was completed by March 31, 1996. The Company
wrote off the fixed assets of its operator service center in 1995
and recorded a non-cash charge of $298,626.
Other revenues increased $685,581, or 32.3%, from $2,125,712
for the year ended December 31, 1994 to $2,811,293 for the year
ended December 31, 1995. This increase was primarily the result
of the 1995 Acquisitions.
Operating expenses. Line charges increased $1,019,190, or
22.9%, from $4,456,509 for the year ended December 31, 1994 to
$5,475,699 for the year ended December 31, 1995. Line charges
represented 28.1% of total revenues for the year ended December
31, 1994 and 29.3% of total revenues for the year ended December
31, 1995. The increase resulted, in part, from increased coin
calls resulting from the $0.75 Long Distance Call Program as well
as increases in certain local telephone company line charges.
However, this program reduces billing, collection and operator
service costs.
Location commissions increased $76,436, or 2.3%, from
$3,391,190 for the year ended December 31, 1994 to $3,467,626 for
the year ended December 31, 1995. Location commissions repre-
sented 21.4% of total revenues for the year ended December 31,
1994 and 18.5% of total revenues for the year ended December 31,
1995. The decrease in location commissions as a percentage of
total revenues is due to lower location commissions for those
public pay telephones acquired in the 1995 Acquisitions.
Other operating expenses increased $1,045,590, or 24.5%,
from $4,264,672 for the year ended December 31, 1994 to
$5,310,262 for the year ended December 31, 1995. Other operating
expenses represented 26.9% of total revenues for the year ended
December 31, 1994 and 28.4% of total revenues for the year ended
December 31, 1995. The increase was the result of higher person-
nel costs, rent, utilities and service related expenses attribut-
able to the 1995 Acquisitions, the increase in the Company's
public pay telephone base, and the additional personnel to
accommodate the increased business.
Depreciation and amortization increased $2,146,780, or
96.0%, from $2,236,269 for the year ended December 31, 1994 to
$4,383,049 for the year ended December 31, 1995. Depreciation
and amortization represented 14.1% of total revenues for the year
ended December 31, 1994 and 23.4% of total revenues for the year
ended December 31, 1995. The increase was primarily due to the
1995 Acquisitions and the resultant expansion of its public pay
telephone base which included purchases of additional computer
equipment, service vehicles and software to accommodate the
Company's growth.
SG&A expenses increased $368,967, or 13.0%, from $2,831,775
for the year ended December 31, 1994 to $3,200,742 for the year
ended December 31, 1995. The increase was due to increases in
advertising, travel and entertainment, wages and payroll related
expenses and general office expenses as a result of hiring
additional personnel to conduct the Company's expanded selling
and marketing program and customer services. SG&A expenses
represented 17.9% of total revenues for the year ended December
31, 1994 and 17.1% of total revenues for the year ended December
31, 1995. The Company expects that SG&A expenses will continue
to decrease as a percentage of total revenues as total revenues
increase.
Other unusual charges and contractual settlements consist
primarily of costs associated with the settlement of contractual
obligations to certain former officers of the Company and related
legal fees, the write-off of selected assets in connection with
the outsourcing of the operator service center and consulting and
legal fees incurred for changes to the operations of the Company.
Settlements of employment contracts and other unusual charges
were $2,169,503, and represented 11.6% of total revenues, for the
year ended December 31, 1995. There were no contractual settle-
ments and other unusual charges for 1994.
Other income (expense). Other income (expense) increased
$448,696, or 115.6%, from $388,215 for the year ended December
31, 1994 to $836,911 for the year ended December 31, 1995.
Interest expense, net of interest income, represented 2.4% of
total revenues for the year ended December 31, 1994 and 4.5% of
total revenues for the year ended December 31, 1995. The
increase was due to financing obtained for acquisitions, addi-
tional service vehicles and switch operating equipment. In
addition, the Company entered into financing agreements with
certain manufacturers throughout the year for the purchase of
phone equipment to accommodate the expansion of its public pay
telephone base.
EBITDA. EBITDA increased $341,713, or 37.1%, from $921,941
for the year ended December 31, 1994 to $1,263,654 for the year
ended December 31, 1995. For the reasons discussed above, EBITDA
represented 5.8% of total revenues for the year ended December
31, 1994 and 6.8% of total revenues for the year ended December
31, 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31,
1993
Revenues. Revenues increased $4,796,570, or 43.3%, from
$11,069,517 for the year ended December 31, 1993 to $15,866,087
for the year ended December 31, 1994. This increase was attrib-
utable primarily to an increase in the number of installed public
pay telephones, which increased by 2,559 from 2,185 at December
31, 1993 to 4,744 at December 31, 1994, with the majority of the
increase relating to an acquisition in the first quarter of 1994.
Revenues from coin calls increased $4,183,389, or 98.7%,
from $4,237,848 for the year ended December 31, 1993 to
$8,421,237 for the year ended December 31, 1994. Non-coin
revenue decreased $755,266, or 12.4%, from $6,074,394 for the
year ended December 31, 1993 to $5,319,128 for the year ended
December 31, 1994. The decrease was primarily the result of a
reduction in the number of telephones to which the Company
provided operator services through pre-subscription arrangements
and aggressive dial-around advertising by AT&T, Sprint and MCI.
Other revenues increased $1,368,437, or 180.7%, from
$757,275 for the year ended December 31, 1993 to $2,125,712 for
the year ended December 31, 1994. This increase was primarily
the result of an increase in the number of installed telephones
and dial-around compensation.
Operating expenses. Line charges increased $1,680,061, or
60.5%, from $2,776,448 for the year ended December 31, 1993 to
$4,456,509 for the year ended December 31, 1994. Line charges
represented 25.1% of total revenues for the year ended December
31, 1993 and 28.1% of total revenues for the year ended December
31, 1994. The increase in line charges was, in part, due to
increased coin calls resulting from the implementation of the
$0.75 Long Distance Call Program, as well as increases in certain
local telephone company line charges.
Location commissions increased $791,860, or 30.5%, from
$2,599,330 for the year ended December 31, 1993 to $3,391,190 for
the year ended December 31, 1994. Location commissions repre-
sented 23.4% of total revenues for the year ended December 31,
1993 and 21.4% of total revenues for the year ended December 31,
1994. The decrease as a percentage of total revenues resulted
from the renegotiation of location agreements acquired in the
acquisition of Alpha Pay Phones - IV L.P. ("Alpha").
Other operating expenses increased $1,256,539, or 41.8%,
from $3,008,133 for the year ended December 31, 1993 to
$4,264,672 for the year ended December 31, 1994. The increase
was primarily the result of higher personnel costs, rent, utili-
ties and service related expenses attributable to the addition of
the Alpha assets, new operations in Texas, the establishment of
Florida and Nevada sales offices, the increase in the Company's
public pay telephone base and the additional field personnel to
accommodate the increased business. Other operating expenses
represented 27.2% of total revenues for the year ended December
31, 1993 and 26.9% of total revenues for the year ended December
31, 1994.
Depreciation and amortization increased $1,340,228, or
149.6%, from $896,041 for the year ended December 31, 1993 to
$2,236,269 for the year ended December 31, 1994. Depreciation
and amortization represented 8.1% of total revenues for the year
ended December 31, 1993 and 14.1% of total revenues for the year
ended December 31, 1994. This increase was primarily due to the
Company's acquisition of the Alpha assets at the end of the first
quarter of 1994 and expansion of the public pay telephone base,
purchases of additional computer equipment, service vehicles and
software to accommodate the Company's growth.
SG&A expenses increased $429,192, or 17.9%, from $2,402,583
for the year ended December 31, 1993 to $2,831,775 for the year
ended December 31, 1994. The increase was primarily the result
of the increases in advertising, travel and entertainment, wages
and payroll related expenses and general office expenses as a
result of hiring additional personnel to conduct the Company's
expanded selling and marketing program and customer services.
SG&A represented 21.7% of total revenues for the year ended
December 31, 1993 and 17.9% of total revenues for the year ended
December 31, 1994.
Other income (expense). Other income (expense) increased
$213,221, or 121.8%, from $174,994 for the year ended December
31, 1993 to $388,215 for the year ended December 31, 1994.
Interest expense, net of interest income, represented 1.5% of
total revenues for the year ended December 31, 1993 and 2.4% of
total revenues for the year ended December 31, 1994. The in-
crease was due to the financing obtained for acquisitions,
additional service vehicles and switch operating equipment. In
addition, the Company entered into financing agreements with
certain manufacturers throughout the year for the purchase of its
telephone base.
EBITDA. EBITDA increased $638,918, or 225.7%, from $283,023
for the year ended December 31, 1993 to $921,941 for the year
ended December 31, 1994. For the reasons discussed above, EBITDA
represented 2.6% of total revenues for the year ended December
31, 1993 and 5.8% of total revenues for the year ended December
31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating
activities during the fiscal years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1996 were $11,208,
$2,380,216, ($579,133) and ($397,324), respectively. Net cash
used in operating activities consisted primarily of the funding
of operating losses, increases in current assets (other than
cash) and repayment of significant current liabilities. Cash
flows used in operating activities in the six months ended June
30, 1996 decreased by $862,598 over cash provided by operations
for the six months ended June 30, 1995 of $465,274, mostly due to
the larger loss in the first and second quarter of 1996, and the
repayment of contractual and other obligations offset by non-cash
charges related to Nominal Value Warrants, depreciation and
amortization, and accretion of debt.
Cash used in investing activities during the fiscal years
ended December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1996 were $1,196,761, $3,214,302, $2,354,011 and
$16,542,990, respectively. Cash used in investing activities
consisted primarily of payments to acquire companies and capital
expenditures primarily due to expansion of the pay telephone
base.
Cash provided by financing activities during the fiscal
years ended December 31, 1993, 1994 and 1995 and for the six
months ended June 30, 1996 were $859,846, $1,229,282, $3,167,850
and $17,252,234, respectively, which consisted primarily of
proceeds from the issuance of debt and equity offset by redemp-
tions and repurchases of preferred and common stock and repay-
ments of debt.
Credit Agreement. On March 15, 1996, the Company entered
into the Credit Agreement (the "Credit Agreement") with ING and
Cerberus, pursuant to which the Lenders agreed to lend the
Company up to $37,250,000. On March 15, 1996, the Company bor-
rowed $30,530,954 pursuant to the Credit Agreement. During the
second quarter of 1996, the Company borrowed an additional
$1,692,500 pursuant to the Credit Agreement. The initial
borrowings under the Credit Agreement were used to complete the
Paramount and IPP acquisitions, to repay $8,503,405 of outstand-
ing debt and $3,173,931 of outstanding obligations under capital
leases, to redeem the 10% Preferred, 8% Preferred, and 7% Pre-
ferred, and to pay related transaction fees. The additional
borrowings of $1,692,500 were used for an acquisition deposit of
$1,300,000, classified as a non-current asset, and working
capital.
On September 13, 1996, concurrent with the acquisition of
Amtel, the Lenders amended the Credit Agreement to increase the
maximum borrowings available under the Credit Agreement to
$41,000,000. The Company then borrowed an additional $8,776,546
and used $5,950,000 of the proceeds to complete the Amtel and POA
acquisitions and the remainder of the proceeds, $2,826,546, for
working capital and payment of certain related acquisition
expenses. As of September 30, 1996, borrowings of $41,000,000
were outstanding and there was no additional borrowing availabil-
ity under the Credit Agreement. The Company was not in compli-
ance with various financial covenants contained in the Credit
Agreement at June 30, 1996 and subsequently received a waiver of
such non-compliance from the Lenders. The Credit Agreement was
amended on October 8, 1996 to make the covenants less restrictive
and, although there can be no assurance, the Company expects to
be in compliance with such covenants as of September 30, 1996.
The Company is seeking an amendment to the Credit Agreement to
permit the incurrence of additional borrowings of up to $2.0
million to fund deposits required in connection with the Pending
Acquisitions and for working capital purposes. The Company
intends to use a portion of the net proceeds from the Company
Debt Offering and the Company Equity Offering to repay the
indebtedness under the Credit Agreement. Concurrently with such
repayment, the Company will terminate the Credit Agreement and
enter into the New Credit Agreement, which will provide for a
senior credit facility of $25 to $50 million. Under the New
Credit Agreement, after giving effect to the consummation of the
Company Debt Offering, the Company Equity Offering and the
Pending Acquisitions, the Company would have had additional
borrowing availability of $______ million as of June 30, 1996,
subject to meeting the debt incurrence covenant under the Inden-
ture. See "Description of Certain Indebtedness" for descriptions
of the terms of the Credit Agreement, the New Credit Agreement
and the Indenture.
Of the Term Loans outstanding under the Credit Agreement,
$29,000,000 can be converted into Series B Preferred at the ratio
of 833 shares for each $100,000 in outstanding debt and accrued
interest. Additionally, in connection with the execution of the
original Credit Agreement on March 15, 1996, ING and Cerberus
each received 102,412 warrants (204,824 warrants in total and
referred to herein as the "Lenders' Warrants"), which would
collectively allow them to purchase up to 204,824 shares of
Series A Preferred at an exercise price of $0.20 per share. Each
share of Series A Preferred is convertible into 20 shares of the
Company's Common Stock. See "Description of Capital Stock." ING
and Cerberus may separately exercise their warrants without any
action of the other party.
Other. The redemption price for the 10% Preferred, 8%
Preferred and 7% Preferred consisted of cash payments aggregating
$1,117,371 and 34,436.33 shares of 14% Preferred. In the aggre-
gate, $6,269,487 of the Company's outstanding obligations,
including portions of the purchase price for the IPP and Para-
mount acquisitions, was liquidated by issuing 107,918.19 shares
of 14% Preferred. The $2,002,386 excess of the redemption price
of the preferred issues redeemed over their aggregate carrying
value was recorded as a reduction of earnings available to common
shareholders on March 15, 1996. The Company may redeem approxi-
mately $5.5 million stated value of 14% Preferred with a portion
of the net proceeds of the Company Debt Offering and the Company
Equity Offering.
At September 30, 1996, long-term debt and obligations under
capital leases, including the current portions, but excluding the
amount allocated to the Lender Warrants, was $55,057,893 and
consisted of: (i) related party debt (payable to the Lenders and
an officer of the Company), including the current portion and
excluding the portion allocated to the Lenders Warrants, of
$41,325,000, an increase of $39,267,500 as compared to $1,732,500
at December 31, 1995; (ii) capital leases of $8,032,032; (iii)
seller notes of $3,634,114; and (iv) other long-term debt,
including the current portion, of $2,066,747, a decrease of
$6,184,671 as compared to $8,596,413 at December 31, 1995. The
overall increase is primarily attributable to debt incurred in
connection with the acquisitions of IPP, Paramount, POA and
Amtel.
On March 15, 1996, warrants to purchase 2,018,942 shares of
Common Stock ("Nominal Value Warrants") were issued in conjunc-
tion with the acquisitions of IPP and Paramount, redemption of
the 10% Preferred, 8% Preferred and 7% Preferred, and conversion
of certain debt of the Company to the 14% Preferred. The war-
rants expire on March 13, 2001. An independent appraiser has
estimated the fair value market value of the Nominal Value
Warrants to be $4,974,673, using the Black-Scholes valuation
model, of which $3,886,139 (the amount attributable to the
warrants provided to related parties in connection with the
redemption of the preferred shares and the conversion of certain
debt) was recorded in the caption "other unusual charges and
contractual settlements" in the Company's statement of operations
for the six months ended June 30, 1996.
In 1995, the Company sold, or issued in consideration for
services rendered, 602,003 shares of its Common Stock to offi-
cers, directors, creditors and affiliates of the Company and to
others, including a predecessor of Southcoast Capital Corpora-
tion, one of the underwriters in the Company Equity Offering and
the Company Debt Offering, at values ranging from $4.20 to $6.01
per share. See "Certain Transactions." Additionally, certain
warrants and options to purchase 660,506 shares of the Company's
Common Stock at prices ranging from $5.70 to $6.00 were granted
in 1995.
On September 12, 1995, the Company borrowed $1,200,000
(which was recorded net of the value of warrants issued of
$349,000) from third party investors pursuant to a 19 month
credit agreement, bearing interest at 12.5%. The proceeds were
used for operating expenses and to make certain employee sever-
ance payments. This debt was repaid on March 15, 1996 with
borrowings under the Credit Agreement.
SEASONALITY
The Company completed two acquisitions which added approxi-
mately 4,400 public pay telephones in 1995, and four acquisitions
which added approximately 15,200 telephones during the first nine
months of 1996. The seasonality of the Company's historical
operating results has been affected by shifts in the geographic
concentrations of its telephones resulting from such acquisi-
tions. In recent years, the Company acquired a large number of
telephones in the northern and western states of the United
States. As a result of such acquisitions, the Company has more
recently experienced lower operating results in the first quarter
due to the effect of the cold weather in the northern and western
states on outdoor public pay telephone usage. Revenues are
typically highest in the fourth quarter because of the increased
volume of calls made during the holiday season.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1996 the Company had
capital expenditures (exclusive of acquisitions) of $2,770,804,
which were financed through cash flow from operations.
Capital expenditures are principally for the expansion of
the Company's installed pay telephone base, including the pur-
chase of telephones and related equipment, operating equipment
and computer hardware.
The Company expects to make capital expenditures of approxi-
mately $225,000 during the three months ended December 31, 1996
and approximately $4,100,000 during the year ended December 31,
1997.
Management believes that based upon the net proceeds to the
Company from the Company Debt Offering and the Company Equity
Offering and cash flow from operations the Company will have the
funds necessary to meet the Company's cash requirements for
working capital, capital expenditures and debt service over the
next twelve months. However, there can be no assurance that the
Company will be able to do so or that the Company Equity Offering
and the Company Debt Offering will be consummated. See "Risk
Factors--Substantial Leverage and Effect on Ability to Pay Indebt-
edness" and "--Possible Non-Consummation of the Pending Acquisi-
tions and the Public Offerings."
BUSINESS
GENERAL
The Company is currently the third largest independent
public pay telephone operator and the eleventh largest public pay
telephone operator in the United States. Upon consummation of
the Pending Acquisitions, the Company believes that it will be
one of the two largest independent public pay telephone operators
in the United States. As of September 30, 1996, after giving
effect to the Pending Acquisitions, the Company would have owned
and operated 38,423 public pay telephones in 43 states, the
District of Columbia and Mexico, of which approximately 96% are
located in 21 states. After giving effect to the Pending Acqui-
sitions, approximately 44% of the Company's public pay telephones
will be located in Florida, Texas and California, which are three
of the four most populous states. As of September 30, 1996, the
Company owned and operated 24,732 public pay telephones, of which
approximately 95% are located in 17 states and approximately 46%
are located in Florida, Texas and California. Since September 1,
1995, the Company has added 19,581 public pay telephones, primar-
ily through a series of acquisitions by the Company of 6 indepen-
dent public pay telephone companies. In addition, the Company
maintains an active program of installing public pay telephones.
The Company owns, operates, services and maintains a system
of micro processor controlled "smart" public pay telephones. The
Company derives substantially all of its revenues from coin and
non-coin calls placed from its public pay telephones. The
Company obtains contracts with national, regional and local
accounts to operate public pay telephones at locations where
significant demand exists for public pay telephone services, such
as malls, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals. As of September 30,
1996, the average remaining life of the Company's contracts with
its customers was 40.1 months (excluding the contracts acquired
in connection with the acquisition of POA).
As of September 30, 1996, the Company owned and operated
24,732 public pay telephones in 41 states and the District of
Columbia and, on a pro forma basis after giving effect to the
Pending Acquisitions, will own and operate 38,423 public pay
telephones in 43 states, the District of Columbia and Mexico.
The following chart sets forth certain information with respect
to the locations of the Company's pay telephones as of September
30, 1996 on an actual basis and a pro forma basis giving effect
to the Pending Acquisitions:
Actual Pro Forma
Public Public
Pay Percent- Pay Percent-
Tele- age of Tele- age of
Location phones Total phones Total
Florida 5,127 20.7% 5,129 13.3%
California 3,705 15.0 3,705 9.6
Missouri 2,912 11.8 2,912 7.6
Texas 2,533 10.2 8,064 21.0
Ohio 1,633 6.6 1,633 4.2
Illinois 1,329 5.4 1,329 3.4
Montana 1,025 2.7
South Carolina 1,249 5.1 1,249 3.2
Virginia 975 3.9 975 2.5
Colorado 764 3.1 1,442 3.8
Tennessee 674 2.7 674 1.8
Washington 616 2.5 616 1.6
Utah 26 2,245 5.9
New Mexico 4 2,409 6.3
Other 3,185 13.0 5,016 13.1
----- ---- ----- ----
Total 24,732 100.0% 38,423 100.0%
====== ===== ====== =====
The public pay telephones to be acquired in the Cherokee
Acquisition are located primarily in Texas, New Mexico, Colorado,
Utah and Montana. All of the public pay telephones to be ac-
quired in the Texas Coinphone Acquisition are located in Texas.
On an actual basis, the Company had revenues and EBITDA of
$16.8 million and $3.0 million, respectively, for the six months
ended June 30, 1996. On the same basis, the Company's EBITDA
margins have increased to 17.6% for the six months ended June 30,
1996 from 3.0% for the six months ended June 30, 1995. The
increase in EBITDA margin is primarily due to the elimination of
costs associated with the closing of certain offices, the elimi-
nation of redundant executives and administrative personnel in
billing and other operational areas and leveraging the Company's
existing field technicians.
After giving pro forma effect to the 1995 Acquisitions and
1996 Acquisitions, the Company would have achieved revenues of
$59.6 million and $30.2 million for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively, and
EBITDA of $10.4 million and $6.5 million for the year ended
December 31, 1995 and the six months ended June 30, 1996, respec-
tively. After giving pro forma effect to the 1995 Acquisitions,
the 1996 Acquisitions and the Pending Acquisitions, the Company
would have achieved revenues of $91.5 million and $46.6 million
for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively, and EBITDA of $21.2 million and
$10.2 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively. See "Pro Forma Finan-
cial Data."
In June 1995, Peter Graf was appointed Chairman of the Board
of Directors and in September 1995 was appointed Chief Executive
Officer of the Company. In September 1995, Stuart Hollander,
Joseph Abrams, Aron Katzman and Steven Richman were appointed to
the board of directors of the Company, and the majority of the
existing board resigned at that time. The new management team
identified and implemented the business strategy set forth below.
BUSINESS STRATEGY
The Company's objective is to grow through additional
acquisitions and internally, thereby achieving economies of scale
and cost savings. The Company has implemented the following
strategy to meet its objective:
Grow through acquisitions. The Company believes that there
is a significant opportunity to consolidate the highly fragmented
independent segment of the public pay telephone industry.
Selective acquisitions enable the Company to expand its geograph-
ic presence and further its strategy of clustering its public pay
telephones more rapidly than with new installations. The Company
has been able to make acquisitions at attractive prices because
smaller companies typically are not able to achieve the economies
of scale realized by the Company. As a result, when acquisitions
are integrated, the Company can operate the public pay telephones
at significantly lower operating costs than the seller. Accord-
ingly, the Company maintains an active acquisition program to
acquire public pay telephones that are in, or contiguous to, its
existing markets or that can form the basis of a new cluster.
Management believes that the Company's experience in completing
acquisitions of companies in the public pay telephone industry is
instrumental in identifying and negotiating additional acquisi-
tions as well as integrating the Acquisitions. In addition, as
the Company grows to become the leading supplier of independent
public pay telephone services in an area, "fill-in" and contigu-
ous acquisitions become less attractive to other potential
acquirors as their ability to create significant clusters is
reduced. Moreover, the Company believes that such growth will
further enhance its ability to negotiate favorable rates with
long distance and operator services providers as well as suppli-
ers of pay telephones and other related equipment.
Facilitate internal growth. The Company actively seeks to
install new public pay telephones and intends to enhance its
sales and marketing efforts to obtain additional contracts to own
and operate public pay telephones with new and existing national,
regional and local accounts. In evaluating locations for the
installation of public pay telephones, the Company generally
conducts a site survey to examine various factors, including
population density, traffic patterns, historical usage informa-
tion and other geographic factors. The installation of public
pay telephones is generally less expensive than acquiring public
pay telephones.
Reduce operating costs through geographically concentrated
clusters. The Company believes that in addition to facilitating
additional acquisitions, the clustering of public pay telephones
creates an opportunity to generate savings through reduced field
service and collection expenses, the closing of duplicate offic-
es, reduction in staff and general corporate overhead expenses
and reduced expenses associated with interLATA and intraLATA
traffic.
Form strong relationships with service providers and
suppliers. As part of its strategy to continue to reduce operat-
ing costs, the Company outsources its long distance and operator
services to a number of subcontractors that are OSPs, principally
Intellicall. The Company intends to strengthen its relationships
with Intellicall, together with other OSPs, and the suppliers of
its public pay telephone equipment as its market presence in-
creases. By achieving close working relationships with its OSPs
and suppliers, the Company believes that it will be in a position
to negotiate lower cost agreements with increasingly favorable
terms.
Use of state-of-the-art technology. The Company's public
pay telephones are "smart" telephones and are operated by means
of advanced microprocessor technology that enables the telephones
to perform substantially all of the necessary coin-driven and
certain non coin-driven functions independent of the Company's
central office. Unlike "dumb" telephones used by most BOCs and
other LECs, smart telephones, in concert with the Company's
management information systems, enable the Company to determine
each telephone's operability and need for service as well as its
readiness for collection of coin revenues. In addition, rate
changes and other software-dependent functions can also be
performed from the central office without dispatching service
technicians to individual public pay telephones. As a result,
the Company can increase the number of public pay telephones it
owns while reducing the costs on a per phone basis of telephone
service and maintenance and coin collection.
Provide superior customer service. The Company strives to
maximize the number of its telephones that are operational at any
one time and thereby retain existing customers and attract new
ones. Accordingly, the Company employs both advanced telecommu-
nications technology and trained field technicians to ensure
superior customer service. This technology also enables the
Company to (i) maintain accurate records of telephone activity
which can be verified by customers and (ii) respond quickly to
equipment malfunctions. The Company's standard of performance is
to repair malfunctions within 24 hours of their occurrence.
Achieve market recognition. With the greater financial
resources available to the Company following the Company Debt
Offering and the Company Equity Offering, the Company intends to
promote actively its brand and customer service capabilities.
The Company seeks to promote and achieve recognition of its
products and services by posting on all of its public pay tele-
phones the "PhoneTel" label and through advertisements in trade
magazines. The Company believes that achieving market recogni-
tion will facilitate its expansion strategy by enhancing its
ability to obtain additional accounts and encouraging the use of
its public pay telephones in locations where consumers have
multiple pay telephone options.
INDUSTRY OVERVIEW
Public pay telephones are primarily owned and operated by
BOCs and other LECs and independent public pay telephone compa-
nies. Of the approximately 2.54 million public pay telephones
operated in the United States in 1996, Multimedia Telecommunica-
tions Association estimates that approximately 87% are operated
by BOCs and other LECs and approximately 13% are operated by
independent public pay telephone companies. Within the United
States, the Multimedia Telecommunications Association estimates
that there were approximately 342,000 public pay telephones owned
by independent public pay telephone companies in 1995. Today's
telecommunications marketplace was principally shaped by the 1984
court-directed divestiture of the BOCs by AT&T. The AT&T dives-
titure and the many regulatory changes adopted by the FCC and
state regulatory authorities in response to the AT&T divestiture,
including the authorization of the connection of competitive or
independently-owned public pay telephones to the public switched
network, have resulted in the creation of new business segments
in the telecommunications industry. Prior to these developments,
only BOCs or other LECs owned and operated public pay telephones.
As part of the AT&T divestiture, the United States was
divided into geographic areas known as Local Access Transport
Areas or "LATAs." BOCs and other LECs provide telephone service
that both originates and terminates within the same LATA
("intraLATA") pursuant to tariffs filed with and approved by
state regulatory authorities. Until recently, BOCs were prohib-
ited from telecommunications offering or deriving revenues or
income from telecommunications services between LATAs
("interLATA"). Long distance companies, such as AT&T, MCI and
Sprint, provide interLATA services 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 servicing the local area in which the
recipient of the call is located. This terminating LEC then
delivers the call to the recipient.
As a result of the February 8, 1996 enactment of the Tele-
communications Act, the BOCs may provide interLATA telecommunica-
tions services and may compete for the provision of interLATA
toll calls, upon receipt of all necessary regulatory approvals
and the satisfaction of applicable conditions. The Telecommuni-
cations Act permits the BOCs to provide virtually all "out of
region" long distance telecommunications services immediately
upon the receipt of any state and/or federal regulatory approvals
otherwise applicable to long distance service. For the BOCs and
other LECs to provide interLATA toll service within the same
states in which they also provide local exchange service ("in-
region service"), prior FCC approval must be obtained. The
timing of such approval is unclear and may depend on the outcome
of litigation related to recent regulations promulgated by the
FCC relating to the duties of BOCs and other incumbent LECs under
Section 257 of the Telecommunications Act. This FCC approval to
provide" in-region" service is conditioned upon, among other things,
a showing by a BOC or other LEC that, with certain limited excep-
tions, facilities-based local telephone competition is present in
its market, that it has entered into at least one interconnection
agreement, and that it has satisfied the 14-point "competitive
checklist" established by the Telecommunications Act. In addi-
tion, the Telecommunications Act is designed to facilitate the
entry of any entity (including cable television companies and
utilities) into both the competitive local exchange and long
distance telecommunications markets. As a result of the Telecom-
munications Act, long distance companies (such as AT&T and MCI),
cable television companies, utilities and other new competitors
will be able to provide local exchange service in competition
with the incumbent BOC or other LEC. This should ultimately
increase the number and variety of carriers that provide local
access line service to independent public pay telephone providers
such as the Company.
Prior to 1987, coin calls were the sole source of revenues
for independent public pay telephone operators. Long distance
calling card and collect calls from these public pay telephones
were handled exclusively by AT&T. Beginning in 1987, a competi-
tive operator service system developed which allowed OSPs,
including long distance companies such as MCI and Sprint, to
handle non-coin calls and to offer independent public pay tele-
phone companies commissions for directing operator assisted or
calling card calls to them.
Generally, public pay telephone revenues may be generated
through: (i) coin calls; (ii) operator service calls ("0+" i.e.,
credit card, collect and third number billing calls, and "0-",
i.e. calls transferred by the LECs to the OSPs requested by the
caller); and (iii) access code calls using carrier access numbers
(e.g., "10XXX" codes, "1-800" or "950"). Section 276 of the
Telecommunication Act and the FCC implementing rules (both of
which were recently enacted) will permit independent public pay
telephone providers to generate additional revenues from all of
these three categories, each of which consists of local,
intraLATA toll, intrastate interLATA, interstate interLATA and
international call components.
ACQUISITION STRATEGY
The Company believes that the existence of many small
independent public pay telephone providers presents acquisition
opportunities for the Company. The Company believes that acqui-
sitions of other independent public pay telephone companies and
management's experience in identifying and negotiating potential
acquisitions and integrating acquired companies into the
Company's ongoing operations may substantially accelerate its
rate of growth, increase the Company's concentration of public
pay telephones through clustering and thereby increase profit-
ability through economies of scale. The Company intends to
continue this acquisition program upon consummation of the
Company Debt Offering and the Company Equity Offering.
In reviewing potential acquisition candidates, the Company
considers various factors, including:
Historical and pro forma financial performance. The Company
reviews the historical revenues, mix between coin and non-coin
revenue and cash flows of the public pay telephone providers to
be acquired and analyzes their prospective profitability based on
pro forma considerations, such as lower service and collection
expenses, lower general and administrative expenses, and the more
favorable terms and conditions which the Company may be able to
obtain from OSPs and long distance carriers due to the increased
level of calls on such pro forma basis.
Location and economies of scale. The Company considers the
geographic proximity of the public pay telephones to be acquired
to the Company's existing clusters or markets and the extent to
which the acquisition would provide the Company with economies of
scale through more efficient operation and maintenance of a
larger number of public pay telephones within a geographic region
or cluster. In addition, the Company seeks to acquire indepen-
dent public pay telephone companies in new markets where the
Company believes it can create a new cluster and achieve internal
growth through increases in the number of public pay telephones
as well as through additional acquisitions. The Company also
assesses the resources that would be necessary to integrate
effectively and efficiently the target company into the Company's
existing operations, including the staff required to service the
new public pay telephones. To date, the Company has targeted
companies that operate primarily in the southeastern, midwestern
and western areas of the United States.
Location agreements and condition of equipment. The Company
reviews the standard terms of location agreements including the
revenue sharing terms and commissions, term and transferability
of related site location agreements with location providers, the
line charges required to be paid for the public pay telephones
and the type and condition of the proposed equipment to be
acquired. The Company also conducts a physical survey of a
representative sample of the public pay telephones proposed to be
acquired.
Regulatory matters. The Company reviews the applicable
regulatory framework, as well as proposed changes in regulatory
matters, in states where the Company is not currently operating
and is considering the acquisition of a significant number of
public pay telephones.
The Company believes that it has a competitive advantage
over other potential acquirors because of management's experience
in identifying and negotiating acquisitions and in integrating
acquired companies into the Company's ongoing operations.
The following table summarizes the recent acquisitions
completed, or entered into, by the Company as of October 30,
1996:
Number of
Installed
Public
Pay Tele-
Date of phones
Expected to be Primary
Company to be Acquired Acquisition Acquired Areas Served
---------------------- ----------- -------- ------------
Cherokee Communications, January 1997 13,500 Texas;
Inc. (1) New Mexico;
Colorado;
Utah; Montana
Texas Coinphone (2) January 1997 1,200 Texas
------
Total installed public 14,700
pay telephones to be ======
acquired
Number of
Installed
Public
Pay Tele-
Date of phones Primary
Company Acquired Acquisition Acquired Areas Served
---------------- ----------- -------- ------------
Amtel Communications September 6,872 California;
Services (3) 13, 1996 Washington;
Oregon;
Colorado
Payphones of America, August 1, 3,115 Missouri;
Inc. (4) 1996 Illinois;
Virginia;
Florida
IPP (5) March 15, 2,101 North Carolina;
1996 South Carolina;
Tennessee
Paramount Communications March 15, 2,528 Florida
Systems, Inc. (6) 1996
Public Telephone Corpora- October 16, 1,200 Illinois;
tion (7) 1995 Michigan
World Communications, September 3,237 Missouri;
Inc. (8) 22, 1995 Illinois;
Florida
Alpha Pay Phones - IV March 25,
L.P. (9) 1994 2,155 Texas
-----
Total installed public
pay telephones acquired 21,208
======
________________
(1) See "The Pending Acquisitions The Cherokee Acquisition."
(2) See "The Pending Acquisitions The Texas Coinphone Acquisi-
tion."
(3) The purchase price paid by the Company for Amtel consisted
of $7.0 million in cash and $6.0 million in Common Stock.
Such purchase price also included inventory of an additional
728 public pay telephones and related parts.
(4) The purchase price paid by the Company for POA consisted of
$500,000 in cash, 166,666 shares of Common Stock, assumption
of $7.75 million of capital lease obligations, $3.6 million
in notes payable to the sellers, the assumption of $0.2
million in liabilities and two five-year non-competition and
consulting agreements with two of the sellers for an aggre-
gate of approximately $.3 million.
(5) The purchase price paid by the Company for IPP consisted of
$3.5 million in cash, 555,589 shares of Common Stock, 5,453
shares of 14% Preferred, 117,785 Nominal Value Warrants and
the assumption of $1.8 million in liabilities, of which $1.6
million was repaid by the Company on March 15, 1996. The
cash purchase price included three five year non-compete
agreements, with an aggregate value of $60,000, with three
of IPP's former officers.
(6) The purchase price paid by the Company for Paramount con-
sisted of $9.6 million in cash, 8,333 shares of 14% Pre-
ferred, 179,996 Nominal Value Warrants and the assumption of
$0.7 million in liabilities which were repaid by the Company
on March 15, 1996. The purchase price included a five year
consulting and non-compete agreement, valued at $50,000,
with one of Paramount's former officers.
(7) The purchase price paid by the Company for Public Telephone
consisted of 224,879 shares of Common Stock and the assump-
tion of $2.8 million in liabilities. In connection with the
acquisition, the Company entered into five year non-compete
agreements with two of Public's former owners which require
cash payments and the issuance, in the aggregate, of 80,000
shares of the Company's Common Stock.
(8) The purchase price paid by the Company for World consisted
of 402,500 shares of Common Stock, 530,534 shares of 10%
Non-Voting Preferred and the assumption of $6.9 million in
liabilities. All shares of the 10% Non-Voting Preferred
were converted into 884,214 shares of the Company's Common
Stock on June 28, 1996. In connection with the acquisition,
the Company entered into two year non-compete and employment
agreements with three of World's former officers, which
require, in the aggregate, payment of $625,000 over a two
year period.
(9) The purchase price paid by the Company for Alpha consisted
of $2.3 million in cash, a $1.1 million note payable to the
sellers and the assumption of $2.2 million in liabilities.
In connection with the acquisition, the Company entered into
five year non-compete agreements with two of Public's former
owners, which require cash payments and the issuance, in the
aggregate, of 80,000 shares of the Company's Common Stock.
PRODUCTS AND SERVICES
Installation of public pay telephones
The Company's primary business is to obtain contracts,
either through acquisitions or internal growth, from location
providers to install and operate public pay telephones on a
revenue sharing basis. The Company installs public pay tele-
phones in properties owned or controlled by others where signifi-
cant demand exists for public pay telephone services, such as
shopping malls, convenience stores, service stations, grocery
stores, restaurants and truck stops, at no cost to the location
provider. The Company then services and collects money from
these telephones and pays the location owner a share of the
public pay telephone's revenues. As of September 30, 1996, the
Company owned and operated 24,732 installed public pay telephones
and after giving pro forma effect to the Pending Acquisitions
would have had owned and operated 38,423 installed public pay
telephones.
The percentage of revenues paid by the Company to the
location provider is generally fixed for the term of the agree-
ment and generally ranges from 15% to 40% if based on gross
revenues per pay telephone or from 10% to 40% if based on net
revenues per public pay telephone. The term of a location
agreement generally ranges from three to ten years and provides
for the automatic renewal of the contract for the same period as
the original term of the contract if it is not cancelled by the
location provider under the terms of the agreement. The Company
can generally terminate an agreement on 30-days' prior notice to
the location provider if the public pay telephone does not
generate sufficient total revenues for two consecutive months.
Under certain of the Company's location agreements, the failure
of the Company to remedy a default within a specified period
after notice may give the location provider the right to termi-
nate such agreement. The duration of the contract and the
commission arrangement depends on the location, number of tele-
phones and revenue potential of the account.
The Company's average cost of installing a public pay
telephone in 1996 has ranged from $2,000 to $2,500, which costs
include site surveys, telephones, enclosures and related hard-
ware, commissions and all other costs incurred in connection with
installation.
Local Service
Substantially all of the Company's public pay telephones
accept coins as well as other forms of payment for local or long-
distance calls. The Company's public pay telephones generate
coin revenues primarily from local calls. State regulatory
authorities typically set the maximum rate for local coin calls
that may be charged by BOCs and other LECs and independent public
pay telephone companies although this will change over the next
year as states follow the FCC's mandate and deregulate the price
of a local coin call. See "--Governmental Regulations." The
Company charges the same rate as the BOCs and the other LECs for
local calls in substantially all of the territories in which the
Company's public pay telephones are located. In most territories
that charge is $0.25, although in some jurisdictions the charge
is less than $0.25 per local call and in a limited number of
other jurisdictions, which have already deregulated local calls,
the charge is $0.35. Whereas local coin calls have traditionally
been provided for an unlimited call duration, some jurisdictions
in which the Company's public pay telephones are located have
begun to allow call timing, which requires the deposit of an
additional amount after a specified period. The Company pays
monthly line and usage charges to LECs for all of its installed
public pay telephones. These charges cover basic telephone
service as well as the transport of local coin calls.
Operator-Assisted Long Distance Services
The Company outsources its long distance and operator
service operations to a number of OSPs, including Intellicall,
which is the Company's primary provider of such services, AT&T,
BellSouth, Opticom and Conquest. The Company receives commis-
sions from these services based on the volume of calls made as
well as on the amount of revenues generated per call. However,
in certain regions the Company may also install an automated
operator system for select pay telephones that allows the tele-
phones to collect and store billing information and forward calls
to the called party, i.e. "store and forward" calls. The Company
also receives additional revenues from long distance carriers for
dial-around calls made from its public pay telephones whereby the
consumer gains access to an OSP or a long distance company other
than one designated by the Company. In May 1992, the FCC ruled
that 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, including Illinois,
Florida, Georgia and South Carolina, have implemented intrastate
dial-around compensation programs for independent public pay
telephones. Other states are currently considering intrastate
dial-around compensation programs for independent public pay
telephones. The recently enacted Section 276 of the Telecommuni-
cations Act requires the FCC to establish a per-call compensation
plan to ensure that public pay telephone service providers are
fairly compensated for all calls made from their telephones
commencing November 6, 1996. In an order released on September
20, 1996 (which order is currently subject to pending petitions
at the FCC seeking reconsideration), the FCC implemented new
rules that replace the current $6.00 flat fee per telephone per
month with an interim $45.85 flat fee per telephone per month
from November 6, 1996 to October 1997. In October 1997, the flat
fee will be replaced by a per-call compensation mechanism. See
"--Governmental Regulations." Management believes that both the
interim plan and the per-call compensation plan will generate
significant additional revenues, net of related expenses and
processing fees, commencing November 6, 1996 for the Company.
TELEPHONE EQUIPMENT
The Company purchases its pay telephones from two of the
three largest independent manufacturers of public pay telephones,
Intellicall and Protel Inc. The Company has also acquired
telephones manufactured by the third manufacturer of public pay
telephones, Elcotel Inc. Although all three manufacturers use
similar technology, the Company seeks to purchase primarily a
single brand of telephone within a geographic area. This maxi-
mizes the efficiency of the Company's field technicians and makes
it easier to stock appropriate spare parts. It is the Company's
policy to place the PhoneTel name on telephones that it acquires
or installs.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have enabled
the Company to enhance customer service and to achieve strong
operational and financial controls by enabling management to
react quickly and efficiently to critical information collected
from the Company's public pay telephones. The custom operational
software used to manage the Company's public pay telephone
business is an internally developed application named Prophecy.
Prophecy is a comprehensive system of data collection and analy-
sis that supports daily operations in the field and provides the
Company with management data. The Prophecy software allows the
Company's management information systems to accept direct output
from the polling operations of the individual public pay tele-
phones, analyze the data and produce daily operational reports
for the Company's field offices. In addition, Prophecy develops
summaries of management information.
The Prophecy software is scalable and is able to support the
varying proprietary protocols of the individual manufacturers of
its public pay telephones. The Company's polling operations are
supported by the software provided by the manufacturers of the
public pay telephones owned by the Company. The Company believes
that its Prophecy management information systems supports its
expansion strategy by enabling the Company to integrate effi-
ciently and effectively newly acquired companies.
The Company's public pay telephones are "smart" telephones
and are operated by means of advanced microprocessor technology
that enables the telephones to perform substantially all the
necessary coin-driven and certain non coin-driven functions
independent of the Company's central office. Unlike the "dumb"
telephones used by most BOCs and other LECs, the Company's public
pay telephones are equipped with an audit feature which is linked
by modem to the Company's central computer. Substantially all of
the Company's public pay telephones are called daily by the
Company's central office to determine their operability or need
for service as well as their readiness for collection of coin
revenues. Rate changes and other software-dependent functions
can also be performed from the central office without dispatching
service technicians to individual public pay telephones. These
polling processes are accomplished on computers that are dedicat-
ed to the nightly processing of public pay telephone information.
