<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-15211
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHONETEL TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
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<S> <C> <C>
OHIO 4813 34-1462198
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S.EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
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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)
------------------------
<TABLE>
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COPIES TO:
<S> <C>
STEPHEN M. BANKER, ESQ. DANIEL J. ZUBKOFF, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP CAHILL GORDON & REINDEL
919 THIRD AVENUE 80 PINE STREET
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10005
(212) 735-3000 (212) 701-3000
</TABLE>
<TABLE>
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STATE OF PRIMARY STANDARD INDUSTRIAL I.R.S.
NAME OF ADDITIONAL REGISTRANTS INCORPORATION CLASSIFICATION CODE NUMBER IDENTIFICATION NO.
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Public Telephone Corporation Indiana 4813 34-1813512
World Communications, Inc. Missouri 4813 43-1724466
Paramount Communications Systems, Inc. Florida 4813 59-2822743
Northern Florida Telephone Corporation Florida 4813 59-3025564
Payphones of America, Inc. Ohio 4813 34-1838787
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</TABLE>
* Address and telephone number of principal executive offices and agent for
service are same as those of PhoneTel Technologies, Inc.
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
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
of1933, check the following box. [ ]
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. [ ]
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL 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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<PAGE> 2
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.
PROSPECTUS SUBJECT TO COMPLETION
DATED NOVEMBER 18, 1996
[LOGO PHONETEL TECHNOLOGIES, INC.]
$110,000,000
% Senior Notes due 2006
Interest payable and
ISSUE PRICE: %
The % Senior Notes due 2006 (the "Notes") are being offered (the "Offering")
by PhoneTel Technologies, Inc. (the "Company"). Concurrently herewith, the
Company is offering (the "Concurrent Offering") shares of its Common Stock,
$.01 par value (the "Common Stock"). The Concurrent Offering is being made by
separate prospectus.
The Notes will be guaranteed, jointly and severally, fully and unconditionally,
by: Public Telephone Corporation, World Communications, Inc., Paramount
Communications Systems, Inc., Northern Florida Telephone Corporation and
Payphones of America, Inc. (collectively, the "Subsidiary Guarantors"). The
Subsidiary Guarantors constitute all of the Company's subsidiaries; any and all
future subsidiaries of the Company will be required to become Subsidiary
Guarantors.
The Company expects to use the net proceeds of this Offering, together with the
proceeds of the Concurrent Offering to consummate the Cherokee Acquisition and
the Texas Coinphone Acquisition (each as defined herein), to repay certain
indebtedness and for working capital and other general corporate purposes. If
the Cherokee Acquisition is not consummated prior to , 1997 (the
"Special Offer Notice Date"), the Company will be required to offer to purchase
(the "Special Offer") $35.0 million aggregate principal amount of the Notes at a
price (the "Special Offer Price") equal to 101% of the principal amount of the
Notes plus accrued and unpaid interest to the date of purchase.
The Notes will mature on , 2006, unless previously redeemed. Interest
on the Notes will be payable semiannually on and ,
commencing , 1997. 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 herein, plus accrued and unpaid interest to the date
of redemption. In addition, at any time prior to , 1999, the Company,
at its option, may redeem from time to time up to % of the aggregate
principal amount of the Notes originally issued with the net cash proceeds to
the Company from one or more Equity Offerings (as defined herein), other than
the Concurrent Offering, at a redemption price equal to % of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption;
provided, however, that at least $75.0 million in aggregate principal amount of
the Notes remains outstanding immediately after any such redemption. Upon a
Change of Control (as defined herein), the Company will have the obligation to
offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
The Notes will be general unsecured obligations of the Company and will be
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
effectively subordinated to all secured indebtedness of the Company to the
extent of the assets pledged to secure such indebtedness, including all
indebtedness of the Company under the New Credit Agreement (as defined herein)
which is expected to be secured by all of the assets of the Company. The Company
does not currently have, and does not currently intend to issue, significant
indebtedness to which the Notes would be senior. The Subsidiary Guarantees (as
defined herein) will be senior unsecured obligations of the Subsidiary
Guarantors. The Subsidiary Guarantees will be effectively subordinated to all
secured indebtedness of the Subsidiary Guarantors to the extent of the assets
pledged to secure such indebtedness. As of September 30, 1996, on a pro forma
basis after giving effect to the Offering, the Concurrent Offering and the
Pending Acquisitions (as defined herein), the Company would have had
approximately $113.2 million of indebtedness outstanding, of which $.9 million
would have been secured and the Subsidiary Guarantors would have had
approximately $.3 million of indebtedness outstanding (other than the Subsidiary
Guarantees), all of which would have been secured. There is currently no trading
market for the Notes and the Company does not intend to list the Notes on any
securities exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) COMPENSATION (2) COMPANY (3)
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<S> <C> <C> <C>
Per Note % % %
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Total(3) $ $ $
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</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
The Notes are being offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters,
and certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Notes will be made through the book-entry
facilities of The Depository Trust Company, against payment therefor on or about
, 1996.