This information is used to plan collection and servicing routes
on a daily basis by the Company's service technicians. This
allows the Company to minimize the number of service technicians
required to service its telephones while maintaining a high level
of operability of its public pay telephones.
SALES AND MARKETING
The Company relies on its internal sales force and indepen-
dent sales representatives to market its products and services.
The internal sales force receives salaries plus commissions for
each public pay telephone installed and the sales representatives
are paid on a commission-only basis for each public pay telephone
installed. In addition, the Company pays its technicians a
finders fee for certain phones installed. The Company has 9
sales persons who report to the Vice President of Sales and
Marketing. The Company also markets its products and services
through advertising in trade publications, booths at trade shows
and referrals from existing accounts.
The Company directs a major portion of its marketing efforts
for public pay telephones to multi-station accounts, such as
shopping centers, convenience stores, service stations, grocery
stores, restaurants, truck stops and bus terminals (stations).
These multi-station accounts have the advantages of greater
efficiency in collection and maintenance. The Company also
solicits single station accounts, where there is a demonstrated
high demand for public pay telephone service. In evaluating
locations for the installation of public pay telephones, the
Company generally conducts a site survey to examine various
factors, including population density, traffic patterns, histori-
cal usage information and other geographical factors. The
Company generally will not install a public pay telephone unless
it believes based on the site survey that the site will generate
a minimum level of revenues.
CUSTOMERS
The Company's public pay telephone operations are diversi-
fied on both a geographical and customer account basis. Current-
ly, the Company owns and operates public pay telephones in 41
states and the District of Columbia through agreements with both
multi-station customers such as shopping malls, convenience
stores, service stations and grocery stores as well as with
single station customers. After giving effect to the consumma-
tion of the Pending Acquisitions, the Company will own and
operate public pay telephones in 43 states, the District of
Columbia and Mexico (approximately 96% of which public pay
telephones are located in 21 states).
The Company owns and operates the public pay telephones for
certain properties owned by Simon DeBartolo. The Company derived
approximately 15% and 8% of its total revenue for the year ended
December 31, 1995 and for the six months ended June 30, 1996,
respectively, from the operation of these public pay telephones.
As the Company expands its installed public pay telephone base
through additional acquisitions, it expects that the percentage
of total revenue derived from Simon DeBartolo will continue to
decline. Other than Simon DeBartolo, no single customer generat-
ed more than 5% of the Company's total revenue for the year ended
December 31, 1995 or the six months ended June 30, 1996. See
"Risk Factors--Dependence on Significant Customer." On a pro
forma basis after giving effect to the Pending Acquisitions, no
single customer would have accounted for more than 5% of the
Company's total revenue for the year ended December 31, 1995 or
the six months ended June 30, 1996.
GOVERNMENTAL REGULATIONS
The operations of the public pay telephone industry are
regulated primarily by the public service or utility commission
of the various states and by the FCC. In particular, the Company
must obtain approvals to operate public pay telephones from the
public utility commissions of most states in which the Company
operates. In addition, from time to time, legislation is enacted
by Congress or the various state legislatures that affects the
telecommunications industry generally and the public pay tele-
phone industry specifically. Court decisions may also have a
significant effect on the public pay telephone industry. Changes
in existing laws and regulations as well as the creation of new
ones, applicable to the activities of the Company or other
telecommunications businesses (including the extent of competi-
tion, the charges of providers of interexchange and operator
services and the implementation of new technologies), may have a
material adverse effect on the Company's business, results of
operations or financial condition.
State. Since the AT&T break-up, state regulatory authori-
ties have primarily been responsible for regulating intrastate
public pay telephone services. Public utility commissions in
most states have established rules and regulations that govern
the provision of public pay telephone services, including certif-
ication or registration, notice to end users of the identity of
the service provider in the form of postings or verbal announce-
ments, requirements for rate quotes upon request, call routing
restrictions, and maximum price limitations. While not necessar-
ily uniform, these rules and regulations generally establish
minimum technical and operational characteristics to assure that
public interest considerations are met. To date, each state has
had the right to regulate pricing and other aspects of the
operations of independently-owned public pay telephones and all
intrastate telephone service. In some jurisdictions, in order
for the Company to operate its own public pay telephones, it may
be necessary to become certificated and have tariffs filed. The
procedure and length of time for the process varies from state to
state. Until recently, in many states only local telephone
companies were permitted to process local and/or intraLATA
operator assisted calls. The Company has obtained the requisite
regulatory approvals to provide public pay telephone service in
all states in which it provides such services and complies with
applicable state regulations governing such services.
The recently enacted Section 276 of the Telecommunications
Act gives the FCC authority to adopt rules affecting intrastate
telephone services and to preempt state rules and regulations
inconsistent with those adopted by the FCC. As discussed in more
detail under the caption "--Federal," the FCC adopted rules on
September 20, 1996 (which rules are currently subject to pending
petitions at the FCC seeking reconsideration) that will preempt
certain existing state regulations and will limit the scope of
future state regulation of pricing and other aspects of public
pay telephone operation. In particular, states are required to:
(a) deregulate the price of a local phone call;
(b) eliminate all intrastate subsidies for BOC and LEC
pay phone services;
(c) enact rules governing the provision of "public
interest pay phones;" and
(d) conduct a thorough review of all existing state
pay phone rules to ensure that those rules do not
conflict with the intent of Section 276 and the
FCC implementing rules.
Federal. Until recently, the FCC has not actively regulated
the provision of intrastate public pay telephone services by
independent public pay telephone companies. However, the Company
believes that the recent enactment of Section 276 of the Telecom-
munications Act will have a significant impact on the FCC's role
in governing and regulating the provision of intrastate public
pay telephone services. In addition, the FCC actively regulates
the interstate and foreign telecommunications market, which
affects the Company's operations in numerous ways.
Until the enactment of Section 276, the FCC had regulated
public pay telephones primarily in the context of its regulation
of OSPs, and in particular, through its implementation of the
Telephone Operator Consumer Services Improvement Act (the "Opera-
tor Services Act"). The Operator Services Act was enacted in
October 1990 and established various requirements for companies
that provide operator services and call aggregators (which send
calls to these OSPs). The requirements of the Operators Services
Act include call branding, information posting, rate quoting and
the filing of informational tariffs. The Company must comply or
ensure compliance with certain billing and consumer information
requirements. For example, the Company is not permitted to or to
allow its OSP to bill consumers for unanswered calls, bill for
calls that do not reflect the location or the origination of the
call, or bill the call from any location other than from where
the call is made, unless the consumer's consent is explicitly
obtained. Furthermore, the Company and its OSP must identify the
OSP presubscribed to the public pay telephone to end users in the
form of postings at or near the telephone or verbal announcements
in accordance with the FCC's requirements. The Company also must
allow consumers to access the interexchange carrier of their
choice by entering a specific code number, i.e., a "10XXX," "800"
or a "950" number. The Company believes that it complies with
the provisions of the Operator Services Act as a call aggregator
(i.e., one who makes telephones available to the public for long
distance calls using an OSP). The Operator Services Act also
requires the FCC to take action to limit the exposure of public
pay telephone companies to undue risk of fraud.
The Operator Services Act also directed the FCC to consider
the need to prescribe compensation to owners of independent
public pay telephones for dial-around access to a long distance
company other than the one selected by the independent public pay
telephone company. In May 1992, the FCC ruled that independent
public pay telephone companies are entitled to compensation for
these calls. Due to the complexity of establishing an accounting
system for determining compensation for these calls, the FCC
temporarily set compensation at $6.00 per public pay telephone
per month, to be allocated among long distance companies earning
annual toll revenues for interstate calls in excess of $100
million per year in accordance with their market share. Similar-
ly, state regulatory authorities, including, for example, Illi-
nois, Florida, Georgia and South Carolina, implemented intrastate
dial-around compensation programs for independent public pay
telephone providers and other states are considering such pro-
grams. In 1995, Section 276 of the Telecommunications Act was
enacted, which required the FCC to establish a per-call compensa-
tion plan to ensure that all public pay telephone service provid-
ers are fairly compensated for all calls, both intrastate and
interstate. See "--Compensation."
In 1992, the FCC initiated a rulemaking in which it proposed
to implement the "billed party preference" system ("BPP") for 0+
interLATA traffic from public pay telephones and other aggregator
locations such as hotels and motels. Under BPP, operator-assist-
ed long distance traffic would be carried automatically by the
OSP preselected by the party being billed for the call. Under
the current presubscription system, unless an access code is
dialed, 0 + calls from public pay telephones are routed to the
OSP presubscribed to the public pay telephones. Under BPP as
proposed, 0 + calls would be completed by an OSP with no rela-
tionship to the public pay telephone provider, and thus would
eliminate commissions paid by the presubscribed OSP to the public
pay telephone provider on 0 + calls.
In June 1996, the FCC issued a Second Further Notice of
Proposed Rulemaking in CC Docket No. 92-77 in which it tentative-
ly concluded that the costs of BPP outweigh the benefits, and
proposed to not implement BPP. Instead, the FCC proposed to (i)
establish benchmarks for OSP rates based upon a composite of the
rates charged by the three largest interexchange carriers (AT&T,
MCI, and Sprint), which composite is intended to reflect rates in
line with what consumers expect to pay, and (ii) require OSP's
that charge rates and/or fees imposed by location owners whose
total is greater than a given percentage above the benchmarks, to
disclose the applicable charges for the call to consumers orally
before connecting a call. Alternatively, the FCC proposed to
require all OSP's to disclose their rates on all 0+ calls. The
effect of the rules, if any, ultimately adopted by the FCC, on
the Company's business, results of operations or financial
condition can not be determined at this time.
In September 1996, the FCC adopted rules which implement the
public pay telephone provisions of Section 276 of the Telecommu-
nications Act. Petitions seeking reconsideration of aspects of
these FCC rules were filed with the FCC in October 1996 and are
currently pending. Key elements of the rulemaking include:
(a) Compensation. Currently independent public pay tele-
phone providers are not compensated on a per-call basis
for toll-free calls, such as "800" calls and debit card
calls, both domestic and international. The new FCC
rules establish a three-phase compensation plan to
ensure that public pay telephone providers are fairly
compensated for all calls originating from public pay
telephones, with the exception of emergency calls and
telecommunications relay service calls for hearing-
disabled individuals. For the period from November 6,
1996 through October 1, 1997, the $6.00 flat fee per
telephone per month will be replaced by an interim
$45.85 flat fee per telephone per month (which was
established by the FCC by multiplying $0.35 per call
times the estimated industry average of 131 access code
calls and "800" calls per pay telephone per month). In
October 1997, the flat fee will be replaced by a per-
call compensation mechanism. From October 1997 to
October 1998, the per-call payment shall be $0.35;
thereafter, the per-call rate shall be equal to the
local coin call rate for each location. Obtaining fair
compensation for these dial-around calls is particular-
ly important since the use of access codes to reach a
preferred long distance carrier has recently gained
significant exposure and customer acceptance, because
of marketing campaigns of the larger interexchange
carriers, such as AT&T's "1-800-CALLATT" and MCI's "1-
800-COLLECT." BOCs are not permitted to receive com-
pensation for dial-around calls until they have com-
plied with the Computer III non-structural safeguards
and have ceased subsidizing their public pay telephone
operations (see below).
The Section 276 requirement that public pay telephone opera-
tors receive fair compensation for all public pay telephone
calls also applies to local coin drop calls. To implement
the requirement, the new FCC rules mandate a two phase
transition to market-based rates for local coin drop calls.
During the first year-long phase, states may continue to set
the local coin rate in the same manner as they currently do,
but they are also free to adopt market-based rates at any
time during this one-year period. In addition, states are
required during this period to review and remove, if neces-
sary, those state regulations, such as entry and exit re-
strictions, that affect public pay telephone competition and
are inconsistent with the Telecommunications Act and the new
FCC rules. In the second phase, which will begin in October
1997, the market will be allowed to set the rate for local
coin calls in each state, unless the state can demonstrate
to the satisfaction of the FCC that there are market fail-
ures within the state that would not allow market-based
rates.
(b) BOC subsidization. BOCs and other LECs have tradition-
ally included a public pay telephone cost element in
determining the access charges imposed upon carriers to
terminate long distance calls. Section 276 and the new
FCC rules require LECs to eliminate these and other
subsidies, to reduce their interstate access charges,
to operate their public pay telephones as detariffed
customer premises equipment and to provide independent
public pay telephone providers all functionalities used
by the LEC in its own delivery of public pay telephone
service. In contrast to the past, when the LEC imposed
a subscriber line charge on public pay telephone pro-
viders but not on their own public pay telephones, the
FCC now requires that any subscriber line charge and
tariffed network services charges apply equally to both
LEC and independent public pay telephones.
(c) Non-structural safeguards. The FCC adopted certain
non-structural safeguards in its Computer III inquiry
which were designed to prevent BOCs from using their
incumbent market power in an anti-competitive manner.
These safeguards generally allow the BOCs to provide
certain services on an integrated basis (i.e., directly
rather than through a separate subsidiary) provided
that BOCs (i) allow nondiscriminatory access to their
network features and functionalities; (ii) restrict use
of customer proprietary network information; (iii)
subscribe to certain network information disclosure
rules; (iv) do not discriminate in the provision,
installation, and maintenance of services and reporting
and (v) adopt certain cost accounting safeguards. In
its rulemaking, the FCC applied these safeguards to the
provision of public pay telephone services by the BOCs,
and found that further non-structural safeguards were
unnecessary. The FCC also decided to reclassify BOC
public pay telephone service as a "nonregulated activi-
ty" so that costs from public pay telephone activities
would be separated from regulated non-public pay tele-
phone accounts. Consistent with this approach, in a
rulemaking initiated in July 1996 to implement certain
accounting safeguards under the Telecommunications Act,
the FCC proposed to apply accounting safeguards identi-
cal to those adopted in Computer III to prevent the
subsidization of BOC public pay telephone services by
non-public pay telephone revenues.
(d) InterLATA presubscription. In the past BOCs were not
permitted to compete in the interLATA marketplace.
Section 276 permits BOCs to negotiate with location
providers and select interLATA long distance service
providers for their public pay telephones, unless the
FCC determines that it is not in the public's interest.
In its rulemaking, the FCC concluded that a BOC should
be permitted to negotiate for the right to select the
interLATA carrier serving its public pay telephones,
but not until its plan to comply with the Computer III
non-structural safeguards has been approved by the FCC.
(e) IntraLATA presubscription. Until recently, in almost
every state only the LEC has been able to be
"presubscribed" to a telephone for local and intraLATA
toll calls, including at a public pay telephone.
"Presubscription" refers to an arrangement whereby a
call is automatically connected to a pre-selected
carrier, unless another carrier's access code is di-
aled. According to the FCC, intraLATA presubscription
(the ability to presubscribe a carrier other than the
BOC or LEC) has been ordered to become available in
eighteen states. Section 276 provides that all public
pay telephone service providers have the right to
"negotiate with the location provider on the location
provider's selecting and contracting with, and subject
to the terms of any agreement with the location provid-
er, to select and contract with, the carriers that
carry intraLATA calls from their payphones." The FCC's
new rules give all public pay telephone service provid-
ers (including BOCs and independent providers such as
the Company) the right to negotiate with location
providers concerning the intraLATA carrier.
(f) Public interest public pay telephones. Section 276
requires the FCC to ensure that public pay telephones
provided in the interest of public health, safety, and
welfare are maintained and supported equitably. The
new FCC rules adopt a narrow definition of "public
interest payphone," and leave to the discretion of the
states how to fund their respective public interest
public pay telephone programs, so long as the funding
mechanism (i) "fairly and equitably" distributes the
costs of such program, and (ii) does not involve the
use of subsidies prohibited by Section 276(b)(1)(B) of
the Telecommunications Act. Each state's funding
review must be completed by October 1998.
The Company believes that Section 276 and the implementing
regulations adopted by the FCC will likely have an overall
positive effect on the public pay telephone industry in general
and the Company in particular. However, the final rules adopted
by the FCC and Section 276 have not yet been interpreted by the
courts, and there can be no assurance regarding the effect that
the rules and policies ultimately adopted thereunder will have on
the Company.
SERVICEMARK
The Company uses the servicemark "PhoneTel" on its tele-
phones, letterhead and in various other manners. On November 22,
1988, the United States Patent and Trademark Office granted the
Company a Certificate of Registration for the servicemark
"PhoneTel" for providing telecommunications services for a period
of twenty years.
COMPETITION
The public pay telephone industry is, and can be expected to
remain, highly competitive. While the Company's principal
competition comes from BOCs and other LECs, the Company also
competes with other independent providers of public pay telephone
services, major OSPs and interexchange carriers. In addition,
the Company competes with providers of cellular communications
services and personal communications services (wireless), which
provide an alternative to the use of public pay telephones.
Furthermore, pursuant to the recently enacted Section 276 of the
Telecommunications Act and the FCC's implementing regulations,
BOCs are permitted to negotiate with location providers and
select interLATA long distance service providers for their public
pay telephones. See "--Governmental Regulations." This will
enable BOCs to generate revenues from a new service, as well as
to compete with independent public pay telephone providers for
locations to install their public pay telephones by offering
location providers higher commissions for long distance calls
than those currently offered by independent public pay telephone
providers. This competition for locations may have a material
adverse effect on the Company's business, results of operations
and financial condition.
Some of the other public pay telephone companies have
pursued an acquisition strategy similar to the Company's and
frequently compete with the Company for the most favorable public
pay telephone contracts and sites. Although the Company is one
of the largest independent public pay telephone service provid-
ers, most BOCs and other LECs and interexchange carriers have,
and some independent public pay telephone companies with which
the Company competes may have, substantially greater financial,
marketing and other resources than the Company. In addition, in
response to competition from public pay telephone companies, many
BOCs and other LECs have increased their compensation arrangement
with location providers by offering higher commissions.
The Company believes the principal competitive factors in
the public pay telephone industry are (i) commission payments to
location providers, (ii) the ability to serve accounts with
locations in several LATAs or states and (iii) the quality of
service provided to location owners and public pay telephone
users. The Company believes that it is well-positioned to
compete effectively in the public pay telephone industry.
EMPLOYEES
The Company had 168 employees at September 30, 1996, of whom
124 were employed to perform or support field operations. The
Company considers its relations with its employees to be satis-
factory. None of the employees of the Company are a party to
agreements with any unions.
PROPERTIES
The Company's principal office is located at 1127 Euclid
Avenue, Suite 650, Cleveland, Ohio, where the Company leases
approximately 15,200 square feet of space at a monthly rental of
$12,728. The lease is scheduled to terminate in December 1997.
The monthly rent will increase to $15,200 in 1997. The lease
also contains five, one year renewal options. As of September
30, 1996, the Company also maintains service and sales offices in
leased premises in Fort Lauderdale, Orlando, Ocala, and Tampa,
Florida; Las Vegas, Nevada; Farmers Branch, Texas; Springfield,
St. Louis, and Kansas City, Missouri; Chicago, Illinois; Livonia,
Michigan; Hilton Head, South Carolina; Knoxville, Tennessee; San
Diego, Hayward and Santa Fe Springs, California; Kent, Washing-
ton; Denver, Colorado; Cicero, Indiana; Lincolnton, North Caroli-
na; Portland, Oregon; and Newport News, Virginia, at an aggregate
monthly rental of $39,958. The Company believes that it would be
able to replace any leases that are not renewed upon expiration
with leases having comparable terms.
The Company expects that upon consummation of the Pending
Acquisitions it will acquire and maintain service and sales
offices in owned or leased premises in Houston, Lubbock, McAllen,
El Paso and Corpus Christi, Texas; Albuquerque, Farmington and
Gallup, New Mexico; Billings and Missoula, Montana; Salt Lake
City and Cedar City, Utah; Bismarck, North Dakota; Flagstaff,
Arizona; and Grand Junction, Colorado.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings
as to which the outcome would have a material adverse effect on
the Company's business, results of operations or financial
condition.
MANAGEMENT
The following table sets forth the names and ages (as of
September 30, 1996) and positions of each of the directors and
executive officers of the Company.
Name Age Position
---- --- --------
Peter G. Graf 59 Chairman,
Chief Executive
Officer
and Director
Tammy L. Martin 32 Executive Vice Pres-
ident,
Chief Administra-
tive
Officer, General
Counsel
and Secretary
Nickey B. Maxey 40 Chief Operating
Officer and
Director
Gary Pace 45 Senior Vice Presi-
dent,
Acquisitions and
Regulatory Matters
Richard Kebert 50 Chief Financial
Officer
Joseph Abrams 60 Director
George H. Henry 43 Director
Stuart Hollander 66 Director
Aron Katzman 58 Director
Steven Richman 53 Director
PETER G. GRAF has been Chairman and a Director of the
Company since July 1, 1995 and was elected Chief Executive
Officer of the Company in September 1995 and spends a substantial
portion of his time fulfilling such duties. Mr. Graf is licensed
as an attorney and as a certified public accountant and serves as
an officer and/or director of various privately-held companies
and the managing partner of an accounting firm. From 1991 to
September 1995, Mr. Graf served as Vice Chairman of USA Mobile
Communications Holdings, Inc.
TAMMY L. MARTIN was elected Executive Vice President and
Chief Administrative Officer of the Company in April 1996 and has
been General Counsel and Secretary of the Company since September
1995. Prior to that, Ms. Martin served as associate legal counsel
for the Company during 1993 and 1994. Prior to joining the
Company, Ms. Martin was in private legal practice from 1992 to
1993 and was self-employed as an accountant from 1990 to 1992.
NICKEY B. MAXEY has served as Chief Operating Officer and a
Director of the Company since April 1996. Mr. Maxey was founder
and President of International Pay Phones, Inc., a Tennessee
company and International Pay Phones, Inc., a South Carolina
company, both of which were merged into the Company in March
1996. Mr. Maxey has also owned and operated Resort Hospitality
Services, Inc., a telecommunications company since 1990.
GARY PACE has been Senior Vice President of the Company
since its merger with World in September 1995. Prior to such
merger, Mr. Pace was President of World since 1989.
RICHARD KEBERT has served as Chief Financial Officer of the
Company since September 1996. Prior to joining the Company, Mr.
Kebert was an independent consultant. From 1994 to 1996, he was
Vice President - Finance and Administration of Accordia of
Cleveland, Inc. For 12 years prior thereto, Mr. Kebert held
several senior management positions with Mr. Coffee, inc.,
including Vice President - Administration and Secretary. Mr.
Kebert is licensed as a certified public accountant.
JOSEPH ABRAMS has been a Director since September 1995. Mr.
Abrams is also a director of Merisel, Inc. a public company that
distributes micro computer hardware and software, and Spectrum
Signal Processing, Inc., a public company that specializes in
digital signal solutions. Mr. Abrams was a co-founder of and
served as the President of AGS Computers from 1967 to 1991. From
1991 to 1996, Mr. Abrams has been a private investor.
GEORGE H. HENRY has been a Director since April 1993. Mr.
Henry has been the managing director of G. Howard Associates,
Inc., a private investment firm, since 1986. Mr. Henry is also
on the Board of Directors of Biovail International Corporation
and a trustee of Mitchell College.
STUART HOLLANDER has been a Director since September 1995.
Mr. Hollander was founder, principal owner and Chairman of the
Board of World from 1986 until it was merged into the Company in
1995. Prior to that he was Executive Vice President of Hollander
& Company, Inc., one of the largest distributors of consumer
electronics in the U.S., representing Zenith Radio Corporation;
the founder and an officer of Lesley Acceptance Corporation;
Chairman and a Member of the Board of Jaeger of Canada, Inc.; and
a member of the Board of Pioneer Bank and Trust Company.
ARON KATZMAN has been a Director since September 1995. Mr.
Katzman is President of New Legends, Inc., a country
club/residential community in the St. Louis, Missouri area, and
Chairman and Chief Executive Officer of Decorating Den of Missou-
ri, a company engaged in the selling of decorating franchises in
Missouri. Previously, Mr. Katzman was founder and a former
Director of Medicine Shoppe, Inc., a franchisor of pharmacies,
and Chairman and Chief Executive Officer of Roman Company, a
manufacturer and distributor of fashion costume jewelry, from
1984 until it was sold in 1994. Mr. Katzman was formerly a
director and officer of World, which was merged into the Company
in September 1995.
STEVEN RICHMAN has been a Director since September 1995.
Mr. Richman is the principal owner of, and has served as the
Chairman and President of, Fabric Resources International for
more than the past five years. Mr. Richman was the co-founder
and an officer of Cable Systems USA; and an officer at Cellular
Systems USA and a director of USA Mobile Communications Holdings,
Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a Compensation
Committee and an Audit Committee. Although neither committee had
held any meetings in 1995, both committees are scheduled to meet
in the fourth quarter of 1996. The Audit Committee is expected
to meet on a quarterly basis in 1997.
The Compensation Committee has the authority to make deci-
sions with respect to executive compensation matters. Joseph
Abrams (Chairman of the Compensation Committee), George Henry and
Peter Graf are the members of the Compensation Committee.
The Audit Committee has the authority to recommend to the
Board of Directors the independent accountants to audit the
Company's financial statements, to meet with the independent
accountants and to review the Company's financial statements,
results of audits and fees charged. Aron Katzman (Chairman of
the Audit Committee) and Steven Richman are the members of the
Audit Committee.
COMPENSATION OF DIRECTORS
The Company compensates non-employee directors for serving
on the Board and reimburses them for any expenses incurred as a
result of Board of Directors meetings. The Board of Directors
had approved an annual fee of $5,000 for non-employee directors
in cash, or at the director's election, shares of Common Stock.
During 1995, Mr. Henry received a fee $5,000 which was paid in
1,111 shares of Common Stock of the Company.
EXECUTIVE COMPENSATION
On September 22, 1995, the Company entered into a consulting
agreement with Stuart Hollander, World's former Chairman, pursu-
ant to the terms of the acquisition of World. The agreement with
Mr. Hollander entitles him to annual salaries of $125,000 and
$135,000 during the two year term of the agreement.
On September 22, 1995 the Company also entered into an
employment agreement with the Company's Senior Vice President,
Gary Pace, pursuant to the terms of the acquisition of World.
The agreement with Mr. Pace entitles him to annual salaries of
$110,000 and $120,000, as well as certain bonuses, during the two
year term of the agreement.
On September 1, 1996, the Company also entered into an
employment agreement with the Company's Chief Financial Officer,
Richard Kebert. The agreement with Mr. Kebert entitles him to an
annual salary of $120,000, as well as a guaranteed minimum bonus
of $15,000 during the eighteen-month term of the agreement.
The Company has not entered into employment agreements with
Peter Graf or Nickey Maxey, the Company's Chief Executive Officer
and Chief Operating Officer, respectively. Mr. Graf and Mr.
Maxey provide their services to the Company without receiving any
compensation. The Company does, however, reimburse such officers
for their business expenses.
The following table sets forth a summary of all compensation
of the Company's Chief Executive Officer and all other executive
officers whose total compensation exceeded $100,000 per year for
any year in the three year period ended December 31, 1995 (the
"named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Name and Long-Term Compensation
Principal
Position Year Annual Compensation Awards Payouts
---------- ---- ------------------- --------------------- ------------------------
Long-
Other Term
Annual Restricted- Incen- All Other
Compen- Stock Options/ tive Compen-
Salary Bonus sation Award(s) SARs Payouts sation
------ ----- ------ -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter G. Graf 1995 -- -- -- -- 47,583 -- --
Chairman, 1994 -- -- -- -- 24,705 -- --
Chief
Executive
Officer,
and Director
Jerry H. Burger 1995 $ 74,293 $13,600 $13,600(1) -- 62,500 -- $212,000(2)
Former Chief 1994 $ 40,000 -- -- -- -- -- --
Executive
Officer 1993 $ 42,000 $75,000 $ 5,917(3) -- 43,333(4)
Bernard Mandel 1995 $147,544 $ 9,760 $ 9,760(5) -- 41,666 -- $146,500(6)
Former President, 1994 $ 88,894 -- $ 4,154(3) -- -- -- --
Chief 1993 $ 83,269 $25,000 $ 3,698(3) -- 10,000(7) -- --
Operating
Officer
and
Secretary
Daniel J.Moos 1995 $ 95,000 $ 1,442 $12,800(8) -- 54,999(9) -- --(10)
Former
Executive
Vice President,
Chief Financial
Officer, and
Treasurer
</TABLE>
____________________
(1) Represents the value of 2,833 shares paid to Mr. Burger for
services provided.
(2) On September 15, 1995, the Company and Mr. Burger entered
into a separation agreement which provided for the termina-
tion of the employment agreement and the resignation of Mr.
Burger as a director, officer and employee of the Company.
Pursuant to the separation agreement, the Company agreed to
pay Mr. Burger $650,000 in installments, with the final
amount paid March 15, 1996. All other compensation repre-
sents payment under the separation agreement with Mr. Burger
and related expenses excluding payment of $445,000, plus
accrued interest of $4,291, paid on March 15, 1996.
(3) Value of non-business use of Company automobile.
(4) 26,000 options expired in 1995.
(5) Represents the value of 2,033 shares paid to Mr. Mandel for
services provided.
(6) On September 15, 1995, the Company and Mr. Mandel entered
into a separation agreement which provided for the termina-
tion of the employment agreement and the resignation of Mr.
Mandel as a director, officer and employee of the Company.
Pursuant to the separation agreement, the Company agreed to
pay Mr. Mandel the amount of $450,000 in installments, with
the final amount paid March 15, 1996. All other compensa-
tion represents payment under the separation agreement with
Mr. Mandel, excluding payment of $308,500, plus accrued
interest of $2,976, paid on March 15, 1996.
(7) Expired in 1995.
(8) Represents the value of 2,666 shares paid to Mr. Moos for
services provided.
(9) 33,000 options not vested at December 31, 1995.
(10) On July 29, 1996, the Company and Mr. Moos entered into a
separation agreement which provided for the termination of
his employment agreement and the resignation of Mr. Moos as
an executive vice president, chief financial officer and
treasurer of the Company, effective August 2, 1996. Pursu-
ant to the separation agreement, the Company agreed to pay
Mr. Moos the amount of $325,000 in installments, of which
$25,000 has been paid, with the final amount to be paid on
the earlier to occur of (i) December 31, 1996 or (ii) the
consummation of a debt or equity offering by the Company in
an amount equal to or greater than $10 million.
The following table sets forth certain information concerning
individual grants of stock options made during the year ended
December 31, 1995 to each of the named executive officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Percent
of
Total
Number Options/
of War-
Securi- rants/
ties SARs
Underly- Granted
ing to Exer-
Options/ Employ- cise
Name and SARs ees in or Base
Principal Posi- Granted Fiscal Price Expiration
tion (#) Year ($/Sh) Date
Peter G. Graf 41,833 6.3% $5.70 December 31, 1997
Chairman, 5,750 0.9% $6.00 August 15, 2000
Chief
Executive
Officer
and Director
Jerry H. Berger 62,500(1) 9.5% $6.00(2) August 31, 1997
Former Chief
Executive
Officer
Bernard Mandel 41,666(3) 6.3% $6.00(2) August 31, 1997
Former Presi-
dent,
Chief Operat-
ing Officer
and Secretary
Daniel J. Moos 54,999(4) 8.3% $6.00(2) August 2, 1998
Former Execu-
tive
Vice Presi-
dent, Chief
Financial
Officer
and Treasurer
(1) Excludes 38,306 additional options issued pursuant to anti-
dilution provisions.
(2) Does not reflect anti-dilutive repricing of options on June
4, 1996, which lowered the exercise price to $3.72 per
share.
(3) Excludes 25,537 additional options issued pursuant to anti-
dilution provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-
dilution provisions.
The following table sets forth certain information about unex-
ercised stock options held by the named executive officers at
December 31, 1995. No stock options were exercised by such
persons during 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of
Securities
Underlying Value of
Unexercised
Unexer- in-the-
cised Money
Op- Op-
tions/SARs tions/SARs
at FY-End at FY-End
(#) ($)
Shares Exercis- Exercis-
Name and Acquired able/ able/
Principal Po- on Exer- Value Unexercisa Unexercisab
sition cise Realized ble le
Peter G. Graf -- -- 75,064 $31,316
Chairman,
Chief
Executive
Officer, and
Director
Jerry H. Bur- -- -- 127,361 $31,840
ger
Former Chief
Executive
Officer
Bernard Mandel -- -- 66,666 $91,667
Former Presi-
dent, Chief
Operating
Officer and
Secretary
Daniel J. Moos -- -- 54,999 $13,750
Former Execu-
tive Vice
President,
Chief
Financial
Officer and
Treasurer
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
the beneficial ownership of the Common Stock owned by each
Director of the Company, each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock, the
named executive officers and all directors and officers as a
group as of September 30, 1996. The table does not give effect
to the issuance and sale of shares by the Company or the sale of
shares by certain of the 5% shareholders in the Company Equity
Offering. Unless otherwise indicated, the number of shares of
Common Stock owned by the named shareholders assumes the exercise
of the warrants or options that are exercisable within 60 days,
the number of which is separately referred to in a footnote, and
the percentage shown assumes the exercise of such warrants or
options and assumes that no warrants or options held by others
are exercised. This information is based upon information
furnished by such persons and statements filed with the Securi-
ties and Exchange Commission and other information known by the
Company.
Number of
Shares
of Common Stock
Name and Address Beneficially Percentage of
of Beneficial Owner Owned Class
Directors
Peter G. Graf(1)(16) 1,029,376 12.89%
Chairman, Chief Executive
Officer and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Nickey B. Maxey(2)(16) 406,184 5.30%
Chief Operating Officer and
Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
George H. Henry(3) 360,376 4.70%
Director
6860 Sunrise Court
Coral Gables, FL 33133
Stuart Hollander(4) 323,559 4.24%
Director
32 Lake Forest
St. Louis, MO 63117
Steven Richman(5)(16) 258,535 3.31%
Director
9 Beech Lane
Kings Point, NY 11024
Aron Katzman (6)(16) 244,664 3.14%
Director
10 Layton Terrace
St. Louis, MO 63124
Number of
Shares
of Common Stock
Name and Address Beneficially Percentage of
of Beneficial Owner Owned Class
Joseph Abrams (7)(16) 195,536 2.50%
Director
85 Old Farm Road
Bedminster, NJ 07921
Named Executive Officers
Jerry Burger (8) 239,930 3.06%
Former Chief Executive Officer
27040 Cedar Road
Beachwood, OH 44122
Bernard Mandel (9) 100,824 1.31%
Former President, Chief Operat-
ing
Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos (10) 100,707 1.30%
Former Executive Vice Presi-
dent,
Chief Financial Officer & Trea-
surer
7399 Stow Road
Hudson, OH 44236
Executive Officers and Direc- 2,961,473 34.62%
tors
as a group (10 per-
sons)(11)(17)
5% Beneficial Owners
Internationale Nederlanden
(U.S.) Capital Corporation 4,464,907 36.89%
(12)(18)
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P. 4,464,907 36.89%
(13)(18)
950 Third Avenue, 20th floor
New York, NY 10022
ACI - HDT Supply Company, et 2,162,163 28.30%
al.,
as Debtors-in-Possession (14)
5452 Oberlin Drive, Suite B
San Diego, CA 92121
J&C Resources (15)(17) 486,860 6.25%
216 Daniel Webster Highway
S. Nashua, NH 03060
Number of
Shares
of Common Stock
Name and Address Beneficially Percentage of
of Beneficial Owner Owned Class
Brenner Securities Corporation 475,108 5.90%
(16)(17)
277 Park Avenue
New York, NY 10172
____________________
(1) Includes warrants to purchase 75,064 shares of Common Stock
through March 13, 2001 and 14% Preferred which is convert-
ible through June 30, 2000 into 269,454 shares of Common
Stock.
(2) Includes 14% Preferred which is convertible through June 30,
2000 into 31,262 shares of Common Stock.
(3) Includes options to purchase 35,000 shares of Common Stock
through October 9, 1998.
(4) Includes 148,864 shares of Common Stock held by his spouse
and 6,266 shares of Common Stock held by other family mem-
bers.
(5) Includes warrants to purchase 126,830 shares of Common Stock
through March 13, 2001, 4,444 shares of Common Stock held by
his spouse, and 14% Preferred which is convertible through
June 30, 2000 into 44,909 shares of Common Stock.
(6) Includes warrants to purchase 95,128 shares of Common Stock
through March 13, 2001 and 14% Preferred which is convert-
ible through June 30, 2000 into 47,469 shares of Common
Stock.
(7) Includes warrants to purchase 125,997 shares of Common Stock
through March 13, 2001 and 14% Preferred which is convert-
ible through June 30, 2000 into 62,873 shares of Common
Stock.
(8) Includes options to purchase 210,430 shares of Common Stock
through August 31, 1997. Beneficial owner has anti-dilu-
tion rights pursuant to stock option agreements or other
rights which will require adjustments to the number of
shares beneficially owned as a result of certain transac-
tions which occurred during the period from July 1, 1996 to
September 30, 1996.
(9) Includes options to purchase 97,541 shares of Common Stock
through August 31, 1997 and 1,250 shares of Common Stock
held by his spouse. Beneficial owner has anti-dilution
rights pursuant to stock option agreements or other rights
which will require adjustments to the number of shares
beneficially owned as a result of certain transactions which
occurred during the period from July 1, 1996 to September
30, 1996.
(10) Includes options to purchase 88,708 shares of Common Stock
which expire August 2, 2000. Beneficial owner has anti-
dilution rights pursuant to stock option agreements or other
rights which will require adjustments to the number of
shares beneficially owned as a result of certain transac-
tions which occurred during the period from July 1, 1996 to
September 30, 1996.
(11) Includes beneficial ownership of Common Stock described
above with respect to Messrs. Graf, Maxey, Richman, Abrams,
Katzman, Hollander, Henry, and beneficial ownership of
Common Stock of Mr. Pace and Ms. Martin.
(12) Includes Lenders' Warrants to purchase the Series A Pre-
ferred, which is immediately convertible into 2,048,240
shares of Common Stock and certain debt under the Credit
Agreement which is convertible into Series B Preferred,
which is immediately convertible into 2,416,667 shares of
Common Stock. ING may exercise a portion of its Lenders'
Warrants in order to sell shares of Common Stock in the
Company Equity Offering. Assuming ING sells 250,000 shares
of Common Stock in the Company Equity Offering and all of
the indebtedness under the Credit Agreement is repaid with a
portion of the net proceeds of the Company Debt Offering,
ING will beneficially own ___ shares of Common Stock, which
would represent ___% of the Common Stock outstanding after
consummation of the Company Equity Offering. Assuming ING
sells 250,000 shares of Common Stock in the Company Equity
Offering and the Credit Agreement indebtedness remains
outstanding because the Company Debt Offering is not consum-
mated, ING will beneficially own shares of Common
Stock, which would represent % of the Common Stock
outstanding after consummation of the Company Equity Offer-
ing.
(13) Includes Lenders' Warrants to purchase the Series A Pre-
ferred, which is immediately convertible into 2,048,240
shares of Common Stock and certain debt under the Credit
Agreement which is convertible into Series B Preferred,
which is immediately convertible into 2,416,667 shares of
Common Stock. Cerberus may exercise a portion of its
Lenders' Warrants in order to sell shares of Common Stock in
the Company Equity Offering. Assuming Cerberus sells
250,000 shares of Common Stock in the Company Equity Offer-
ing and all of the indebtedness under the Credit Agreement
is repaid with a portion of the net proceeds of the Company
Debt Offering, Cerberus will beneficially own ___ shares of
Common Stock, which would represent __% of the Common Stock
outstanding after consummation of the Company Equity Offer-
ing. Assuming Cerberus sells 250,000 shares of Common Stock
in the Company Equity Offering and the Credit Agreement
indebtedness remains outstanding because the Company Debt
Offering is not consummated, Cerberus will beneficially own
shares of Common Stock, which would represent % of
the Common Stock outstanding after consummation of the
Company Equity Offering. See note (18) below.
(14) Represents the shares of Common Stock given by the Company
to ACI-HDT Supply Company and its affiliates (collectively
referred to herein as Amtel) as consideration in the Amtel
acquisition. Each of the Amtel entities is a Debtor-In-
Possession in separate Chapter 11 reorganization proceedings
pending before the Untied States Bankruptcy Court for the
Southern District of California (the "Bankruptcy Court")
identified as Case Nos. 95-08253-All. Pursuant to the Asset
Purchase Agreement dated as of June 26, 1996, as amended,
between the Company and Amtel, Amtel has agreed to distrib-
ute the shares of Common Stock to its creditors after a
final plan of reorganization is confirmed by order of the
Bankruptcy Court.
(15) Represents 14% Preferred which is convertible through June
30, 2000 into 148,200 shares of Common Stock.
(16) See "Certain Transactions" for information with respect to
the 14% Preferred and the Nominal Value Warrants.
(17) Includes warrants to purchase 310,660 shares of Common Stock
through March 13, 2001 and 14% Preferred which is convert-
ible through June 30, 2000 into 107,782 shares of Common
Stock.
(18) Cerberus may sell fewer than 250,000 shares of Common Stock
in the Company Equity Offering. Notwithstanding the lock-up
agreement entered into with the underwriters in the Company
Equity Offering, in such event, Cerberus will be permitted
to sell at any time following the effective date of the
registration statement relating to the Company Equity
Offering up to that number of shares equal to the
difference between 250,000 and the number of shares of
Common Stock actually sold by Cerberus in the Company Equity
Offering. See "Description of Capital Stock--Registration
Rights and Lock-ups."
CERTAIN TRANSACTIONS
On March 15, 1996, Nominal Value Warrants to purchase
2,018,942 shares of Common Stock expiring March 13, 2001 were
issued in conjunction with the acquisitions of IPP and Paramount,
redemption of the 10% Preferred, 8% Preferred, and 7% Preferred,
and conversion of certain debt of the Company into the 14%
Preferred. See "Description of Capital Stock--Preferred Stock--14%
Preferred" for a description of the terms of the 14% Preferred.
Concurrently with their exchange of debt and preferred stock for
the 14% Preferred, the following directors, executive officers
and security holders of 5% or more of the Common Stock received
the amount of 14% Preferred and Nominal Value Warrants shown
below. The Company may use a portion of the net proceeds of the
Company Debt Offering and the Company Equity Offering to redeem
all of the 14% Preferred other than the shares of 14% Preferred
beneficially owned by Peter G. Graf.
Value of
Debt/Preferr
ed
Surrendered Number of
and Stated Nominal
Value of 14% Value
Preferred Warrants
Name of Beneficial Owner Issued Issued
Peter G. Graf $1,500,000 539,989
Chairman, Chief Executive
Officer and Director
Joseph Abrams 350,000 125,997
Director
Aron Katzman 264,250 95,128
Director
Steven Richman 250,000 89,998
Director
Nickey B. Maxey 174,032 62,650
Chief Operating Officer and
Director
J&C Resources 825,000 296,994
5% Owner
Brenner Securities Corporation 600,000 143,994
5% Owner
A predecessor of Southcoast Capital Corporation, which is a
5% or more stockholder and one of the underwriters in the Company
Debt Offering and the Company Equity Offering, was paid fees
consisting of (i) $600,000 in cash, (ii) $600,000 of 14% Pre-
ferred and (iii) Nominal Value Warrants to purchase 143,944
shares of Common Stock of the Company for providing financial
advisory services to the Company in connection with the Credit
Agreement. In addition, a predecessor of Southcoast Capital
Corporation received 56,666 shares of Common Stock and warrants
to purchase 166,666 shares of the Company's Common Stock at an
exercise price of $6.00 per share for services rendered in
connection with the acquisition of World and certain bridge
financing.
ING, which is a 5% or more stockholder and one of the
Lenders under the Credit Agreement, received customary fees
during 1995 and 1996 pursuant to the terms of the Credit Agree-
ment.