J.P. MORGAN & CO.
CIBC WOOD GUNDY SECURITIES CORP.
ING BARINGS
SOUTHCOAST CAPITAL CORPORATION
, 1996
<PAGE> 3
[MAP DEPICTING LOCATION OF PHONETEL'S PAY TELEPHONES PER STATE AS OF
SEPTEMBER 30, 1996 (ACTUAL)]
[MAP DEPICTING LOCATION OF PHONETEL'S PAY TELEPHONES PER STATE AS OF SEPTEMBER
30, 1996 ON PRO FORMA BASIS AFTER GIVING EFFECT TO PENDING ACQUISITIONS]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Notes in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to any person to whom it
is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any date
subsequent to the date hereof or that there has been no change in the affairs of
the Company since the date hereof.
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Available Information............... 3
Prospectus Summary.................. 4
Risk Factors........................ 12
The Pending Acquisitions............ 17
Use of Proceeds..................... 19
Capitalization...................... 20
Selected Financial Data............. 21
Pro Forma Financial Data............ 24
Management's Discussion and 37
Analysis of Financial Condition
and Results of Operations.........
Business............................ 45
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PAGE
<S> <C>
Management.......................... 56
Security Ownership of Certain 60
Beneficial Owners and
Management........................
Certain Transactions................ 63
Description of Capital Stock........ 63
Description of Certain 67
Indebtedness......................
Description of the Notes............ 68
Underwriting........................ 87
Legal Matters....................... 87
Experts............................. 88
Glossary............................ A-1
Index to Financial Statements....... F-1
</TABLE>
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 the American
Stock Exchange, Inc. and such reports and other information concerning the
Company are therefore available for inspection at the offices of the American
Stock Exchange, Inc. located at 86 Trinity Place, New York, NY 10006-1881.
This Prospectus constitutes a part of a Registration Statement on Form SB-2
filed by the Company with the Commission under the Securities Act. This
Prospectus omits certain of the information 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 Notes 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 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., Washington, D.C. 20549, and copies thereof may be
obtained from the Commission at prescribed rates.
3
<PAGE> 5
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 elsewhere 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 and (ii) assumes no exercise of
the underwriters' over-allotment option in the Concurrent 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
The Company is currently the third largest independent public pay telephone
operator and the twelfth 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) (collectively, 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 38,421 installed public pay telephones in 42 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 installed 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 19,053 public pay telephones through a series of acquisitions by the
Company of six 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 location providers to operate public pay telephones at
locations where significant demand exists for public pay telephone service, such
as shopping centers, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals.
On an actual basis, the Company had revenues and EBITDA (as defined in footnote
6 on page 10) of $28.3 million and $5.6 million, respectively, for the nine
months ended September 30, 1996. The Company's EBITDA margin has increased to
19.6% for the nine months ended September 30, 1996 from 2.8% for the nine months
ended September 30, 1995. The increase in the EBITDA margin is primarily due to
the significant increase in the number of installed public pay telephones and
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 six acquisitions completed from September
1, 1995 to September 30, 1996, the Company would have achieved revenues of $59.6
million and $45.4 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, and EBITDA of $10.4 million and
$9.8 million for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. After giving pro forma effect to such six
acquisitions and the Pending Acquisitions (collectively, the "Acquisitions"),
the Company would have achieved revenues of $91.5 million and $70.4 million for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, and EBITDA of $21.2 million and $16.1 million for the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
See "Pro Forma Financial Data." Management believes that as a result of certain
recent regulatory changes implemented by the Federal Communications Commission
("FCC") relating to compensation for 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 Developments."
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.