Southcoast Capital Corporation will receive approximately
$810,000 in customary fees for providing financial advisory
services to the Company in connection with the Cherokee Acquisi-
tion. In addition, Southcoast Capital Corporation will receive
customary fees for acting as underwriter in connection with each
of the Company Equity Offering and the Company Debt Offering.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, $.01 par value per share, and
10,000,000 shares of Preferred Stock, without par value, except
as further designated by the Board of Directors (the "Preferred
Stock"). As of September 30, 1996, there was outstanding (i)
7,639,709 shares of Common Stock, (ii) 116,316.05 shares of 14%
Cumulative Redeemable Convertible Preferred Stock, $60 stated
value per share (the "14% Preferred"), (iii) Lenders' Warrants to
purchase 204,824 shares of Series A Preferred, which are then
immediately convertible into 4,096,480 shares of Common Stock,
(iv) 983,805 Nominal Value Warrants, which are exercisable into
the same number of shares of Common Stock, (v) 830,351 additional
warrants which are exercisable into the same number of shares of
Common Stock and (vi) 650,746 stock options for Common Stock, all
of which are immediately exercisable. In addition, at September
30, 1996, $29,000,000 of indebtedness outstanding under the
Credit Agreement was convertible at the Lenders' option into
approximately 241,667 shares of Series B Preferred, which are
then immediately convertible into 4,833,333 shares of Common
Stock. Upon completion of the Company Debt Offering and the
Company Equity Offering, there will be outstanding (i) ___ shares
of Common Stock, (ii) ___ shares of 14% Preferred, (iii) Lenders'
Warrants to purchase ____ shares of Series A Preferred, (iv)
983,805 Nominal Value Warrants, (v) 830,351 additional warrants
and (vi) 650,746 stock options for Common Stock. After the
Company Debt Offering and the Company Equity Offering and the
application of the net proceeds therefrom, there would be no debt
outstanding under the Credit Agreement or the New Credit Agree-
ment that was convertible into Series B Preferred or Common
Stock.
The following summary is qualified in its entirety by the
provisions of the Company's Articles of Incorporation, as amended
(the "Articles of Incorporation"), a copy of which has been
incorporated by reference as an exhibit to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each
share held on all matters submitted to a vote of shareholders and
they do not have any cumulative voting rights except as permitted
by Ohio law. Accordingly, holders of a majority of the outstand-
ing shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election.
Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors
out of funds legally available therefore, subject to preferential
dividend rights of any outstanding series of Preferred Stock.
Upon the liquidation, dissolution or winding-up of the Company,
holders of Common Stock are entitled to receive ratably the net
assets of the Company available for distribution after the
payment of all debts and liabilities of the Company and the
liquidation preferences which may be granted to holders of the
Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding
shares of Common Stock are, and the shares offered hereby will
be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of
holders of shares of the 14% Preferred, the Series A Preferred,
the Series B Preferred and any other series of Preferred Stock
that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to issue from time to
time up to an aggregate of 10,000,000 shares of Preferred Stock,
in one or more series, without any further shareholder approval.
Each such series of Preferred Stock shall have such number of
shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be deter-
mined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund
provisions, liquidation preferences, conversion rights and
preemptive rights.
The authority of the Board to create and issue at its
discretion any series of Preferred Stock without shareholder
approval could adversely affect the voting power and other rights
of the holders of Common Stock. The ability of the Board to
issue Preferred Stock, while providing flexibility in connection
with financings, acquisitions and other corporate purposes, could
have the effect of discouraging an attempt by another person or
entity to acquire control of the Company through a merger, sale
of the Company's assets or similar transaction, since the issu-
ance of Preferred Stock could be used to dilute the share owner-
ship of a person or entity seeking to obtain control of the
Company. Additionally, future issuances of any series of Pre-
ferred Stock could result in additional classes of shares with
conversion features and preferences over the Common Stock with
respect to dividends and distributions in liquidation and could
also result in the dilution of net income and book value per
share of the Company.
The Board of Directors has designated the following out-
standing series of Preferred Stock pursuant to its authority
under the Articles of Incorporation:
Series A Preferred
The Company has 250,000 shares of Series A Preferred autho-
rized, none of which have been issued. Lenders' Warrants for the
purchase of 204,824 shares of Series A Preferred at an exercise
price of $0.20 per share were issued by the Company in connection
with the Credit Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources."
The Series A Preferred shares are pari passu with the Common
Stock with respect to the payment of dividends. If a dividend or
other distribution is declared by the Board of Directors to be
paid to holders of the Common Stock, then simultaneously with the
payment of such dividend or making of such distribution, and as a
condition precedent to its right to do so, the Board of Directors
will pay or distribute to the holders of the Series A Preferred
the same dividends or distributions as such holders would have
been entitled to receive if such holders had converted their
shares of Series A Preferred into Common Stock prior to the
record date used by the Board of Directors for determining the
holders of Common Stock entitled to receive such dividend or
distribution.
With respect to liquidation preferences, the Series A
Preferred is pari passu with the Series B Preferred and senior to
the Common Stock and any other series of Preferred Stock.
Accordingly, upon the liquidation, dissolution or winding up of
the Company, holders of the Series A Preferred will be entitled
to receive, on a ratable and pari passu basis with the holders of
the Series B Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any
payment to holders of Common Stock or any other series of Pre-
ferred Stock, a liquidation preference of $0.20 per share plus
accrued and unpaid dividends to the date of payment.
Holders of the Series A Preferred have the right, at any
time, to convert each share of Series A Preferred into 20 shares
of fully paid and nonassessable Common Stock, subject to certain
antidilution adjustments and regulatory restrictions applicable
to bank holding companies.
Except as provided by law, the holders of Series A Preferred
have no voting rights.
Series B Preferred
The Company has 250,000 shares of Series B Preferred autho-
rized, none of which have been issued. Term Loans of $29,000,000
outstanding under the Credit Agreement, which may be converted
into Series B Preferred at the ratio of approximately 833 shares
of Series B Preferred for each $100,000 of outstanding debt and
accrued interest, will be repaid with a portion of the net
proceeds from the Company Debt Offering and the Company Equity
Offering. See "Prospectus Summary The Company Equity Offering
and the Company Debt Offering."
The Series B Preferred shares are pari passu with the Common
Stock with respect to the payment of dividends. If a dividend or
other distribution is declared by the Board of Directors to be
paid to holders of the Common Stock, then simultaneously with the
payment of such dividend or making of such distribution, and as a
condition precedent to its right to do so, the Board of Directors
will pay or distribute to the holders of the Series B Preferred
the same dividends or distributions as such holders would have
been entitled to receive if such holders had converted their
shares of Series B Preferred into Common Stock prior to the
record date used by the Board of Directors for determining the
holders of Common Stock entitled to receive such dividend or
distribution.
With respect to liquidation preferences, the Series B
Preferred is pari passu with the Series A Preferred and senior to
the Common Stock and any other series of Preferred Stock.
Accordingly, upon the liquidation, dissolution or winding up of
the Company, holders of the Series B Preferred will be entitled
to receive, on a ratable and pari passu basis with the holders of
the Series A Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any
payment to holders of Common Stock or any other series of Pre-
ferred Stock, a liquidation preference of $120 per share plus
accrued and unpaid dividends to the date of payment.
Holders of the Series B Preferred have the right, at any
time, to convert each share of Series B Preferred into 20 shares
of fully paid and nonassessable Common Stock, subject to certain
antidilution adjustments and regulatory restrictions applicable
to bank holding companies.
Except as provided by law, the holders of Series B Preferred
have no voting rights.
14% Preferred
The Company has 200,000 shares of 14% Preferred authorized
of which 116,316.05 shares were issued at September 30, 1996.
Holders of the 14% Preferred are entitled to receive dividends
payable in additional shares of 14% Preferred at a quarterly rate
of 0.035 shares per share of 14% Preferred outstanding, on the
first business day of each April, July, October and January,
commencing April 1, 1996. Dividends on the outstanding shares of
14% Preferred accrue, whether or not declared. Unless full
cumulative dividends on all shares of 14% Preferred outstanding
have been paid, no redemption or fund for such redemption may be
authorized, no dividend (other than a dividend payable in Common
Stock or any other class of stock ranking junior to the 14%
Preferred as to dividends and upon liquidation) or other distri-
bution may be declared or paid on any class of the Company's
stock ranking junior to the 14% Preferred as to dividends or as
to liquidation preferences. However, the holders of at least 50%
of the outstanding shares of 14% Preferred may vote to approve a
redemption.
With respect to liquidation preferences, the 14% Preferred
is junior to the Series A Preferred and the Series B Preferred
and is senior to the Common Stock and any other series of Pre-
ferred Stock. Accordingly, upon the liquidation, dissolution or
winding up of the Company, holders of the 14% Preferred will be
entitled to receive out of the assets of the Company legally
available for distribution to its stockholders after making
payment to the holders of the Series A Preferred and the Series B
Preferred and before making any payment to holders of Common
Stock or any other series of Preferred Stock, a liquidation
preference of $60.00 per share.
Holders of the 14% Preferred have the right, at any time, to
convert each share of 14% Preferred, including any accrued and
unpaid dividend shares, into 10 shares of fully paid and nonas-
sessable Common Stock, subject to certain antidilution adjust-
ments.
The 14% Preferred is mandatorily redeemable by the Company
on June 30, 2000, and is redeemable at any time prior thereto at
the Company's option, in each case, at a redemption price of $60
per share plus accrued and unpaid dividends. Holders of the 14%
Preferred have 20 days from receipt of notice of a redemption by
the Company to convert their 14% Preferred shares into Common
Stock. The Company may use a portion of the net proceeds of the
Company Debt Offering and the Company Equity Offering to redeem
shares of 14% Preferred having a liquidation preference of
approximately $5.5 million. See "Prospectus Summary The Company
Equity Offering and The Company Debt Offering."
Except as provided by law, the holders of the 14% Preferred
have no voting rights.
From time to time, the Board of Directors has designated
other series of Preferred Stock, none of which are currently
outstanding.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of September 30, 1996, the Company has reserved
12,551,876 shares of Common Stock for issuance under the follow-
ing circumstances: (i) exercise of warrants to purchase 204,824
shares of Series A Preferred at $0.20 per share, immediately
convertible into 4,096,480 shares of Common Stock; (ii) conver-
sion of 116,316.05 shares of 14% Preferred into 1,163,161 shares
of Common Stock; (iii) exercise of 983,805 Nominal Value War-
rants; (iv) exercise of 830,351 warrants at prices ranging from
$5.70 to $15.75 per share; (v) exercise of 650,746 stock options
at prices ranging from $2.63 to $19.50 per share; and (vi)
conversion of $29,000,000 of outstanding debt under the Credit
Agreement and accrued interest into 241,667 shares of Series B
Preferred that are immediately convertible into 4,833,333 shares
of Common Stock.
REGISTRATION RIGHTS AND LOCK-UPS
The Company has entered into registration rights agreements
with the Selling Shareholders and has filed the Registration
Statement of which this Prospectus forms a part in order to
satisfy its obligations under such agreements.
Notwithstanding the filing of the Registration Statement,
however, each of ING and Cerberus (who hold approximately 67% of
the shares of Common Stock offered hereby) have agreed not to
transfer, sell or otherwise dispose of shares of Common Stock
(except for 250,000 shares which may be sold by each of ING and
Cerberus as part of the Company Equity Offering or otherwise)
prior to the expiration of 360 days after the Effective Date
without the consent of Southcoast Capital Corporation except as
follows: (i) up to 900,000 shares in the aggregate may be
transferred, sold or otherwise disposed of by each of ING and
Cerberus during the period commencing on the 181st day following
the Effective Date and ending on the 270th day following the
Effective Date and (ii) up to 1,150,000 shares in the aggregate
(including any shares sold pursuant to clause (i)) may be
transferred, sold or otherwise disposed of by each of ING and
Cerberus during the period commencing on the 271st day following the
Effective Date and ending on the 360th day following the Effective
Date. In addition, other Selling Shareholders who hold approximately
25% of the shares of Common Stock offered hereby have agreed not to
transfer, sell or otherwise dispose of such shares for a period of
180 days commencing on the date of the consummation of the Company
Equity Offering without the consent of Southcoast Capital Corporation.
In connection with the Company Equity Offering, the Company
and its directors and executive officers have agreed not to
offer, sell, contract to sell, grant any option or other right
for the sale of, or otherwise dispose of any shares of Common
Stock in any manner prior to the expiration of 180 days after the
Effective Date without the prior written consent of Southcoast
Capital Corporation, except that the Company may issue shares of
Common Stock upon the exercise of options or in connection with
acquisitions.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
American Securities Transfer & Trust, Inc.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE CREDIT AGREEMENT
The Credit Agreement consists of (i) the Revolving A Loans
(as defined therein) in the aggregate principal amount of
$7,250,000, (ii) the Revolving B Loans (as defined therein) in
the aggregate principal amount of $4,750,000 and (iii) the Term
Loans (as defined therein) in the aggregate principal amount of
$29,000,000. The obligations under the Credit Agreement are
secured by a first priority lien on all of the Company's in-
stalled telephones and other assets (other than the telephones
acquired in the POA acquisition).
The Credit Agreement requires monthly interest payments at
the ING Alternate Base Rate (as defined therein) plus 5% (13.25%
at September 30, 1996). The Credit Agreement contains certain
representations and warranties, certain negative and affirmative
financial covenants and certain conditions and events of default
which are customarily required for similar financings. Such
covenants include, among other things, restrictions on the
Company's ability to pay dividends, incur or permit to exist
debt, liens or lease obligations, make investments and capital
expenditures, dispose of assets and also include restrictions on
the activities of subsidiaries. Such financial covenants also
require the Company to maintain certain financial ratios includ-
ing, among other things, minimum net worth, working capital and
EBITDA (as defined therein). The Credit Agreement also contains
a subjective acceleration clause which states that in the event
of a material adverse change in the business, as determined by
the Lenders, the Lenders can require prepayment of the debt at
their discretion. The Lenders have agreed to waive their right
to exercise this subjective acceleration clause through December
31, 1997.
Principal payments under the Credit Agreement commence April
1997, and continue monthly and/or quarterly through June 1999 at
which time the remaining principal balance is due. The amount of
the principal payment is contingent upon numerous factors,
including the borrowing base and cash flow of the Company.
As of September 30, 1996, approximately $41 million of
indebtedness (excluding accrued interest) was outstanding under
the Credit Agreement. The Company expects that up to $43.0
million of indebtedness will be outstanding under the Credit
Agreement as of the date of this Prospectus. Simultaneously with
the closing of the Company Debt Offering, the Company will retire
all of the outstanding indebtedness under the Credit Agreement
and will enter into the New Credit Agreement.
The following summary of the terms of the Credit Agreement
does not purport to be complete, and is subject to the detailed
provisions of, and is qualified in its entirety by reference to,
the Credit Agreement. The Credit Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus
forms a part.
THE NEW CREDIT AGREEMENT
The Company is negotiating with several lenders to enter
into the New Credit Agreement. However, there can be no assur-
ance that the Company will be able to enter into the New Credit
Agreement on the terms described herein or at all.
The New Credit Agreement is expected to provide for
borrowings of $25.0 million to $50.0 million in the form of a
senior secured credit facility. Funds available under the New
Credit Agreement are expected to be available to retire indebted-
ness under the Credit Agreement, to finance certain acquisitions,
to fund the optional redemption of the Notes and for capital
expenditures and working capital needs.
The Company expects that the New Credit Agreement will
contain restrictions on the Company's ability to pay dividends,
incur or permit to exist debt, liens or lease obligations, make
investments and capital expenditures, dispose of assets and also
include restrictions on the activities of the Subsidiary Guaran-
tors. The New Credit Agreement is also expected to contain
provisions requiring the Company to maintain certain financial
ratios.
THE NOTES
The Notes that are being offered in the Company Debt Offer-
ing will be issued under an Indenture (the "Indenture") to be
dated as of December , 1996, by and among the Company, each
subsidiary of the Company (the "Subsidiary Guarantors") and
, as trustee (the "Trustee"). The following summary of the terms
of the Notes and the Indenture does not purport to be complete,
and is subject to the detailed provisions of, and is qualified in
its entirety by reference to, the Notes and the Indenture. A
copy of the form of the Indenture, which includes the form of
Note, has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
The Indenture will provide for the issuance of up to $110.0
million aggregate principal amount of Notes. The Notes will be
general unsecured obligations of the Company and senior in right
of payment to all existing and future indebtedness of the Company
that is expressly subordinated and will be pari passu in right of
payment with all other senior indebtedness of the Company. The
Notes will be guaranteed by the Subsidiary Guarantors, including
any and all future subsidiaries of the Company.
The Notes will mature on , 2006, unless previously
redeemed. The Notes will be redeemable, in whole or in part, at
the option of the Company at any time on or after , 2001,
at the redemption prices set forth in the Indenture, plus accrued
and unpaid interest to the date of redemption. In addition, at
any time or from time to time prior to , 1999, the Company
may redeem up to % of the aggregate principal amount of the
Notes originally issued with the net cash proceeds to the Company
of one or more public equity offerings or equity private place-
ments (other than the Company Equity Offering) at a redemption
price equal to % of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption provided
that at least $75.0 million principal amount of the Notes remains
outstanding immediately after any such redemption.
If the Cherokee Acquisition is not consummated prior to
, 1997, the Company will be required to offer to purchase (the
"Special Offer") $35.0 million principal amount of the Notes on
or prior to , 1997 (the "Special Offer Date") at a price equal
to 101% of the principal amount of the Notes plus accrued and
unpaid interest to the Special Offer Date. Immediately upon
consummation of the Company Debt Offering and prior to the
consummation of the Cherokee Acquisition, the portion of the net
proceeds of the Company Debt Offering equal to the amount suffi-
cient to permit the Company to purchase $35.0 million principal
amount of the Notes on the Special Offer Date at the Special
Offer Price will be held and pledged to the Trustee for the
benefit of the holders of the Notes and the obligations of the
Company to consummate the Special Offer will be secured by such
funds (the "Trust Funds").
The Indenture will impose certain limitations on the ability
of the Company and the Subsidiary Guarantors to, among other
things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset
sales, enter into certain transactions with interested persons,
incur liens, impose restrictions on the ability of a Subsidiary
Guarantor to pay dividends or make certain payments to the
Company, conduct business other than the pay telephone and
ancillary businesses, merge or consolidate with any other person
or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company.
The Indenture will contain customary events of default,
including, without limitation, the following: (i) the failure to
pay principal or interest when due on the Notes; (ii) certain
defaults under agreements relating to other indebtedness; (iii)
the breach of any covenant in the Indenture; (iv) the levy of
certain judgments; and (v) certain bankruptcy, reorganization and
insolvency events. The occurrence of an event of default under
the Indenture will permit the holders of the Notes to accelerate
the Notes and to pursue other remedies.
In addition, upon a "change of control" (as defined in the
Indenture), the Company will have the obligation to offer to
repurchase all outstanding Notes from the holders thereof at a
price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase.
SELLING SHAREHOLDERS
This Prospectus relates to offers and sales from time to
time of up to 13,304,263 shares of Common Stock by the selling
shareholders named below (collectively, the "Selling Sharehold-
ers"). The table below sets forth certain information with
respect to the Selling Shareholders and their beneficial owner-
ship of Common Stock as of the date hereof. Except as otherwise
disclosed in "Management," "Certain Transactions," "Security
Ownership of Certain Beneficial Owners and Management" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Credit
Agreement," none of the Selling Shareholders holds any position,
office or has had any other material relationship with the
Company, or any of its predecessors or affiliates, during the
past three years. The table has been prepared based upon infor-
mation furnished to the Company by or on behalf of the Selling
Shareholders. All of the shares being registered on behalf of
the Selling Shareholders, as set forth below, may be offered
hereby.
Shares Being
Selling Shareholder Registered
------------------- -------------
Abrams, Douglas 24,165
Ackerman, R. Kevin 233
Aerial Partners Limited 177,082
Allenstown Investments Limited c/o Charles
Johnston 21,000
Arnstein, Frederick Jr., as trustee for
Frederick A. Arnstein, Jr. 12,901
Axelbaum, Jerold L. and Shirley F.
Axelbaum, as trustees for Jerold L.
Axelbaum Revocable Trust 10,894
Berk, Gary 10,833
Berthel Fisher & Company Inc. 236,888
Blackman, Paul 4,166
Blumenfeld, Andrew D. 1,787
Blumenfeld, Emily A. 1,787
Blumenfeld, James M. 1,787
Blumenfeld, Jane A. 1,787
Blumenfeld, John A., as trustee for John A.
Blumenfeld 378
Blumenfeld, John A., Jr. 1,787
Bowlin, Richard R. 11,175
Brenner Securities Corporation 475,108
Bridges, W. Lloyd, M.D. 2,328
Bridges, W. Lloyd, M.D. Trust 4,656
Brinkmeier, William 42,233
Burger, Jerry 210,430
Cerberus Partners, L.P. (1) 4,214,907
Collins, Hugh 103,703
Commercial Alloys Corporation 4,166
Danco (D. Schouweiler - FWNB) 1,164
Danco (G.R. Nolan, M.D. IRA-FWNB) 11,640
Danco (S. Schouweiler-FWNB) 1,164
DeBartolo Trusts (2) 363,195
Delaware Charter (Samuel B. Gregory, Jr.
IRA) 12,804
Evans, Richard C. & Martha, Trust 2,328
Evans, Richard W. 1,164
Evans, Ryan M. 1,164
French, Arleen N., as trustee for Arleen N.
French Revocable Trust 2,680
Gabriel Capital Group 177,082
Galakatos, George, as Trustee under living
trust of George Galakatos 78,155
Gavatin, Linda S. 893
Greenberg, Lawrence H. and Sandra M.
Greenberg, with right of survivorship 4,764
Gregory, Constance A. 2,794
Gregory, Samuel B., Jr. 3,260
Guyer, Gerald H. 4,656
Harvey, Linda M. 24,774
Harvey, Michael S and Linda M. Harvey, as
joint tenants with right of survivorship 6,449
Harvey, Michael S. 1,086
Henry, George 206,883
Hoffman, Augusta 10,344
Hoffman, Burton D. 2,978
Hoffman, David 26,221
Hoffman, James 10,344
Hoffman, Larry 2,978
Hollander, Jason 6,267
Hollander, Sharon M., as trustee for Sharon
M. Hollander 148,865
Hollander, Stuart S. 6,267
Hollander, Stuart., as trustee for Stuart
Hollander 162,163
Huffman, Alton L. 112,180
Huffman, Jeff 109,151
Internationale Nederlanden (U.S.) Capital
Corporation (3) 4,214,907
Katzman, Aron 102,067
Klaehn, William R. 12,804
Kliethermes, Roberta 2,918
Kliethermes, Roberta Ann, as custodial
trustee for Kimberly Anne Kliethermes 30
Kliethermes, Roberta Ann, as custodial
trustee for Regina Linn Kliethermes 30
Kolbrener, Maynard, II 26,795
Kolbrener, Richard 5,954
Kolbrener, Robert 15,878
Kolbrener, Thomas 5,954
Komisarow, Marvin L. 16,296
M & M Financial Services 12,500
Mandel, Bernard 97,541
Mann, Vincent 833
Mark Twain Trust for separate account of
Richard S. Marx under Blumenfeld, Kaplan &
Sandweiss Profit Sharing Plan 39,696
Mark Twain Trust for the separate account
of John A. Blumenfeld under Blumenfeld,
Kaplan and Sandweiss Profit Sharing Plan
Account 14,887
Martin, James R. 112,237
Martin, Thomas J. 181,027
Martin, Thomas J. 233
Martin, Thomas J. Jr. 18,158
Marx, Richard S., as trustee for Richard S.
Marx 9,311
Maxey, Nickey 405,127
McCadden, John E., Jr. and Patricia N.
McCadden, as trustees for John E. McCadden,
Jr., as trustee 12,210
Miniaci, Albert J. (4) 266,777
Minner, Jack D. 145,256
Mitchusson, Margaret, as trustee for Marga-
ret M. Mitchusson Trust 1,936
Mitchusson, Robert L., as trustee for Rob-
ert L. Mitchusson Trust 317
Moos, Daniel 63,708
Morgan, Jerald L. 10,476
Morgan, Lewis G. 5,820
Moses & Partners, Inc. 15,833
Moses, William Jr. 36,666
Moulton, Edmond A. 833
Newman, Andrew R. 1,489
Newman, Elizabeth J. 1,489
Newman, Lee I. 1,489
Newman, Matthew 14,887
Niedt, Greg S. or Moira M.B. Niedt with
right of survivorship 12,945
Nolan, Gerald R. M.D. 1,164
Pace, Gary 142,910
Paine Weber (Krueger-IRA) 11,640
Roman, Adele G., as trustee for Adele G.
Rowan Revocable Living Trust 148
Roman, Melvin F., as trustee for Melvin F.
Roman Revocable Living Trust 148
Rojeski, Stanley 54,211
Sale, Fred R. and Susan W. Sale, as trust-
ees for Fred R. Sale 17,125
Sale, Susan W. and Fred R. Sale, as trust-
ees for Susan W. Sale 17,128
Sass, Richard 8,394
Schlott, Richard C. Sr. (Richard L. Schlott
Jr) 6,519
Schouweiler, David E. 932
Schouweiler, Jeanne R. 2,328
Schouweiler, Scot C. 5,820
Schraier, Mark Z. 2,665
SKBW Partnership (Edward E. Beck) 2,794
Spitzer, Gloria F., as trustee for Gloria
F. Spitzer Living Trust 10,344
Spitzer, Jeffrey A. 893
Spitzer, Michael N. 893
Spitzer, Sanford, as trustee for Sanford J.
Spitzer Living Trust 239,438
Spitzer-Resnick, Sheryl K. 893
Tymoszczuk, William 40,738
Vela, Donny 3,333
WEA Investments 8,333
Willing, Richard M. 1,489
Willing, Susan 1,489
Wolff, Robert S. 5,032
Yavitz, Marvyn 14,887
------
Total 13,304,263
==========
(1) See notes (13) and (18) under "Security Ownership of Certain
Beneficial Owners and Management."
(2) Includes shares held by various affiliated trusts.
(3) See note (12) under "Security Ownership of Certain Benefi-
cial Owners and Management."
(4) Includes shares held by Albert J. Miniaci directly and
indirectly by Frank Miniaci, as trustee for the Frank
Miniaci Revocable Living Trust, Rose Miniaci, as trustee for
each of the Albert J. Miniaci Irrevocable Trust and the
Dominick F. Miniaci Irrevocable Trust and Dominick F.
Miniaci, as trustee for the Dominick F. Miniaci Trust.
Because the Selling Shareholders may sell all or a part of
their shares of Common Stock offered hereby, no estimate can be
given as to the number of shares of Common Stock that will be
held by any Selling Shareholder upon termination of any offering
made hereby.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to
time by the Selling Shareholders of up to 13,304,263 shares of
Common Stock. Any or all of the shares of Common Stock offered
hereby may be sold from time to time directly by the Selling
Shareholders. Alternatively, the Common Stock may from time to
time be offered by the Selling Shareholders to or through broker-
dealers or underwriters, who may act solely as agents or who may
acquire Common Stock as principals. The distribution of shares
of the Common Stock being offered by the Selling Shareholders may
be effected in one or more transactions that may take place on
Nasdaq or on such other national securities exchange or automated
interdealer quotation system on which the shares of Common Stock
are then listed, or in the over-the-counter market, including
block trades or ordinary broker's transactions, through privately
negotiated transactions, through an underwritten public offering
or through a combination of any such methods of sale, at market
prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Such prices
will be determined by the Selling Shareholders or by agreement
between the Selling Shareholders and their underwriters, broker-
dealers or agents. The Company will not receive any proceeds
from the sale of Common Stock by the Selling Shareholders.
The aggregate proceeds to the Selling Shareholders from the
sale of the Common Stock so offered will be the purchase price of
the Common Stock sold less the aggregate agents' commissions and
underwriters' discounts, if any, and other expenses of issuance
and distribution not borne by the Company. The Selling Share-
holders may pay usual and customary or specifically negotiated
underwriting discounts, concessions or commissions in connection
with such sales. The Selling Shareholders and such broker-
dealers, underwriters or agents that participate with the Selling
Shareholders in the distribution of the Common Stock may be
deemed to be underwriters under the Securities Act, and any
commissions received by them and any profit on the resale of the
Common Stock purchased by them might be deemed to be underwriting
discounts and commissions under the Securities Act. Those
persons who act as broker-dealers, underwriters or agents in
connection with the sale of the Common Stock will be selected by
the Selling Shareholders and may have other business relation-
ships with, and perform services for, the Company or its affili-
ates in the ordinary course of business.
The Company has agreed to pay all expenses (other than
commissions or discounts of underwriters, broker-dealers or
agents, brokers' fees, state and local transfer taxes and fees
and any other expenses that certain of the registration rights
agreements have assigned to particular Selling Shareholders) in
connection with the registration and sale of the Common Stock
being offered by the Selling Shareholders. Pursuant to the
registration rights agreements entered into by the Company and
the Selling Shareholders, the Company has agreed to indemnify the
Selling Shareholders, and with respect to certain Selling Share-
holders, each of their respective officers and directors and any
person who controls such Selling Shareholders, against certain
liabilities incurred in connection with the registration and sale
of the Common Stock offered hereby, including liabilities under
the Securities Act.
In order to comply with the securities laws of certain
states, if applicable, the shares of Common Stock offered hereby
will be sold in such jurisdictions only through registered or
licensed broker-dealers. In certain states the Common Stock
offered hereby may not be sold unless the Common Stock has been
registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied
with.
At any time that a particular offer of Common Stock is made
by the Selling Shareholders, to the extent required, a Prospectus
Supplement will be distributed which will set forth the identity
of, and certain information relating to, the particular Selling
Shareholder who is offering the Common Stock, the number of
shares of Common Stock being offered and the terms thereof,
including the name or names of any underwriters, broker-dealers
or agents, any discounts, commissions or other items constituting
compensation from such Selling Shareholder and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby
will be passed upon by Tammy L. Martin, Esq., General Counsel of
the Company.
EXPERTS
The consolidated financial statements of the Company as of
December 31, 1994 and 1995 and for the three years ended December
31, 1995 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Paramount Communications Sys-
tems, Inc. as of December 31, 1995 and for the year then ended
included in this Prospectus have been so included in reliance on
the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Paramount Communications Sys-
tems, Inc. as of December 31, 1994 and for the year then ended
included herein and in the registration statement of which this
Prospectus forms a part have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of
said firm as experts in auditing and accounting.
The financial statements of International Pay Phones, Inc.
(South Carolina) as of December 31, 1994 and 1995 and for each of
the two years ended December 31, 1994 and 1995 included in this
Prospectus have been so included in reliance on the report of
Miller Sherrill Blake, CPA, PA, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of International Pay Phones, Inc.
(Tennessee) as of December 31, 1994 and 1995 and for each of the
two years ended December 31, 1994 and 1995 included in this
Prospectus have been so included in reliance on the report of
Ernest M. Sewell, CPA, independent accountant, given on the
authority of said person as an expert in auditing and accounting.
The financial statements of Payphones of America, Inc. as of
December 31, 1994 and 1995 and for each of the two years ended
December 31, 1994 and 1995 included in this Prospectus have been
so included in reliance on the report of Kerber, Eck & Braeckel
LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The consolidated financial statements of Amtel Communica-
tions, Inc. and combined companies as of December 31, 1995 and
for the six months ended June 30, 1996 and the combined statement
of revenue and direct operating expenses for three months ended
December 31, 1994 included in this Prospectus have been so
included in reliance on the report of Harlan & Boettger, CPAs,
independent accountants, given on the authority of said firm as
experts in auditing and accounting.
The financial statements of Cherokee Communications, Inc. as
of September 30, 1995 and 1994 and for each of the three years in
the period ended September 30, 1995 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
GLOSSARY
The following is a description of certain terms used in this
Prospectus.
ACCESS CHARGES -- The fees paid by long distance companies to
LECs for originating and terminating long distance calls on LECs'
networks.
BPP (Billed-Party Preference) -- Billing system proposed by the
FCC and not adopted in which the party being billed preselects
the service provider of his or her choice to carry long distance
traffic (as opposed to the provider presubscribed by the public
pay telephone provider).
BOCS (Bell Operating Companies) -- The seven regional holding
companies and their respective local telephone operating compa-
nies established by the MFJ. Under the MFJ, the BOCs were
prohibited from providing interLATA telecommunications services
and from manufacturing telecommunications equipment.
CALL AGGREGATOR -- Person that, in the ordinary course of its
operations, makes telephones available to the public or to
transient users for interstate telephone calls using an OSP.
COMPUTER III -- FCC rulemaking proceeding that established
certain non-structural safeguards designed to prevent BOCs from
using their incumbent market power in an anti-competitive manner.
CUSTOMER PROPRIETARY NETWORK INFORMATION -- Information that
relates to the quantity, technical configuration, type, destina-
tion, and amount of use of a telecommunications service sub-
scribed to by any customer of a telecommunications carrier, and
that is made available to the carrier by the customer solely by
virtue of the carrier-customer relationship.
DIAL-AROUND CALLS -- Telephone calls placed from public pay
telephones using a long distance or operator service provider
other than the one selected by the independent public pay tele-
phone company.
FCC -- Federal Communications Commission.
IN-REGION SERVICE -- InterLATA toll service provided by the BOCs
within the same states in which they also provide local exchange
service.
INTEREXCHANGE CARRIER -- See Long Distance Company.
INTERLATA PRESUBSCRIPTION -- Ability of a customer to
presubscribe to a carrier of its choice for interLATA calls.
INTRALATA PRESUBSCRIPTION -- Ability of a customer to
presubscribe to a carrier of its choice for local and intraLATA
calls.
LOCATION PROVIDER -- The property owner or occupant that supplies
the site on which public pay telephones are placed in operation
by the telephone provider.
LATA (Local Access and Transport Area) -- The geographically
defined areas in which BOCs were authorized by the MFJ to provide
local exchange service.
LONG DISTANCE COMPANY OR INTEREXCHANGE CARRIER -- Company provid-
ing transmission services between local exchanges on either an
intrastate or interstate basis. A long distance company may
offer services by using its own or by reselling another carrier's
facilities.
LECS (Local Exchange Carrier) -- Companies providing local
exchange telephone service (including, but not limited to, BOCs).
MFJ (Modification of Final Judgment) -- Court order that divested
the seven BOCs from AT&T and imposed various line of business
restrictions on the BOCs and AT&T.
OPERATOR SERVICES ACT -- The Telephone Operator Consumer Services
Improvement Act of 1990, which imposed various requirements for
OSPs and call aggregators.
OSP (or Operator Service Provider) -- Provider of operator
assistance in the billing or completion (or both) of an inter-
state telephone call.
POLLING -- Process in which the Company's management information
system calls the public pay telephone and collects certain data.
TELECOMMUNICATIONS ACT -- The Telecommunications Act of 1996,
which amended the Communications Act of 1934.
<PAGE> 1
PHONETEL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PHONETEL TECHNOLOGIES, INC.
Audited Financial Statements:
Report of Independent Accountants.............................................. F-3
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995...... F-4
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995.................................................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1993, 1994 and 1995........................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995.................................................................. F-8
Notes to Consolidated Financial Statements..................................... F-10
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996.......... F-26
Consolidated Statements of Operations for the six and three months ended June
30, 1995 and 1996.............................................................. F-27
Consolidated Statements of Cash Flows for the six months ended June 30, 1995
and 1996....................................................................... F-28
Consolidated Statements of Changes in Mandatorily Redeemable Preferred Stock
and Non-Mandatorily Redeemable Preferred Stock, Common Stock and Other
Shareholders' Equity........................................................... F-29
Notes to Consolidated Financial Statements..................................... F-31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Audited Financial Statements -- 1995:
Report of Independent Accountants.............................................. F-37
Balance Sheet as of December 31, 1995.......................................... F-38
Statement of Income for the year ended December 31, 1995....................... F-39
Statement of Cash Flows for the year ended December 31, 1995................... F-40
Statement of Changes in Shareholders' Equity for the year ended December 31,
1995........................................................................... F-41
Notes to Financial Statements.................................................. F-42
Audited Financial Statements -- 1994:
Report of Independent Certified Public Accountants............................. F-45
Balance Sheet as of December 31, 1994.......................................... F-46
Statement of Income for the year ended December 31, 1994....................... F-47
Statement of Shareholders' Equity for the year ended December 31, 1994......... F-48
Statement of Cash Flows for the year ended December 31, 1994................... F-49
Notes to Financial Statements.................................................. F-50
INTERNATIONAL PAY PHONES, INC. (SOUTH CAROLINA)
Audited Financial Statements -- 1995:
Independent Auditors' Report................................................... F-53
Balance Sheet as of December 31, 1995.......................................... F-54
Statement of Income and Retained Earnings for the year ended December 31,
1995........................................................................... F-55
Statement of Cash Flows for the year ended December 31, 1995................... F-56
Notes to Financial Statements.................................................. F-57
Audited Financial Statements -- 1994:
Independent Auditors' Report................................................... F-62
Balance Sheet as of December 31, 1994.......................................... F-63
Statement of Income and Retained Earnings for the year ended December 31,
1994........................................................................... F-64
Statement of Cash Flows for the year ended December 31, 1994................... F-65
Notes to Financial Statements.................................................. F-66
</TABLE>
F-1
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
(TENNESSEE)Audited Financial Statements:
Independent Auditors' Report.................................................... F-70
Balance Sheets as of December 31, 1995 and 1994................................. F-71
Statements of Earnings and Retained Earnings for the years ended December 31,
1995 and 1994.................................................................. F-72
Statements of Cash Flows for the years ended December 31, 1995 and 1994......... F-73
Notes to Financial Statements................................................... F-74
PAYPHONES OF AMERICA, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-77
Consolidated Balance Sheets as of December 31, 1995 and 1994.................... F-78
Consolidated Statements of Operations for the years ended December 31, 1995 and
1994........................................................................... F-79
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1994..................................................... F-80
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1994........................................................................... F-81
Notes to Financial Statements................................................... F-82
Unaudited Financial Statements:
Independent Accountants' Report................................................. F-89
Consolidated Balance Sheets as of June 30, 1996 and 1995........................ F-90
Consolidated Statements of Operations for the six months ended June 30, 1996 and
1995........................................................................... F-91
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995........................................................................... F-92
Notes to Consolidated Financial Statements...................................... F-93
AMTEL COMMUNICATIONS INC. AND COMBINED COMPANIES (DEBTOR-IN POSSESSION)
Audited Financial Statements:
Independent Auditors' Report.................................................... F-98
Combined Balance Sheets as of June 30, 1996 and December 31, 1995............... F-99
Combined Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-100
Combined Statements of Changes in Stockholder's Deficit for the six months ended
June 30, 1996 and the year ended December 31, 1995............................. F-101
Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-102
Notes to Financial Statements................................................... F-103
Audited Statement of Revenues and Direct Operating Expenses:
Independent Auditors' Report.................................................... F-107
Combined Statement of Revenues and Direct Operating Expenses for the three
months ended December 31, 1994................................................. F-108
Notes to Combined Statement of Revenues and Direct Operating Expenses........... F-109
CHEROKEE COMMUNICATIONS, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-111
Balance Sheets as of September 30, 1995 and 1994................................ F-112
Statements of Income for the years ended September 30, 1995, 1994 and 1993...... F-113
Statement of Shareholders' Equity for the years ended September 30, 1995, 1994
and 1993....................................................................... F-114
Statements of Cash Flows for the years ended September 30, 1995, 1994 and
1993........................................................................... F-115
Notes to Financial Statements................................................... F-116
Unaudited Financial Statements:
Condensed Balance Sheets as of September 30, 1995 and June 30, 1996............. F-124
Condensed Income Statements for the three and nine months ended June 30, 1996
and 1995....................................................................... F-125
Condensed Statements of Cash Flows for the nine months ended June 30, 1996 and
1995........................................................................... F-126
Notes to Financial Statements................................................... F-127
</TABLE>
F-2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
March 29, 1996
To the Board of Directors
and Shareholders of
PhoneTel Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of PhoneTel
Technologies, Inc. and its subsidiaries at December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, 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.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-3
<PAGE> 4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 478,756 $ 713,462
Accounts receivable, net of allowance for doubtful
accounts of $44,000 and $40,000, respectively................. 562,147 901,508
Other current assets............................................. 164,331 185,634
----------- -----------
Total current assets.......................................... 1,205,234 1,800,604
Property and equipment, net........................................ 5,294,839 14,099,111
Intangible assets, net............................................. 3,429,121 11,592,157
Other assets....................................................... 228,707 1,425,384
----------- -----------
$10,157,901 $28,917,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 1,814,760 $ 1,010,412
Current portion of obligation under capital leases............... 94,343 288,972
Accounts payable................................................. 2,514,110 2,772,306
Accrued expenses................................................. 814,656 1,610,100
Obligations relating to contractual settlements and restructuring
charges....................................................... -- 962,338
----------- -----------
Total current liabilities..................................... 5,237,869 6,644,128
Long-term debt..................................................... 2,063,896 9,318,501
Obligations under capital leases................................... 208,269 3,243,965
Commitments and contingencies...................................... -- --
Total shareholders' equity......................................... 2,647,867 9,710,662
----------- -----------
$10,157,901 $28,917,256
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Coin calls......................................... $ 4,237,848 $ 8,421,237 $12,130,189
Operator services.................................. 6,074,394 5,319,138 3,776,501
Commissions........................................ 667,976 1,856,482 2,681,172
Other.............................................. 89,299 269,230 130,121
----------- ----------- -----------
11,069,517 15,866,087 18,717,983
----------- ----------- -----------
COSTS AND EXPENSES:
Line and transmission charges...................... 2,776,448 4,456,509 5,475,699
Location commissions............................... 2,599,330 3,391,190 3,467,626
Other operating expenses........................... 1,891,984 3,238,252 4,452,032
Depreciation and amortization...................... 896,041 2,236,269 4,383,049
Selling, general and administrative................ 2,402,583 2,831,775 3,200,742
Billing and collection............................. 1,116,149 1,026,420 858,230
Other unusual charges and contractual
settlements..................................... -- -- 2,169,503
----------- ----------- -----------
11,682,535 17,180,415 24,006,881
----------- ----------- -----------
Loss from operations............................ (613,018) (1,314,328) (5,288,898)
Interest expense..................................... (174,994) (388,215) (836,911)
Interest income...................................... 9,137 7,421 16,112
----------- ----------- -----------
NET LOSS............................................. $ (778,875) $(1,695,122) $(6,109,697)
=========== =========== ===========
Less: Preferred stock dividend requirement........... (207,623) (291,980) (309,668)
----------- ----------- -----------
Net loss applicable to common shareholders........... $ (986,498) $(1,987,102) $(6,419,365)
=========== =========== ===========
Net loss per common share............................ $ (0.96) $ (1.35) $ (3.29)
=========== =========== ===========
Weighted average number of shares.................... 1,031,384 1,470,188 1,950,561
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- 2,500 $ 200,000 2,500 $ 200,000
Issuance of 7% preferred... 2,500 $ 200,000 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 2,500 $ 200,000 2,500 $ 200,000 2,500 $ 200,000
========= ----------- ========= ------------ ========= ------------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... -- -- 12,200 $ 981,084 12,200 $ 981,084
Issuance of 8% preferred... 12,200 $ 981,084 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 12,200 $ 981,084 12,200 $ 981,084 12,200 $ 981,084
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... 1,496 $ 1 1,496 $ 1 1,496 $ 1
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,496 $ 1 1,496 $ 1 1,496 $ 1
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- -- -- -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 530,534 $ 5,305,340
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- 530,534 $ 5,305,340
========= ----------- ========= ------------ ========= ------------
12% CONVERTIBLE PREFERRED
STOCK
Balance at beginning of
year..................... 6,500 $ 650,000 -- -- -- --
Conversion to Common
Stock.................... (6,500) (650,000) -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- -- --
========= ----------- ========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of
year..................... 724,092 $ 7,241 1,284,449 $ 12,845 1,522,158 $ 15,222
Employee stock grants...... 1,533 15 -- -- -- --
Issuance of stock.......... 25,270 253 8,389 84 91,383 914
Private sales of stock..... -- -- 136,111 1,361 472,056 4,720
Exercise of warrants and
options.................. 331,796 3,318 87,931 879 8,333 83
Zandec interest and
commitment fee
conversion............... 76,164 762 -- -- -- --
Conversion of 12% Preferred
to Common Stock.......... 123,764 1,238 -- -- -- --
Financing costs............ 1,830 18 5,278 53 -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 402,500 4,025
Conversion of debt to
equity................... -- -- -- -- 30,231 303
Acquisition of Public
Telephone Corporation.... -- -- -- -- 304,879 3,049
Acquisition escrow
deposits................. -- -- -- -- 23,810 238
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,284,449 $ 12,845 1,522,158 $ 15,222 2,855,350 $ 28,554
========= ----------- ========= ------------ ========= ------------
</TABLE>
F-6
<PAGE> 7
PHONTEL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of
year..................... $ 3,482,110 $ 6,552,473 $ 8,755,364
Employee stock grants...... 10,335 -- --
Issuance of stock.......... 222,917 276,414 528,532
Private sales of stock..... -- 1,473,638 2,010,067
Exercise of warrants and
options.................. 1,335,876 552,581 34,917
JTMFC settlement........... 537,500 -- --
Zandec interest and
commitment fee
conversion............... 220,195 -- --
Options issued below fair
value.................... 24,785 -- --
Conversion of 12% Preferred
to Common Stock.......... 741,346 -- --
Financing costs............ (22,591) (99,742) (83,212)
Acquisition of World
Communications, Inc...... -- -- 2,712,852
Conversion of debt to
equity................... -- -- 137,375
Acquisition of Public
Telephone Corporation.... -- -- 2,054,902
Acquisition escrow
deposits................. -- -- 149,762
Warrants issued with
debt..................... -- -- 349,000
----------- ------------ ------------
Balance at end of year..... $ 6,552,473 $ 8,755,364 $ 16,649,559
----------- ------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of
year..................... $(4,658,009) $ (5,556,807) $ (7,303,804)
Net loss for the year...... (778,875) (1,695,122) (6,109,697)
Conversion of 12% Preferred
to Common Stock.......... (92,584) -- --
Dividends paid on 12% and
8% Preferred Stock....... (27,339) -- --
Dividends paid on 7% and 8%
Preferred Stock.......... -- (51,875) (40,375)
----------- ------------ ------------
Balance at end of year..... $(5,556,807) $ (7,303,804) $(13,453,876)
----------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY... $ 2,189,596 $ 2,647,867 $ 9,710,662
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net loss........................................... $ (778,875) $(1,695,122) $(6,109,697)
Adjustments to reconcile net loss to net cash flow
from operating activities:
Depreciation and amortization................... 896,041 2,236,269 4,383,049
Stock and stock awards issued................... 10,350 76,498 529,449
Accretion of debt............................... -- -- 55,103
Loss on disposal of assets...................... -- -- 298,626
Changes in assets and liabilities:
Accounts receivable........................... (132,885) 32,355 (64,873)
Other current assets.......................... (71,841) (116,591) (47,121)
Accounts payable.............................. (174,731) 1,975,628 (151,008)
Accrued expenses.............................. 263,149 (128,821) (434,999)
Other unusual charges and contractual
settlements................................ -- -- 962,338
--------- --------- ---------
11,208 2,380,216 (579,133)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Alpha Pay Phones-IV................. -- (2,334,215) --
Acquisition of World Communications................ -- -- (696,006)
Acquisition of Public Telephone.................... -- -- 24,191
Cash acquisition deposits.......................... -- -- (950,000)
Purchases of intangible assets..................... -- (363,853) (427,409)
Purchases of other assets.......................... (288,924) (215,382) (67,559)
Purchases of property and equipment................ (907,837) (300,852) (237,228)
--------- --------- ---------
(1,196,761) (3,214,302) (2,354,011)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances....................... -- 1,400,000 3,132,500
Principal payments on borrowings................... (1,637,957) (2,202,608) (1,890,850)
Proceeds from issuance of preferred and common
stock and other................................. 1,245,000 1,674,999 2,014,787
Dividends paid..................................... (27,339) (21,875) (40,375)
Debt financing costs............................... -- (75,000) --
Equity financing costs............................. (26,552) (99,689) (83,212)
Proceeds from warrant/option exercises............. 1,339,194 553,460 35,000
Proceeds from JTMFC settlement..................... 87,500 -- --
Repayment of advance from shareholder.............. (120,000) -- --
--------- --------- ---------
859,846 1,229,287 3,167,850
--------- --------- ---------
(Decrease) increase in cash.......................... (325,707) 395,201 234,706
Cash at beginning of period.......................... 409,262 83,555 478,756
--------- --------- ---------
Cash at end of period................................ $ 83,555 $ 478,756 $ 713,462
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year...................... $ 174,995 $ 385,311 $ 673,906
========= ========= =========
</TABLE>
F-8
<PAGE> 9
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
NON-CASH TRANSACTIONS:
Common stock (402,500 shares) and preferred stock
(530,534 shares) issued for acquisition of World
Communications, Inc............................. -- -- $ 8,022,217
=========== =========== ===========
Common stock (304,879 shares) issued for
acquisition of Public Telephone Corporation..... -- -- $ 2,057,951
=========== =========== ===========
Common stock issued for services (1,830 shares in
1993, 8,389 shares in 1994, and 91,383 shares in
1995)........................................... $ 22,573 $ 76,498 $ 529,446
=========== =========== ===========
Common stock issued in payment of debt and interest
(30,231 shares in 1995)......................... -- -- $ 137,678
----------- ----------- -----------
Common stock issued for acquisition deposit (23,809
shares in 1995)................................. -- -- $ 150,000
=========== =========== ===========
Common stock (5,278 shares) issued for financing
costs in 1994................................... -- $ 99,689 --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 10
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhoneTel Technologies, Inc. and subsidiaries (the "Company") operates in
the telecommunications industry specializing in the business segment that
encompasses the installation of private pay telephones on a revenue sharing
basis, offering operator assisted long distance services, and national and
regional account management. The Company was incorporated on December 24, 1984,
and began its private pay telephone operations in August 1985. In April 1988,
the Company commenced reselling operator assisted long distance services. The
Company's operations are regulated by the Public Service or Ulitity Commissions
of the various States and the Federal Trade Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company capitalizes all
labor and overhead costs related to installing telephones and depreciates those
costs over the life of the telephone or the length of the location contract,
whichever is shorter. Depreciation for financial reporting and tax purposes is
computed using the straight-line method and accelerated methods, respectively,
over the estimated useful lives of the assets commencing when the equipment is
installed or placed in service.
INTANGIBLE ASSETS
Intangible assets include location contracts, non-compete agreements, costs
associated with obtaining operating certification in various states and
capitalized location contract fees. Intangible assets are amortized over the
life of the respective location contract, non-compete and sales commission
agreements, and five years for state operating certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets. A loss relating to an impairment of assets occurs when the aggregate of
the estimated undiscounted future cash inflows, (including any salvage values,
less estimated cash outflows) to be generated by an asset is less than the
asset's carrying value. Impairment is measured based on the difference between
the present value of the discounted expected future cash flows and the asset's
carrying value. No impairment was recorded in 1995 or 1994.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, " Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which establishes criterion for when impairment should be evaluated, how an
asset is determined to be impaired and the method of calculating the impairment
loss. The methods
F-10
<PAGE> 11
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
required by SFAS No. 121 are consistent with the methods currently being used by
the Company to review assets for impairment. Accordingly, the adoption of the
Statement, which is required for the Company in 1996, is not expected to have a
significant impact on the Company.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted long distance
services, and national and regional account management are recognized in the
period in which the customer places the related call.
EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus shares that would be outstanding
assuming exercise of dilutive stock options and warrants. The number of shares
that would be issued from the exercise of stock options and warrants would be
reduced by the number of shares that could have been purchased from the proceeds
at the average market price of the Company's stock.
Fully diluted earnings per share amounts would be determined in the same
manner as primary earnings per share except that the period-end stock price was
used and the number of shares was increased assuming conversion of the 7%
Cumulative Convertible Redeemable Preferred. (The 7% Cumulative Convertible
Redeemable Preferred was redeemed on March 15, 1996.) Due to the Company's net
loss, the impact of the assumed exercise of the stock options and warrants and
the assumed conversion of the 7% Cumulative Convertible Redeemable Preferred was
anti-dilutive and therefore were not included in the determination of the
weighted average shares outstanding.
The weighted average number of common shares outstanding has been adjusted
to reflect the one for six (1:6) reverse stock split which was effective
December 26, 1995.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
INCOME TAXES
The Company utilizes the asset and liability method to account for income
taxes whereby deferred tax assets and liabilities are recognized to reflect the
future tax consequences attributable to temporary differences between the
financial reporting basis of the existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be recovered and settled. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in the period
in which the change is enacted.
OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS
Other unusual charges and contractual settlements consist primarily of
costs associated with the settlement of contractual obligations to certain
former officers of the Company and related legal fees, and the write-off of
selected assets in connection with the outsourcing of the operator service
center, and consulting and legal fees incurred for changes to the operations of
the Company.
F-11
<PAGE> 12
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts relating to 1993 and 1994 have been reclassified to conform
to the current year presentation. The reclassifications have had no impact on
total assets, shareholders' equity or net loss as previously reported.
2. FINANCIAL CONDITION
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility commitment of $37,250,000) from
Internationale Nederlanden (U.S.) Capital Corporation and one other lender
(collectively know as "ING") to meet its anticipated working capital
obligations, consolidate debt, redeem preferred stock, and complete the
acquisitions of two pay phone companies, IPP and Paramount. The Company has
available under the credit facility $6,700,000 to fund future acquisitions and
for general working capital purposes. (See Note 3 and Note 15.)
Management believes, but cannot assure, that cash flow from operations, the
proceeds from the financing discussed above and other financial alternatives
will be sufficient to allow the Company to sustain its operations, meet its
current obligations and maintain some modest sales growth.
3. ACQUISITIONS AND MERGERS
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public") in a transaction accounted for as a purchase. The
Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public and issued 224,879 unregistered shares of the Company's Common Stock
to the shareholders of Public. In connection with the acquisition, the Company
entered into five year non-compete agreements with two of Public's former owners
which require both cash payments and the issuance, in the aggregate, of 80,000
shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock. In connection with the acquisition, the Company
entered into two year non-compete and employment agreements with three of
World's former officers. These non-compete and employment agreements require, in
the aggregate, payment of $625,000 over a two year period.
On March 25, 1994, the Company acquired substantially all of the assets of
Alpha Pay Phones-IV L.P. ("Alpha"). The acquired assets included 2,155 installed
telephones for a cash purchase price of $2,334,215, a note payable to sellers of
$1,100,620 and assumption by the Company of outstanding Alpha liabilities of
$2,164,038.
F-12
<PAGE> 13
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the Public and World acquisitions had occurred at the
beginning of 1994 and 1995 and as though the Alpha acquisition had occurred at
the beginning of 1994.
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Total revenues.............................................. $27,138,550 $ 26,976,221
Net loss.................................................... (4,771,759) (10,516,464)
Net loss applicable to common shareholders.................. (5,594,273) (11,356,666)
Net loss per common share................................... $ (2.57) $ (5.82)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1994 or 1995, or of future results.
The pro forma statement of operations data includes adjustments related to
amortization of intangible assets, interest expense on borrowings used to
finance the acquisition and the weighted average number of common shares
outstanding after giving effect to the acquisitions.
ACQUISITIONS PENDING AT DECEMBER 31, 1995 AND COMPLETED ON MARCH 15, 1996
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. The Company
acquired 2,101 installed phones for a purchase price of $3,496,487 in cash,
555,589 unregistered shares of the Company's Common Stock, 5,453 shares of 14%
Preferred Stock (immediately convertible into 54,530 shares of Common Stock),
and warrants to purchase 117,785 shares of the Company's Common Stock at a
nominal exercise price per share. Additionally, the Company assumed
approximately $1,757,000 in liabilities, of which $1,551,796 was repaid by the
Company on March 15, 1996. The cash purchase price included three five year
non-compete agreements, with an aggregate value of $60,000, with three of IPP's
former officers. The acquisition will be recorded as a purchase and the
difference between the fair value of the tangible assets acquired and the total
purchase price will be recorded as an increase to intangibles and amortized over
the life of the acquired location contracts which is estimated to be 36 to 60
months.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed phones
for a cash purchase price of $9,618,553, 8,333 shares of 14% Preferred Stock
(immediately convertible into 83,330 shares of Common Stock), warrants to
purchase 179,996 shares of the Company's Common Stock at a nominal exercise
price per share, and the Company assumed outstanding liabilities of
approximately $733,000, of which $693,446 was repaid on March 15, 1996. The
purchase price included a five year consulting and non-compete agreement, valued
at $50,000, with one of Paramount's former officers. The acquisition will be
recorded as a purchase and the difference between the fair value of the tangible
assets acquired and the total purchase price will be recorded as an increase to
intangibles and amortized over the life of the acquired location contracts which
is estimated to be 36 to 60 months.
4. ACCOUNTS RECEIVABLE
The Company has billing, collection and advance payment agreements with
Zero Plus Dialing, Inc. ("ZPDI") which provide for, among other things, the sale
of certain eligible accounts to ZPDI. These receivables result from the Company
reselling operator assisted long distance services. Included in accounts
receivable at December 31, 1994 and 1995 is approximately $160,496 and $78,007,
respectively, due from ZPDI. Approximately $5,300,000 and $3,800,000 of
receivables were sold pursuant to these agreements
F-13
<PAGE> 14
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE (CONTINUED)
during 1994 and 1995, respectively, of which approximately $676,755 and $594,076
have not been collected by ZPDI at December 31, 1994 and 1995, respectively.
5. PROPERTY AND EQUIPMENT
As of December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------------
(IN YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Telephone boards, enclosures and cases....... 3-7 $ 6,155,690 $16,386,987
Operator service equipment................... 5 1,065,389 --
Furniture, fixtures and other equipment...... 3-5 1,329,155 989,300
Leasehold improvements....................... 2-5 413,177 231,466
---------- ----------
8,963,411 17,607,753
Less -- accumulated depreciation........... (3,668,572) (3,508,642)
---------- ----------
$ 5,294,839 $14,099,111
========== ==========
</TABLE>
Depreciation expense, including amortization of assets under capital
leases, was $668,415, $1,179,137 and $1,846,453 for the years ended December 31,
1993, 1994 and 1995, respectively.
6. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1994 1995
------------- ----------- -----------
<S> <C> <C> <C>
Costs incurred in the acquisition of
installed phones (See Note 3)............ 36-60 months $ 3,026,387 $12,362,884
Non-compete agreements..................... 24-60 months 400,000 1,513,765
State operating certifications............. 60 months 260,113 466,796
Capitalized location contract fees......... 96-120 months 997,574 1,040,242
----------- -----------
4,684,074 15,383,687
Less: accumulated amortization............. (1,254,953) (3,791,530)
----------- -----------
$ 3,429,121 $11,592,157
========== ==========
</TABLE>
Amortization of intangible assets amounted to $227,629, $1,057,132 and
$2,536,596 for the years ended December 31, 1993, 1994 and 1995, respectively.
7. LONG-TERM DEBT
As of December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Note payable to two third party investors repaid on March
15, 1996. The principal due at the contractual maturity
of April 1997 was $1,200,000............................. -- $ 906,105
Notes payable to bank repaid on March 15, 1996............. -- 2,340,000
</TABLE>
F-14
<PAGE> 15
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
7. LONG-TERM DEBT (CONTINUED)
Notes payable due on demand to five former World
stockholders repaid on March 15, 1996.................... -- 625,000
Notes payable to former stockholders of Public due on April
16, 1996 with interest at 9%. On March 15, 1996 $211,285
was repaid............................................... -- 293,226
Non-compete notes payable to two former officers of Public
repaid on March 15, 1996................................. -- 203,480
Two notes payable to a service provider repaid on March 15,
1996..................................................... $ 1,852,628 1,401,872
Term notes payable to a vendor in monthly installments
ranging from $31,107 to $47,330 including interest at
rates varying from 10% to 13.75%. The vendor has a
security interest in the underlying phones. On March 15,
1996, the Company repaid $225,000, refinanced the
remaining balance owed at 15% interest and the vendor
released its security interest in the goods sold......... 694,611 1,066,428
Promissory notes payable to Alpha repaid on March 15,
1996..................................................... 751,848 500,756
Promissory notes payable to a group of five investors
repaid in 1995........................................... 300,000 --
Promissory note payable to a vendor in monthly installments
of $318 through $535 at an interest rate of 8.75%........ -- 120,617
Promissory note payable in monthly installments of $12,500
through January 1996 at an interest rate of 8%........... 147,721 124,614
Notes payable to directors and shareholders at an imputed
interest rate of prime plus 5%, repaid on March 15,
1996..................................................... -- 1,732,500
Notes payable to two investors repaid on March 15, 1996.... -- 200,000
Note payable to a vendor repaid on March 15, 1996.......... -- 201,101
Note payable to a consultant. On March 15, 1996, the
consultant accepted 12,500 shares of the Company's Common
Stock and $50,000 in full settlement of the debt......... -- 125,000
Non-compete obligation to a former owner of World payable
in bi-weekly installments of $6,000 at an imputed
interest at 9%........................................... -- 288,844
Various notes payable to vendors in monthly installments
ranging from $283 to $3,538 with interest rates ranging
from 6.9% to 10.4%....................................... 131,848 199,370
----------- -----------
3,878,656 10,328,913
Less current maturities.................................... (1,814,760) (1,010,412)
----------- -----------
$ 2,063,896 $ 9,318,501
=========== ===========
</TABLE>
F-15
<PAGE> 16
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LONG-TERM DEBT (CONTINUED)
Following are maturities of long-term debt for each of the next five years
based on the terms of the ING credit facility (See Note 15):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1996.................................................... $ 1,010,412
1997.................................................... 640,913
1998.................................................... 1,001,576
1999.................................................... 7,674,596
2000.................................................... 1,416
-----------
$10,328,913
===========
</TABLE>
On March 15, 1996, $9,214,468 of outstanding debt was repaid.
8. LEASES
OPERATING LEASES
The Company leases its corporate offices and other locations, office
equipment and vehicles under noncancellable operating leases expiring at various
times through 1999.
Future minimum noncancellable payments under operating leases are as
follows:
<TABLE>
<S> <C>
1996...................................................... $329,352
1997...................................................... 303,658
1998...................................................... 96,721
1999...................................................... 54,473
2000...................................................... --
</TABLE>
Rent expense under all operating leases was $264,369, $334,984 and $363,929
for the years ended December 31, 1993, 1994 and 1995, respectively.
CAPITAL LEASES
During 1995, as part of the acquisition of World and Public, the Company
assumed capital leases between various lessors and World and Public. World and
Public leased their installed phones. The allocation of the purchase price
increased the historical book value of the phones to their current fair value.
On March 15, 1996, the Company paid off these leases with the proceeds received
in the refinancing of its debt.
During 1994, the Company entered into lease financing agreements for the
acquisition of computer equipment. Each agreement has a term of 36 months with
interest ranging from 8.6% to 9.7% per year.
Assets recorded under capital leases at December 31 were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Telephone boards, enclosures and cases...................... $ 111,349 $9,429,049
Operator service equipment.................................. 405,570 --
Office equipment............................................ 110,442 170,058
---------- ----------
627,361 9,599,107
Less accumulated amortization............................... (246,198) (616,778)
---------- ----------
$ 381,163 $8,982,329
========== ==========
</TABLE>
F-16
<PAGE> 17
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. LEASES (CONTINUED)
On March 15, 1996, the Company repaid $3,243,965 of the outstanding
obligations under capital leases. The following are maturities of long-term debt
(which replaced obligations under capital leases) based on the terms of the ING
credit facility (See Note 15):
<TABLE>
<S> <C>
1996................................................ $ 288,972
1997................................................ 112,545
1998................................................ 357,371
1999................................................ 2,774,049
2000................................................ --
----------
$3,532,937
==========
</TABLE>
9. INCOME TAXES
No provisions for income tax were required and no income taxes were paid for the
years ended December 31, 1993, 1994 or 1995 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) at December 31
were as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Federal net operating loss carryforward................... $ 1,863,867 $ 5,342,374
Depreciation and amortization............................. 273,287 1,017,406
Bad debts................................................. 17,160 13,600
Other..................................................... 5,538 --
----------- -----------
Gross deferred tax assets................................. 2,159,852 6,373,380
Accruals.................................................. (117,000) --
Deferred sales commissions................................ (130,217) (125,066)
Valuation allowance on deferred tax assets................ (1,912,635) (6,248,314)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
A valuation allowance has been provided against the net deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets will be ultimately realized. The net
operating loss carryforwards, if not utilized, will expire between the years
2002-2010. Internal Revenue Code Section 382 provides for the limitation on the
use of net operating loss carryforwards in years subsequent to significant
changes in ownership. As a result of the Company's Initial Public Offering in
1988 and certain other transactions, including acquisitions, changes in
ownership have occurred resulting in significant limitations on the use of net
operating loss carryforwards. The extent of limitations as a result of
significant changes in ownership has not been determined by the Company.
10. SHAREHOLDERS' EQUITY
As of December 31, shareholders' equity consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized;
530,534 shares issued and outstanding at December 31,
1995)................................................. -- $ 5,305,340
</TABLE>
F-17
<PAGE> 18
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
10. SHAREHOLDERS' EQUITY (CONTINUED)
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... $ 1 1
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares
issued and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 981,084 981,084
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 200,000 200,000
Common Stock ($0.01 par value -- 22,500,000 shares
authorized; 1,522,158 and 2,855,350 shares issued and
outstanding at December 31, 1994 and 1995)............ 15,222 28,554
Additional paid-in capital.............................. 8,755,364 16,649,559
Accumulated deficit..................................... (7,303,804) (13,453,876)
------------ ------------
$ 2,647,867 $ 9,710,662
============ ============
</TABLE>
PREFERRED STOCK
The Company's 10% Cumulative Non-Voting Redeemable Preferred Stock ("10%
Non-Voting Preferred") has a liquidation preference of $10 per share. Under the
terms of the 10% Non-Voting Preferred, which was issued in connection with the
acquisition of World Communications, Inc. by the Company, from December 1996
through November 1997 the Company can be required by each holder of the 10% Non-
Voting Preferred to repurchase their shares for $30 per share. At the time of
the World acquisition, the Company entered into a Voting and Proxy Agreement
("the Agreement") with certain common stockholders of the Company ("Holders")
representing, in the aggregate, over 50% of the then outstanding Common Stock of
the Company. The Agreement has also been signed by the holders of the Nominal
Value Warrants and Series A Preferred such that common shareholders representing
over 50% of the Common Stock have signed the Agreement. Under the terms of the
Agreement, the Holders agreed to call a special meeting of the shareholders by
June 1996 at which time the Holders will propose that each share of the 10%
Non-Voting Preferred be made convertible into 1.67 shares of the Company's
Common Stock (a total of 885,992 shares). Such number of shares had a fair value
at the date of acquisition approximately equal to the stated value of the 10%
Non-Voting Preferred. Under the terms of the Agreement, the Holders have agreed
to vote in favor of the proposal. Once the 10% Non-Voting Preferred is
convertible, the Company cannot be required to redeem the 10% Non-Voting
Preferred. No dividends were paid on the 10% Non-Voting Preferred in 1995 and no
dividends are payable or accrue for nine months from date of issuance or if the
stock is converted to Common Stock. In addition, certain holders of the 10%
Non-Voting Preferred and the Company entered into a separate Voting and Proxy
Agreement which provides that such holders shall vote the shares of 10%
Non-Voting Preferred held by them to approve the foregoing grant of conversion
rights.
The Company's 10% Cumulative Redeemable Preferred Stock ("10% Cumulative
Preferred") was issued to a significant customer in 1992 (see Note 12). No
dividends were paid on the 10% Cumulative Preferred in 1993, 1994 or 1995 and
all outstanding shares of the 10% Cumulative Preferred were redeemed on March
15, 1996.
F-18
<PAGE> 19
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
All outstanding shares of the Company's 8% Cumulative Redeemable Preferred
Stock ("8% Preferred") were redeemed on March 15, 1996. Dividends paid on the 8%
Preferred were $24,400, $30,000 and $36,000 in 1993, 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
All outstanding shares of the Company's 7% Cumulative Convertible
Redeemable Preferred Stock ("7% Preferred") were redeemed on March 15, 1996.
Dividends paid on the 7% Preferred were $21,875 and $4,375 in 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
PREFERRED DIVIDENDS
On December 31, 1993, 1994 and 1995, the Company had dividends in arrears
payable to preferred shareholders in the aggregate amount of $305,950, $546,055
and $826,548, respectively. On March 15, 1996, the 10% Cumulative Preferred, 8%
Preferred and the 7% Preferred Stock and dividends in arrears were either paid
or converted to a new class of preferred stock (See Note 15).
SALES AND ISSUANCE OF UNREGISTERED COMMON STOCK
Sales and issuances of the Company's unregistered Common Stock during 1995
were as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE PRICE
SHARES ISSUED PER SHARE
------------- -------------
<S> <C> <C>
Private sales to officers and directors.................... 286,643 $4.77
Private sales to creditors of the Company.................. 133,332 4.50
Private sales to affiliates of the Company................. 38,888 4.63
Issued in connection with acquisitions..................... 731,189 6.74
Issued to third parties for services....................... 69,895 6.01
Issued to directors for services........................... 21,488 5.09
Issued to directors upon conversion of debt and accrued
interest................................................. 26,065 4.51
Issued to third party creditors upon conversion of debt and
accrued interest......................................... 4,166 4.80
Issued for exercising stock options........................ 8,333 4.20
Other issuances............................................ 13,193 5.20
---------
1,333,192
=========
</TABLE>
Sales to directors, creditors and affiliates of the Company were made at
prices per share below the quoted market values (based on prices calculated by
the Company's investment advisor) of the Company's Common Stock on the dates of
the transactions. No expense was recognized by the Company as the Company
believes that the discount associated with these sales reflects the impact on
quoted market value of issuing unregistered shares.
F-19
<PAGE> 20
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANT ACTIVITY
Stock warrant activity during 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
--------- -------------
<S> <C> <C> <C>
Balance, December 31, 1992................................. 350,887 $3.00- $ 6.00
Granted.................................................... 28,519 6.00- 8.70
Exercised.................................................. (310,962) 3.00- 6.00
Cancelled.................................................. (9,411) 4.50- 9.90
---------
Balance, December 31, 1993................................. 59,033 6.00- 9.90
Granted.................................................... 88,236 7.50- 15.75
Exercised.................................................. (35,000) 6.00- 8.70
Cancelled.................................................. --
---------
Balance, December 31, 1994................................. 112,269 7.50- 15.75
Granted:
To the Company's investment advisor...................... 166,666 6.00
To officers of the Company............................... 47,583 5.70- 6.00
To lenders............................................... 277,884 5.70- 6.00
---------
Total Granted.............................................. 492,133 5.70- 6.00
Exercised.................................................. --
Cancelled.................................................. (24,051) 9.90
---------
Balance, December 31, 1995................................. 580,351 $5.70- $15.75
========
</TABLE>
The estimated fair value of the warrants on the date of the grant for the
warrants issued to the investment advisor has been included in the determination
of World's purchase price. The fair value of warrants issued to lenders has been
recorded as an adjustment to interest expense. The difference between the
intrinsic value and the exercise price of the warrants issued to officers of the
Company was not material. All warrants outstanding at each period end are
exercisable.
STOCK OPTION ACTIVITY
Options are granted by the Company at the discretion of the Board of
Directors to key employees, officers and directors, and generally are
exercisable immediately upon issuance, have terms of three to five years and are
issued with exercise prices at or slightly below quoted market value of the
Company's Common Stock on the date of grant. The amount of compensation expense
recorded by the Company during 1994 and 1995 relating to stock option activity
was not material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." The Statement, which is effective for the Company beginning in
1996, encourages companies to record stock options issued to both employees and
nonemployees at the fair value on the date of grant. As an alternative to fair
value recording, the Statement permits companies to continue to use the methods
outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" but requires that options issued to non-employees be
recorded at the fair value on the date of grant and requires pro forma
disclosure of the impact on the company as if the suggested method had been
used. The Company has not yet determined how it will adopt the Statement.
F-20
<PAGE> 21
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
Information relating to stock option activity during 1993, 1994 and 1995
was as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE
--------- -------------
<S> <C> <C> <C>
Balance, December 31, 1992................................. 249,637 $3.00- $12.60
Granted.................................................... 187,500 3.00- 15.78
Exercised.................................................. (20,833) 3.18- 3.18
Cancelled.................................................. --
---------
Balance, December 31, 1993................................. 416,304 3.00- 15.78
Granted.................................................... 97,758 4.50- 19.50
Exercised.................................................. (52,930) 4.50- 6.00
Cancelled.................................................. (25,000) 5.22- 9.00
---------
Balance, December 31, 1994................................. 436,132 3.00- 19.50
Granted.................................................... 168,373 6.00- 6.00
Exercised.................................................. (8,333) 3.00- 6.00
Cancelled.................................................. (124,427) 6.00- 18.78
---------
Balance, December 31, 1995................................. 471,745 $3.00- $19.50
========
Exercisable, December 31, 1995............................. 435,243 $3.00- $19.50
========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND SEVERANCE AGREEMENTS
On March 15, 1996, the Company settled the amounts owed under the September
15, 1995 Separation Agreements with two of its former officers. Under the terms
of the Separation Agreements, the Company was obligated to pay the former
officers the remainder of their employment agreements and the Company agreed to
accelerate the vesting of options for 194,027 shares of the Company's Common
Stock at $6.00 per share.
As part of the merger with World, the Company executed employment
agreements with three former employees of World. The former Chairman of World
will remain as an advisor to the Company for 24 months and receive $125,000 in
year one and $135,000 in year two plus certain benefits. The former President of
World has become an officer of the Company and will receive $110,000 for the
first year of his contract and $120,000 in the second year, plus other customary
benefits. The former Vice President and Secretary of World has become an officer
of the Company and will receive a base salary of $65,000 for the first year of
her contract and $70,000 for the second year, plus other customary benefits.
On May 1, 1995, the Company entered into a three year employment agreement
with two one year renewal options with an officer of the Company, whereby he
will receive compensation of $95,000, $105,000 and $120,000 during the terms of
the agreement and $130,000 and $140,000 during the option periods of employment,
plus other customary benefits. This agreement provides for early contract
termination and a "change in control" provision which requires severance pay
equal to 150% of the normal salary which would have been payable over the next
three years.
CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion, any
such outstanding matters, of which the Company has knowledge,
F-21
<PAGE> 22
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
have been reflected in the financial statements and are covered by insurance or
would have no material adverse effect on the Company's financial position,
results of operations or cash flows.
12. MAJOR CUSTOMER
The Edward J. DeBartolo Corporation and its affiliates (collectively
"DeBartolo"), accounted for 25%, 18% and 15% of the Company's total revenues for
the years ended December 31, 1993, 1994 and 1995, respectively. The 10%
Cumulative Preferred, which was issued in connection with the DeBartolo
management agreements, was recorded at $1 based on the Company's determination
that the benefits associated with the agreements should be recorded in the
statement of operations as earned. On March 15, 1996, all of the outstanding
shares of the 10% Cumulative Preferred were redeemed by the Company.
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and effective
January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (collectively "the Statements"). The Statements
establish accounting standards for employers who offer postretirement or
postemployment benefits and require that the estimated cost of these benefits be
accrued over the service lives of the covered employers. The Company does not
offer postretirement or postemployment benefits to its employees and, therefore,
the adoption of the Statements did not have a material impact on the Company's
financial statements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents. The carrying amount reported in the balance
sheet approximates fair value.
Long-term debt. The estimated fair value of long-term debt is determined
using interest rates that could be available to the Company for similar
instruments with similar terms.
Estimated fair values of the Company's financial instruments at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents................. $ 713,462 $ 713,462
Long-term debt............................ 10,328,913 10,803,472
Obligations under capital leases.......... 3,532,937 3,741,869
</TABLE>
15. SUBSEQUENT EVENTS
CHANGES IN STOCKHOLDER'S EQUITY, DEBT REFINANCING AND COMPLETION OF
ACQUISITIONS
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Special Convertible Preferred Stock, $0.20 par value, $0.20
Stated Value, 250,000 authorized shares, with each share immediately convertible
into 20 shares of Common Stock, and non-voting, ("Series A Preferred"); (ii)
Series B Special Convertible Preferred Stock, $0.20 par value, $120 Stated
Value, 250,000 authorized shares, with each share immediately convertible into
20 shares of Common Stock, and non-voting ("Series B Preferred"); and (iii) 14%
Convertible Cumulative Redeemable Preferred Stock, without par value, $60 Stated
Value, non-voting, 200,000 authorized shares, and with each share immediately
convertible into
F-22
<PAGE> 23
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
10 shares of Common Stock ("14% Preferred"). Each share of the 14% Preferred is
entitled to receive a quarterly dividend of 0.035 shares of 14% Preferred.
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as the "Lenders"). The Company has available
under the Credit Facility $6,700,000 to fund future acquisitions and for general
working capital purposes. The Company used the funds to complete the Paramount
and IPP acquisitions, to repay all outstanding long-term debt and capital lease
obligations which had a secured interest in the Company's installed phones, to
redeem the 10% Cumulative Preferred, 7% Preferred and 8% Preferred and to pay
related transaction fees. The Credit Facility requires monthly interest payments
at prime plus 5% and contains various covenants restricting the Company's
ability to pay dividends or incur additional debt, among other conditions, and
also contains financial covenants requiring minimum net worth, working capital
and earnings before interest, depreciation and amortization among other
covenants. The Credit Facility also contains a subjective acceleration clause
which states that in the event of a material adverse change in the business, as
determined by the Lenders, the Lenders can call the debt at its discretion. The
Lenders have waived their right to exercise this subjective acceleration clause
through April 1, 1997, (subsequently amended -- see note 16).
Principal payments related to the original facility were to commence
September 1997 and continue quarterly through June 1999 at which time the
remaining principal balance is due. The amount of principal payments is
contingent upon numerous factors, including the borrowing base and cash flow of
the Company. Based on amounts borrowed at March 15, 1996, the estimated
principal payment in September 1997 would be $534,000, increasing to $884,000
quarterly for 1998. All of the Company's installed phones are pledged as
collateral to the Credit Facility.
The majority of the Credit Facility ($29,000,000) can be converted into
Series B Preferred at the ratio of 833 shares for each $100,000 in outstanding
debt and interest. Additionally, the Lenders received warrants to purchase
204,824 shares of Series A Preferred at an exercise price of $0.20 per share.
Each share of Series A Preferred and Series B Preferred is convertible into 20
shares of Common Stock. The estimated fair value of the warrants on the date of
grant will be recorded as interest expense over the term of the Credit Facility.
The Company has estimated the annual non-cash interest expense to be in excess
of $1,900,000.
On March 15, 1996, concurrent with the consummation of the Credit Facility,
the Company redeemed the 10% Cumulative Preferred, the 8% Preferred, and the 7%
Preferred. The redemption price was $1,117,371 and 34,434 shares of 14%
Preferred. In the aggregate, $6,475,011 of the Company's outstanding
obligations, including portions of the purchase price for the pending
acquisitions, was liquidated by issuing 107,918 shares of 14% Preferred. The
approximately $2,000,000 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value will be recorded as a reduction of
earnings available to common shareholders during the first quarter of 1996.
On March 15, 1996, warrants to purchase 2,018,946 shares of Common Stock at
a nominal exercise price per share ("Nominal Value Warrants") were issued in
conjunction with the IPP and Paramount acquisitions, redemption of the 10%
Cumulative Preferred, 8% Preferred, and the 7% Preferred, and conversion of
certain debt of the Company to the 14% Preferred. The warrants expire on March
13, 2001. The Company has utilized an independent appraiser who has estimated
the fair value of the Nominal Value Warrants to be $4,974,673, using the
Black-Scholes valuation method, of which $3,886,139 (the amount attributable to
the warrants provided to related parties in connection with the redemption of
the 10% Cumulative Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
F-23
<PAGE> 24
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
As of March 15, 1996, the Company has reserved 14,366,022 shares of Common
Stock for issuance under the following scenarios: (1) conversion of $29,000,000
of the debt under the Credit Facility into 241,667 shares of Series B Preferred
Stock which is then immediately convertible into 4,833,333 shares of Common
Stock; (2) exercise of warrants to purchase 204,824 shares of Series A Preferred
Stock at $0.20 per share, immediately convertible into 4,096,480 shares of
Common Stock; (3) conversion of 107,918 shares of 14% Preferred into 1,079,179
shares of Common Stock; (4) conversion, upon Shareholder approval, of 530,534
shares of 10% Non-Voting Preferred into 885,992 shares of Common Stock; (5)
exercise of 2,018,942 Nominal Value Warrants; (6) exercise of 980,351 warrants
at prices ranging from $5.70 to $15.75 per share; and (7) exercise of 471,745
stock options at prices ranging from $3.00 to $19.50 per share.
16. SUBSEQUENT EVENTS -- UNAUDITED
PENDING ACQUISITIONS AND CHANGES TO SHAREHOLDERS' EQUITY
During the April and May 1996, warrants representing 972,487 shares of
Common Stock were exercised, and total proceeds to the Company were $9,725. Of
the total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are considered revenue producing telephones, for a
purchase price consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of
the Company's Common Stock, valued at the average of the BID and ASK (as
reported by The NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an
unregistered and block discount of 20.19% as determined by Key Trust Company of
Ohio, N.A. ("Key Trust")) $4,637,840, or $2.15 per share; and (iii)
approximately $675,122 in related acquisition expenses. The Amtel acquisition
closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired approximately
3,115 installed pay telephones for a purchase price, consisting of: (i) $500,000
in cash; (ii) 166,666 unregistered shares of the Company's Common Stock, valued
at the average of the BID and ASK (as reported by NASDAQ on September 16, 1996,
less an unregistered and block discount of 30.42% as determined by Key Trust)
$311,665, or $1.87 per share; (iii) assumption of capital lease obligations of
$7,750,000; (iv) notes payable to the selling shareholders of POA, $3,634,114;
(v) assumption of other debt, $234,890; (vi) two five year non-competition and
consulting agreements with two of the selling shareholders, $307,264; and (vii)
approximately $166,748 in related acquisition expenses.
F-24
<PAGE> 25
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16. SUBSEQUENT EVENTS -- UNAUDITED (CONTINUED)
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA contracts).
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds of $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
Based on amounts borrowed under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter till December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, and September 30, 1996 the Company did not
meet certain financial loan covenants. The Lenders have amended the credit
agreement to enable compliance with these loan covenants and have waived their
right to exercise the subjective acceleration clause through December 31, 1997.
PENDING ACQUISITIONS -- COMPLETION CONTINGENT ON OBTAINING FINANCING
On October 16, 1996, the Company executed a Letter of Intent with Cherokee
Communications, Inc. ("Cherokee") for the acquisition of 14,000 public pay
telephones for a purchase price consisting of (i) $54,000,000 in cash; (ii)
three five year non-compete and consulting agreements with the selling
shareholders, $1,250,000, of which $625,000 is payable at closing; (iii) three
two year employment agreements with the selling shareholders and former officers
of Cherokee requiring 24 monthly payments aggregating $739,640; (iv) additional
consideration of $6,000,000 in cash or Common Stock payable in two equal
installments due January 10, 1998 and 1999 only if the Federal Communications
Commission fails to implement Rate Caps, Rate Guidelines, and/or Billed Party
Preferences during the calendar years of 1997 and 1998; (v) $3,103,933 for
$3,655,761 in current receivables net of assumed income tax liabilities of
$551,828; and (vi) approximately $317,500 in related acquisition expenses.
On October 9, 1996, the Company executed a Letter of Intent with Texas
Coinphone for the acquisition of 1,200 installed pay telephones for a purchase
price of $3,660,000 and $50,000 in related acquisition expenses. Both of these
transactions are subject to financing.