4
<PAGE> 6
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 board and management 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 while implementing 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 geographic presence and further its strategy of clustering its public
pay telephones more rapidly than with new installations. Because smaller
companies typically are not able to achieve the economies of scale realized by
the Company, when acquisitions are integrated, the Company can operate the
public pay telephones at lower operating costs than the seller. Accordingly, 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 acquisitions as well as
integrating such acquisitions. In addition, as the Company grows to become the
leading supplier of independent public pay telephone services in an area,
"fill-in" and contiguous 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 service providers 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 information 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 fill-in and contiguous
acquisitions, the clustering of public pay telephones creates an opportunity to
generate savings through reduced field service and collection expenses, the
closing of duplicate offices, reduction in staff and general corporate overhead
expenses and reduced line and transmission expenses associated with interLATA
and intraLATA traffic.
Form strong relationships with service providers and suppliers. 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 equipment 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 more favorable agreements.
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 individual public pay
telephones of the Company.
Provide superior customer service. The Company strives to maximize the number
of its public pay telephones that are operational 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 as
part of its commitment to provide superior customer service. The technology used
by the Company enables it 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.
5
<PAGE> 7
Achieve market recognition. With the greater financial resources available to
the Company following the Offering and the Concurrent 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
advertisements in trade magazines. The Company believes that achieving market
recognition 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 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
dial-around calls from November 6, 1996 to October 6, 1997 (which fee was
established by the FCC by multiplying $0.35 per call by 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 6, 1998, at the local coin drop rate, which the FCC has concluded will
be determined by the marketplace, not by regulation. 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 management of the Company at this
time. See "Business--Products and Services--Operator Assisted Long Distance
Services" and "Business--Governmental Regulations--Federal."
RECENT ACQUISITIONS
In connection with its business strategy of growth through acquisitions, the
Company acquired 6,872 installed 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 installed 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, the
POA Sellers' Notes (as defined herein) 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, Utah, Montana and
Colorado), of which 13,500 will be installed, 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 in
cash or Common Stock payable in two equal installments in January 1998 and 1999
if certain new regulatory changes are not implemented by the end of 1998. In
addition, the Company will pay $1.25 million in connection with certain
non-competition agreements. See "The Pending Acquisitions--The Cherokee
Acquisition." On October 9, 1996, the Company entered into a letter of intent to
acquire 1,200 installed 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 "The Pending Acquisitions--The Texas Coinphone
Acquisition."
The Company is seeking an amendment to the Credit Agreement (as defined herein),
in part to fund deposits required in connection with the Pending Acquisitions.
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 consummation of the
Offering is not 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 at
the Special Offer Price if the Cherokee Acquisition is not consummated prior to
, 1997. See "Risk Factors--Possible Non-Consummation of the Pending
Acquisitions" and "Description of the Notes--Special Offer to Purchase."
6
<PAGE> 8
SOURCES AND USES OF FUNDS
Concurrently with or prior to the completion of the Offering, it is anticipated
that the Company will consummate the Concurrent Offering. The Company intends to
use the estimated net proceeds to the Company of $22.5 million from the
Concurrent Offering to repay approximately $8.0 million of the debt outstanding
under the Credit Agreement and the balance for working capital and other general
corporate purposes. See "Use of Proceeds."
The following table sets forth the estimated sources and uses of the proceeds to
be received by the Company from the Offering and the Concurrent Offering
(determined as of September 30, 1996):
<TABLE>
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In millions AMOUNT
------
<S> <C>
SOURCES OF FUNDS:
Concurrent Offering................................................................... $25.0
% Senior Notes due 2006............................................................. 110.0
------
Total sources of funds........................................................... $135.0
======
USES OF FUNDS:
Cherokee Acquisition (1).............................................................. $55.7
Texas Coinphone Acquisition........................................................... 3.7
Repay Credit Agreement................................................................ 41.0
Repay capitalized lease obligations................................................... 7.8
Repay POA Sellers' Notes.............................................................. 3.3
Related fees and expenses (2)......................................................... 9.1
Working capital and general corporate purposes (3).................................... 14.4
------
Total uses of funds.............................................................. $135.0
======
</TABLE>
- ---------------
(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
Concurrent Offering of $2.5 million, (ii) estimated underwriting discount
and other expenses of the Offering of $5.85 million, and (iii) estimated
fees and expenses incurred in connection with the New Credit Agreement of
$750,000.
(3) The Company may elect, at its option, to use a portion of the proceeds to
redeem approximately $5.5 million of 14% Preferred in lieu of using such
funds for working capital purposes.
7
<PAGE> 9
THE OFFERING
SECURITIES OFFERED..........
$110,000,000 aggregate principal amount of %
Senior Notes due 2006.
MATURITY DATE............... , 2006.
INTEREST PAYMENT DATES...... and , commencing ,
1997.
SPECIAL OFFER TO PURCHASE...