F-25
<PAGE> 26
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER (UNAUDITED)
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 713,462 $ 1,025,382
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $100,961, respectively......................... 901,508 1,570,576
Other current assets............................................. 185,634 302,469
----------- -----------
Total current assets.......................................... 1,800,604 2,898,427
Property and equipment, net........................................ 14,099,111 22,995,039
Intangible assets, net............................................. 11,592,157 24,286,302
Other assets....................................................... 1,425,384 1,863,716
----------- -----------
$28,917,256 $52,043,484
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt -- related parties............. -- $ 3,548,454
Current portion of long-term debt -- others...................... $ 1,010,412 1,502,653
Current portion of obligations under capital leases.............. 288,972 73,510
Accounts payable................................................. 2,772,306 2,039,122
Accrued expenses................................................. 1,610,100 3,338,419
Deferred revenues................................................ -- 900,000
Other unusual charges and contractual settlements................ 962,338 480,551
----------- -----------
Total current liabilities..................................... 6,644,128 11,882,709
Long-term debt -- related parties (amounts due at
maturity $1,732,500 and $29,000,000, respectively)............... 1,732,500 23,149,508
Long-term debt -- others........................................... 7,586,001 287,556
Obligations under capital leases................................... 3,243,965 202,557
14% cumulative preferred stock mandatorily redeemable
(redemption amount $6,742,960, due June 30, 2000)................ -- 6,404,228
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity...................... 9,710,662 10,116,926
----------- -----------
$28,917,256 $52,043,484
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 27
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE
SIX MONTHS ENDED JUNE 30, 30,
-------------------------- ------------------------
1995 1996 1995 1996
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls.............................. $ 4,995,329 $ 10,411,344 $2,664,224 $ 5,959,549
Non-coin................................ 2,305,495 5,292,530 1,004,207 3,383,648
Other................................... 577,238 1,101,636 436,316 855,709
----------- ------------ --------- -----------
7,878,062 16,805,510 4,104,747 10,198,906
----------- ------------ --------- -----------
OPERATING EXPENSES:
Line and transmission charges........... 2,100,427 3,866,207 1,287,084 2,260,838
Location commissions.................... 1,516,365 2,536,730 886,665 1,377,263
Other operating expenses................ 2,682,710 5,047,451 1,132,493 2,906,855
Depreciation and amortization........... 1,432,491 5,312,885 731,591 3,227,617
Selling, general & administrative....... 1,345,427 2,398,724 767,934 1,295,041
Other unusual charges and contractual
settlements.......................... -- 5,334,514 -- 531,149
----------- ------------ --------- -----------
9,077,420 24,496,511 4,805,767 11,598,763
----------- ------------ --------- -----------
Loss from operations...................... (1,199,358) (7,691,001) (701,020) (1,399,857)
OTHER INCOME (EXPENSE):
Interest expense -- related parties..... -- (1,816,890) -- (1,537,174)
Interest expense -- others.............. (220,230) (274,221) (116,939) (50,266)
Interest income......................... 6,588 1,976 6,038 2,142
----------- ------------ --------- -----------
(213,642) (2,089,135) (110,901) (1,585,298)
----------- ------------ --------- -----------
Loss before extraordinary item............ (1,413,000) (9,780,136) (811,921) (2,985,155)
Extraordinary item:
Loss on debt restructuring.............. -- (267,281) -- (90,571)
----------- ------------ --------- -----------
NET LOSS.................................. $(1,413,000) $(10,047,417) $ (811,921) $(3,075,726)
=========== ============ ========= ===========
Earnings per share calculation:
Preferred dividend payable in cash...... (154,834) -- (77,417) --
Preferred dividend payable in kind...... -- (110,622) -- (83,372)
Accretion of 14% Preferred to its
redemption value..................... -- (24,119) -- (24,119)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred......................... -- (2,002,386) -- --
----------- ------------ --------- -----------
Net loss applicable to
common shareholders..................... $(1,567,834) $(12,184,544) $ (889,338) $(3,183,217)
=========== ============ ========= ===========
Net loss per common share before
extraordinary item...................... $ (0.99) $ (3.33) $ (0.54) $ (0.74)
=========== ============ ========= ===========
Net loss per common share................. $ (0.99) $ (3.41) $ (0.54) $ (0.76)
=========== ============ ========= ===========
Weighted average number of shares......... 1,586,142 3,576,381 1,648,058 4,196,868
=========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 28
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $(1,413,000) $(10,047,417)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Depreciation and amortization............................... 1,432,491 5,312,885
Issuance of Nominal Value Warrants.......................... -- 3,886,140
Stock issued in lieu of cash, payments...................... 61,160 20,620
Accretion of related parties' debt.......................... -- 561,008
Accretion of other debt..................................... 45,921
Loss on debt restructuring.................................. -- 338,546
Increase in allowance for doubtful accounts................. -- 60,961
Amortization of deferred revenues........................... -- (300,000)
Changes in assets and liabilities:
Accounts receivable....................................... (233,352) (584,429)
Other current assets...................................... 94,429 (116,835)
Accounts payable.......................................... 575,257 (703,756)
Accrued expenses.......................................... (51,711) 1,610,819
Other unusual charges and contractual settlements......... -- (481,787)
----------- ------------
465,274 (397,324)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc................... -- (4,826,335)
Acquisition of Paramount Communications Systems................ -- (9,780,644)
Deferred charges on pending acquisitions....................... -- (44,747)
Deferred revenues.............................................. -- 1,200,000
Purchases of intangible assets................................. (185,087) (662,436)
Change in other assets......................................... (79,209) 236,668
Acquisition deposits........................................... -- (1,600,000)
Purchases of property and equipment............................ (220,626) (1,065,496)
----------- ------------
(484,922) (16,542,990)
----------- ------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances................................... 200,000 --
Proceeds from related party debt............................... -- 32,223,454
Proceeds from shareholder debt................................. -- 575,000
Principal payments on borrowings............................... (918,141) (10,272,477)
Proceeds from issuance of preferred and common stock and
other....................................................... 690,000 --
Dividends paid................................................. (40,375) --
Debt financing costs........................................... -- (4,166,097)
Redemption of 10% Preferred and 8% Preferred................... -- (1,117,371)
Equity financing costs......................................... (52,935) --
Proceeds from warrant and option exercises..................... 20,000 9,725
----------- ------------
(101,451) 17,252,234
----------- ------------
(Decrease) increase in cash...................................... (121,099) 311,920
Cash at beginning of period...................................... 478,756 713,462
----------- ------------
Cash at end of period............................................ $ 357,657 $ 1,025,382
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 29
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 1995 30, 1996
-------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MANDATORILY REDEEMABLE PREFERRED STOCK
14% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
Redemption of 7% Preferred................... -- -- 3,625.00 $ 217,500
Redemption of 8% Preferred................... -- -- 14,143.33 848,600
Redemption of 10% Preferred.................. -- -- 16,668.00 1,000,000
Conversion of debt........................... -- -- 59,695.39 3,581,723
Acquisition of Paramount Communications...... -- -- 8,333.33 375,768
Acquisition of International Payphones....... -- -- 5,453.14 245,896
Dividends payable-in-kind.................... -- -- 4,464.48 110,622
Accretion of carrying value to amount
payable at redemption, June 30, 2000...... -- -- -- 24,119
------- ---------- ---------- -----------
TOTAL MANDATORILY REDEEMABLE
PREFERRED STOCK.............................. -- -- 112,382.67 $ 6,404,228
======= ========== ========== ===========
NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. 2,500 $ 200,000 2,500 $ 200,000
Redemption of 7% Preferred................... -- -- (2,500) (200,000)
------- ---------- ---------- -----------
Balance at end of period..................... 2,500 $ 200,000 --
======= ---------- ========== -----------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 12,200 $ 981,084 12,200 $ 981,084
Redemption of 8% Preferred................... -- -- (12,200) (981,084)
------- ---------- ---------- -----------
Balance at end of period..................... 12,200 $ 981,084 -- --
======= ---------- ========== -----------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 1,496 $ 1 1,496 $ 1
Redemption of 10% Preferred.................. -- -- (1,496) (1)
------- ---------- ---------- -----------
Balance at end of period..................... 1,496 $ 1 -- --
======= ---------- ========== -----------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. -- -- 530,534 $ 5,305,340
Acquisition of World Communications, Inc..... 530,534 $5,305,340 -- --
Redemption of 10% Preferred.................. -- -- (530,534) (5,305,340)
------- ---------- ---------- -----------
Balance at end of period..................... 530,534 $5,305,340 -- --
======= ========== ========== ===========
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
------- ---------- ---------- -----------
Balance at end of period..................... -- -- -- --
======= ---------- ========== -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 30
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY -- CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, 1995 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
SERIES B SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year.............. -- -- -- --
--------- ------------ --------- ------------
Balance at end of period.................. -- -- -- --
========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of year.............. 1,522,158 $ 15,222 2,855,350 $ 28,554
Issuance of stock for services............ 91,383 914 4,400 44
Private sales of stock.................... 472,056 4,720 -- --
Exercise of warrants and options.......... 8,333 83 972,487 9,725
Acquisition of World Communications,
Inc.................................... 402,500 4,025 -- --
Conversion of debt to equity.............. 30,231 303 -- --
Acquisition of Public Telephone
Corporation............................ 304,879 3,049 -- --
Acquisition escrow deposits............... 23,810 238 (23,810) (238)
Acquisition of International Payphones.... -- -- 555,589 5,555
Redemption of 10% Non-Voting Preferred.... -- -- 884,214 8,842
--------- ------------ --------- ------------
Balance at end of period.................. 2,855,350 $ 28,554 5,248,230 $ 52,482
========= ------------ ========= ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............. $ 8,755,364 $ 16,649,559
Issuance of stock for services............ 528,532 20,576
Private sales of stock.................... 2,010,067 --
Exercise of warrants and options.......... 34,917 --
Acquisition of World Communications,
Inc.................................... 2,712,852 --
Conversion of debt to equity.............. 137,375 --
Acquisition of Public Telephone
Corporation............................ 2,054,902 --
Acquisition escrow deposits............... 149,762 (149,762)
Financing costs........................... (83,212) --
Acquisition of International Payphones.... -- 2,790,042
Acquisition of Paramount Communications... -- 443,510
Warrants issued with debt................. 349,000 6,411,500
Issuance of Nominal Value Warrants........ -- 4,240,941
Redemption of 10% Non-voting Preferred.... -- 5,296,498
------------ ------------
Balance at end of period.................. $ 16,649,559 $ 35,702,864
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year.............. $ (7,303,804) $(13,453,876)
Net loss for the period................... (6,109,697) (10,047,417)
Dividends paid on 7% and 8% Preferred..... (40,375) --
14% Preferred dividend payable-in-kind.... -- (110,622)
Accretion of 14% Preferred carrying
value.................................. -- (24,119)
Redemption of 7% Preferred................ -- (17,500)
Redemption of 8% Preferred................ -- (293,516)
Redemption of 10% Preferred............... -- (1,691,370)
------------ ------------
Balance at end of period.................. $(13,453,876) $(25,638,420)
------------ ------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY................ $ 9,710,662 $ 10,116,926
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 31
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB and subsequently amended on Form 10-KSB(A)-1 for the year
ended December 31, 1995.
Certain amounts relating to the three and six months ended June 30, 1995
have been reclassified to conform to the current quarter presentation. The
reclassifications have no impact on total assets, shareholders' equity or net
loss as previously reported.
2. ACQUISITIONS AND MERGERS
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. In connection with
the acquisition of IPP, the Company acquired 2,101 installed telephones for a
purchase price consisting of: (i) $3,496,487 in cash; (ii) 555,589 unregistered
shares of the Company's Common Stock, par value $.01, ("Common Stock"); (iii)
5,453.14 unregistered shares of 14% Convertible Cumulative Redeemable Preferred
Stock ("14% Preferred"); and (iv) warrants to purchase 117,785 shares of the
Company's Common Stock at a nominal exercise price per share ("Nominal Value
Warrants"). Additionally, the Company assumed approximately $1,757,000 in
liabilities, of which $1,551,796 was repaid by the Company on March 15, 1996.
The cash purchase price included three five year non-compete agreements, with an
aggregate value of $60,000, with three of IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed
telephones for a purchase price consisting of: (i) $9,618,553 in cash; (ii)
8,333.33 shares of 14% Preferred; and (iii) Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock.
In addition, the Company assumed outstanding liabilities of approximately
$733,000, of which $697,947 was repaid on March 15, 1996. The purchase price
included a five year consulting and non-compete agreement, valued at $50,000,
with one of Paramount's former officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,531,404, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 60 months.
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public Telephone") in a transaction accounted for as a purchase.
The Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public Telephone and issued 224,879 unregistered shares of the Company's
Common Stock to the shareholders of Public Telephone. In connection with the
acquisition, the Company entered into five year non-compete agreements with two
of Public
F-31
<PAGE> 32
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Telephone's former owners which require both cash payments and the issuance, in
the aggregate, of 80,000 unregistered shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
and 3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock, which was subsequently converted to 884,214
unregistered shares of Common Stock on June 28, 1996.
The Public Telephone and World acquisitions were recorded as purchases and
the differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,305,168, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 36 months.
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public, IPP and Paramount acquisitions had
occurred at the beginning of 1995 and as though the IPP and Paramount
acquisitions had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
PRO FORMA SELECTED RESULTS OF OPERATIONS DATA
------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues....................... $ 18,386,972 $ 19,294,190 $ 9,602,762 $ 10,198,906
Net loss before extraordinary item... (7,072,374) (9,835,846) (3,468,918) (2,985,155)
Net loss applicable to common
shareholders....................... (7,492,475) (10,210,618) (3,678,969) (3,183,217)
Net loss per common share............ $(2.63) $(2.69) $(1.26) $(0.76)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995 or 1996, or of future results.
The pro forma statement of operations data includes adjustments related to the
amortization of intangible assets, reductions in certain selling, general, and
administrative expenses, interest expense on borrowings used to finance the
acquisitions and the weighted average number of common shares outstanding after
giving effect to the acquisitions.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are installed telephones, for a purchase price
consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of the Company's
Common Stock, valued at the average of the BID and ASK (as reported by The
NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an unregistered and
block discount of 20.19% as determined by an independent valuation firm),
$4,637,840, or $2.15 per share; and (iii) approximately $675,122 in related
acquisition expenses. The Amtel acquisition closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired approximately
3,115 installed pay telephones for a purchase price, consisting of: (i) $500,000
in cash; (ii) 166,666 unregistered shares of the Company's
F-32
<PAGE> 33
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Common Stock, valued at the average of the BID and ASK (as reported by NASDAQ on
September 16, 1996, less an unregistered and block discount of 30.42% as
determined by an independent valuation firm), $311,665, or $1.87 per share;
(iii) assumption of capital lease obligations of $7,750,000; (iv) notes payable
to the selling shareholders of POA, $3,634,114; (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, $307,264; and (vii) approximately $166,748 in
related acquisition expenses.
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA's contracts).
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and June 30, 1996, property and equipment consisted
of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, JUNE 30,
(IN YEARS) 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Telephones, boards, enclosures and cases...... 3-7 $ 16,386,987 $27,228,267
Furniture, fixtures and other equipment....... 3-5 989,300 1,312,548
Leasehold improvements........................ 2-5 231,466 235,422
------------ -----------
17,607,753 28,776,237
Less -- accumulated depreciation............ (3,508,642) (5,781,198)
------------ -----------
$ 14,099,111 $22,995,039
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
As of December 31, 1995 and June 30, 1996, intangible assets consisted of the
following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD DECEMBER 31, JUNE 30,
(IN MONTHS) 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Costs incurred in the acquisition and
installation
of telephones................................ 36-120 $ 13,403,126 $23,459,098
Debt restructuring costs....................... 40 -- 5,495,898
Non-compete agreements......................... 24-60 1,513,765 1,623,765
State operating certifications................. 60 466,796 466,796
------------ -----------
15,383,687 31,045,557
Less: Accumulated amortization................. (3,791,530) (6,759,255)
------------ -----------
$ 11,592,157 $24,286,302
========== ==========
</TABLE>
5. LONG-TERM DEBT -- RELATED PARTIES
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as "Lenders"). Subsequent to March 15, 1996,
F-33
<PAGE> 34
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
5. LONG-TERM DEBT -- RELATED PARTIES (CONTINUED)
the Company borrowed an additional $1,692,500 against the Credit Facility. As of
June 30, 1996, $5,026,546 was available to the Company under the Credit Facility
to fund acquisitions and for general working capital purposes, subject to
certain conditions (including availability of additional collateral). However,
at June 30, 1996, due to the unavailability of additional collateral, no
additional funds could be borrowed by the Company. The initial borrowings under
the Credit Facility were used to complete the Paramount and IPP acquisitions, to
repay $8,503,405 of outstanding debt and $3,173,931 of outstanding obligations
under capital leases, to redeem the 10% Cumulative Redeemable Preferred Stock
("10% Preferred"), 8% Cumulative Redeemable Preferred Stock ("8% Preferred"),
and 7% Cumulative Convertible Redeemable Preferred Stock ("7% Preferred"), and
to pay related transactions fees. The additional borrowings of $1,692,500 were
used for an acquisition deposit ($1,300,000) classified as a non-current asset
and working capital.
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds, $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
There were no available amounts under the credit facility at September 13, 1996.
The Credit Facility requires monthly interest payments at the Alternate
Base Rate (as defined therein) plus 5% and contains various covenants
restricting the Company's ability to pay dividends or incur additional debt,
among other conditions, and also contains financial covenants requiring minimum
net worth, working capital and earnings before interest, depreciation and
amortization among other covenants. The Credit Facility also contains a
subjective acceleration clause which states that in the event of a material
adverse change in the business, as determined by the Lenders, the Lenders can
call the debt at their discretion. The Lenders have waived their right to
exercise this subjective acceleration clause through December 31, 1997. Pursuant
to the Credit Facility amendments dated September 13, 1996, principal payments
commence in April 1997, and continue monthly and/or quarterly through June 1999
at which time the remaining principal balance is due. The amount of the
principal payment is contingent upon numerous factors, including the borrowing
base and cash flow of the Company.
Based on amounts borrowings under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter until December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, the Company did not meet certain financial
loan covenants. The Lenders have amended the credit agreement to enable
compliance with these loan covenants.
The majority of the Credit Facility (currently $29,000,000) can be
converted into Series B Special Convertible Preferred Stock ("Series B
Preferred"), at the ratio of 833 shares for each $100,000 in outstanding debt
and accrued interest. Additionally, the Lenders received warrants to purchase
204,824 shares of Series A Special Convertible Preferred Stock ("Series A
Preferred"), at an exercise price of $0.20 per share for the initial borrowings
under the Credit Facility. Pursuant to the loan agreement, the Lenders will
receive additional warrants to purchase Series A Preferred for providing the
$1,300,000 acquisition deposit. Each share of Series A Preferred and Series B
Preferred is convertible into 20 shares of Common Stock. The debt under the
Credit Facility was initially recorded net of an allocation of the fair value of
the warrants. Such fair value was determined using the Black-Scholes valuation
model. The Company recorded non-cash interest expense (accretion of debt) of
$480,864 for the three months ended June 30, 1996 and $561,008 for the six
months ended June 30, 1996.
F-34
<PAGE> 35
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and June 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock
($60 stated value -- 200,000 shares authorized;
107,918.19 shares issued and outstanding at June 30,
1996; cumulative dividends issuable of 4,464.48 shares,
valued at $110,622; mandatory redemption amount of
$6,742,960 due June 30, 2000)............................ -- $6,404,228
</TABLE>
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the six and three months ended June 30, 1996, the
carrying value of the 14% Preferred was increased by $24,119 through accretions.
Each share of 14% Preferred is entitled to receive a quarterly dividend of 0.035
shares of 14% Preferred. Each share of 14% Preferred is convertible into 10
shares of Common Stock.
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
As of December 31, 1995 and June 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized; 530,534
shares issued and outstanding at December 31, 1995,
converted to Common Stock pursuant to its terms on June
28, 1996).............................................. $ 5,305,340 --
Series A Special Convertible Preferred Stock ($0.20 par
value, $0.20 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
Series B Special Convertible Preferred Stock ($0.20 par
value, $120 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 1 --
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 981,084 --
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 200,000 --
</TABLE>
F-35
<PAGE> 36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Common Stock
($0.01 par value -- 50,000,000 shares authorized;
2,855,350 and 5,248,230 shares issued and outstanding
at December 31, 1995 and June 30, 1996)................ 28,554 52,482
Additional paid-in capital............................... 16,649,559 35,702,864
Accumulated deficit...................................... (13,453,876) (25,638,420)
------------ ------------
$ 9,710,662 $ 10,116,926
=========== ===========
</TABLE>
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14% Preferred.
On March 15, 1996, concurrent with the Credit Facility, the Company
redeemed the 10% Preferred, 8% Preferred, and 7% Preferred. The redemption price
was cash payments aggregating $1,117,371 and 34,436.33 shares of 14% Preferred.
In the aggregate, $6,269,487 of the Company's outstanding obligations, including
portions of the purchase price for the IPP and Paramount acquisitions, was
liquidated by issuing 107,918.19 shares of 14% Preferred.
The $2,002,386 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value was recorded as a reduction of
earnings available to common shareholders as of March 31, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of
Common Stock were issued in conjunction with the IPP and Paramount acquisitions,
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, and conversion
of certain related party debt of the Company to the 14% Preferred. Certain
holders of the 14% Preferred are deemed related parties pursuant to the rules
and regulations of the Securities and Exchange Commission. The warrants expire
on March 13, 2001. The Company has utilized an independent appraiser who has
estimated the fair market value of the Nominal Value Warrants to be $4,974,673,
using the Black-Scholes valuation method, of which $3,886,139 (the amount
attributable to the warrants provided to related parties in connection with the
redemption of the 10% Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
During April and May 1996, warrants representing 972,487 shares of Common
Stock were exercised, and total proceeds to the Company were $9,725. Of the
total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
F-36
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
May 17, 1996
The Board of Directors of
Paramount Communications Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1995 and the results of its operations, its
changes in shareholders' equity and its cash flows for the year then ended 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 6, on March 15, 1996, the Company's net assets were sold to
an unrelated party.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-37
<PAGE> 38
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 479,984
Receivables:
Trade....................................................................... 237,455
Shareholder................................................................. 38,168
----------
Total current assets................................................... 755,607
Property and equipment, net...................................................... 788,582
Intangible assets, net........................................................... 146,029
Other assets..................................................................... 15,098
----------
$1,705,316
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 373,866
Location commissions payable................................................... 65,958
Shareholder distributions payable.............................................. 155,532
Notes payable to affiliates.................................................... 483,246
----------
Total current liabilities.............................................. 1,078,602
----------
Commitments and contingencies.................................................... --
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 606,714
----------
Total shareholders' equity.................................................. 626,714
----------
$1,705,316
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 39
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Coin calls..................................................................... $3,751,744
Non-coin calls................................................................. 1,923,724
----------
Total revenues.............................................................. 5,675,468
----------
Operating costs and expenses:
Telephone charges.............................................................. 1,543,956
Commissions.................................................................... 696,443
Selling, general and administrative............................................ 2,407,479
Depreciation and amortization.................................................. 393,204
----------
Total operating costs and expenses.......................................... 5,041,082
----------
Operating income............................................................ 634,386
----------
Other income (expenses):
Interest and other income...................................................... 14,800
Interest expense............................................................... (64,210)
Other.......................................................................... (85,231)
----------
Total other expenses........................................................ (134,641)
----------
Net income.................................................................. $ 499,745
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 40
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 499,745
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 393,204
Changes in assets and liabilities:
Decrease in receivables................................................... 2,392
Decrease in other current assets.......................................... 11,190
Decrease in other assets.................................................. 9,632
Increase in other accounts payable and accrued expenses................... 179,706
Increase in location commissions payable.................................. 10,915
----------
Net cash provided by operating activities.............................. 1,106,784
----------
Cash flows from investing activities:
Purchases of equipment......................................................... (356,791)
----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party....................... 200,000
Distributions to shareholders.................................................. (229,088)
Repayments of notes payable to related parties................................. (439,470)
----------
Net cash used in financing activities.................................. (468,558)
----------
Net increase in cash and cash equivalents.............................. 281,435
Cash and cash equivalents, beginning of year..................................... 198,549
----------
Cash and cash equivalents, end of year........................................... $ 479,984
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................... $ 64,210
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 41
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1994............................... 100 $100 $ 19,900 $106,969 $126,969
Net income........................................ -- -- -- 499,745 499,745
Distributions..................................... -- -- -- -- --
---- ---- ------- -------- --------
Balance
December 31, 1995............................... 100 $100 $ 19,900 $606,714 $626,714
==== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 42
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March 1987 as a result of the deregulation of the
telephone industry. The Company is in the business of installing, maintaining
and operating pay telephones throughout South Florida.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over five years, the estimated useful lives of the respective assets.
Maintenance, repairs and minor replacements of these items are charged to
expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July 1998. Also, in connection
with certain equipment acquisitions, the Company entered into location contracts
for two and one-half years terms. These contracts expired in June 1995.
REVENUE RECOGNITION
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida.
SHAREHOLDERS DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", which requires the disclosure of fair value of financial
instruments. The Company's financial instruments consist of cash and cash
equivalents, trade receivables and notes payable to affiliates. The carrying
amount of these instruments at December 31, 1995 approximates their fair value.
F-42
<PAGE> 43
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Installed pay telephones and related equipment.............. $ 3,259,133
Furniture, fixtures and office equipment.................... 40,125
Automobiles................................................. 31,943
Leasehold improvements...................................... 4,025
Warehouse equipment......................................... 1,772
-----------
3,336,998
Accumulated depreciation.................................... (2,548,416)
-----------
Property and equipment, net................................. $ 788,582
===========
</TABLE>
Depreciation expense amounted to $282,902 for the year ended December 31,
1995.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Non-compete agreements...................................... $ 533,135
Location contracts.......................................... 194,240
-----------
727,375
Accumulated amortization.................................... (581,346)
-----------
Intangible assets, net...................................... $ 146,029
===========
</TABLE>
Amortization expense related to intangible assets amounted to $110,302 for
the year ended December 31, 1995.
4. RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Company has notes payable to related parties, with principal and
interest payable monthly at an annual rate of 10% and due in 1996. These notes
are collateralized by installed pay telephones and related equipment. The notes
were assumed and subsequently paid-off by the acquiring company (Note 6).
Interest expense paid to related parties relating on these notes amounted
to $64,210 in 1995.
F-43
<PAGE> 44
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. RELATED PARTY TRANSACTIONS (CONTINUED)
PAYROLL ALLOCATION
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
OPERATING LEASE
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the facility on a month-to-month basis. The lease provides that the Company pay
its proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1995 amounted to $22,812.
VEHICLE LEASES
The Company leases various vehicles from a related party. Total lease
payments made in connection with these leases amounted to $46,866 during 1995.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's financial
position or results of operations.
6. SUBSEQUENT EVENTS
ACQUISITION
On March 15, 1996, the Company completed an Asset Purchase Agreement with
an unrelated party. Under the terms of the Agreement, the Company sold its
assets, including 2,528 installed telephones and related equipment, for a cash
price of approximately $9.6 million, warrants to purchase shares of stock of the
acquiring company, and the assumption, by the acquiring company, of
approximately $733,000 of outstanding Company liabilities. The purchase price
also included a five year consulting agreement with one of the Company's former
officers valued at $50,000.
TELECOMMUNICATIONS REFORM
On February 8, 1996, the President of the United States signed into law the
Telecommunications Act of 1996 (the "Act"). The Act changes many provisions of
the Communications Act of 1934 and requires the Federal Communications
Commission (the "FCC") to change its existing rules and adopt new rules in
several areas affecting broadcasting. This Act is one of the most significant
changes to the Communications Act since its adoption in 1934. Since the Act
recently was passed and became law, the FCC has only begun the proceedings that
the Act requires and it remains to be seen how the FCC will interpret certain of
its provisions. Congress and the FCC currently have under consideration and may
in the future adopt new laws and regulations and policies regarding a wide
variety of matters which could, directly or indirectly, adversely affect the
operation of the Company as well as its business strategies.
F-44
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheet of Paramount Communications
Systems, Inc. as of December 31, 1994, and the related statement of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-45
<PAGE> 46
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 198,549
Accounts receivable............................................................ 258,931
Other current assets........................................................... 30,274
----------
Total current assets................................................... 487,754
Property and equipment, net (note 2)............................................. 714,693
Intangible assets, less accumulated amortization of $471,044..................... 256,331
Other assets..................................................................... 15,188
----------
$1,473,966
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 177,908
Location commissions payable................................................... 55,043
Accrued interest payable....................................................... --
Sales tax payable.............................................................. 16,252
Shareholder distributions payable.............................................. 384,620
Current maturities of notes payable -- related parties (note 3)................ 436,619
----------
Total current liabilities.............................................. 1,070,442
Long-term portion of notes payable -- related parties (note 3)................... 276,555
----------
Total liabilities...................................................... 1,346,997
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 106,969
----------
Total shareholders' equity............................................. 126,969
Commitments and contingencies (note 4)...........................................
----------
$1,473,966
==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 47
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Revenues:
Coin calls.................................................................... $3,685,295
Non-coin calls................................................................ 2,030,194
----------
Total revenues........................................................ 5,715,489
----------
Operating costs and expenses:
Telephone charges............................................................. 1,748,270
Commissions................................................................... 676,304
Selling, general and administrative........................................... 2,099,203
Depreciation and amortization................................................. 770,429
----------
Total operating costs and expenses.................................... 5,294,206
----------
Operating income...................................................... 421,283
----------
Other expense:
Interest and other expense.................................................... (4,686)
Interest expense.............................................................. (72,902)
----------
Total other expenses.................................................. (77,588)
----------
Net income............................................................ $ 343,695
==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 48
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993......... 100 100 $ 19,900 $ 397,894 $ 417,894
Net income............................ -- -- -- 343,695 343,695
Distributions......................... -- -- -- (634,620) (634,620)
--- ---- -------- --------- ---------
Balances at December 31, 1994......... 100 $100 $ 19,900 $ 106,969 $ 126,969
=== ==== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 49
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 343,695
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of plant and equipment....................... 582,753
Amortization of intangible assets.......................................... 129,726
Amortization of deferred asset............................................. 57,950
Loss on write-off of property and equipment................................ 14,980
Changes in assets and liabilities:
Decrease in accounts receivable.......................................... 6,814
Increase in other current assets......................................... (5,841)
Increase in other assets................................................. (270)
Decrease in other current liabilities.................................... (5,131)
-----------
Net cash provided by operating activities............................. 1,124,676
-----------
Cash flows from investing activities:
Purchases of equipment........................................................ (59,625)
Proceeds from sale of equipment............................................... 3,578
Purchase of investments....................................................... (11,715)
Purchase of intangible assets................................................. --
-----------
Net cash used in investing activities................................. (67,762)
-----------
Cash flows from financing activities:
Increase in notes payable -- related party.................................... 200,000
Distributions to shareholders................................................. (626,989)
Repayments of notes payable -- related parties................................ (591,366)
-----------
Net cash used in financing activities................................. (1,018,355)
-----------
Net increase in cash and cash equivalents............................. 38,559
Cash and cash equivalents at beginning of year.................................. 159,990
-----------
Cash and cash equivalents at end of year........................................ $ 198,549
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................................ $ 74,570
===========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 50
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March, 1987 as a result of the deregulation of the
telephone industry. The Company is a Subchapter S corporation in the business of
installing, maintaining and operating pay telephones throughout South Florida.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment are calculated on a straight-line basis over five years,
the estimated useful lives of the assets.
(d) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July, 1998. The location
contracts are amortized over two and one-half years and expire through June,
1995.
(e) RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
(f) INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
(g) CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida. No single customer
accounted for more than 5% of the Company's sales.
(h) DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
F-50
<PAGE> 51
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Installed pay telephones and related equipment............... $2,845,325
Furniture, fixtures and office equipment..................... 35,525
Automobiles.................................................. 26,328
Leasehold improvements....................................... 4,025
Warehouse equipment.......................................... 1,772
----------
2,912,975
Less accumulated depreciation and amortization............... 2,198,282
----------
$ 714,693
==========
</TABLE>
Depreciation and amortization of property and equipment was $582,753.
(3) RELATED PARTY TRANSACTIONS
(a) NOTES PAYABLE -- RELATED PARTIES
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Notes payable to various related parties, principal and
interest payable monthly at rates ranging from 8% to 10%,
due from March, 1993 to April, 1997, collateralized by
installed pay telephones and related equipment............. $ 713,174
Less current maturities of notes payable -- related
parties.................................................... 436,619
----------
Long-term portion of notes payable -- related
parties.......................................... $ 276,555
==========
</TABLE>
Interest expense paid to related parties relating to the above amounted to
$72,902.
Aggregate maturities of notes payable -- related parties subsequent to
December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995 $436,619
1996 276,555
--------
$713,174
========
</TABLE>
(b) PAYROLL ALLOCATION -- RELATED PARTY
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
(c) COMMISSION REVENUE -- RELATED PARTY
Operator assisted service commissions received from a company under common
ownership which are included in non-coin call revenue amounted to $-0- in 1994.
(4) OPERATING LEASE -- RELATED PARTY
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the
F-51
<PAGE> 52
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(4) OPERATING LEASE -- RELATED PARTY (CONTINUED)
facility on a month-to-month basis. The lease provides that the Company pay its
proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1994 was $23,373.
F-52
<PAGE> 53
May 21, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones, Inc.
(a South Carolina corporation) as of December 31, 1995, and the related
statement of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Pay Phones, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ Miller Sherrill Blake CPA
Lincolnton, North Carolina
F-53
<PAGE> 54
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and Cash Equivalents..................................................... $ 11,336
Accounts Receivable........................................................... 142,801
-----------
Total Current Assets....................................................... 154,137
-----------
Property and Equipment
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 28,441
Vehicles...................................................................... 236,393
Telephone Equipment........................................................... 2,304,632
Accumulated Depreciation...................................................... (1,563,039)
-----------
Total Property and Equipment............................................... 1,022,427
-----------
Other Assets
Covenants Not to Compete -- Net of Amortization............................... 105,528
Goodwill -- Net of Amortization............................................... 21,282
-----------
Total Other Assets......................................................... 126,810
-----------
Total Assets.................................................................... $ 1,303,374
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses......................................... $ 151,539
Notes Payable................................................................. 107,125
Notes Payable -- Related Party................................................ 25,000
Current Portion of Long-Term Debt............................................. 343,763
-----------
Total Current Liabilities.................................................. 627,427
-----------
Long-Term Liabilities
Notes Payable -- Less Current Portion......................................... 643,935
Obligations under Capital Leases -- Less Current Portion...................... 95,895
-----------
Total Long-Term Liabilities................................................ 739,830
-----------
Total Liabilities..................................................... 1,367,257
-----------
Stockholders' Equity
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (131,107)
-----------
Total Stockholders' Equity................................................. (63,883)
-----------
Total Liabilities And Stockholders' Equity...................................... $ 1,303,374
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-54
<PAGE> 55
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales............................................................................ $3,360,596
Cost of Goods Sold............................................................... 2,308,012
----------
Gross Profit........................................................... 1,052,584
OPERATING EXPENSES
General And Administrative Expenses............................................ 517,868
Depreciation Expense........................................................... 413,144
Interest Expense............................................................... 149,248
----------
Total Operating Expenses............................................... 1,080,260
----------
Income From Operations........................................................... (27,676)
OTHER (INCOME) EXPENSE
(Gain) Loss on Sale of Assets.................................................. (733)
----------
Total Other (Income) Expense........................................... (733)
Income Before Corporate Taxes.......................................... (26,943)
Deferred Tax Expense............................................................. 35,800
----------
Net Income............................................................. (62,743)
Beginning Retained Earnings...................................................... (68,364)
----------
Ending Retained Earnings......................................................... $ (131,107)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-55
<PAGE> 56
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES:
Net Income..................................................................... $ (62,743)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and Amortization............................................... 451,929
Net (increase) decrease in receivables...................................... (61,817)
Net increase (decrease) in accounts payable and accrued expenses............ 40,406
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... (733)
---------
Net Cash Provided (Used) by Operating Activities................................. 402,842
---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment.......................................................... (66,943)
---------
Net Cash Provided (Used) by Investing Activities................................. (66,943)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to settle short-term debt............................................. (148,738)
Payments to settle long-term debt.............................................. (187,055)
Proceeds from short-term debt.................................................. 52,315
Proceeds from long-term debt................................................... 50,000
Payments under capital lease obligations....................................... (105,024)
---------
Net Cash Provided (Used) by Financing Activities................................. (338,502)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (2,603)
Cash and Cash Equivalents at beginning of year................................. 13,939
---------
Cash and Cash Equivalents at end of year......................................... $ 11,336
=========
SUPPLEMENTAL DISCLOSURES
Interest Paid.................................................................. $ 149,248
=========
Income Taxes Paid.............................................................. $ 0
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-56
<PAGE> 57
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1995:
<TABLE>
<S> <C>
Amounts payable to shareholders due on demand............................. $25,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 14,800
-------
$39,800
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $19,508 for the year ended December
31, 1995.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employees deferred
salary up to a maximum to 2% of compensation. The contribution was $3,115 for
the year ended December 31, 1995.
NOTE D -- NOTES PAYABLE
Short-term notes payable consist of the following at December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Lincoln Bank....... $ 50,000 10.25% Personal Guarantees
Olen Beal.......... 50,000 12.00% Personal Guarantees
Conquest........... 7,125 10.00% Personal Guarantees
--------
$107,125
========
</TABLE>
See Independent Auditor's Report.
F-57
<PAGE> 58
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following notes:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Note Payable -- NationsBank...................................................... $ 10,261
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- NationsBank...................................................... 10,264
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 9,616
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle.
Note Payable -- Ford Motor Credit................................................ 13,576
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 12,285
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle.
Note Payable -- GMAC............................................................. 16,105
Due in monthly installments of $362.68 which includes interest calculated at
10.0%. Matures in August of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 21,478
Due in monthly installments of $485.00 which includes interest calculated at
8.99%. Matures in June of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 29,398
Due in monthly installments of $550.46 which includes interest calculated at
9.99%. Matures in December of 2001. Secured by vehicle.
Note Payable -- First Union National............................................. 32,958
Due in monthly installments of $694.24 which includes interest calculated at
9.06%. Matures in December of 2000. Secured by vehicle.
Note Payable -- Olen Beal........................................................ 41,627
Due in monthly installments of $1,660.72 which includes interest calculated at
12.0%. Matures in April of 1998. Guaranteed by officers.
Note Payable -- First National Bank.............................................. 437,098
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance.
</TABLE>
See Independent Auditor's Report.
F-58
<PAGE> 59
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995
---------
NOTE E -- LONG-TERM DEBT (CONTINUED)
<S> <C>
Note Payable -- Karl Baker....................................................... 191,741
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment.
Note Payable -- First Union National Bank........................................ 2,000
Due in monthly installments of $666.67 principle plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company.
Note Payable -- Elcotel.......................................................... 11,300
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and
guaranteed by officers.
---------
857,361
Less: Current Maturities....................................................... (213,426)
---------
Total Long-Term Debt................................................... $ 643,935
=========
</TABLE>
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1996 $213,426
1997 221,139
1998 228,947
1999 169,611
2000 24,238
--------
$857,361
========
</TABLE>
NOTE F -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carryforward........................................ $ 38,350
Valuation Allowance.................................................... (38,350)
--------
Net deferred tax asset................................................... $ 0
========
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was
approximately $250,000 at December 31, 1995 and will expire in the year 2010.
NOTE G -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1998. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included
See Independent Auditor's Report.
F-59
<PAGE> 60
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- LEASES (CONTINUED)
in depreciation expense for the year ended December 31, 1995. The following is a
summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment........ $ 416,160
Accumulated Depreciation... (113,159)
---------
$ 303,001
=========
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1995
for each of the next five years are as follows:
<TABLE>
<S> <C>
1996............. $130,337
1997............. 84,811
1998............. 11,084
1999............. 0
2000............. 0
--------
$226,232
========
</TABLE>
NOTE H -- RENTALS UNDER OPERATING LEASES
The Company leased various vehicles under operating leases. Several of
those leases were terminated during the year ended December 31, 1995. The
remaining operating leases will expire in 1998.
Future minimum rental payments required under operating leases that have
remaining terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............. $ 5,016
1997.............. 5,016
1998.............. 2,508
-------
$12,540
=======
</TABLE>
Rental expense was approximately $19,577.
NOTE I -- CONTINGENCIES
The Company is a party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period, the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE J -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. have negotiated to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
was finalized on March 15, 1996. Also, an additional loan was secured from
NationsBank on January 3, 1996 in the amount of $50,000. Interest is calculated
at 10%, and the note matures March 3, 1996.
See Independent Auditor's Report.
F-60
<PAGE> 61
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE L -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
outstanding at December 31, 1995.
See Independent Auditor's Report.
F-61
<PAGE> 62
January 17, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones,
Inc. (a South Carolina corporation) as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Pay Phones,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ TERRI A. BLAKE, CPA
- ------------------------------------------------------
For the Firm
F-62
<PAGE> 63
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents..................................................... $ 13,939
Accounts Receivable........................................................... 80,984
-----------
TOTAL CURRENT ASSETS.................................................. 94,923
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 27,441
Vehicles...................................................................... 146,295
Telephone Equipment........................................................... 2,134,307
Accumulated Depreciation...................................................... (1,155,533)
-----------
TOTAL PROPERTY AND EQUIPMENT.......................................... 1,168,510
-----------
OTHER ASSETS
Covenants Not to Compete -- Net of Amortization............................... 143,695
Goodwill -- Net of Amortization............................................... 21,900
Deferred Tax Asset............................................................ 35,800
-----------
TOTAL OTHER ASSETS.................................................... 201,395
-----------
TOTAL ASSETS.................................................................... $ 1,464,828
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses......................................... $ 93,151
Bank Overdraft................................................................ 17,982
Notes Payable................................................................. 166,645
Notes Payable -- Related Party................................................ 61,903
Current Portion of Long-Term Debt............................................. 264,089
-----------
TOTAL CURRENT LIABILITIES............................................. 603,770
-----------
LONG-TERM LIABILITIES
Notes Payable -- Less Current Portion......................................... 724,379
Obligations under Capital Leases -- Less Current Portion...................... 137,819
-----------
TOTAL LONG-TERM LIABILITIES........................................... 862,198
-----------
TOTAL LIABILITIES................................................... 1,465,968
-----------
STOCKHOLDERS' EQUITY
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (68,364)
-----------
TOTAL STOCKHOLDERS' EQUITY............................................ (1,140)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 1,464,828
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-63
<PAGE> 64
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Sales............................................................................ $2,631,627
Cost of Goods Sold............................................................... 1,950,062
----------
GROSS PROFIT................................................................... 681,565
OPERATING EXPENSES
General And Administrative Expenses............................................ 435,365
Depreciation Expense........................................................... 389,201
Interest Expense............................................................... 103,697
----------
TOTAL OPERATING EXPENSES............................................... 928,263
----------
INCOME FROM OPERATIONS............................................ (246,698)
OTHER (INCOME) EXPENSE
Miscellaneous Income........................................................... (2,076)
(Gain) Loss on Sale of Assets.................................................. 28,571
----------
Total Other (Income) Expense........................................... 26,495
Income Before Corporate Taxes.......................................... (273,193)
Deferred Tax Benefit Provision................................................... (35,800)
----------
NET INCOME........................................................ (237,393)
BEGINNING RETAINED EARNINGS...................................................... 169,029
----------
ENDING RETAINED EARNINGS............................................... $ (68,364)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-64
<PAGE> 65
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net Cash Flow From Operating Activities:
Net Income..................................................................... $(237,393)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation................................................................ 389,201
Net (increase) decrease in receivables...................................... (24,429)
Net increase (decrease) in accounts payable and accrued expenses............ 50,764
Net increase (decrease) in accrued taxes.................................... (3,791)
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... 28,571
---------
Net Cash Provided (Used) by Operating Activities................................. 238,723
---------
Cash Flow From Investing Activities:
Purchase of equipment....................................................... (186,716)
---------
Net Cash Provided (Used) by Investing Activities................................. (186,716)
---------
Cash Flow From Financing Activities:
Payments to settle short-term debt.......................................... (133,405)
Payments to settle long-term debt........................................... (352,114)
Proceeds from short-term debt............................................... 206,903
Proceeds from long-term debt................................................ 260,736
Payments under capital lease obligations.................................... (43,290)
---------
Net Cash Provided (Used) by Financing Activities................................. (61,170)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (9,163)
Cash and Cash Equivalents at beginning of year................................. 23,102
---------
Cash and Cash Equivalents at end of year......................................... $ 13,939
=========
Supplemental Disclosures
Interest Paid.................................................................. $ 103,697
=========
Income Taxes Paid.............................................................. $ 3,587
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-65
<PAGE> 66
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1994:
<TABLE>
<S> <C>
Amounts payable to officers due on demand................................. $ 5,000
Amounts payable to shareholders due on demand............................. 50,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 6,903
-------
$61,903
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $14,934 for the year ended December
31, 1994.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employee's deferred
salary up to a maximum of 2% of compensation. The contribution was $5,847 for
1994.
See Independent Auditors' Report
F-66
<PAGE> 67
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt consists of the following notes:
Note Payable -- NationsBank....................................................... $ 13,293
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- NationsBank....................................................... 13,295
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 12,702
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,539
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle
Note Payable -- First Union National Bank......................................... 15,486
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,802
Due in monthly installments of $401.09 which includes interest calculated at
7.75%. Matures in January of 1999. Secured by vehicle
Note Payable -- First National Bank............................................... 528,493
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance
Note Payable -- Karl Baker........................................................ 231,643
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment
Note Payable -- First Union National Bank......................................... 9,998
Due in monthly installments of $666.67 principal plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company
Note Payable -- Elcotel........................................................... 24,411
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and guarantees
of officers..................................................................... 906,016
--------
Less: Current Maturities.......................................................... (181,637)
--------
Total Long-Term Debt.................................................... $724,379
========
</TABLE>
See Independent Auditors' Report
F-67
<PAGE> 68
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $181,637
1996........................................ 193,141
1997........................................ 194,620
1998........................................ 209,562
1999........................................ 127,056
--------
$906,016
========
</TABLE>
NOTE E -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carry forward........................................ $34,300
Temporary differences -- Principally depreciation methods............... 1,500
-------
Total deferred tax asset.................................................. $35,800
=======
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was $228,776
at December 31, 1994 and will expire in the year 2009.
NOTE F -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense
for the year ended December 31, 1994.
The following is a summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment...................................................... $292,845
Accumulated Depreciation................................................. (35,686)
--------
$257,159
========
</TABLE>
See Independent Auditors' Report
F-68
<PAGE> 69
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE F -- LEASES (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1994
for each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $ 82,452
1996........................................ 94,760
1997........................................ 43,059
1998........................................ 0
1999........................................ 0
--------
$220,271
========
</TABLE>
NOTE G -- CONTINGENCIES
The Company is party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE H -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. are negotiating to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
has not been finalized as of the date this statement was issued.