If the Cherokee Acquisition is not consummated prior
to , 1997 (the "Special Offer Notice
Date") the Company will be required to offer to
purchase (the "Special Offer") $35.0 million aggregate
principal amount of the Notes at a price (the "Special
Offer Price") equal to 101% of the principal amount of
the Notes plus accrued and unpaid interest to the
Special Offer Purchase Date (as defined herein). Prior
to the consummation of the Cherokee Acquisition, the
portion of the net proceeds of the Offering, equal to
the amount sufficient to permit the Company to
purchase $35.0 million aggregate principal amount of
the Notes on the Final Special Offer Purchase Date (as
defined herein) at the Special Offer Price, will be
held by and pledged to the Trustee for the benefit of
the holders of the Notes and the obligation of the
Company to consummate the Special Offer will be
secured by such funds (the "Trust Funds").
OPTIONAL REDEMPTION
BY THE COMPANY............
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
herein, plus accrued and unpaid interest to the date
of redemption. In addition, at any time prior to
, 1999, the Company, at its option, may
redeem up to % of the aggregate principal amount
of the Notes originally issued with the cash proceeds
received by the Company from one or more Equity
Offerings, other than the Concurrent Offering, at any
time or from time to time, at a redemption price equal
to % of the principal amount thereof, plus
accrued and unpaid interest to the date of redemption;
provided, however, that at least $75.0 million in
aggregate principal amount of the Notes remains
outstanding immediately after any such redemption.
CHANGE OF CONTROL OFFER.....
Upon a Change of Control, the Company has the
obligation to offer to purchase all the outstanding
Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date
of purchase. See "Description of the Notes--Change of
Control" for a discussion of the circumstances in
which the Company may not be required to make a Change
of Control Offer (as defined herein).
OFFERS TO PURCHASE..........
In the event of certain asset sales, the Company will
be required to offer to purchase the Notes at 100% of
their principal amount plus accrued and unpaid
interest, if any, to the date of purchase with the net
cash proceeds of such asset sales.
RANKING.....................
The Notes will be senior unsecured obligations of the
Company and will rank senior in right of payment to
all indebtedness of the Company which is by its terms
expressly subordinated in right of payment to the
Notes and pari passu in right of payment with all
other existing or future senior indebtedness of the
Company. As of September 30, 1996, on a pro forma
basis after giving effect to the Offering and the
Concurrent Offering, the Company would have had
approximately $113.2 million of indebtedness
outstanding, of which $.9 million would have been
secured. Any right of the holders of the Notes to
participate in the assets of the Company will be
subject to the prior claims of secured creditors, such
as the lenders under the New Credit Agreement, with
respect to those assets securing such claims. The
Company does not currently have, and does not
currently intend to issue, significant indebtedness to
which the Notes will be senior.
SUBSIDIARY GUARANTEES.......
The Notes will be guaranteed, jointly and severally,
fully and unconditionally, on a senior basis by the
Subsidiary Guarantors (the "Subsidiary Guarantees").
The Subsidiary Guarantees will be effectively
subordinated to all secured indebtedness of the
Subsidiary Guarantors to the extent of the assets
pledged to secure such indebtedness. At September 30,
1996, on a pro forma basis after giving effect to the
Offering, the Concurrent Offering and the Pending
Acquisitions, the Subsidiary Guarantors would have had
approximately $.3 million
8
<PAGE> 10
of indebtedness outstanding (other than the Subsidiary
Guarantees), all of which would have been secured.
PRINCIPAL COVENANTS.........
The Indenture for the Notes (the "Indenture") will
impose certain limitations on the ability of the
Company and its subsidiaries 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 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.
USE OF PROCEEDS.............
The Company intends to use the proceeds from the sale
of the Notes, together with the proceeds of the
Concurrent Offering, to (i) finance the Pending
Acquisitions, (ii) retire all of the indebtedness
under the Credit Agreement, (iii) to repay
approximately $7.8 million of obligations under
certain capital lease obligations, (iv) to repay
approximately $3.3 million under the POA Sellers'
Notes, (v) pay related fees and expenses and (vi) for
working capital and other general corporate purposes,
including the possible redemption of approximately
$5.5 million of 14% Preferred (as defined herein). In
the event the Cherokee Acquisition is not consummated
prior to , 1997, the Company will be
obligated to offer to purchase $35.0 million aggregate
principal amount of the Notes. See "The Pending
Acquisitions--The Cherokee Acquisition" and
"Description of the Notes--Special Offer to Purchase."
RISK FACTORS
Prospective investors should consider carefully all of the information set forth
in this Prospectus, particularly the matters set forth under the caption "Risk
Factors."
9
<PAGE> 11
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1995 SEPTEMBER 30,
-------------------------------- -------------------------------- ---------
PRO FORMA FOR
PRO FORMA FOR 1995 AND 1996
1995 AND 1996 ACQUISITIONS,
ACQUISITIONS, PENDING ACQUISI-
CONCURRENT TIONS, CONCUR-
OFFERING AND RENT OFFERING
Dollars in thousands, except per share data 1993 1994 1995 OFFERING (1) AND OFFERING (2) 1995
--------------------------------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $11,070 $15,866 $18,718 $59,610 $91,496 $11,957
Costs and expenses 11,683 17,180 24,007 68,734 101,106 15,203
Loss from operations (613) (1,314) (5,289) (9,124) (9,609) (3,246)
Interest expense 175 388 837 12,070 14,520 304
Loss before extraordinary item (779) (1,695) (6,110) (20,479) (24,505) (3,538)
Net loss (779) (1,695) (6,110) -- -- (3,538)
Net loss applicable to common (986) (1,987) (6,419) (21,132) (25,158) (3,770)
shareholders (5)
Net loss per common share (5) (0.96) (1.35) (3.29) (1.74) (2.08) (2.22)
Weighted average number of common shares 1,031,384 1,470,188 1,950,561 12,113,084 12,113,084 1,695,280
FINANCIAL RATIOS AND OPERATING DATA:
EBITDA (6) $283 $922 $1,264 $10,382 $21,245 $337
EBITDA margin (7) 2.56% 5.81% 6.75% 17.42% 23.22% 2.82%
Ratio of EBITDA to interest expense 1.62 2.38 1.51 .86 1.46 1.11
Number of public pay telephones in 2,350 4,891 9,458 24,074 37,763 8,344
service
Ratio of earnings to fixed charges (8) -- -- -- -- -- --
<CAPTION>
PRO FORMA
FOR 1996
PRO FORMA ACQUISITIONS,
FOR 1996 PENDING
ACQUISITIONS, ACQUISITIONS,
CONCURRENT CONCURRENT
OFFERING AND OFFERING AND
Dollars in thousands, except per share data 1996 OFFERING(3) OFFERING(4)
--------- ------------ -----------
<S> <<C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $28,315 $45,379 $70,447
Costs and expenses 37,156 54,354 81,389
Loss from operations (8,840) (8,975) (10,942)
Interest expense 4,140 9,127 10,527
Loss before extraordinary item (12,980) (17,297) (21,534)
Net loss (13,247) -- --
Net loss applicable to common (15,519) (17,567) (21,803)
shareholders (5)
Net loss per common share (5) (3.60) (1.31) (1.63)
Weighted average number of common shares 4,305,130 13,376,413 13,376,413
FINANCIAL RATIOS AND OPERATING DATA:
EBITDA (6) $5,554 $9,766 $16,055
EBITDA margin (7) 19.62% 21.52% 22.79%
Ratio of EBITDA to interest expense 1.34 1.07 1.53
Number of public pay telephones in 24,732 24,732 38,421
service
Ratio of earnings to fixed charges (8) -- -- --
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
AS OF SEPTEMBER 30, 1996
-----------------------------------------------------------------
PRO FORMA FOR
PRO FORMA FOR THE PENDING
THE OFFERING ACQUISITION,
AND CONCURRENT THE OFFERING AND
ACTUAL OFFERING (9) CONCURRENT OFFERING(10)
----------------- -------------- -----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $74,940 $115,797 $151,751
Long-term debt and obligations under capital
leases (including current installments) 49,521(11) 77,677 113,239
14% Mandatorily redeemable preferred stock 6,539 6,539 6,539
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity 11,645 24,344 24,344
Working capital (deficit)(12) (11,319) 32,889 9,789
</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"), the Concurrent Offering and the Offering, as if
such transactions had occurred on January 1, 1995, and assuming $35
million is held in escrow for five months and is 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.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, and
the Pending Acquisitions (collectively, the "Acquisitions"), the
Concurrent Offering and the 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. Because
Cherokee's fiscal year ends on September 30, the historical and pro
forma information relating to Cherokee is for the nine month period
ended June 30, 1996.
(3) Gives effect to the 1996 Acquisitions, the Concurrent Offering and
the Offering, as if such transactions had occurred on January 1,
1996, and assuming $35 million is held in escrow for five months
and is 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.