NOTE I -- LINE OF CREDIT
The Company has a line of credit for $150,000 that expires in March of
1995. At December 31, 1994 the company has outstanding $100,000 on the line of
credit. Interest is calculated at 10.50%. Loan is guaranteed by officers and
their spouses.
NOTE J -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
shares outstanding at December 31, 1994.
See Independent Auditors' Report
F-69
<PAGE> 70
INDEPENDENT AUDITOR'S REPORT
To The Stockholders
International Payphones, Inc.
Hilton Head Island, South Carolina
We have audited the accompanying Balance Sheets of International Payphones, Inc.
(a Tennessee corporation) as of December 31, 1995 and December 31, 1994, and the
related Statements of Earnings and Retained Earnings and Cash Flows for years
then ended. These financial statements are the responsibility of the management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Payphones, Inc.
and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ ERNEST M. SEWELL, CPA
April 24, 1996
F-70
<PAGE> 71
INTERNATIONAL PAYPHONES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash.......................................................... $ 17,321.08 $ 25,530.67
Accounts receivable - trade................................... 48,996.42 35,913.21
Other amounts receivable (Note D)............................. 5,600.00 25,574.54
Parts and supplies inventory.................................. 9,420.00 11,625.00
------------ ------------
Total Current Assets.......................................... 81,337.50 98,643.42
Property and Equipment
Property and equipment (Note B and F)......................... 816,148.89 720,142.61
Accumulated depreciation...................................... (539,338.28) (455,592.94)
------------ ------------
Net Property and Equipment.................................... 276,810.61 264,549.67
------------ ------------
TOTAL ASSETS.......................................... $ 358,148.11 $ 363,193.09
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note F).................... $ 73,978.08 $ 48,761.05
Accounts payable - trade...................................... 2,717.23 7,822.66
Accrued payroll and payroll taxes............................. -- 10,265.07
Other accrued liabilities (Note E)............................ 18,391.81 24,220.91
Deferred income taxes (Note C)................................ 6,000.00 5,100.00
------------ ------------
Total Current Liabilities..................................... 101,087.12 96,169.69
Long-term debt - net of current portion (Note F)................ 118,654.10 81,515.83
------------ ------------
TOTAL LIABILITIES..................................... 219,741.22 177,685.52
Shareholders' Equity
Common stock.................................................. 3,321.00 3,321.00
Additional paid-in capital.................................... 106,000.00 106,000.00
Retained earnings............................................. 29,085.89 76,186.57
------------ ------------
Total Shareholders' Equity.................................... 138,406.89 185,507.57
------------ ------------
TOTAL LIABILITIES AND EQUITY.......................... $ 358,148.11 $ 363,193.09
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-71
<PAGE> 72
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Revenue.......................................................... $1,194,620.91 $1,135,734.73
Direct costs..................................................... 608,061.14 553,336.70
------------- -------------
Gross Profit................................................... 586,559.77 582,398.03
General and Administrative Expenses.............................. 563,028.15 546,365.04
------------- -------------
Earnings from operations....................................... 23,531.62 36,032.99
Other income (expense):
Interest income................................................ (665.84) --
Gain (loss) on asset sale...................................... 916.16 (2,731.45)
------------- -------------
Earnings before taxes.......................................... 25,113.62 33,301.54
Provision for income tax expense (Note C)........................ 2,300.00 2,535.00
------------- -------------
Net earnings........................................... 22,813.62 30,766.54
BEGINNING RETAINED EARNINGS............................ 76,186.57 88,677.65
------------- -------------
99,000.19 119,444.19
Less dividend distributions...................................... (69,914.30) (43,257.62)
------------- -------------
ENDING RETAINED EARNINGS............................... $ 29,085.89 $ 76,186.57
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-72
<PAGE> 73
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................. $ 22,813.62 $ 30,766.54
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Depreciation................................................ 91,174.16 96,689.77
(Gain) loss on disposal of property......................... (916.16) 2,731.45
(Increase) decrease in accounts receivable.................. (13,083.21) (4,610.68)
(Increase) decrease in inventories.......................... 2,205.00 32,152.00
Increase (decrease) in accounts payable..................... (5,105.43) (16,981.09)
Increase (decrease) in income taxes payable................. 3,000.00 (5,280.00)
Increase (decrease) in other accrued expenses............... (5,829.10) 3,112.86
Increase (decrease) in payroll taxes........................ (10,265.07) 9,691.53
----------- ------------
Total adjustments........................................... 61,180.19 117,505.84
----------- ------------
Net Cash Provided (Used) by Operating Activities............... 83,993.81 148,272.38
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property............................. 18,250.06 5,312.20
Purchases of fixed assets...................................... (71,329.00) (18,225.16)
Leasehold improvements......................................... -- (10,274.42)
----------- ------------
Net Cash Provided (Used) by Investing Activities............... (53,078.94) (23,187.38)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................................... 96,329.00 30,893.30
Decrease in other accounts receivable.......................... 19,974.54 29,012.38
Repayment of long-term debt.................................... (49,068.19) (52,552.75)
Repayment of capital lease obligations......................... (34,345.51) (59,869.12)
Repayment of stockholder loans................................. -- (22,575.20)
Dividends paid................................................. (72,014.30) (43,257.62)
----------- ------------
Net Cash Provided (Used) by Financing Activities............... (39,124.46) (118,349.01)
----------- ------------
NET INCREASE (DECREASE) IN CASH............................. (8,209.59) 6,735.99
CASH AT BEGINNING OF YEAR................................... 25,530.67 18,794.68
----------- ------------
CASH AT END OF YEAR......................................... $ 17,321.08 $ 25,530.67
=========== ============
SUPPLEMENTAL DISCLOSURES
Noncash Investing and Financing Activities:
Assets acquired through capital lease.......................... $(49,440.00) $ (66,598.00)
Capital lease used to acquire assets........................... 49,440.00 66,598.00
Cash Paid During the Year for:
Interest....................................................... $ 13,489.00 $ 20,919.00
Income taxes................................................... 2,300.00 2,535.00
</TABLE>
The accompanying notes are an integral part of this statement.
F-73
<PAGE> 74
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE A -- GENERAL
International Payphones, Inc. is a Tennessee corporation formed in 1985 to
sell, install, lease and maintain pay telephone equipment. The majority of the
Company's operations are in the eastern region of the the state of Tennessee
where it owns approximately 500 telephones and receives pay telephone coin
income and long distance commissions. Under agreements with pay phone site
location owners the Company collects the pay phone coin revenue and the long,
terms run distance commission income and pays a percentage of this revenue to
the site location owner each month. These agreements cover periods ranging from
five to twenty years.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over useful lives ranging from 5 to 7 years for equipment
and vehicles and 31.5 years for leasehold improvements. Repairs and maintenance
are charged to expense when incurred and improvements which substantially
prolong the useful lives of the assets involved are capitalized and depreciated.
The cost of assets classified by major categories is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Furniture & fixtures.................................... $ 58,120.58 $ 58,120.58
Office equipment........................................ 35,998.97 35,998.97
Telephone equipment..................................... 515,563.78 466,123.78
Leasehold improvements.................................. 74,802.66 74,802.66
Vehicles................................................ 131,662.90 85,096.62
----------- -----------
Total cost.................................... $816,148.89 $720,142.61
=========== ===========
</TABLE>
NOTE C -- INCOME TAXES
The Company is an S corporation for Federal income tax purposes. As a
result, no provision for Federal income taxes is made by the Company because the
individual shareholders' report and pay Federal income tax on their allocated
percentage of the corporation's net earnings. The Company does pay Tennessee
state excise tax on its net earnings at a 6% tax rate. There are timing
differences in how items of income and expense are reported on the tax return
and in the financial statements. These differences involve trade receivables for
long distance commission income which is reported as income when earned in the
financial statements but is reported as received for tax purposes. In addition,
depreciation expense is claimed under IRS Code Section 179 and using accelerated
writeoff methods for tax purposes while the straight-line writeoff method is
used for financial reporting. State excise tax is provided for in the financial
statements as the items of income and deduction are recognized therein
regardless of when they are reported on the income tax return. As a result of
these timing differences, deferred tax liabilities of $ 6,000 and $ 3,000,
respectively, have been accrued at December 31, 1995 and December 31, 1994.
NOTE D -- OTHER AMOUNTS RECEIVABLE:
The Company is affiliated through common stock ownership and control with
other companies involved in the telecommunications industry. Loans to these
affiliates on open account totaled $19,886 at December 31, 1994. Loans to
employees at December 31, 1994 totaled $7,937.
F-74
<PAGE> 75
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- OTHER ACCRUED LIABILITIES:
Other accrued liabilities include the Company's estimate of accrued site
commissions due as of December 31, 1995 and December 31, 1994. Under the terms
of the Company's royalty agreements with its customers, site commissions are
payable after the end of the month in which the net coin and long distance
revenue is received. As of December 31, 1995 and December 31, 1994, the Company
has accrued approximately two months, respectively, of unpaid site commissions.
NOTE F -- LONG-TERM DEBT:
Long-term debt at December 31, 1995 and December 31, 1994 includes the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Note payable to First National Bank of Gatlinburg dated November
2, 1994 in the face amount of $17,000 payable in 18 monthly
installments of $1,000 including interest at prime plus 1.5%........ $ 4,377.89 $ 15,269.36
Note payable to Conquest Communications dated in December, 1993 in
the face amount of $25,000 payable in monthly installments with
interest............................................................ -- 5,117.01
Note payable to First Union Bank of Georgia dated October 11, 1993
in the face amount of $24,763 payable in 60 monthly installments of
$487 including interest at 6.75%. This note is collateralized by a
1994 Ford Explorer.................................................. -- 19,773.54
Notes payable (two) to First Union Bank of South Carolina dated
September 17, 1993 in the face amounts of $15,022 each, both payable
in 60 monthly installments of $292 including interest at 6.25%.
These notes are collateralized by two 1993 Ford cargo vans.......... 18,219.80 23,457.12
Note payable to First Tennessee Bank dated January 31, 1994 in the
face amount of $13,893 payable in 60 monthly installments of $289
including interest at 9.00%. This note is collateralized by a 1994
Toyota Corolla...................................................... 9,422.68 11,681.97
Note payable to Nationsbank of South Carolina dated December 14,
1993 in the face amount of $15,596 payable in 60 monthly
installments of $309 including interest at 7.00%. This note is
collateralized by a 1994 Ford Econoline............................. 10,187.33 12,867.48
Note payable to First National Bank of Gatlinburg dated August 28,
1995 in the face amount of $25,000 payable in 23 monthly
installments of $1,000 including interest at prime plus 2.362%. This
note is collateralized by pay phones and royalty contracts.......... 21,890.59 --
Capitalized lease purchase agreement dated January 26, 1994 in the
original sum of $66,370, due in monthly installments of $2,139
through December, 1996, decreasing to $1,123 through March, 1997,
including sales tax and finance charges at 14%...................... 21,412.70 42,110.40
Capitalized lease purchase agreement dated May 5, 1995 in the
original sum of $49,440, due in monthly installments of $1,842
through March, 1998, including sales tax and finance charges at
19%................................................................. 36,981.01 --
Note payable to Nationsbank of South Carolina dated November 4,
1995 in the face amount of $71,329 payable in 60 monthly
installments of $1,484 including interest at 8.95%. This note is
collateralized by a 1995 Mercedes................................... 70,140.18 --
----------- -----------
192,632.18 130,276.88
Less current portion................................................ (73,978.08) (48,761.05)
----------- -----------
$118,654.10 $ 81,515.83
=========== ===========
</TABLE>
F-75
<PAGE> 76
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- OPERATING LEASES
The Company leases its office space from one of the stockholders under an
oral agreement at a monthly rate of $1,000 plus utilities, taxes, repairs,
maintenance and leasehold improvements. The Company also leases three vehicles
under separate noncancelable operating lease agreements dated March 25, 1993,
January 22, 1994 and April 21, 1995. These agreements call for monthly lease
payments of $509, $1,006, and $444, respectively, including sales tax. Each
agreement allows for additional charges for excess milage upon expiration of the
lease. Future minimum annual lease payments under the vehicle leases are as
follows:
<TABLE>
<S> <C>
Year ended December 31, 1995..................................................... $22,183.00
Year ended December 31, 1996..................................................... 18,936.00
Year ended December 31, 1997..................................................... 11,371.00
Year ended December 31, 1998..................................................... 1,333.00
----------
$53,823.00
</TABLE>
NOTE H -- EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Effective March 15, 1996 the Company entered into a merger agreement with
PhoneTel Technologies, Inc. under which 100% of the Company stock was acquired
by Phonetel and the Company ceased to exist as a separate entity.
F-76
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
Board of Directors
Payphones of America, Inc.
We have audited the accompanying Consolidated balance sheets of Payphones
of America, Inc. (a Tennessee corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Payphones of
America, Inc. and subsidiary as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in Note
B, the Company has suffered recurring losses from operations and has limited
liquidity which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KERBER, ECK & BRECKELL LLP
St. Louis, Missouri
January 30, 1996 (except for Note L, as
to which the date is February 7, 1996)
F-77
<PAGE> 78
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 3,852 $ 147,910
Accounts receivable................................................. 377,325 367,973
Prepaid expenses.................................................... 25,754 14,315
---------- ----------
Total current assets......................................... 406,931 530,198
PROPERTY AND EQUIPMENT
Telephone equipment................................................. 3,891,230 3,831,941
Furniture and fixtures.............................................. 59,497 47,396
Trucks and autos.................................................... 201,555 154,956
---------- ----------
4,152,282 4,034,293
Less accumulated depreciation and amortization................. 1,422,621 820,509
---------- ----------
2,729,661 3,213,784
Uninstalled pay telephone equipment................................. 89,145 104,074
Building not used in operations, net of accumulated depreciation of
$5,375 for 1995 and $3,763 for 1994............................... 59,125 60,738
---------- ----------
2,877,931 3,378,596
OTHER ASSETS
Site location contracts, less accumulated amortization of $1,000,928
for 1995 and $406,776 for 1994.................................... 1,980,822 2,530,488
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $70,377 for 1995 and $50,889 for
1994.............................................................. 709,125 728,613
Covenants not to compete, less accumulated amortization of $545,417
for 1995 and $380,417 for 1994.................................... 279,584 444,584
Other intangibles, less accumulated amortization of $59,099 for 1995
and $43,589 for 1994.............................................. 102,558 117,767
Other............................................................... 24,332 21,510
---------- ----------
3,096,421 3,842,962
---------- ----------
$6,381,283 $7,751,756
========= =========
LIABILITIES
CURRENT LIABILITIES
Notes payable to bank............................................... $ 243,750 $ 262,750
Current maturities of long-term obligations......................... 1,330,954 1,241,818
Accounts payable.................................................... 882,723 699,385
Accrued expenses.................................................... 146,063 18,656
---------- ----------
Total current liabilities.................................... 2,603,490 2,222,609
LONG-TERM OBLIGATIONS, less current maturities...................... 4,753,853 5,355,740
DEFERRED INCOME TAXES............................................... -- 284,000
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock -- authorized but unissued, 10,000,000
shares............................................................ -- --
Common stock -- authorized, 10,000,000 shares without par value;
issued and outstanding, 2,567,324 shares in 1995 and 1,033,990
shares in 1994.................................................... 348,756 339,423
Additional contributed capital...................................... -- 132,230
Accumulated deficit................................................. (1,324,816) (582,246)
---------- ----------
(976,060) (110,593)
---------- ----------
$6,381,283 $7,751,756
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 79
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales
Coin calls........................................................ $ 3,747,247 $2,153,974
Non-coin calls.................................................... 4,418,667 3,692,117
Other............................................................. 49,221 22,053
----------- ----------
Total net Sales................................................ 8,215,135 5,868,144
Cost of sales
Telephone charges................................................. 3,599,271 2,676,604
Commissions....................................................... 1,178,156 722,746
Service, maintenance and network expense.......................... 289,036 214,636
Depreciation and amortization..................................... 1,218,095 723,516
----------- ----------
6,284,558 4,337,502
----------- ----------
Gross profit................................................... 1,930,577 1,530,642
Selling, general and administrative expenses
Salaries, wages and benefits...................................... 823,430 488,913
Depreciation and amortization..................................... 200,095 198,398
Dues and subscriptions............................................ 53,905 50,960
Outside services.................................................. 40,521 63,736
Phone maintenance................................................. 118,824 --
Professional services............................................. 171,303 85,920
Taxes
Personal property.............................................. 75,785 4,295
Sales.......................................................... 63,948 37,907
Telephone......................................................... 69,137 24,696
Rent.............................................................. 71,511 31,389
Other............................................................. 223,165 120,105
----------- ----------
1,911,624 1,106,319
----------- ----------
Earnings from operations....................................... 18,953 424,323
Other income (expense)
Interest income................................................... 415 14,741
Interest expense.................................................. (971,141) (600,624)
Gain (loss) on sale of assets..................................... (80,652) 98,904
Other income...................................................... 12,135 9,366
----------- ----------
(1,039,243) (477,613)
----------- ----------
Loss before income taxes....................................... (1,020,290) (53,290)
Income taxes
Current........................................................... (6,280) (8,856)
Deferred.......................................................... 284,000 (128,000)
----------- ----------
277,720 (136,856)
----------- ----------
NET LOSS....................................................... $ (742,570) $ (190,146)
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 80
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD INDICATED BELOW
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON CONTRIBUTED EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994
As originally reported...................... $339,423 $210,219 $ (153,727) $ 395,915
Prior period adjustment..................... -- 55,192 (238,373) (183,181)
-------- ---------- ----------- ---------
As restated................................. 339,423 265,411 (392,100) 212,734
Net loss for the year ended
December 31, 1994........................... -- -- (190,146) (190,146)
Cash dividends................................ -- (133,181) -- (133,181)
-------- ---------- ----------- ---------
Balance at December 3l, 1994.................. 339,423 132,230 (582,246) (110,593)
Net loss for the year ended
December 31, 1995........................... -- -- (742,570) (742,570)
Stock warrants exercised...................... 9,333 -- -- 9,333
Cash dividends................................ -- (132,230) -- (132,230)
-------- ---------- ----------- ---------
Balance at December 31, 1995.................. $348,756 $ -- $(1,324,816) $(976,060)
======== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-80
<PAGE> 81
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net loss......................................................... $ (742,570) $ (190,146)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization............................... 1,418,191 921,914
(Gain) loss on sale of assets............................... 80,652 (98,904)
Changes in assets and liabilities
(Increase) decrease in accounts receivable............... (9,352) 9,040
(Increase) decrease in prepaid expenses.................. (11,439) 72
Increase in other asset.................................. (2,822) --
Increase in accounts payable............................. 183,338 244,517
Increase in accrued expenses............................. 127,407 18,554
Increase (decrease) in deferred income taxes............. (284,000) 128,000
----------- -----------
Total adjustments................................... 1,501,975 1,223,193
----------- -----------
Net cash provided by operating activities........... 759,405 1,033,047
Cash flows from investing activities
Capital expenditures............................................. (203,112) (229,613)
Proceeds from sale of assets..................................... 54,297 195,714
----------- -----------
Net cash used in investing activities............... (148,815) (33,899)
Cash flows from financing activities
Proceeds from long-term obligations.............................. 507,239 123,355
Payments on notes payable to bank................................ (19,000) (11,900)
Payments on long-term obligations................................ (1,119,990) (696,191)
Stock warrants exercised......................................... 9,333 --
Dividends paid................................................... (132,230) (133,181)
----------- -----------
Net cash used in financing activities............... (754,648) (717,917)
----------- -----------
Net increase (decrease) in cash.................................... (144,058) 281,231
Cash (overdraft) at beginning of period............................ 147,910 (133,321)
----------- -----------
Cash at end of period.............................................. $ 3,852 $ 147,910
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 82
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. THE COMPANY
Payphones of America, Inc. operates, services and maintains a system of
approximately 2,800 pay telephones in the Southeastern and Midwestern United
States.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. INTANGIBLE ASSETS
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. CONCENTRATIONS OF CREDIT RISK
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of 1995 revenues
were generated by the Company's pay telephones located in the states of Missouri
(36%) and Virginia (33%). No other area has a disproportionate credit risk.
F-82
<PAGE> 83
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- GOING CONCERN
The Company has experienced recurring losses and has accumulated losses
since inception of $1,324,816. As of December 31, 1995, the Company's current
liabilities exceed its current assets by $2,196,559. These factors raise doubt
about the Company's ability to continue as a going concern. The Company's
continued existence as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its debt and lease obligations and to obtain additional financing
or refinancing as may be required. Historically, the Company has generated
sufficient cash flow to meet its obligations and to pay its debt and lease
obligations, and, although it cannot be assured that the Company will be able to
continue as a going concern in view of its present financial condition,
management believes that continued strategic business acquisitions and
improvements in planning and budgeting should enable the Company to meet its
obligations and sustain its operations.
NOTE C -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.50% at December 31, 1995). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on February 10, 1996.
F-83
<PAGE> 84
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1995
--------------------------------------
CURRENT LONG-TERM 1994
PORTION PORTION TOTAL TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes payable to stockholders................ $ 248,333 $ 184,276 $ 432,609 $ 149,000
Note payable to Mark Twain Bank.............. 1,594 26,988 28,582 29,683
Notes payable to Ford Motor Credit Company... 36,098 36,389 72,487 63,582
Notes payable to Ronald L. Coleman........... 14,069 299,868 313,937 426,517
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom...................... 105,454 185,273 290,727 397,818
Note payable to Communications
Finance Corporation........................ 87,466 320,034 407,500 482,853
Note payable to R. Greg Kintz and
Paul Wm. Schindler......................... 103,350 45,750 149,100 236,550
Capital lease obligations
Berthel, Fisher & Company Leasing, Inc..... 717,554 3,655,275 4,372,829 4,749,921
Intellicall, Inc............................. 17,036 -- 17,036 59,466
Copying Concepts Office Systems.............. -- -- -- 2,168
---------- ---------- ---------- ----------
$1,330,954 $4,753,853 $6,084,807 $6,597,558
========= ========= ========= =========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
F-84
<PAGE> 85
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS (CONTINUED)
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment..................................... $ 3,871,519
Site location contracts................................. 2,980,749
-----------
6,852,268
Less accumulated depreciation and amortization........ (2,256,701)
-----------
$ 4,595,567
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following December 31, 1995:
<TABLE>
<S> <C>
1996.................................................... $ 1,330,954
1997.................................................... 1,087,032
1998.................................................... 1,024,518
1999.................................................... 998,138
2000.................................................... 771,115
2001 and thereafter..................................... 873,050
-----------
$ 6,084,807
==========
</TABLE>
NOTE E -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
The provision for income taxes consists of the following for the year ended
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current...................................... $ (6,280) $ (8,856)
Deferred..................................... 284,000 (128,000)
--------- ---------
$ 277,720 $(136,856)
========= =========
</TABLE>
F-85
<PAGE> 86
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are attributable to the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation................................ $(472,000) $(365,000)
Accumulated amortization................................ 262,000 81,000
Tax benefit of net operating loss carryforward.......... 460,000 --
--------- ---------
250,000 (284,000)
Less valuation allowance..................................... (250,000) --
--------- ---------
Net deferred tax asset (liability).................... $ -- $(284,000)
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards for Federal income tax
purposes which are available to offset future Federal taxable income. These
carryforwards expire as follows:
<TABLE>
<S> <C>
2008..................................................... $ 9,194
2009..................................................... 332,849
2010..................................................... 836,510
----------
$1,178,553
=========
</TABLE>
NOTE F -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended December 31:
<TABLE>
<S> <C>
1996...................................................... $ 95,091
1997...................................................... 93,246
1998...................................................... 60,550
1999...................................................... 59,000
2000...................................................... 64,400
2001 and thereafter....................................... 310,500
--------
Total minimum lease payments.............................. $682,787
========
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1995
and 1994, was $71,512 and $31,389, respectively.
NOTE G -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
------- --------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
F-86
<PAGE> 87
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- STOCK WARRANTS (CONTINUED)
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE H -- STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the year
ended December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Interest....................................... $852,612 $597,956
Income taxes................................... 6,280 16,388
</TABLE>
During 1995 and 1994, the Company entered into capital lease obligations
totalling $100,000 and $4,000,000, respectively, which represent noncash
financing activities.
NOTE I -- PRIOR PERIOD ADJUSTMENT
Retained earnings at December 31, 1994, were restated following completion
of the Company's first audit to reflect the correction of the following account
balances:
<TABLE>
<S> <C>
Accounts receivable...................................... $ (14,061)
Property and equipment................................... 15,307
Other assets............................................. 20,521
Accumulated depreciation and amortization................ 21,219
Accounts payable......................................... (94,965)
Income taxes payable..................................... (20,639)
Notes payable............................................ 49,112
Deferred income taxes.................................... (156,000)
Additional contributed capital........................... (55,192)
Other.................................................... (3,675)
---------
$ 238,373
=========
</TABLE>
NOTE J -- ACQUISITION
On September 23, 1994, the Company purchased certain assets of Eastern
Telecom Corporation, operators of pay telephones in the Southeastern region of
the United States. The acquisition was accounted for using the purchase method.
The purchase price of $4,000,000 was allocated as follows:
<TABLE>
<S> <C>
Fair market value of assets acquired
Inventories............................................ $ 2,000
Equipment.............................................. 1,721,839
Site contracts......................................... 2,276,161
----------
Purchase price........................................... $4,000,000
=========
</TABLE>
In connection with the asset purchase, the Company entered into a purchase
commitment with the seller for services of $500,000. In 1995, the commitment
decreased to approximately $192,000 based on actual revenues generated by the
assets acquired. The Company's annual obligation under this agreement is $32,000
through 2001.
F-87
<PAGE> 88
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.
NOTE L -- SUBSEQUENT EVENT
On February 7, 1996, the Telecommunications Act of 1996 was signed into
law. The Act recognizes that independent public payphone providers are entitled
to fair rules to compete with the Regional Bell Operating Companies and other
local exchange companies. For instance, the Act prohibits Bell operating
companies from subsidizing payphone service directly or indirectly with revenues
generated from their exchange or access services. Bell companies are also
prohibited from discriminating in favor of their payphone services. The
legislation directs the Federal Communications Commission to develop fair rules
in implementing the payphone provision within nine months. The potential impact
of this Act on the financial position of the Company is unknown at this time.
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the short-term
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at December 31, 1995, based on
market rates and conditions.
F-88
<PAGE> 89
INDEPENDENT ACCOUNTANTS' REPORT
Payphones of America, Inc. and Subsidiary
Stockholders and Board of Directors
We have reviewed the accompanying consolidated balance sheets, income
statements and cash flow statements of Payphones of America, Inc. and Subsidiary
as of June 30, 1996 and 1995, and for the six month periods then ended. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
October 16, 1996
F-89
<PAGE> 90
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Current assets
Accounts receivable....................................... $ 372,557.99 $ 339,498.44
Prepaid expenses.......................................... 39,245.11 26,097.67
Other..................................................... 40,210.91 91,139.99
-------------- --------------
Total current assets.............................. 452,014.01 456,736.10
-------------- --------------
Operating equipment
Telecommunications equipment.............................. 3,924,343.66 3,848,670.36
Telephone equipment held for installation................. 20,684.45 20,684.45
-------------- --------------
3,945,028.11 3,869,354.81
Less accumulated depreciation and amortization............ (1,533,605.18) (991,873.18)
-------------- --------------
Net operating equipment..................................... 2,411,422.93 2,877,481.63
-------------- --------------
Leasehold improvements, equipment, furniture and fixtures
net of accumulated depreciation and amortization of
$180,991.76 and $118,347.19 respectively.................. 30,706.63 167,422.68
Intangible assets
Site contracts, net....................................... 1,688,500.68 2,234,952.07
Non compete agreements, net............................... 197,083.33 362,083.35
Other..................................................... 793,406.35 831,335.75
-------------- --------------
2,678,990.36 3,428,371.17
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
LIABILITIES
Current liabilities
Book overdraft of cash.................................... $ 170,709.08 $ 169,071.69
Notes payable to bank..................................... 243,750.00 249,750.00
Accounts payable.......................................... 73,168.23 53,245.60
Accrued expenses.......................................... 583,216.66 773,202.58
Current maturities of long term debt...................... 736,073.00 63,003.28
-------------- --------------
Total current liabilities......................... 1,806,916.97 1,308,273.15
-------------- --------------
Long-term debt, less current maturities
Notes payable and obligations under capital leases........ 4,568,293.81 5,891,563.57
Notes payable to stockholders............................. 568,090.19 262,894.81
Deferred income taxes....................................... -- 284,000.00
-------------- --------------
Total liabilities................................. 6,943,300.97 7,746,731.53
-------------- --------------
Stockholders' equity
Common stock.............................................. 348,756.03 348,756.03
Additional paid-in-capital................................ -- (46,133.09)
Accumulated deficit....................................... (1,718,923.07) (1,119,342.89)
-------------- --------------
Total stockholders' equity........................ (1,370,167.04) (816,719.95)
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
</TABLE>
F-90
<PAGE> 91
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues
Coin calls................................................... $1,516,505.67 $1,649,738.77
Non coin calls............................................... 1,539,280.30 1,937,053.41
Other........................................................ 712,438.98 13,786.67
------------- -------------
Total revenues....................................... 3,768,224.95 3,600,578.85
------------- -------------
Cost of revenues
Line access charges.......................................... 698,365.13 866,025.91
Commissions.................................................. 436,680.69 556,942.49
Service and collections...................................... 1,060,772.30 777,406.11
Depreciation and amortization................................ 596,134.05 572,783.12
------------- -------------
Total cost of revenues............................... 2,791,952.17 2,773,157.63
------------- -------------
Gross profit................................................... 976,272.78 827,421.22
Selling, general and admin. expenses........................... 985,289.98 943,668.15
------------- -------------
Operating loss................................................. (9,017.20) (116,246.93)
Other income(expense)
Interest expense............................................. (333,229.92) (479,226.62)
Gain(loss)on sale of assets.................................. (55,474.76) 6,273.67
Other income................................................. 4,110.74 4,192.64
------------- -------------
Total other income(expense).......................... (384,593.94) (468,760.31)
------------- -------------
Loss before taxes on income.................................... (393,611.14) (585,007.24)
Taxes on income................................................ -- --
------------- -------------
Net loss............................................. $ (393,611.14) $ (585,007.24)
============= =============
</TABLE>
F-91
<PAGE> 92
PAYPHONES OF AMERICA, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Increase(decrease) in cash
Operating activities
Net loss................................................... $(393,611.14) $(585,007.24)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 698,211.55 679,329.58
(Gain) loss on sale of property and equipment.............. 55,474.76 (6,273.67)
Changes in assets and liabilities:
Decrease in accounts receivable.......................... 4,767.01 28,474.56
Increase in prepaid expenses............................. (13,491.11) (11,782.67)
(Decrease)increase in accounts payable and accrued
expenses.............................................. (372,401.11) 108,407.18
------------ ------------
Total adjustments..................................... 372,561.10 798,154.98
------------ ------------
Net cash provided by operating activities............. (21,050.04) 213,147.74
Investing activities
Purchase of fixed assets...................................... (54,350.00) (40,442.55)
Proceeds from sale of assets.................................. 20,000.00 6,273.67
------------ ------------
Net cash used in investing activities................. (34,350.00) (34,168.88)
------------ ------------
Financing activities
Proceeds from notes and capital leases........................ 489,928.35 210,816.45
Principal payments on debt.................................... (609,089.39) (601,496.75)
Stock warrants exercised...................................... -- 9,333.34
Dividends paid................................................ -- (114,613.68)
------------ ------------
Net cash used in financing activities........................... (119,161.04) (495,960.64)
------------ ------------
Net increase(decrease) in cash.................................. (174,561.08) (316,981.78)
Cash beginning of period........................................ 3,852.00 147,910.09
------------ ------------
Cash overdraft at end of period................................. $(170,709.08) $(169,071.69)
============ ============
</TABLE>
F-92
<PAGE> 93
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. The Company
Payphones of America, Inc. operates, services and a system of approximately
2,800 pay telephones in the Southeastern and Midwestern United States.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. Intangible Assets
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. Concentrations of Credit Risk
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of revenues were
generated by the Company's pay telephones located in the states of Missouri and
Virginia. No other area has a disproportionate credit risk.
F-93
<PAGE> 94
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.25% at June 30, 1996). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on October 10, 1996.
NOTE C -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
PORTION PORTION TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
Notes payable to stockholders................. $ 76,100 $ 568,090 $ 644,190
Notes payable to Ford Motor Credit Company.... 14,070 36,389 50,459
Notes payable to Ronald L. Coleman............ 7,232 299,868 307,100
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom....................... 23,909 185,273 209,182
Note payable to Communications Finance
Corporation................................. 66,806 320,034 386,840
Note payable to R. Greg Kintz and Paul Wm.
Schindler................................... 47,700 45,750 93,450
Capital lease obligations Berthel, Fisher &
Company Leasing, Inc........................ 492,910 3,680,980 4,173,890
Intellicall, Inc............................ 7,346 -- 7,346
-------- ---------- ----------
$736,073 $5,136,384 $5,872,457
======== ========== ==========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
F-94
<PAGE> 95
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment...................... $3,871,519
Site location contracts.................. 2,980,749
----------
6,852,268
Less accumulated depreciation and
amortization........................ 2,934,631
----------
$3,917,637
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following June 30, 1996:
<TABLE>
<S> <C>
1997..................................... $1,208,993
1998..................................... 1,055,775
1999..................................... 1,011,328
2000..................................... 884,627
2001..................................... 822,083
2002 and thereafter...................... 436,524
----------
$5,419,330
==========
</TABLE>
NOTE D -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
There was no provision for income taxes for the periods ended June 30, 1996
and 1995.
F-95
<PAGE> 96
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
Deferred tax assets and liabilities are attributable to the following at
June 30,:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation........................ $(472,000) $(365,000)
Accumulated amortization........................ 262,000 81,000
Tax benefit of net operating loss
carryforward.................................. 460,000 284,000
--------- ---------
250,000 --
Less valuation allowance........................... (250,000) --
--------- ---------
Net deferred tax asset (liability)......... $ -- $ --
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards (based on filed tax
returns through December 31, 1995) for Federal income tax purposes which are
available to offset future Federal taxable income. These carryforwards expire as
follows:
<TABLE>
<S> <C>
2008..................................... $ 9,194
2009..................................... 332,849
2010..................................... 836,510
----------
$1,178,553
==========
</TABLE>
NOTE E -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended June 30,:
<TABLE>
<S> <C>
1997................................... $ 94,169
1998................................... 76,898
1999................................... 59,775
2000................................... 61,700
2001................................... 64,400
2002 and thereafter.................... 278,300
-----------
Total minimum lease payments........... $ 635,242
===========
</TABLE>
Rent expense for all operating leases for the periods ended June 30, 1996
and 1995, was $47,545 and $35,756, respectively.
F-96
<PAGE> 97
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE F -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
------- ---------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE G -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the shortterm
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at June 30, 1996, based on market
rates and conditions.
F-97
<PAGE> 98
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined balance sheets of Amtel
Communications, Inc., and Combined Companies (Note B) as of June 30, 1996 and
December 31, 1995, and the related combined statements of operations,
stockholder's deficit, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amtel Communications, Inc., and
combined Companies (Note B) as of June 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, on August
3, 1995, the Company filed voluntary petitions for relief under Chapter 11 of
Title II of the United States Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt 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.
Harlan & Boettger
San Diego, California
August 23, 1996
F-98
<PAGE> 99
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN POSSESSION)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31, 1995
------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash..................................................... $ 422,566 $ 616,974
Accounts receivable...................................... 527,883 791,238
Inventory................................................ 2,001,072 1,874,290
Other.................................................... 137,553 180,280
------------ -----------------
TOTAL CURRENT ASSETS..................................... 3,089,074 3,462,782
------------ -----------------
FIXED ASSETS (Note C)
Property and equipment, net.............................. 462,813 1,060,119
Deferred site costs, net................................. 9,812,154 10,359,692
------------ -----------------
TOTAL FIXED ASSETS.................................... 10,274,967 11,419,811
------------ -----------------
OTHER ASSETS............................................... 294,619 289,216
------------ -----------------
TOTAL ASSETS.......................................... $13,658,660 $15,171,809
=========== =================
POST-PETITION LIABILITIES
Accounts payable - trade................................. $ 677,425 $ 1,010,211
Accounts payable - bankruptcy............................ 1,253,555 539,942
Accrued expenses......................................... 767,661 709,518
------------ -----------------
TOTAL POST-PETITION LIABILITIES.......................... 2,698,641 2,259,671
PRE-PETITION LIABILITIES
SUBJECT TO COMPROMISE (Note D)
Accounts payable - trade................................. 6,123,480 6,123,480
Accrued sales tax........................................ 1,615,671 1,615,671
Notes payable............................................ 7,774,805 7,774,805
Lessor liabilities....................................... 65,085,000 65,085,000
------------ -----------------
TOTAL PRE-PETITION LIABILITIES........................... 80,598,956 80,598,956
------------ -----------------
STOCKHOLDER'S DEFICIT
Common stock, 1,000,000 shares authorized, $0.01 par
value, 400,000 shares authorized, no par value, 50,000
shares issued and outstanding......................... 50,000 50,000
Retained deficit......................................... (69,688,937 ) (67,736,818)
------------ -----------------
TOTAL STOCKHOLDER'S DEFICIT.............................. (69,638,937 ) (67,686,818)
------------ -----------------
TOTAL LIABILITIES & DEFICIT.............................. $13,658,660 $15,171,809
=========== =================
</TABLE>
See accompanying notes to the financial statements.
F-99
<PAGE> 100
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
REVENUE
Coin.................................................... $ 4,696,852 $ 9,689,179
LD Commissions.......................................... 1,406,593 2,848,753
Interstate.............................................. 578,681 761,181
Intralata............................................... 460,601 1,849,477
Other................................................... 62,095 1,910,550
------------- -----------------
TOTAL REVENUE........................................... 7,204,822 17,059,140
------------- -----------------
COSTS AND EXPENSES
Line charges............................................ 2,428,704 6,862,015
Location commissions.................................... 1,639,127 3,921,741
Other operating expenses................................ 321,947 2,651,734
Selling, general and administrative..................... 2,231,970 15,103,091
Depreciation and amortization........................... 777,823 1,621,029
Other................................................... -- 67,356
------------- -----------------
LOSS FROM OPERATIONS BEFORE OTHER
EXPENSES AND REORGANIZATION ITEMS....................... (194,749) (13,167,826)
------------- -----------------
OTHER
Interest income......................................... (1,606) --
Interest expense........................................ 6,077 7,429,502
Loss on asset disposal.................................. 453,898 429,967
Other expenses.......................................... 505,113 --
------------- -----------------
LOSS BEFORE REORGANIZATION ITEMS........................ (1,158,231) (21,027,295)
REORGANIZATION ITEMS (Note E)
Professional fees....................................... 721,277 539,942
Other................................................... 68,611 --
------------- -----------------
LOSS BEFORE INCOME TAXES.................................. (1,948,119) (21,567,237)
INCOME TAXES (Note F)..................................... 4,000 4,000
------------- -----------------
NET LOSS.................................................. $(1,952,119) $ (21,571,237)
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-100
<PAGE> 101
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994............................. 50,000 $50,000 $(46,165,581) $(46,115,581)
Net loss.................................... -- -- (21,571,237) (21,571,237)
------ ------- ------------ ------------
DECEMBER 31, 1995............................. 50,000 50,000 (67,736,818) (67,686,818)
Net loss.................................... -- -- (1,952,119) (1,952,119)
------ ------- ------------ ------------
JUNE 30, 1996................................. 50,000 $50,000 $(69,688,937) $(69,638,937)
====== ======= =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-101
<PAGE> 102
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(1,952,119) $ (21,571,237)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 777,823 1,621,029
Loss on disposal of property......................... 453,898 429,966
Non-cash reorganization items........................ 713,613 539,942
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................ 263,355 50,449
Inventory.......................................... (126,782) (16,077)
Deposits........................................... (5,401) (140,157)
Other assets....................................... 42,726 (175,612)
Increase (decrease) in:
Accounts payable................................... (332,786) 2,426,573
Accrued expenses................................... 58,143 2,325,189
Notes payable...................................... -- 4,556,207
------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES..................... (107,530) (9,953,728)
------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (103,518) (64,151)
Proceeds from sale of property.......................... 147,635 --
Expenditures for deferred site costs.................... (130,995) (2,866,920)
------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES..................... (86,878) (2,931,071)
------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................... -- (76,148)
Proceeds from lessor liabilities........................ -- 13,209,000
------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. -- 13,132,852
NET INCREASE (DECREASE) IN CASH........................... (194,408) 248,053
CASH, BEGINNING OF PERIOD................................. 616,974 368,921
------------- -----------------
CASH, END OF PERIOD....................................... $ 422,566 $ 616,974
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-102
<PAGE> 103
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-All. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates continuity of operations
and the realization of assets and the satisfaction of liabilities in the normal
course of business. The Chapter 11 filings, the Company's leveraged financial
structure, and recurring net losses resulting in a deficit in stockholder's
equity, raise substantial doubt about its ability to continue as a going
concern. A plan of reorganization may materially change the amounts reported in
the consolidated financial statements (which do not give effect to adjustments
to the carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of these actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in these combined financial statements.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined financial statements include the accounts of Amtel
Communications, Inc., Amtel Communications Payphones, Inc., Amtel Communications
Services, Inc., Amtel Communications Correctional Facilities, Inc. and ACI-HDT
Supply Company. The five entities are all owned 100% by the same individual.
Collectively, the five entities will be referred to as "the Company". Material
intercompany transactions and balances have been eliminated.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
and money market funds to be cash equivalents.
F-103
<PAGE> 104
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORY
Inventory consists primarily of pay telephones, pedestals, and enclosures
to be installed in the Company's business locations. Inventory is stated at the
lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over estimated useful lives of 3-5 years.
DEFERRED SITE COSTS
Deferred site costs consist of pay telephones and related components and
installation costs necessary to make the pay phone ready for operation. Costs
are being amortized on the straight-line method over estimated useful lives of 8
years.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
INCOME TAXES
The Company provides for federal and state income taxes currently payable
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes and income and expenses for
tax purposes.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. FIXED ASSETS:
Included in fixed assets are property and equipment (furniture, fixtures,
and computers) and deferred site costs (pay phones, housing and installation
costs) both of which are carried at cost.
Property and equipment and deferred site costs are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Property and equipment............... $ 989,108 $ 1,898,564
Accumulated depreciation............. (526,295) (838,446)
----------- -----------
Net........................... $ 462,813 $ 1,060,118
=========== ===========
Deferred site costs.................. $13,284,000 $13,153,005
Accumulated amortization............. (3,471,849) (2,793,313)
----------- -----------
Net........................... $ 9,812,151 $10,359,692
=========== ===========
</TABLE>
F-104
<PAGE> 105
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
D. PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS:
Pre-petition liabilities consist of secured and unsecured debt, all of
which are subject to compromise under the proposed plan of reorganization.
Certain inventory was returned to the parties claiming a secured interest in the
asset at or around the petition filing date. The claimed secured claims are
classified as subject to compromise as the value of the collateral is less than
the corresponding obligation.
Pre-petition liabilities at June 30, 1996 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accounts payable................................. $ 6,123,480 $ 6,123,480
Accrued state sales tax.......................... 1,615,671 1,615,671
Secured notes payable............................ 7,774,805 7,774,805
Lessor liabilities............................... 65,085,000 65,085,000
----------- -----------
$80,598,956 $80,598,956
========== ==========
</TABLE>
A plan of reorganization may materially change the amount and terms of
these pre-petition liabilities.
Lessor liability consists of funds borrowed from independent third parties,
under which the Company agreed to sell, lease-back, install and maintain, a pay
telephone for an initial investment of $3,000 -- $3,600 per pay telephone. The
Company agreed to pay $51 per month per phone, for a five year period and then
return the initial investment to the investors. Investors had the right to have
their investment returned at any time within the five year period for a nominal
surrender fee. These transactions have been accounted for as financing
transactions and payments made by the Company have been recorded as interest
expense in the statement of operations.
Payments to investors for the six months ended June 30, 1996 and the year
ended December 31, 1995 were approximately $0 and $6,762,000, respectively.
As of the petition date, in accordance with current accounting
pronouncements, the Company discontinued accruing interest on its pre-petition
debt obligations. If such interest had continued to be accrued, interest expense
for the first six months of 1996 and the last five months of 1995 would have
been $457,628 and $379,351, respectively. Interest expense associated with the
lessor liability is not reflected in these accruals as the obligations are not
represented by formal notes.
In conjunction with the Chapter 11 case, there are differences between
claims filed by potential creditors and amounts recorded by the Company. These
differences will be resolved by negotiated agreement between the Company and the
claimant or by the Court. Additional claims may arise in conjunction with the
termination of contractual obligations related to executory contracts and
leases. As a result, recorded amounts may be adjusted but the Company believes
that any such adjustments will not be material.
E. REORGANIZATION ITEMS:
Reorganization items represent expenses resulting from the reorganization
and restructuring of the business. Since these expenses do not relate to the
Company's normal operations they are reported separately on the statement of
operations.
F. INCOME TAXES:
As discussed in Note B, the Company adopted SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires the use of the balance sheet method of
accounting for income taxes. Under this method, a deferred
F-105
<PAGE> 106
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
F. INCOME TAXES (CONTINUED):
tax asset or liability represents the tax effect of temporary differences
between financial statement and tax bases of assets and liabilities and is
measured using the latest enacted tax rates.
The provision for income taxes for the six months ended June 30, 1996 and
the year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current provision.................... $4,000 $4,000
====== ======
</TABLE>
The Company realized substantial net operating losses for the six months
ended June 30, 1996 and the year ended December 31, 1995 as well as in prior
periods. Calculation of the temporary differences between financial statement
and tax bases of assets and liabilities is complicated by the fact the Company
has not filed tax returns since 1993. A valuation reserve has been established
equal to the potential tax benefit that could result from the use of the net
operating losses for these periods since there is reasonable doubt the Company
can generate income to utilize these losses.
G. COMMITMENTS:
The Company leases building space for its six branches, including warehouse
facilities in Seattle, Washington; Denver, Colorado; Portland, Oregon; Hayward,
California; Los Angeles, California; and its corporate headquarters in San
Diego, California. The leases have expiration dates ranging from September, 1996
to October, 1998. The agreements call for a cumulative annual base rent of
$246,336.
Net future minimum rental payments required under this lease as of June 30,
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-----------
<S> <C>
1997................................. $209,461
1998................................. 113,040
1999................................. 33,600
2000................................. --
2001................................. --
--------
$356,101
========
</TABLE>
Total rent expense charged to operations for the six months ended June 30,
1996 and the year ended December 31, 1995 was $204,227 and $544,193,
respectively.
H. PROPOSED PLAN OF REORGANIZATION:
During the six months ended June 30, 1996, the Company evaluated its
long-term market strategies with the goal of reducing expenses and improving
overall operating results. As a result, the Company entered into an asset
purchase agreement with PhoneTel Technologies, Inc. (an Ohio Corporation)
("PhoneTel") dated June 26, 1996 wherein the Company will sell substantially all
of its pay phone operating assets for cash and stock of PhoneTel totaling
$13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel stock). In July, 1996
PhoneTel made a non refundable deposit of $1,300,000 to open escrow for the
purchase of these assets.
F-106
<PAGE> 107
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined statement of revenues and direct
operating expenses of Amtel Communications, Inc., and combined Companies (Note
B) for the three months ended December 31, 1994. This combined statement of
revenues and direct operating expenses is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and direct operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the revenues and direct
operating expenses for the three months ended December 31, 1994, pursuant to the
Securities and Exchange Commission's communication dated July 25, 1996 described
in Note C, and is not intended to be a complete presentation of the Company's
operations.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenue and direct operating expenses of Amtel Communications, Inc., and
combined Companies (Note B) for the three months ended December 31, 1994 in
conformity with generally accepted accounting principles.
The accompanying combined statement of revenues and direct operating
expenses has been prepared assuming that the Company will continue as a going
concern. As described in Note A, on August 3, 1995, the Company filed voluntary
petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The combined statement of revenues and
direct operating expenses does not include any adjustment that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-107
<PAGE> 108
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
REVENUE
Coin.......................................................... $ 2,603,577
LD Commissions................................................ 593,370
Interstate.................................................... 68,155
Intralata..................................................... 593,842
Other......................................................... 1,509,861
-----------
TOTAL REVENUE................................................. 5,368,805
-----------
COSTS AND EXPENSES
Line charges.................................................. 1,342,855
Location commissions.......................................... 890,903
Other operating expenses...................................... 1,481,073
Selling, general and administrative........................... 4,115,854
Depreciation and amortization................................. 480,702
-----------
LOSS FROM OPERATIONS BEFORE OTHER INCOME AND EXPENSES......... (2,942,582)
-----------
OTHER
Interest income............................................... (105)
Interest expense.............................................. 2,295,382
-----------
NET LOSS...................................................... $(5,237,859)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-108
<PAGE> 109
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-A11. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined statement of revenues and direct operating expenses has been
prepared assuming the Company will continue as a going concern, which
contemplates continuity of operations and the realization of assets and the
satisfaction of liabilities in the normal course of business. The Chapter 11
filings, the Company's leveraged financial structure, and recurring net losses
resulting in a deficit in stockholder's equity, raise substantial doubt about
its ability to continue as a going concern. A plan of reorganization may
materially change the amounts reported in the combined statement of revenues and
direct operating expenses (which do not give effect to adjustments to the
carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of this actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in this combined statement of revenues and direct operating expenses.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined statement of revenues and direct operating expenses includes
the accounts of Amtel Communications, Inc., Amtel Communications Payphones,
Inc., Amtel Communications Services, Inc., Amtel Communications Correctional
Facilities, Inc. and ACI-HDT Supply Company. The five entities are all owned
100% by the same individual. Collectively, the five entities will be referred to
as "the Company". Material intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
F-109
<PAGE> 110
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
ESTIMATES
The preparation of a combined statement of revenues and direct operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the combined statement of revenues and direct operating expenses and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. INCOMPLETE PRESENTATION:
By letter dated July 25, 1996 to PhoneTel Technologies, Inc., the
Securities and Exchange Commission (SEC) granted a waiver of Item 310(c) of
Regulation S-B which requires submission of two years of audited statements of
operations. Instead, the SEC has accepted audited statements of operations for a
twenty-one month period. This combined statement of revenues and direct
operating expenses together with the combined statement of operations from the
audited financial statements for the six months ended June 30, 1996 and for the
year ended December 31, 1996 comprise the twenty-one month period.
D. SUBSEQUENT EVENT -- PROPOSED PLAN OF REORGANIZATION:
In 1996, the Company evaluated its long-term market strategies with the
goal of reducing expenses and improving overall operating results. As a result,
the Company entered into an asset purchase agreement with PhoneTel Technologies,
Inc. (an Ohio Corporation) ("PhoneTel") dated June 26, 1996 wherein the Company
will sell substantially all of its pay phone operating assets for cash and stock
of PhoneTel totaling $13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel
stock). In July, 1996 PhoneTel made a non refundable deposit of $1,300,000 to
open escrow for the purchase of these assets.
F-110
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cherokee Communications, Inc.:
We have audited the accompanying balance sheets of Cherokee Communications,
Inc. (the Company) as of September 30, 1995 and 1994, and the related statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
November 17, 1995
F-111
<PAGE> 112
CHEROKEE COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 668,778 $ 780,962
Short-term cash investments..................................... 150,000
Trade accounts receivable, less allowance for doubtful accounts
of $264,803 and $255,965, respectively (Notes 6 and 10)...... 4,453,192 4,251,894
Inventories (Note 6)............................................ 137,036 78,792
Prepaid expenses and other current assets (Note 10)............. 303,273 213,863
Deferred income tax benefits (Note 9)........................... 108,717 112,718
----------- -----------
Total current assets.................................... 5,670,996 5,588,229
Property and equipment -- net (Notes 2, 3 and 6).................. 12,935,453 11,334,863
Site licenses -- net (Note 1)..................................... 1,941,467 2,221,780
Investment in and advances to affiliates (Note 5)................. 164,549 30,188
Deferred income tax benefits (Note 9)............................. 93,704
Other assets -- net (Note 4)...................................... 681,754 890,856
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing (Note 6)................... $ 659,604 $ 1,705,174
Current portion of other notes payable (Note 6)................. 1,491,767 1,395,338
Current portion of capital lease obligations (Note 7)........... 1,094,381 1,616,814
Accounts payable................................................ 310,358 267,755
Accrued telecommunication and other expenses.................... 2,971,935 2,575,808
Income taxes payable............................................ 256,140 368,143
----------- -----------
Total current liabilities............................... 6,784,185 7,929,032
Long-term liabilities:
Notes payable, less current portion (Note 6).................... 6,605,835 5,295,294
Capital lease obligations, less current portion (Note 7)........ 780,593 2,139,216
Deferred income tax liability (Note 9).......................... 342,359
----------- -----------
Total long-term liabilities............................. 7,728,787 7,434,510
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 8):
Convertible redeemable preferred stock.......................... 2,400,000 2,400,000
Common stock warrants, with mandatory redemption requirements... 1,087,000 1,087,000
Common stock, no par value; 15,000,000 shares authorized,
5,320,467 and 5,312,467 shares issued and outstanding,
respectively................................................. 351,903 343,183
Additional paid-in capital...................................... 10,630 10,630
Retained earnings............................................... 3,031,714 955,265
----------- -----------
Total shareholders' equity.............................. 6,881,247 4,796,078
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
</TABLE>
See notes to financial statements.
F-112
<PAGE> 113
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Telecommunications revenues:
Pay phone coin calls................................ $14,036,665 $10,797,869 $ 7,258,037
Automated operator, routed calls.................... 17,049,394 16,425,708 13,543,072
Other (Note 5)...................................... 505,581 641,899 825,694
----------- ----------- -----------
Total....................................... 31,591,640 27,865,476 21,626,803
Operating costs and expenses:
Telephone charges................................... 7,851,842 7,257,272 4,956,950
Commissions......................................... 4,909,445 4,341,260 3,258,932
Telecommunication fees and validation............... 1,821,930 1,834,389 1,843,614
Depreciation and amortization (Note 2).............. 4,298,090 4,284,734 3,218,450
Field operations personnel.......................... 2,016,935 1,610,952 1,191,829
Chargebacks and doubtful accounts................... 1,104,896 784,636 1,046,353
Selling, general and administrative (Note 10)....... 5,520,405 4,634,890 3,714,601
----------- ----------- -----------
Total....................................... 27,523,543 24,748,133 19,230,729
----------- ----------- -----------
Operating income...................................... 4,068,097 3,117,343 2,396,074
Other income (expense):
Interest expense.................................... (1,450,249) (1,682,465) (1,345,065)
Amortization of debt discount....................... (181,167) (181,167) (75,486)
Interest income..................................... 57,278 20,329 20,731
Equity in earnings (losses) of affiliates (Note
5)............................................... (34,608) (226,625) (6,948)
Gain on equipment sales and other (Note 3).......... 1,160,238 67,917 84,325
----------- ----------- -----------
Total....................................... (448,508) (2,002,011) (1,322,443)
----------- ----------- -----------
Income before income taxes............................ 3,619,589 1,115,332 1,073,631
Provision for income taxes (Note 9)................... 1,399,140 512,402 418,508
----------- ----------- -----------
Net income.................................. $ 2,220,449 $ 602,930 $ 655,123
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-113
<PAGE> 114
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON COMMON STOCK ADDITIONAL RETAINED
-------------------- STOCK -------------------- PAID-IN EARNINGS
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL (DEFICIT)
------- ---------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1992....... -- $ -- $ -- 5,000,000 $ 5,000 $ 10,630 $ (50,788)
Issuance of preferred
stock...................... 240,000 2,400,000
Cash dividends on preferred
stock...................... (108,000)
Issuance of common stock..... 312,467 338,183
Issuance of common stock
warrant (Note 8)........... 1,087,000
Net income................... 655,123
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1993.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 496,335
Cash dividends on preferred
stock...................... (144,000)
Net income................... 602,930
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1994.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 955,265
Cash dividends on preferred
stock...................... (144,000)
Proceeds from exercise of
common stock options....... 8,000 8,720
Net income................... 2,220,449
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1995.... 240,000 $2,400,000 $1,087,000 5,320,467 $351,903 $ 10,630 $3,031,714
======= ========== ========== ========= ======== ======= ==========
</TABLE>
See notes to financial statements.
F-114
<PAGE> 115
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 2,220,449 $ 602,930 $ 655,123
Noncash items in net income:
Depreciation and amortization............................. 4,298,090 4,284,734 3,218,450
Amortization of debt discount............................. 181,167 181,167 75,486
Equity in earnings (losses) of affiliates................. 34,608 226,625 6,948
Deferred income taxes..................................... 440,064 88,456 (35,731)
Gain on sale of property and equipment.................... (1,136,894) (51,854) (59,491)
Cash from (used for) changes in operating working capital:
Trade accounts receivable................................. (201,298) (946,867) (1,933,366)
Inventories............................................... (58,244) 58,875 (137,667)
Prepaid expenses and other current assets................. (89,410) (56,234) (70,710)
Accounts payable and accrued liabilities.................. 438,730 619,244 424,157
Income taxes payable...................................... (112,003) 335,672 (91,743)
----------- ----------- -----------
Net cash from operating activities...................... 6,015,259 5,342,748 2,051,456
----------- ----------- -----------
Investing Activities:
Additions to property and equipment......................... (5,794,108) (4,059,111) (5,224,466)
Increase in site licenses................................... (440,220) (433,746) (753,966)
Increase in other assets.................................... (79,353) (644,428)
Proceeds from sale of property and equipment................ 2,041,310 96,905 108,700
Investments in and advances to affiliates................... (218,767) (40,591) (333,329)
Distributions from affiliates............................... 49,798 60,427 55,765
Sale (purchase) of short-term cash investments.............. 150,000 (150,000)
----------- ----------- -----------
Net cash used for investing activities.................. (4,291,340) (4,526,116) (6,791,724)
----------- ----------- -----------
Financing Activities:
Issuance of (payments on) note payable -- receivable
financing................................................. (1,045,570) 161,812 1,543,362
Issuance of other notes payable............................. 4,048,753 2,122,523 9,333,355
Payments on notes payable and capital lease obligations..... (4,704,006) (2,948,227) (7,950,674)
Issuance of common stock.................................... 8,720
Issuance of preferred stock................................. 2,400,000
Cash dividends on preferred stock........................... (144,000) (144,000) (108,000)
----------- ----------- -----------
Net cash from (used for) financing activities........... (1,836,103) (807,892) 5,218,043
Increase (decrease) in cash and cash equivalents.............. (112,184) 8,740 477,775
Cash and cash equivalents:
Beginning of year........................................... 780,962 772,222 294,447
----------- ----------- -----------
End of year................................................. $ 668,778 $ 780,962 $ 772,222
=========== =========== ===========
Supplemental information:
Interest paid............................................... $ 1,462,519 $ 1,635,052 $ 1,230,562
=========== =========== ===========
Income taxes paid........................................... $ 1,091,368 $ 23,000 $ 568,861
=========== =========== ===========
Noncash investing and financing activities:
Equipment and other assets acquired under capital lease
obligations and debt.................................... $ -- $ 367,500 $ 2,718,189
=========== =========== ===========
Common stock issued for financing costs................... $ -- $ -- $ 338,183
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-115
<PAGE> 116
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Cherokee Communications, Inc. (the Company) owns, operates and
maintains 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 telephone systems, the Company also derives
revenue from routing calls to operator service companies and through its own
automated operator system (AOS) installed in its telephones. A summary of owned
and managed phones at September 30 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Owned............................................... 9,333 8,182 6,320
Managed............................................. 276 233 235
----- ----- -----
Total..................................... 9,609 8,415 6,555
===== ===== =====
</TABLE>
REVENUES from coin and noncoin calls are recognized at the time the calls
are made and are dependent on service provided by the long-distance carriers.
Accounts receivable primarily includes revenues generated from calls completed
through the Company's AOS and from commissions to be received from operator
service companies. An allowance for doubtful accounts is provided at the time of
revenue recognition for the estimated settlement ("true-up") for actual
chargebacks made by the telephone companies, based on historical experience. The
"true-up" for actual chargebacks is typically made within six months. Also, the
related telecommunication expenses are accrued for the costs for validating,
transmitting, and billing and collecting calls completed through the AOS, as
well as for commissions to be paid to third-party property owners.
CASH EQUIVALENTS represent highly liquid investments with initial or
remaining maturities at the date of purchase of three months or less. Short-term
cash investments consist of certificates of deposit with maturities greater than
three months.
INVENTORIES, which primarily consist of telephone booth enclosures and
related parts, are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and
amortization. Cost of telecommunications equipment includes the initial line
hook-up charges, sales commissions, labor and other charges incurred for
installing pay phones. Depreciation and amortization are provided primarily
using the double declining balance method, later switching to the straight-line
method over the following estimated useful lives of the related assets:
buildings, 20 years; leasehold improvement, 25 years; telecommunications
equipment, seven years and ten years; telecommunications software licenses, four
years; vehicles, computer equipment and software, five years; and furniture and
office equipment, five to seven years. Beginning October 1, 1993, the Company
began depreciating newly acquired telecommunications equipment over a ten-year
period using the straight-line method (see Note 2). Refurbishment, repairs and
maintenance costs are expensed as incurred.
SITE LICENSES are stated at the cost of site licenses acquired in asset
acquisitions, less accumulated amortization of $2,690,403 and $2,224,277 at
September 30, 1995 and 1994, respectively. Amortization is provided using the
straight-line method over the terms of the related site license agreements,
generally two to seven years.
OTHER ASSETS are amortized using the straight-line method over the
following periods: deferred financing costs over the life of the respective
financing agreement; and noncompete agreements and patents, five years.
F-116
<PAGE> 117
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DEFERRED FEDERAL INCOME TAXES are provided under the asset and liability
method for temporary differences in the recognition of income and expense for
tax and financial reporting purposes and for the expected benefit of tax credit
carryforwards.
2. CHANGE IN DEPRECIABLE LIFE
Effective October 1, 1993, the Company increased the estimated useful life
of its telecommunications equipment acquired after that date from seven to ten
years. This was to more appropriately reflect the anticipated useful service
period for newly acquired equipment. The effect of this change in accounting
method reduced depreciation expense by approximately $293,000 and increased net
income during the 1994 period by approximately $193,000.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Telecommunications equipment:
Owned................................................... $12,577,986 $ 9,312,536
Under capital leases.................................... 5,725,587 6,328,695
Telecommunications software licenses...................... 2,214,455 1,880,832
Vehicles.................................................. 2,184,227 1,630,211
Furniture and office equipment............................ 686,820 491,401
Machinery................................................. 30,005 30,005
Land and buildings........................................ 75,747 73,787
----------- -----------
Total........................................... 23,494,827 19,747,467
Less accumulated depreciation and amortization............ 10,559,374 8,412,604
----------- -----------
Property and equipment -- net............................. $12,935,453 $11,334,863
=========== ===========
</TABLE>
In October 1994, the Company sold approximately 760 telephones, certain
other assets and related site agreements for approximately $1.7 million, which
resulted in a gain on the sale of assets of approximately $1 million.
4. OTHER ASSETS
Other assets at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred financing costs.................................... $1,113,451 $1,034,098
Patents..................................................... 46,009 46,009
Noncompete agreements....................................... 252,500 252,500
---------- ----------
Total............................................. 1,411,960 1,332,607
Less accumulated amortization............................... 730,206 441,751
---------- ----------
Other assets -- net......................................... $ 681,754 $ 890,856
========== ==========
</TABLE>
In connection with the subordinated debt financing in May 1993, the Company
paid certain investment banking fees of $365,992 in cash and $338,183 in common
stock of 312,467 shares (at $1.08 per share). These amounts were accounted for
as deferred financing costs.
F-117
<PAGE> 118
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has a 50% investment in a partnership, Cherokee Public Phones
(CPP), which owns pay phones. The Company provides certain management and
recordkeeping services to CPP.
During 1993, the Company invested $80,000 for a 49% investment in a
corporate joint venture in Mexico, Corporaciones Interamericana De Desarrollo
Comunicaciones, S.A. de C.V. (CID), which owns and operates pay phones primarily
in Monterrey, Mexico. During the year ended September 30, 1994, the Company made
additional cash advances of $69,839. Total advances at September 30, 1994, of
$323,168 were converted to the investment in CID. In July 1994, an outside
investor invested $250,000 in CID, which reduced the Company's ownership
interest in CID to 33% as of September 30, 1994.
In March 1995, the Company invested $25,000 to acquire an additional 17%
interest in CID, increasing its ownership percentage to 50% as of September 30,
1995. Additional cash advances of $193,767 made to CID during the year are
included in the investment.
The Company has the following balances with these affiliates at September
30:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
CID -- Investment, at equity................................... $179,020 $ 44,659
CPP -- Equity interest in (net advances from) the
partnership.................................................. (14,471) (14,471)
-------- -------
Total................................................ $164,549 $ 30,188
======== =======
</TABLE>
Equity in earnings (losses) of affiliates consist of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
CID............................................... $(84,406) $(287,052) $(62,713)
CPP............................................... 49,798 60,427 55,765
--------- ---------- ---------
Total................................... $(34,608) $(226,625) $ (6,948)
========= ========== =========
</TABLE>
Transactions in the Company's financial statements arising from the above
arrangement with CPP are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Other revenue -- management fees.................. $ 47,637 $ 50,525 $ 39,559
Distributions from affiliates..................... 49,798 60,427 55,765
</TABLE>
6. NOTES PAYABLE
Notes payable to Zero Plus Dialing Inc. (ZPDI) of $659,604 and $1,705,174
at September 30, 1995 and 1994, respectively, are due on demand and bear
interest at prime plus 3% (11.75% at September 30, 1995). These notes represent
advances on trade accounts receivable being collected by ZPDI on behalf of the
Company, under an agreement which expires July 1, 1996, and are collateralized
by accounts receivable of $3,651,571 at September 30, 1995.
F-118
<PAGE> 119
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Long-term notes payable at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Equipment notes:
Notes payable, Comerica Bank:
Revolving capital expenditure facility.................... $906,200... $ --
Revolving acquisition facility............................ 1,636,582
Note payable, Paycom, Inc. -- due in monthly installments
through July 1997 of $39,015, including interest at 15.0%,
collateralized by equipment, paid in 1995................. 1,038,157
Note payable, G.E. Capital -- due in monthly installments
through July 1995 of $58,141, including interest at 12.0%,
collateralized by equipment............................... 550,673
Notes payable, Tri Con Capital Corp. due in monthly
installments through May 1995, collateralized by
equipment................................................. 13,363
Other equipment notes payable............................... 131,327
---------- ----------
Total equipment notes............................. 2,674,109 1,602,193
Vehicle notes:
Notes payable, FMCC -- due in monthly installments of
$18,104, including interest ranging from 2.9% to 16.75%,
maturing through November 1998, collateralized by
automobiles............................................... $ 902,726 $ 743,407
Notes payable, GMAC -- due in monthly installments of
$1,210, including interest ranging from 7.0% to 9.0%,
maturing through October 1997, collateralized by
automobiles............................................... 22,630 32,070
Note payable, Lone Oak Bank -- due in monthly installments
through July 1996 of $475, including interest at 10.0%,
collateralized by an automobile........................... 9,521
---------- ----------
Total vehicle notes......................................... 925,356 784,998
Subordinated and other notes:
Subordinated note payable, Banc One Capital Partners
Corporation -- bearing interest at 12% payable quarterly
beginning July 1993, with principal due at maturity in May
1999, net of $649,181 and $830,347, respectively, of
unamortized debt discount assigned to common stock warrant
(see Note 8). Borrowings under this $5 million financing
commitment are unsecured and subject to certain financial
covenants and ratios...................................... 4,350,819 4,169,653
Notes payable insurance companies -- due in monthly
installments through June 1996, including interest,
unsecured................................................. 147,318... 133,788
---------- ----------
Total subordinated and other notes payable.................. 4,498,137 4,303,441
---------- ----------
Total............................................. 8,097,602 6,690,632
Less current portion........................................ 1,491,767 1,395,338
---------- ----------
Long-term notes payable, less current portion............... $6,605,835 $5,295,294
========== ==========
</TABLE>
Notes payable to Comerica Bank consist of revolving credit loans under
which the Company may borrow up to $5 million under each credit facility ($10
million under the acquisition facility effective November 1, 1995 -- see Note
12), or the collateral base amount, which is equal to $1,200 per telephone. The
notes are collateralized by substantially all assets, subject to the preferences
of other notes payable, and the personal guaranty of the Company's majority
shareholder for $1 million. Outstanding principal on the capital expenditure
facility is payable in 48 equal monthly payments of $19,700 beginning August 1,
1995. Borrowings under the acquisition facility are payable in 36 and 48 equal
monthly payments beginning the month after
F-119
<PAGE> 120
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
advances are made. Interest is payable monthly at the prime rate plus 1% to 3%.
The interest rate margin is adjustable monthly based on a certain financial
ratio under the terms of the agreement. Interest rates on these notes were 9.75%
at September 30, 1995. Borrowings under the acquisition facility may occur
through January 24, 1997.
Maturities of long-term notes payable at September 30, 1995 (before
reduction for the $649,181 unamortized debt discount), are as follows:
<TABLE>
<S> <C>
1996............................................................. $1,491,767
1997............................................................. 1,171,235
1998............................................................. 760,757
1999............................................................. 5,323,024
----------
Total.................................................. $8,746,783
==========
</TABLE>
7. LEASE COMMITMENTS
The Company is leasing telecommunications equipment under capital leases,
and all of its operating facilities through operating leases. The Company leases
its primary office facility under an operating lease with a related party, as
discussed in Note 10. Rental expense for all operating leases was $174,808,
$116,009 and $111,890 for the years ended September 30, 1995, 1994 and 1993,
respectively. Future minimum rental payments required under these noncancelable
leases at September 30, 1995, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ---------
<S> <C> <C>
Year ending September 30:
1996............................................... $1,305,115 $ 135,361
1997............................................... 841,827 64,172
1998............................................... 0 35,696
1999............................................... 0 4,180
---------- --------
2,146,942 $ 239,409
========
Amount representing interest......................... 271,968
----------
Present value of minimum lease payments.............. 1,874,974
Less current portion................................. 1,094,381
----------
Capital lease obligations, less current portion...... $ 780,593
==========
</TABLE>
8. CAPITAL STOCK
DIVIDEND RESTRICTIONS -- Certain note payable agreements and preferred
stock instruments restrict the Company's ability to pay cash dividends on its
common stock.
CONVERTIBLE REDEEMABLE PREFERRED STOCK -- The Company has authorized and
issued 240,000 shares of nonvoting, cumulative convertible redeemable preferred
stock ($1.00 par value) for $2,400,000. Each share of preferred stock is
convertible into approximately 9.24 shares of common stock, subject to
adjustments in certain events, prior to December 31, 2000. The preferred stock
will be automatically converted in the event of an initial public offering.
Holders of the preferred stock are entitled to receive cumulative cash
dividends payable quarterly, at an annual rate of $.60 per share commencing
March 31, 1993, through January 1, 2003, and at an annual rate of $1.10 per
share commencing April 1, 2003. In liquidation, the preferred stock is entitled
to $10 per share.
F-120
<PAGE> 121
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Beginning on December 30, 2000, or at any time thereafter, the Company may,
at its option, redeem any number of outstanding shares of preferred stock at $10
per share, plus all accrued and unpaid dividends. At any time after December 31,
2002, and prior to December 31, 2010, holders of the preferred stock have the
option to sell, and the Company has the obligation to purchase, any number of
outstanding shares at the then-determined fair market value.
COMMON STOCK WARRANTS -- In connection with the subordinated debt financing
in May 1993, the Company issued warrants exercisable for 1,562,338 shares of
common stock at $1.08206 per share through May 1999. Upon certain occurrences or
after May 1998, the warrant holder may require the Company to redeem the
warrants at a specified price, which generally is a multiple of defined cash
flow. A fair value of $1,087,000 was assigned to the warrants when issued and is
accounted for as debt issue discount (see Note 6).
STOCK OPTIONS -- The stock option plan provides for granting incentive
stock options to key employees. Incentive stock options must have an exercise
price of at least the fair market value on the date of grant. Options may be
exercised in whole or in installments over ten years after the grant. All
options would become exercisable upon a public offering. The total aggregate
number of the Company's common stock that may be granted under this plan cannot
exceed 12.7% of the common stock, determined on a fully diluted basis, not to
exceed 1,471,000 shares. The Company has granted the following options which
vest over three years:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Granted:
December 1992............................................. 376,344 $ 1.09
March 1994................................................ 108,333 $ 1.09
Forfeited:
February 1994............................................. (26,882) $ 1.09
Exercised:
December 1994............................................. (8,000) $ 1.09
-------
Total options outstanding at September 30, 1995............. 449,795
=======
Options exercisable at September 30, 1995................... 261,087 $ 1.09
=======
</TABLE>
A summary of the Company's common shares reserved for future conversions or
issuances is as follows:
<TABLE>
<S> <C>
Convertible preferred stock............................................... 2,218,000
Common stock warrants..................................................... 1,562,338
Common stock options granted.............................................. 449,795
---------
Total shares contingently issuable........................................ 4,230,133
Common stock options available for future grants.......................... 986,323
---------
Total common shares reserved.................................... 5,216,456
=========
</TABLE>
F-121
<PAGE> 122
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
Deferred income taxes under SFAS No. 109 represent the net tax effects of
(a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
and (b) tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred tax benefits (liability) as of September
30, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts, not currently deductible.... $ 90,033 $ 86,868
Accrued expenses, not currently deductible................... 18,684 17,108
All other.................................................... 8,742
--------- ---------
Total current asset.......................................... 108,717 112,718
Accelerated depreciation and amortization for tax purposes... (348,391) (253,457)
Alternative minimum tax (AMT) credit carryforwards........... 6,032 340,135
Other........................................................ 7,026
--------- ---------
Total noncurrent asset (liability)........................... (342,359) 93,704
--------- ---------
Net deferred tax asset (liability)................. $(233,642) $ 206,422
========= =========
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Current........................................... $ 959,076 $423,946 $454,239
Deferred.......................................... 440,064 88,456 (35,731)
---------- -------- --------
$1,399,140 $512,402 $418,508
========== ======== ========
</TABLE>
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Income taxes computed at federal statutory rate... $1,230,661 $379,213 $365,034
State income taxes................................ 103,210 34,000 33,911
Expenses not deductible for tax purposes.......... 13,585 5,578 5,920
Nondeductible loss of foreign affiliate........... 28,590 67,642
Other............................................. 23,094 25,969 13,643
---------- -------- --------
Total................................... $1,399,140 $512,402 $418,508
========== ======== ========
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company leases its primary office facilities from a shareholder on a
monthly basis. The Company also conducts certain other transactions with this
shareholder and affiliated corporations which are 100%
F-122
<PAGE> 123
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
owned by the shareholder. Transactions and balances in the Company's financial
statements arising from the above arrangements are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
During the period:
Rent expense........................................ $49,200 $43,200 $43,200
Airplane charter expense............................ 96,470
Management and consulting fees expense.............. 3,750
Other operating expenses............................ 32,483 37,717
Note receivable from an employee at September 30, due
on demand (included in other current assets)........ 2,193 4,944
Accounts receivable from employees.................... 12,428 18,039 23,558
</TABLE>
Trade accounts receivable include $385,146 at September 30, 1995, due from
an operator service company, which is a co-owner in the Mexican joint venture
(Note 5) and is a significant lender to the Company's majority shareholder, who
has pledged approximately 20% of his common stock as collateral on the related
debt.
11. CONTINGENCIES
The Company is a defendant in various legal proceedings arising in the
ordinary course of business. Although the results of these matters cannot be
predicted with certainty, management believes the outcome will not have a
material adverse effect on the Company's financial position.
12. SUBSEQUENT TELEPHONE PURCHASE AND FINANCING
On November 1, 1995, the Company purchased approximately 1,600 telephones
and related assets and agreements for approximately $3.5 million. The purchase
was financed through the Company's revolving acquisition facility, which was
increased from $5 million to $10 million effective November 1, 1995.
* * * * * *
F-123
<PAGE> 124
CHEROKEE COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, (UNAUDITED)
1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 668,778 $ 364,691
Trade accounts receivable, less allowance for doubtful accounts
of $264,803 and $200,692, respectively....................... 4,453,192 3,712,950
Inventories..................................................... 137,036 168,200
Prepaid expenses and other current assets....................... 303,273 64,998
Deferred income tax benefits.................................... 108,717 145,441
----------- -----------
Total current assets.................................... 5,670,996 4,456,280
Property and equipment -- net..................................... 12,935,453 16,186,760
Site licenses -- net.............................................. 1,941,467 4,048,701
Investment in and advances to affiliates.......................... 164,549 152,989
Other assets...................................................... 681,754 512,055
----------- -----------
Total................................................... $ 21,394,219 $ 25,356,785
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing............................ $ 659,604 $ 0
Current portion of other notes payable.......................... 1,491,767 2,982,325
Current portion of capital lease obligations.................... 1,094,381 977,433
Accounts payable................................................ 310,358 754,048
Accrued telecommunications and other expenses................... 2,971,935 2,977,635
Income taxes payable............................................ 256,140 2,327
----------- -----------
Total current liabilities............................... 6,784,185 7,693,768
Long term liabilities
Note payable, less current portion.............................. 6,605,835 10,636,237
Capital lease obligations, less current portion................. 780,593 0
Deferred income tax liability................................... 342,359 342,359
----------- -----------
Total long-term liabilities............................. 7,728,787 10,978,596
Shareholders' equity
Convertible redeemable preferred stock.......................... 2,400,000 2,400,000
Common stock warrants, with mandatory redemption requirements... 1,087,000 1,087,000
Common stock.................................................... 351,903 351,903
Additional paid-in capital...................................... 10,630 10,630
Retained earnings............................................... 3,031,714 2,834,888
----------- -----------
Total shareholders' equity...................................... 6,881,247 6,684,421
----------- -----------
Total................................................... $ 21,394,219 $ 25,356,785
=========== ===========
</TABLE>
See notes to financial statements.
F-124
<PAGE> 125
CHEROKEE COMMUNICATIONS, INC.
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE
NINE MONTHS ENDED JUNE 30 30
--------------------------- -------------------------
1995 1996 1995 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Telecommunications revenues:
Payphone coin calls................. $ 9,942,304 $12,571,961 $3,511,706 $4,322,079
Automated operator, routed calls.... 11,540,935 11,061,973 4,587,250 4,098,481
Other............................... 363,273 817,273 113,941 368,005
---------- ---------- ---------- ----------
Total....................... 21,846,512 24,451,207 8,212,897 8,788,565
Operating costs and expenses:
Telephone charges................... 5,675,136 6,451,165 2,034,337 2,276,146
Commissions......................... 3,429,761 3,885,956 1,299,886 1,413,149
Telecommunications fees and
validation....................... 1,273,673 1,179,606 541,814 460,227
Depreciation and amortization....... 3,248,748 3,831,645 1,088,844 1,363,637
Field operations personnel.......... 1,370,974 2,191,875 447,289 740,659
Chargebacks and doubtful accounts... 578,823 736,374 232,171 329,914
Selling, general and
administrative................... 4,180,403 4,909,963 1,392,213 1,472,583
---------- ---------- ---------- ----------
Total....................... 19,757,518 23,186,584 7,036,554 8,056,315
Operating income...................... 2,088,994 1,264,623 1,176,343 732,250
Other income (expense)
Interest expense.................... (1,125,584) (1,223,042) (382,827) (427,100)
Amortization of debt discount....... (138,303) (135,875) (47,721) (45,292)
Interest income..................... 38,303 3,645 16,954 780
Equity in earnings (losses) of
affiliates....................... 8,936 (46,671) (4,113) (39,759)
Gain on equipment sales and other... 1,150,521 29,306 15,664 3,116
---------- ---------- ---------- ----------
Total....................... (66,127) (1,372,637) (402,043) (508,255)
---------- ---------- ---------- ----------
Income before income taxes............ 2,022,867 (108,014) 774,300 223,995
Provision (benefit) for income
taxes............................... 692,882 (19,188) 291,159 76,158
---------- ---------- ---------- ----------
Net income (loss)..................... $ 1,329,985 $ (88,826) $ 483,141 $ 147,837
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-125
<PAGE> 126
CHEROKEE COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net income...................................................... $ 1,329,985 $ (88,826)
Noncash items in net income:
Depreciation and amortization................................ 3,248,748 3,831,645
Amortization of debt discount................................ 138,303 135,875
Equity in earnings (losses) of affiliates.................... 8,936 (46,671)
Gain on sale of property and equipment....................... (1,123,268) (11,672)
Cash from (used for) changes in operating working capital:
Trade accounts receivable.................................... 444,819 740,242
Other current assets......................................... (95,746) 67,888
Prepaid expenses............................................. (96,014) 238,275
Accounts payable and accrued liabilities..................... 782,566 449,390
Income taxes payable......................................... (16,616) (253,813)
---------- ---------
Net cash from operating activities...................... 4,621,713 5,062,333
Investing activities:
Additions to property and equipment............................. (4,771,952) (6,007,499)
Increase in site licenses....................................... (418,274) (3,052,918)
Increase in other assets........................................ (79,353) 0
Proceeds from sale property and equipment....................... 1,979,406 50,668
Increase in investments in affiliates........................... (18,946) (34,177)
---------- ---------
Net cash used for investing activities.................. (3,309,119) (9,043,926)
Financing activities
Issuance of (payments on) note payable-receivable financing..... (461,277) (659,604)
Issuance of other notes payable................................. 4,123,985 7,750,005
Payments on notes payable and capital lease obligations......... (4,409,580) (3,304,895)
Issuance of common stock........................................ 8,720 0
Cash dividends on preferred stock............................... (108,000) (108,000)
---------- ---------
Net cash from financing activities...................... (846,152) 3,677,506
---------- ---------
Increase (decrease) in cash and cash equivalents.................. 466,442 (304,087)
Cash and cash equivalents
Beginning of period............................................. 780,962 668,778
---------- ---------
End of period................................................... $ 1,247,404 $ 364,691
========== =========
</TABLE>
See notes to financial statements.
F-126
<PAGE> 127
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended September 30, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS AND MERGERS
On November 1, 1995, the Company completed the acquisition of the assets of
Teltrust, Inc. (a Utah corporation). In connection with the acquisition of
Teltrust, Inc., the Company acquired 1,488 installed payphones and 81 jail
phones for a purchase price of $3,523,568 in cash.
The Teltrust, Inc. acquisition was recorded as a purchase and the
difference between the fair value of the tangible assets acquired and the total
purchase price of $3,523,568, was recorded as site licenses and are being
amortized over the average life of the acquired location contracts which have
been estimated to be 60 months.
3. PROPERTY AND EQUIPMENT
As of September 30, 1995 and June 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES SEPTEMBER 30 JUNE 30
(IN YEARS) 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Telephones, boards, and enclosures......... 7-10 $ 18,303,573 $ 23,093,015
Telecommunications software licenses....... 4-5 2,214,455 2,512,242
Vehicles................................... 5 2,184,227 2,732,601
Other equipment............................ 5-7 716,825 845,783
Land and buildings......................... 20-25 75,747 75,747
------------ ------------
$ 23,494,827 $ 29,259,388
Less: accumulated depreciation........... (10,559,374) (13,072,628)
------------ ------------
$ 12,935,453 $ 16,186,760
</TABLE>
F-127
<PAGE> 128
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996
4. OTHER ASSETS
As of September 30, 1995 and June 30, 1996, other assets consisted of the
following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD SEPTEMBER 30 JUNE 30
(IN YEARS) 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Deferred financing costs...................... 3-6 $1,113,451 $1,113,451
Patents....................................... 5 46,009 46,009
Noncompete agreements......................... 5 252,500 252,500
------------ ------------
$1,411,960 $1,411,960
Less: accumulated amortization.............. (730,206) (899,905)
------------ ------------
$ 681,754 $ 512,055
</TABLE>
F-128
=============================================================================
NO DEALER, SALESPERSON OR
ANY OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CON-
TAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT. IF
GIVEN OR MADE, SUCH INFORMATION 13,304,263 SHARES
OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR
ANY UNDERWRITER OR AGENT. THIS PHONETEL TECHNOLOGIES, INC.
PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITA-
TION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDIC- COMMON STOCK
TION WHERE OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS
PROSPECTUS OR ANY PROSPECTUS _______________
SUPPLEMENT NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY PROSPECTUS
CIRCUMSTANCES, CREATE ANY IM- _______________
PLICATION THAT THE INFORMATION
HEREIN OR THEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
_____________
TABLE OF CONTENTS
Page
Available Information . . . 2
Prospectus Summary . . . . . 3 , 1996
Risk Factors . . . . . . . 12
The Pending Acquisitions . 22
Use of Proceeds . . . . . . 24
Capitalization . . . . . . 24
Price Range of Common Stock 27
Dividend Policy . . . . . . 28
Selected Financial Data . . 29
Pro Forma Financial Data . 32
Management's Discussion and
Analysis of Financial Condition
and
Results of Operations . . 49
Business . . . . . . . . . 62
Management . . . . . . . . 82
Security Ownership of Certain
Beneficial Owners and Manage-
ment . . . . . . . . . . . 89
Certain Transactions . . . 93
Description of Capital Stock
94
Description of Certain Indebt-
edness . . . . . . . . . . 100
Selling Shareholders . . . 103
Plan of Distribution . . . 108
Legal Matters . . . . . . . 110
Experts . . . . . . . . . . 110
Glossary . . . . . . . . . A-1
Index to Financial Statements
============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Articles of Incorporation of the
Company provides for indemnification, to the fullest extent
permitted or required under law, of any director or officer of
the Company or any person serving at the request of the Company
as a director, trustee or officer of another entity, in connec-
tion with any action, suit or proceeding, criminal, civil or
administrative, to which such person, is or may be a party by
reason of their status as such.
Pursuant to section 1701.13(E) of the Ohio Revised Code, a
director, officer or employee is entitled to indemnification only
if a determination is made (i) by the directors of the Company
acting at a meeting at which a quorum consisting of directors who
neither were nor are parties to or threatened with any such
action, suit or proceeding is present or (ii) by the shareholders
of the Company at a meeting held for such purpose by the affirma-
tive vote of the holders of shares entitling them to exercise a
majority of the voting power of the Company on such proposal or
without a meeting by the written consent of the holders of share
entitling them to exercise two-thirds of the voting power on such
proposal, that such director, officer or employee (a) was not,
and has not been adjudicated to have been, negligent or guilty of
misconduct in the performance of his duty to the Company, (b)
acted in good faith and in a manner he reasonably believed to be
in the best interest of the Company and (c) in any matter the
subject of a criminal action, suit or proceeding, had no reason-
able cause to believe that his conduct was unlawful.
Additionally, section 1701.13(E)(5)(a) of the Ohio Revised
Code provides that, unless prohibited by specific reference in a
corporation's articles of incorporation or code of regulations, a
corporation shall pay a director's expenses, including attorneys'
fees, incurred in defending an action, suit or proceeding brought
against a director in such capacity, whether such action, suit or
proceeding is brought by a third party or by or in the right of
the corporation, provided the director delivers to the corpora-
tion an undertaking to (a) repay such amount if it is proved in a
court of competent jurisdiction that his action or failure to act
was undertaken with deliberate intent to injure the corporation
or with reckless disregard for the best interests of the corpora-
tion and (b) reasonably cooperate with the corporation in such
action, suit or proceeding.
Section 1701.13(E)(7) of the Ohio Revised Code provides that
a corporation may purchase insurance or furnish similar protec-
tion for any director, officer or employee against any liability
asserted against him in any such capacity, whether or not the
corporation would have power to indemnify him under Ohio law.
Such insurance may be purchased from or maintained with a person
in which the corporation has a financial interest.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
Except for the Securities and Exchange Commission registra-
tion fee, all fees and expenses are estimated and will be paid by
the Company.
Securities and Exchange Commission Registration Fee $11,591
Nasdaq listing fees . . . . . . . . . *
Printing and Engraving Expenses . . . *
Accounting Fees and Expenses . . . . . *
Legal Fees and Expenses . . . . . . . *
Transfer Agent's and Registrar's Fees and Expenses*
Miscellaneous . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . $ *
------------------------
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During 1993 the Company issued 20,833 shares of Common Stock
to Zandec, Ltd. in connection with the exercise of certain
options resulting in proceeds to the Company in the amount of
$66,250. In addition, the Company issued 310,962 shares of
Common Stock to various individuals in connection with the
exercise of Series B, C, D and E Warrants resulting in proceeds
to the Company totaling $1,272,945. The aforementioned shares
were issued pursuant to the exemption from registration provided
under Section 4(2) of the Act.
On February 13, 1993 the Company issued 8,333 shares of
Common Stock to The Cafaro Company ("Cafaro") at a value of
$56,250 in consideration for entering into a ten-year agreement
with the Company to provide Cafaro with telecommunications
services. On June 30, 1993 a director was issued 1,830 shares of
Common Stock as reimbursement for certain fees which were valued
at $22,573. Both issuances were exempt from registration pursu-
ant to the exemption provided under Section 4(2) of the Act.
On June 30, 1993 the Company issued 6,667 shares of Common
Stock to a director and 1,686 shares to Susan Etter in a private
sale resulting in proceeds to the Company in the aggregate of
$63,916. On the same day, the Company issued 16,164 shares of
Common Stock to Zandec, Ltd. representing the conversion of
$220,957 of debt and interest into equity. In addition, shares
of 12% Preferred Stock valued at $742,584 were converted into
123,764 shares of Common Stock of the Company. On June 30, 1993
the Company issued 12,000 and 200 shares of 8% Preferred, respec-
tively, to J&C Resources, Inc. and Susan Etter with proceeds
totaling $981,084. All of the aforementioned shares were issued
pursuant to the exemption from registration provided under
Section 4(2) of the Act.
On July 12, 1993 an employee was issued 1,533 shares of
Common Stock as compensation in the amount of $10,350. On
December 31, 1993 Standard Phone Company was issued 8,582 shares
of Common Stock in connection with the acquisition of certain pay
telephones, enclosures and the associated location contracts.
The value of said shares issued was $103,004. All of the afore-
mentioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
During 1993, the Company issued 2,500 shares of 7% Preferred
Stock to Joseph Abrams with proceeds totaling $200,000. The
shares were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
During the first quarter of 1994 a total of 87,927 shares of
Common Stock were issued in consideration of the exercise of
certain warrants and options. Proceeds from the exercise of said
warrants and options totalled $553,964. Said shares were issued
pursuant to the exemption from registration provided under
Section 4(2) of the Act.
In four private sales during March and May 1994, the Company
sold 136,109 shares of its Common Stock for an aggregate of
$1,478,165. Said shares were issued pursuant to the exemption
from registration provided under Regulation S of the Act. In
addition, 5,276 shares of Common Stock were issued to Montmelion
Investments pursuant the exemption provided under Section 4(2) of
the Act to pay for a portion of the financing costs, valued at
$99,690, associated with the aforementioned private placement.
On March 1, 1994 the Company issued 1,282 shares of Common
Stock valued at $11,128 to two directors as compensation for
their service on the Board of Directors. On the same day the
Company issued 500 shares to a consultant for services rendered
in the amount of $4,340. On November 28, 1994 the Company issued
1,480 shares of Common Stock to two directors as compensation
valued at $12,846 for their service on the Board of Directors.
On the same day, the Company issued 2,091 shares to a director
for reimbursement of certain fees and expenses valued at $18,150
and 3,033 shares to a contractor for services rendered which were
valued at $26,363. All of the aforementioned shares were issued
pursuant to the exemption from registration provided under
Section 4(2) of the Act.
On March 8, 1995 and July 14, 1995 the Company issued 3,333
and 5,000 shares of Common Stock in consideration of the exercise
of options with proceeds to the Company totalling $35,000. The
shares were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
In May 1995 the Company issued 162,498 shares of Common
Stock in a private placement to five individuals with proceeds
totalling $640,000. On May 8, 1995 the Company issued a total of
7,532 shares of Common Stock to three former executives of the
Company as compensation totalling $36,160. On July 26, 1995 the
Company issued 66,666 shares of Common Stock in a private place-
ment to three individuals with proceeds totalling $300,000. On
August 18, 1995 the Company issued 65,091 shares of Common Stock
two private placements with proceeds totalling $277,913 and
issued 1,111 shares of Common Stock valued at $5,000 to a direc-
tor as consideration for his service on the Board of Directors.
On August 30, 1995 the Company issued an aggregate of 116,666
shares to Ariel Fund Limited and Gabriel Capital, L.P. in a
private placement with proceeds totalling $525,000. On September
6, 1995 the Company issued an aggregate of 26,666 shares of
Common Stock to two individuals in a private placement with
proceeds totalling $119,999. On October 26, 1995 the Company
issued 6,832 shares of Common Stock in a private placement to two
employees and Sanford J. Spitzer with proceeds totalling $30,750.
On November 6, 1995 the Company issued 16,666 shares of Common
Stock in a private placement to Ariel Fund Limited and Gabriel
Capital, L.P. with proceeds totalling $75,000. On November 15,
1995 the Company issued 5,555 shares of Common Stock to an
employee in a private placement with proceeds totalling 25,000.
In November and December 1995 the Company issued 3,750 and 1,666
shares, respectively, to Moira MB Neidt and John and Patricia
McCadden with proceeds totalling $33,625. All of the aforemen-
tioned shares were issued pursuant to the exemption from regis-
tration provided under Section 4(2) of the Act.
On February 7, 1995 the Company issued 833 shares of Common
Stock valued at $5,000 to an employee as compensation for servic-
es rendered. In May and June 1995 the Company issued 30,231
shares of Common Stock to five lenders in connection with the
conversion of $137,678 of debt into equity. In July 1995 the
Company issued 1,271 shares of Common Stock to a director as
reimbursement of Company related expenses totalling $5,726. In
August 1995 the Company issued 3,128 shares of Common Stock to
two directors as reimbursement of Company related expenses
totalling $14,083. In September 1995 the Company issued 1,018
shares of Common Stock to a director as reimbursement of Company
related expenses totalling $4,585. In October 1995 the Company
issued 971 shares of Common Stock to a director for reimbursement
of Company related expenses totalling $5,127. In November 1995
the Company issued 1,719 shares of Common Stock to a director for
reimbursement of Company related expenses totalling $13,084. In
December 1995 the Company issued 25,682 shares of Common Stock to
two directors for reimbursement of Company related expenses
totalling $24,282. On December 20, 1995 the Company issued
12,500 shares of Common Stock to M&M Financial Services, Inc. in
consideration of services rendered in the amount of $75,000 in
connection with the World acquisition. All of the aforementioned
shares were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
On December 26, 1995 the Company issued 56,666 shares of
Common Stock to Brenner Securities Corporation, a predecessor of
Southcoast Capital Corporation, for financial services in the
amount of $340,000 rendered in connection with the World acquisi-
tion. All of the aforementioned shares were issued pursuant to
the exemption from registration provided under Section 4(2) of
the Act.
On September 21, 1995 the Company issued 402,500 shares of
Common Stock to the former shareholders of World in connection
with the acquisition. The value of the stock issued in connec-
tion with said acquisition was $2,716,876. The aforementioned
shares were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
On September 21, 1995 the Company also issued 530,534 shares
of 10% Preferred Stock to the former shareholders of World in
connection with the acquisition. Such shares were issued pursu-
ant the exemption from registration provided under Section 4(2)
of the Act.
On October 16, 1995 the Company issued 224,881 shares of
Common Stock to the former shareholders of Public Telephone in
connection with the acquisition at a value of $1,517,951. In
addition, the Company issued 45,833 and 34,166 shares of Common
Stock to Thomas Martin and James Martin, respectively, as consid-
eration for the execution of non-compete agreements valued at
$540,000. The aforementioned shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the
Act.
On November 24, 1995 the Company issued 23,809 shares of
Common Stock at a value of $150,000 in connection with the IPP
acquisition. The shares were issued pursuant to the exemption
from registration provided under Section 4(2) of the Act.
During January 1996 the Company issued 528 shares of Common
Stock to a director for reimbursement of Company related expenses
totalling $3,168. The shares were issued pursuant to the exemp-
tion from registration provided under Section 4(2) of the Act.
On March 15, 1996 the Company issued 555,589 shares of
Common Stock valued at $1,106,506 and 5,453.14 shares of 14%
Preferred valued at $245,897 and Nominal Value Warrants to
purchase 117,785 shares of the Company's Common Stock to the
former shareholders of IPP in connection with the IPP acquisi-
tion. In addition, the Company also issued 8,333.33 shares of
14% Preferred valued at $375,769 and Nominal Value Warrants to
purchase 179,996 shares of the Company's Common Stock to the
former shareholders of Paramount in connection with the Paramount
acquisition. On March 15, 1996 the Company also issued 204,824
shares of Series A Preferred to the Lenders under the Credit
Agreement. The Company also issued 3,871 shares of Common Stock
to Applied Telecommunications Technologies, Inc. representing
conversion of $30,000 of debt into equity. The aforementioned
securities were issued pursuant to the exemption from registra-
tion provided under Section 4(2) of the Act.
On March 15, 1996, concurrent with the Company entering into
the Credit Agreement, the Company redeemed the 10% Preferred, 8%
Preferred and 7% Preferred. In connection with the redemption of
said classes of stock, the Company issued 34,436.33 shares of 14%
Preferred and Nominal Value Warrants to purchase 503,770 shares
of Common Stock. The Company also issued 59,695.39 shares of 14%
Preferred and Nominal Value Warrants to purchase 1,217,391 shares
of Common Stock in connection with the conversion of $3,581,723
of debt owed to related parties. All of the securities were
issued pursuant to the exemption from registration provided under
Section 4(2) of the Act.
During April 1996 the Company issued 432,498 shares of
Common Stock, in the aggregate, to J&C Resources, Inc., Jeffrey
Huffman, Alton Huffman, Thomas Martin and James Martin in consid-
eration of the exercise of certain warrants resulting in proceeds
totalling $4,325. On May 2, 1996 the Company issued 539,989
shares of Common Stock to a director in consideration of the
exercise of certain warrants resulting in proceeds totalling
$5,400. On July 22, 1996 the Company issued 62,650 shares of
Common Stock to a director in consideration of the exercise of
certain warrants resulting in proceeds to the Company totalling
$627. The aforementioned securities were issued pursuant to the
exemption from registration provided under Section 4(2) of the
Act.
On September 13, 1996 the Company issued 2,162,163 shares of
Common Stock valued at $4,637,840 to Amtel, as debtor-in-posses-
sion pursuant to a Chapter 11 bankruptcy proceeding, as partial
consideration for the Amtel acquisitions. On September 16, 1996
the Company issued 166,666 shares of Common Stock valued at
$311,665 to the former shareholders of POA, as partial consider-
ation for the POA acquisition. Said shares were issued pursuant
to the exemption from registration provided under Section 4(2) of
the Act.
On June 27, 1996 the Company issued 884,214 shares of Common
Stock valued at $5,305,284 to the former shareholders of World in
connection with the conversion of the convertible 10% Preferred.
Said shares were issued pursuant to the exemption from registra-
tion provided under Section 4(2) of the Act.
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation dated August
30, 1989. (2)
3.3 Amendment and Restated Code of Governmental Regula-
tions. (5)
3.5 Amendment to Articles of Incorporation dated January
3, 1992. (5)
3.6 Amendment to Articles of Incorporation dated January
20, 1992. (5)
3.7 Amendment to Articles of Incorporation dated April 9,
1992. (8)
3.8 Amendment to Articles of Incorporation dated June 18,
1993. (8)
3.9 Amendment to Articles of Incorporation dated June 30,
1993. (8)
3.10 Amendment to Articles of Incorporation dated Septem-
ber 22, 1995. (13)
3.11 Amendment to Articles of Incorporation dated December
15, 1995. (13)
3.12 Amendment to Articles of Incorporation dated February
28, 1996. (13)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 14% Convertible Preferred Stock. (13)
4.3 Form of Indenture relating to the Notes offered in
the Company Debt Offering (including the form of
Note).*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity
of the Notes registered hereby.*
10.1 Stock Option Agreement between William Tymoszczuk and
PhoneTel Technologies, Inc., dated March 1, 1987. (3)
10.2 Stock Incentive Plan for Key Employees, dated May 5,
1987. (1)
10.3 Amended and Restated Stock Option Agreement between
PhoneTel Technologies, Inc. and Jerry H. Burger dated
July 1, 1993. (8)
10.4 Stock Option Agreement dated July 1, 1993 between
PhoneTel Technologies, Inc. and Bernard Mandel. (8)
10.5 Form of Stock Option Agreement between PhoneTel Tech-
nologies, Inc. and DeBartolo, Inc. (4)
10.6 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corpo-
ration. (8)
10.7 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Jerry Burger, togeth-
er with amendments thereto. (13)
10.8 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Bernard Mandel, to-
gether with amendments thereto. (13)
10.9 Lease Agreement between PhoneTel Technologies, Inc.
and Bankers Leasing Association, Inc. dated February
12, 1992. (5)
10.10 Registration Rights Agreement dated April 10, 1992
among PhoneTel Technologies, Inc., George H. Henry,
Carl Kirchhoff and Charles Stuart. (5)
10.11 Registration Rights Agreement among PhoneTel Technol-
ogies, Inc. J & C Resources, Inc. and Allen
Moskowitz. (5)
10.12 Form of Stock Option Agreement and Registration
Rights Agreement between PhoneTel Technologies, Inc.
and The Edward J. DeBartolo Corporation. (5)
10.13 Stock Option Agreement and Registration Rights Agree-
ment between PhoneTel Technologies, Inc. and William
D. Moses, Jr. dated May 11, 1992. (5)
10.14 Assignment Agreement between William D. Moses, Jr.
and Edward A. Moulton transferring the right to re-
ceive options to acquire 5,000 shares of Common Stock
of PhoneTel Technologies, Inc. (9)
10.15 Stock Option Agreement and Registration Rights Agree-
ment between PhoneTel Technologies, Inc. and George
H. Henry dated March 24, 1992. (5)
10.16 Amendment No. 1 to Amended and Restated Loan Agree-
ment and Registration Rights Agreement dated October
23, 1992 by and among PhoneTel Technologies, Inc., J
& C Resources, Inc. and Allen Moskowitz. (6)
10.17 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April
23, 1992. (6)
10.18 Master Agreement between The Cafaro Company and
PhoneTel Technologies, Inc. dated December 23, 1992.
(6)
10.19 Operator Subscriber Service Agreement dated March 25,
1994 between U.S. Long Distance, Inc. and Alpha Pay
Phones-IV, L.P. (7)
10.20 Non-competition Agreement among PhoneTel Technolo-
gies, Inc., Alpha Pay Phones-IV, L.P., American Tele-
communications Management Corporation, Stephen C.
Fowler and Ronald T. Huggard dated January 5, 1994.
(8)
10.21 Stock Option Agreement for WEA Investments, Inc.
relative to 50,000 shares of Common Stock under op-
tion dated on or about November 30, 1993. (8)
10.22 Stock Option Agreement with Allenstown Investments
Limited dated on or about January 10, 1994 relative
to grant of an option to purchase 126,000 shares of
PhoneTel Technologies, Inc. Common Stock. (8)
10.23 Stock Option Agreement with Douglas Abrams with re-
spect to 45,000 shares of Common Stock of PhoneTel
Technologies, Inc. dated on or about January 10,
1994. (8)
10.24 Amendment to Stock Option Agreement dated January 10,
1994 with Douglas Abrams with respect to 45,000
shares of Common Stock of PhoneTel Technologies, Inc.
(9)
10.25 Stock Option Agreement with William Moses, Jr. rela-
tive to 75,000 shares of Common Stock of PhoneTel
Technologies, Inc. dated on or about January 29,
1993. (8)
10.26 Agreement dated January 5, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses
relative to loan in the amount of one million dollars
and providing for warrants to purchase 100,000 shares
and contingent right to acquire warrants to purchase
400,000 shares of PhoneTel Technologies, Inc. Common
Stock. (8)
10.27 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses
relative to restructuring the repayment schedule of
certain monies owed by PhoneTel Technologies, Inc.
and providing for warrants to purchase 45,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)
10.28 Loan Agreement dated December 29, 1993 between
PhoneTel Technologies, Inc. and certain lenders iden-
tified therein with respect to borrowing by PhoneTel
Technologies, Inc. of $400,000 and the granting of
warrants to purchase, in the aggregate, a total of
62,745 shares of Common Stock by PhoneTel Technolo-
gies, Inc. (8)
10.29 Letter Agreement dated February 23, 1995 between
PhoneTel Technologies, Inc. and certain lenders iden-
tified therein with respect to the extension of the
maturity dates of certain promissory notes and the
granting of additional warrants to purchase Common
Stock of PhoneTel Technologies, Inc. (9)
10.30 Stock Option Agreement dated March 3, 1994 between
PhoneTel Technologies, Inc. and George H. Henry rela-
tive to a grant of an option to purchase 39,000
shares of PhoneTel Technologies, Inc. Common Stock.
(9)
10.31 Stock Option Agreements dated in January 1994 between
PhoneTel Technologies, Inc. and George H. Henry
granting options to purchase, in the aggregate, a
total of 106,551 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.32 Stock Option Agreement with George H. Henry dated in
August 1993 relative to a grant of an option to pur-
chase 150,000 shares of PhoneTel Technologies, Inc.
Common Stock. (9)
10.33 Stock Option Agreement with Vincent Mann relative to
5,000 shares of Common Stock under option dated No-
vember 15, 1994. (9)
10.34 Stock Option Agreement with Donald Vella with respect
to 20,000 shares of Common Stock of PhoneTel Technol-
ogies, Inc. dated on or about November 15, 1994. (9)
10.35 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 49,412 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.36 Warrant Agreements with Richard Thatcher dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 7,500 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.37 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.38 Warrant Agreements with Gerald Waldshutz dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 6,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.39 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.40 Warrant Agreements with Steven Richman dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 6,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.41 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 49,412 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.42 Warrant Agreements with Janice Fuelhart dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 1,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.43 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 148,235 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.44 Warrant Agreements with Peter Graf dated February,
March and April 1995, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a
total of 28,750 shares of PhoneTel Technologies, Inc.
Common Stock. (9)
10.45 Stock Option Agreement dated May 24, 1994 between
PhoneTel Technologies, Inc. and the Estate of William
D. Moses, and subsequent assignment thereof dated
February 2, 1995, relative to the grant of an option
to purchase 50,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.46 Stock Option Agreement dated September 13, 1994 be-
tween PhoneTel Technologies, Inc. and the Estate of
William D. Moses, and subsequent assignment thereof
dated February 2, 1995, relative to the grant of an
option to purchase 45,000 shares of PhoneTel Technol-
ogies, Inc. Common Stock. (9)
10.47 Warrant Agreement dated March 31, 1994 between
PhoneTel Technologies, Inc. and the Estate of William
D. Moses, and subsequent assignment thereof dated
February 2, 1995, relative to the grant of warrants
to purchase 200,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.48 Agreement and Plan of Merger dated September 22,
1995, together with Exhibits attached thereto, by and
among PhoneTel Technologies, Inc. Phone Tel II, Inc.,
and World Communications, Inc. (10)
10.49 Amendment to Agreement and Plan of Merger dated Sep-
tember 22, 1995 by and among PhoneTel Technologies,
Inc., PhoneTel II, Inc., and World Communications,
Inc. (10)
10.50 Agreement and Plan of Merger dated October 16, 1995,
together with Exhibits attached thereto, by and among
PhoneTel Technologies, Inc., PhoneTel II, Inc., and
Public Telephone Corporation. (11)
10.51 Agreement and Plan of Merger dated November 22, 1995,
between PhoneTel Technologies, Inc. and International
Pay Phones, Inc., South Carolina corporation, and all
amendments thereto. (12)
10.52 Agreement and Plan of Merger dated November 22, 1995,
between PhoneTel Technologies, Inc. and International
Pay Phones, Inc., Tennessee corporation, and all
amendments thereto. (12)
10.53 Share Purchase Agreement dated as of November 16,
1995, between PhoneTel Technologies, Inc. and Para-
mount Communications Systems, Inc., and all amend-
ments thereto. (12)
10.54 Credit Agreement dated as of March 15, 1996 among
PhoneTel Technologies, Inc., Various Lenders and
Internationale Nederlanden (U.S.) Capital Corporation
(the "Credit Agreement"). (12)
10.55 Security Agreement dated as of March 15, 1996 among
PhoneTel Technologies, Inc. Public Telephone Corpora-
tion, World Communications, Inc., Northern Florida
Telephone Corporation and Paramount Communications
Systems, Inc. and Internationale Nederlanden (U.S.)
Capital Corporation as Agent for itself and certain
other lenders. (12)
10.56 Warrant Purchase Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation
and Cerberus Partners, L.P. (12)
10.57 Registration Rights Agreement dated as of March 15,
1996 between PhoneTel Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation
and Cerberus Partners, L.P. (12)
10.58 Warrant Certificate dated as of March 15, 1996 grant-
ing Internationale Nederlanden (U.S.) Capital Corpo-
ration the right to purchase 102,412 shares of Series
A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (13)
10.59 Warrant Certificate dated as of March 15, 1996 grant-
ing Cerberus Partners, L.P. the right to purchase
102,412 shares of Series A Special Convertible Pre-
ferred Stock of PhoneTel Technologies, Inc. (13)
10.60 Form of Warrant issued on March 15, 1996 to persons
listed on Schedule A to this exhibit. (13)
10.61 Operator Service Subscriber Agreement dated as of
February 29, 1996 by and between Intellicall Operator
Services, Inc. and PhoneTel Technologies, Inc. (13)
10.62 Intellistar License Agreement dated as of February
29, 1996 by and between Intellicall, Inc. and
PhoneTel Technologies, Inc. (13)
10.63 Relay Services Agreement dated as of February 29,
1996 by and between Intellicall, Inc. and PhoneTel
Technologies, Inc. (13)
10.64 Stock Option Agreement dated April 1, 1995 between
PhoneTel Technologies, Inc. and Daniel J. Moos. (13)
10.65 Separation Agreement dated July 29, 1996 between
PhoneTel Technologies, Inc. and Daniel J. Moos.*
10.66 Employment Agreement dated September 1, 1996 between
PhoneTel Technologies, Inc. and Richard Kebert.*
10.67 First Amendment to Credit Agreement dated as of April
11, 1996.*
10.68 Second Amendment to Credit Agreement dated as of June
1996. (14)
10.69 Third Amendment to Credit Agreement dated as of Au-
gust 1, 1996. (14)
10.70 Fourth Amendment to Credit Agreement dated as of
September 13, 1996. (14)
10.71 Fifth Amendment to Credit Agreement dated as of Sep-
tember 13, 1996. (14)
10.72 Sixth Amendment to Credit Agreement dated as of Octo-
ber 8, 1996.*
10.73 Asset Purchase Agreement among PhoneTel Technologies,
Inc., an Ohio Corporation As Buyer and ACI-HDT Supply
Company, a California corporation, Amtel Communica-
tions Services, a California corporation, Amtel Com-
munications Correctional Facilities, a California
corporation, Amtel Communication, Inc., a California
corporation, Amtel Communications, Inc., a California
corporation, and Amtel Communications Payphones,
Inc., a California corporation, as Seller, dated June
26, 1996, and all amendments thereto. (14)
10.74 Amended and Restated Share Purchase Agreement among
PhoneTel III, Inc., Payphones of America, Inc. and
All of the Shareholders of Payphones of America,
Inc., dated as of August 1, 1996, and all amendments
thereto. (14)
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit
5.1).*
24.1 Powers of Attorney (included on signature pages here-
of).
_________________
* To be filed by amendment.
(1) Incorporated by reference from the Registration Statement on
Form S-18 (Registration No. 33-16962C) of PhoneTel Technolo-
gies, Inc. (the "Company"), filed with the Securities and
Exchange Commission on September 1, 1987.
(2) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration
No. 33-30428, filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-16962C), filed with the Securities and Exchange
Commission on October 30, 1987.
(4) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated
March 25, 1994.
(8) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated
September 22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated
October 16, 1995.
(12) Incorporated by reference from the Company's Form 8-K dated
March 15, 1996.
(13) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated
September 13, 1996.
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to
directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the
Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Act and is therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the small business issuer
will, unless in the opinion of its counsel that matter has been
settled by controlling precedent, submit to a court of appropri-
ate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(b) The undersigned small business issuer will:
(1) For determining any liability under the Securities
Act, treat the information omitted from the form of prospec-
tus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed
by the small business issuer pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this
Registration Statement as of that time the Commission de-
clared it effective.
(2) For determining any liability under the Securi-
ties Act of 1933, treat each post-effective amendment that
contains a form of prospectus as a new registration state-
ment for the securities offered in the Registration State-
ment, and that offering of the securities at that time as
the initial bona fide offering of those securities.
(c) The undersigned small business issuer will:
(1) File, during any period in which it offers or
sells securities, a post-effective amendment to this regis-
tration statement to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamen-
tal change in the information in the registration
statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of prospec-
tus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effec-
tive registration statement.
(iii) Include any additional or changed mate-
rial information on the plan of distribution.
(2) For determining liability under the Securities
Act, treat each post-effective amendment as a new registra-
tion statement of the securities offered, and the offering
of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on form
SB-2 and authorizes this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on November 12, 1996.
PHONETEL TECHNOLOGIES, INC.
By:/s/ Peter G. Graf
--------------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE
SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF
AND TAMMY L. MARTIN, AND EACH OF THEM, HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT EITHER ONE OF WHOM MAY ACT WITHOUT THE OTHER,
WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION FOR HIM AND IN
HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY
AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS
REGISTRATION STATEMENT AND TO SIGN ANY AND ALL ADDITIONAL REGIS-
TRATION STATEMENTS RELATING TO THE SAME OFFERING OF SECURITIES AS
THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE 462(B)
UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH,
WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID
ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUI-
SITE AND NECESSARY TO BE DONE AS FULLY TO ALL INTENTS AND PURPOS-
ES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND
CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR EITHER
OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of
1933, this Registration Statement has been signed by the follow-
ing persons in the capacities and on the dates indicated.
Name Title Date
/s/ Peter G. Graf Chairman of the Board, November 12, 1996
Peter G. Graf Chief Executive Officer,
and Director
/s/ Nickey B. Maxey Chief Operating Officer November 12, 1996
Nickey B. Maxey and Director
/s/ Stuart Hollander Director November 12, 1996
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer November 12, 1996
Richard Kebert and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Joseph Abrams Director November 12, 1996
Joseph Abrams
/s/ George Henry Director November 12, 1996
George Henry
/s/ Aron Katzman Director November 12, 1996
Aron Katzman
/s/ Steven Richman Director November 12, 1996
Steven Richman
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation dated August
30, 1989. (2)
3.3 Amendment and Restated Code of Governmental Regula-
tions. (5)
3.5 Amendment to Articles of Incorporation dated January
3, 1992. (5)
3.6 Amendment to Articles of Incorporation dated January
20, 1992. (5)
3.7 Amendment to Articles of Incorporation dated April 9,
1992. (8)
3.8 Amendment to Articles of Incorporation dated June 18,
1993. (8)
3.9 Amendment to Articles of Incorporation dated June 30,
1993. (8)
3.10 Amendment to Articles of Incorporation dated Septem-
ber 22, 1995. (13)
3.11 Amendment to Articles of Incorporation dated December
15, 1995. (13)
3.12 Amendment to Articles of Incorporation dated February
28, 1996. (13)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 14% Convertible Preferred Stock. (13)
4.3 Form of Indenture relating to the Notes offered in
the Company Debt Offering (including the form of
Note).*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity
of the Notes registered hereby.*
10.1 Stock Option Agreement between William Tymoszczuk and
PhoneTel Technologies, Inc., dated March 1, 1987. (3)
10.2 Stock Incentive Plan for Key Employees, dated May 5,
1987. (1)
10.3 Amended and Restated Stock Option Agreement between
PhoneTel Technologies, Inc. and Jerry H. Burger dated
July 1, 1993. (8)
10.4 Stock Option Agreement dated July 1, 1993 between
PhoneTel Technologies, Inc. and Bernard Mandel. (8)
10.5 Form of Stock Option Agreement between PhoneTel Tech-
nologies, Inc. and DeBartolo, Inc. (4)
10.6 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corpo-
ration. (8)
10.7 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Jerry Burger, togeth-
er with amendments thereto. (13)
10.8 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Bernard Mandel, to-
gether with amendments thereto. (13)
10.9 Lease Agreement between PhoneTel Technologies, Inc.
and Bankers Leasing Association, Inc. dated February
12, 1992. (5)
10.10 Registration Rights Agreement dated April 10, 1992
among PhoneTel Technologies, Inc., George H. Henry,
Carl Kirchhoff and Charles Stuart. (5)
10.11 Registration Rights Agreement among PhoneTel Technol-
ogies, Inc. J & C Resources, Inc. and Allen
Moskowitz. (5)
10.12 Form of Stock Option Agreement and Registration
Rights Agreement between PhoneTel Technologies, Inc.
and The Edward J. DeBartolo Corporation. (5)
10.13 Stock Option Agreement and Registration Rights Agree-
ment between PhoneTel Technologies, Inc. and William
D. Moses, Jr. dated May 11, 1992. (5)
10.14 Assignment Agreement between William D. Moses, Jr.
and Edward A. Moulton transferring the right to re-
ceive options to acquire 5,000 shares of Common Stock
of PhoneTel Technologies, Inc. (9)
10.15 Stock Option Agreement and Registration Rights Agree-
ment between PhoneTel Technologies, Inc. and George
H. Henry dated March 24, 1992. (5)
10.16 Amendment No. 1 to Amended and Restated Loan Agree-
ment and Registration Rights Agreement dated October
23, 1992 by and among PhoneTel Technologies, Inc., J
& C Resources, Inc. and Allen Moskowitz. (6)
10.17 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April
23, 1992. (6)
10.18 Master Agreement between The Cafaro Company and
PhoneTel Technologies, Inc. dated December 23, 1992.
(6)
10.19 Operator Subscriber Service Agreement dated March 25,
1994 between U.S. Long Distance, Inc. and Alpha Pay
Phones-IV, L.P. (7)
10.20 Non-competition Agreement among PhoneTel Technolo-
gies, Inc., Alpha Pay Phones-IV, L.P., American Tele-
communications Management Corporation, Stephen C.
Fowler and Ronald T. Huggard dated January 5, 1994.
(8)
10.21 Stock Option Agreement for WEA Investments, Inc.
relative to 50,000 shares of Common Stock under op-
tion dated on or about November 30, 1993. (8)
10.22 Stock Option Agreement with Allenstown Investments
Limited dated on or about January 10, 1994 relative
to grant of an option to purchase 126,000 shares of
PhoneTel Technologies, Inc. Common Stock. (8)
10.23 Stock Option Agreement with Douglas Abrams with re-
spect to 45,000 shares of Common Stock of PhoneTel
Technologies, Inc. dated on or about January 10,
1994. (8)
10.24 Amendment to Stock Option Agreement dated January 10,
1994 with Douglas Abrams with respect to 45,000
shares of Common Stock of PhoneTel Technologies, Inc.
(9)
10.25 Stock Option Agreement with William Moses, Jr. rela-
tive to 75,000 shares of Common Stock of PhoneTel
Technologies, Inc. dated on or about January 29,
1993. (8)
10.26 Agreement dated January 5, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses
relative to loan in the amount of one million dollars
and providing for warrants to purchase 100,000 shares
and contingent right to acquire warrants to purchase
400,000 shares of PhoneTel Technologies, Inc. Common
Stock. (8)
10.27 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses
relative to restructuring the repayment schedule of
certain monies owed by PhoneTel Technologies, Inc.
and providing for warrants to purchase 45,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)
10.28 Loan Agreement dated December 29, 1993 between
PhoneTel Technologies, Inc. and certain lenders iden-
tified therein with respect to borrowing by PhoneTel
Technologies, Inc. of $400,000 and the granting of
warrants to purchase, in the aggregate, a total of
62,745 shares of Common Stock by PhoneTel Technolo-
gies, Inc. (8)
10.29 Letter Agreement dated February 23, 1995 between
PhoneTel Technologies, Inc. and certain lenders iden-
tified therein with respect to the extension of the
maturity dates of certain promissory notes and the
granting of additional warrants to purchase Common
Stock of PhoneTel Technologies, Inc. (9)
10.30 Stock Option Agreement dated March 3, 1994 between
PhoneTel Technologies, Inc. and George H. Henry rela-
tive to a grant of an option to purchase 39,000
shares of PhoneTel Technologies, Inc. Common Stock.
(9)
10.31 Stock Option Agreements dated in January 1994 between
PhoneTel Technologies, Inc. and George H. Henry
granting options to purchase, in the aggregate, a
total of 106,551 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.32 Stock Option Agreement with George H. Henry dated in
August 1993 relative to a grant of an option to pur-
chase 150,000 shares of PhoneTel Technologies, Inc.
Common Stock. (9)
10.33 Stock Option Agreement with Vincent Mann relative to
5,000 shares of Common Stock under option dated No-
vember 15, 1994. (9)
10.34 Stock Option Agreement with Donald Vella with respect
to 20,000 shares of Common Stock of PhoneTel Technol-
ogies, Inc. dated on or about November 15, 1994. (9)
10.35 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 49,412 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.36 Warrant Agreements with Richard Thatcher dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 7,500 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.37 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.38 Warrant Agreements with Gerald Waldshutz dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 6,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.39 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.40 Warrant Agreements with Steven Richman dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 6,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.41 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 49,412 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.42 Warrant Agreements with Janice Fuelhart dated Febru-
ary, March and April 1995, issued pursuant to a Let-
ter Agreement dated February 23, 1995, relative to
the grant of warrants, in the aggregate, to purchase
a total of 1,250 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.43 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March
1995, and related Warrant Agreements thereto, issued
pursuant to a Letter Agreement dated February 23,
1995, relative to the grant of warrants, in the ag-
gregate, to purchase a total of 148,235 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.44 Warrant Agreements with Peter Graf dated February,
March and April 1995, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a
total of 28,750 shares of PhoneTel Technologies, Inc.
Common Stock. (9)
10.45 Stock Option Agreement dated May 24, 1994 between
PhoneTel Technologies, Inc. and the Estate of William
D. Moses, and subsequent assignment thereof dated
February 2, 1995, relative to the grant of an option
to purchase 50,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.46 Stock Option Agreement dated September 13, 1994 be-
tween PhoneTel Technologies, Inc. and the Estate of
William D. Moses, and subsequent assignment thereof
dated February 2, 1995, relative to the grant of an
option to purchase 45,000 shares of PhoneTel Technol-
ogies, Inc. Common Stock. (9)
10.47 Warrant Agreement dated March 31, 1994 between
PhoneTel Technologies, Inc. and the Estate of William
D. Moses, and subsequent assignment thereof dated
February 2, 1995, relative to the grant of warrants
to purchase 200,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.48 Agreement and Plan of Merger dated September 22,
1995, together with Exhibits attached thereto, by and
among PhoneTel Technologies, Inc. Phone Tel II, Inc.,
and World Communications, Inc. (10)
10.49 Amendment to Agreement and Plan of Merger dated Sep-
tember 22, 1995 by and among PhoneTel Technologies,
Inc., PhoneTel II, Inc., and World Communications,
Inc. (10)
10.50 Agreement and Plan of Merger dated October 16, 1995,
together with Exhibits attached thereto, by and among
PhoneTel Technologies, Inc., PhoneTel II, Inc., and
Public Telephone Corporation. (11)
10.51 Agreement and Plan of Merger dated November 22, 1995,
between PhoneTel Technologies, Inc. and International
Pay Phones, Inc., South Carolina corporation, and all
amendments thereto. (12)
10.52 Agreement and Plan of Merger dated November 22, 1995,
between PhoneTel Technologies, Inc. and International
Pay Phones, Inc., Tennessee corporation, and all
amendments thereto. (12)
10.53 Share Purchase Agreement dated as of November 16,
1995, between PhoneTel Technologies, Inc. and Para-
mount Communications Systems, Inc., and all amend-
ments thereto. (12)
10.54 Credit Agreement dated as of March 15, 1996 among
PhoneTel Technologies, Inc., Various Lenders and
Internationale Nederlanden (U.S.) Capital Corporation
(the "Credit Agreement"). (12)
10.55 Security Agreement dated as of March 15, 1996 among
PhoneTel Technologies, Inc. Public Telephone Corpora-
tion, World Communications, Inc., Northern Florida
Telephone Corporation and Paramount Communications
Systems, Inc. and Internationale Nederlanden (U.S.)
Capital Corporation as Agent for itself and certain
other lenders. (12)
10.56 Warrant Purchase Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation
and Cerberus Partners, L.P. (12)
10.57 Registration Rights Agreement dated as of March 15,
1996 between PhoneTel Technologies, Inc. and
Internationale Nederlanden (U.S.) Capital Corporation
and Cerberus Partners, L.P. (12)
10.58 Warrant Certificate dated as of March 15, 1996 grant-
ing Internationale Nederlanden (U.S.) Capital Corpo-
ration the right to purchase 102,412 shares of Series
A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (13)
10.59 Warrant Certificate dated as of March 15, 1996 grant-
ing Cerberus Partners, L.P. the right to purchase
102,412 shares of Series A Special Convertible Pre-
ferred Stock of PhoneTel Technologies, Inc. (13)
10.60 Form of Warrant issued on March 15, 1996 to persons
listed on Schedule A to this exhibit. (13)
10.61 Operator Service Subscriber Agreement dated as of
February 29, 1996 by and between Intellicall Operator
Services, Inc. and PhoneTel Technologies, Inc. (13)
10.62 Intellistar License Agreement dated as of February
29, 1996 by and between Intellicall, Inc. and
PhoneTel Technologies, Inc. (13)
10.63 Relay Services Agreement dated as of February 29,
1996 by and between Intellicall, Inc. and PhoneTel
Technologies, Inc. (13)
10.64 Stock Option Agreement dated April 1, 1995 between
PhoneTel Technologies, Inc. and Daniel J. Moos. (13)
10.65 Separation Agreement dated July 29, 1996 between
PhoneTel Technologies, Inc. and Daniel J. Moos.*
10.66 Employment Agreement dated September 1, 1996 between
PhoneTel Technologies, Inc. and Richard Kebert.*
10.67 First Amendment to Credit Agreement dated as of April
11, 1996.*
10.68 Second Amendment to Credit Agreement dated as of June
1996. (14)
10.69 Third Amendment to Credit Agreement dated as of Au-
gust 1, 1996. (14)
10.70 Fourth Amendment to Credit Agreement dated as of
September 13, 1996. (14)
10.71 Fifth Amendment to Credit Agreement dated as of Sep-
tember 13, 1996. (14)
10.72 Sixth Amendment to Credit Agreement dated as of Octo-
ber 8, 1996.*
10.73 Asset Purchase Agreement among PhoneTel Technologies,
Inc., an Ohio Corporation As Buyer and ACI-HDT Supply
Company, a California corporation, Amtel Communica-
tions Services, a California corporation, Amtel Com-
munications Correctional Facilities, a California
corporation, Amtel Communication, Inc., a California
corporation, Amtel Communications, Inc., a California
corporation, and Amtel Communications Payphones,
Inc., a California corporation, as Seller, dated June
26, 1996, and all amendments thereto. (14)
10.74 Amended and Restated Share Purchase Agreement among
PhoneTel III, Inc., Payphones of America, Inc. and
All of the Shareholders of Payphones of America,
Inc., dated as of August 1, 1996, and all amendments
thereto. (14)
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit
5.1).*
24.1 Powers of Attorney (included on signature pages here-
of).
_________________
* To be filed by amendment.
(1) Incorporated by reference from the Registration Statement on
Form S-18 (Registration No. 33-16962C) of PhoneTel Technolo-
gies, Inc. (the "Company"), filed with the Securities and
Exchange Commission on September 1, 1987.
(2) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration
No. 33-30428, filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-16962C), filed with the Securities and Exchange
Commission on October 30, 1987.
(4) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated
March 25, 1994.
(8) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated
September 22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated
October 16, 1995.
(12) Incorporated by reference from the Company's Form 8-K dated
March 15, 1996.
(13) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated
September 13, 1996.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our report dated
March 29, 1996 relating to the financial statements of PhoneTel
Technologies, Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
November 12, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our report dated
May 17, 1996 relating to the financial statements of Paramount
Communication Systems, Inc., which appears in such Prospectus.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
November 12, 1996
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
August 23, 1996 relating to the financial statements of Amtel
Communications, Inc. and Combined Companies, which appears in
such Prospectus. We also consent to the references to us under
the headings "Experts" in such Prospectus.
/s/ HARLAN & BOETTGER
San Diego, California
November 8, 1996
Exhibit 23.4
The Board of Directors
Paramount Communications Systems, Inc.:
We consent to the use of our report included in the prospectus
constituting part of this registration statement on Form SB-2 of
our report dated March 10, 1995, with respect to the balance
sheet of Paramount Communications Systems, Inc. as of December
31, 1994, and the related statements of income, shareholders'
equity, and cash flows for the year then ended, and to the
reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
November 8, 1996
Exhibit 23.5
November 7, 1996
Consent of Independent Public Accountants
Richard P. Kerbert
Chief Financial Officer
Phonetel Technologies, Inc.
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
Dear Richard:
I hereby consent to the use by Phonetel Technologies, Inc.
in the Prospectus constituting a part of its Form SB-2
registration statement of my audit report dated April 24, 1996
relating to the financial statements of International Payphones,
Inc. (a Tennessee Corporation) as of and for the years ended
December 31, 1995 and 1994.
I also consent to the reference to our firm as "experts" in
accounting and auditing.
Sincerely yours,
/s/ Ernest M. Sewell, CPA
Ernest M. Sewell, CPA
Exhibit 23.6
Consent of Independent Public Accountants
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
January 17, 1996, and May 21, 1996, relating to the financial
statements of International Pay Phones, Inc., which appears in
such Prospectus. We also consent to the references to us under
the headings "Experts" in such Prospectus.
/s/ MILLER SHERRILL BLAKE CPA PA
MILLER SHERRILL BLAKE CPA PA
November 8, 1996
Exhibit 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
January 30, 1996 and October 16, 1996 relating to the financial
statements of December 31, 1995 and 1994 and June 30, 1996 and
1995, respectively, which appear in such Prospectus. We also
consent to the references to us under the headings "Experts" in
such Prospectus.
/s/ KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
November 8, 1996
Exhibit 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of PhoneTel
Technologies, Inc. on Form SB-2 of our report dated November 17,
1995, relating to the financial statements of Cherokee
Communications, Inc. appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
November 7, 1996