(4) Gives effect to the 1996 Acquisitions, the Pending Acquisitions,
the Concurrent Offering and the 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. Because
Cherokee's fiscal year ends on September 30, the historical and pro
forma information relating to Cherokee is for the nine month period
ended June 30, 1996.
(5) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption
of the 10% Preferred (as defined herein), the 8% Preferred (as
defined herein) and the 7% Preferred (as defined herein) realized
in March 1996.
(6) 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.
(7) 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.
(8) Earnings of the Company have been inadequate to cover fixed
charges. The dollar amount of earnings required to attain a ratio
of one-to-one for the years ended December 31, 1993, 1994, 1995 and
the nine months ended September 30, 1995 and September 30, 1996
were $778,875, $1,695,122, $6,109,697, $3,537,757 and $12,980,078,
respectively. The dollar amount of earnings required to attain a
ratio of one-to-one for the year ended December 31, 1995 and
10
<PAGE> 12
the nine months ended September 30, 1996 after giving pro forma
effect to the 1995 and 1996 Acquisitions, Concurrent Offering and
Offering were $20,756,716 and $17,297,007, respectively. The dollar
amount of earnings required to attain a ratio of one-to-one for the
year ended December 31, 1995 and the nine months ended September
30, 1996 after giving pro forma effect to the 1995 and 1996
Acquisitions, Pending Acquisitions, Concurrent Offering and
Offering were $23,383,752 and $21,552,937, respectively. For
purposes of this computation, earnings are defined as income (loss)
before income taxes and fixed charges. Fixed charges are defined as
the sum of (i) interest costs (including capitalized interest
expense); (ii) amortization of deferred financing costs and (iii)
an estimated portion of rent expense representing interest costs.
(9) Gives effect to the Offering and the Concurrent Offering, as if
such transactions had occurred on September 30, 1996 and assuming
the $35 million is held in escrow for five months and is then
utilized to purchase Notes from the bondholders.
(10) Gives effect to the Pending Acquisitions, the Offering and the
Concurrent Offering, as if such transactions had occurred on
September 30, 1996. Because Cherokee's fiscal year ends on
September 30, the historical and pro forma information relating to
Cherokee is as of June 30, 1996.
(11) Excludes $5,228,956 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.
(12) Working capital (deficit) is calculated by subtracting the
Company's current liabilities from its current assets.
11
<PAGE> 13
RISK FACTORS
An investment in the Notes 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 Notes offered hereby.
SUBSTANTIAL LEVERAGE AND EFFECT ON ABILITY TO PAY INDEBTEDNESS
The Company will have substantial indebtedness upon the consummation of this
Offering. In addition, earnings were insufficient to cover fixed charges by
approximately $6.1 million and $13.0 million for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively. As of September
30, 1996 on a pro forma basis after giving effect to the Pending Acquisitions,
the Offering and the Concurrent Offering, the Company's total indebtedness would
have been $113.2 million, its total assets would have been $151.8 million and
its mandatorily redeemable preferred stock and other equity would have been
$30.9 million. The Company will repay indebtedness under, and terminate, the
Credit Agreement upon consummation of the Offering and is negotiating with
lenders to enter into a new $25 to $50 million senior credit facility upon
consummation of the Offering (the "New Credit Agreement"). There can be no
assurance that the New Credit Agreement will be executed.
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 Strategy."
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
Offering and the Concurrent 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. 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 dispositions 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 Indenture 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 Agreement." For
restrictions on debt refinancing and asset dispositions under the Indenture, see
"Description of 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 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 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 technologies), particularly in the states
of Florida, Texas, Missouri and California, may have a material adverse effect
on the Company's business, 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
12
<PAGE> 14
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 -- Federal" and "-- Competition." 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 public pay telephone
services in 1986. Although the Company has experienced revenue growth since the
beginning of its operations, the Company has operated at a loss since its
inception. For the year ended December 31, 1995 and for the nine months ended
September 30, 1996, the Company has incurred losses before taxes and
extraordinary item of $6,109,697 and $12,980,078, respectively, and on a pro
forma basis after giving effect to the Acquisitions, the Offering and the
Concurrent Offering would have incurred losses before taxes and extraordinary
items of $23,383,752 and $21,552,937, respectively. There can be no assurance
that revenue growth will continue or that the Company will ever achieve or
sustain profitability. See "Pro Forma Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements of the Company and notes thereto contained
elsewhere in this Prospectus.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS; IMPACT OF ASSET
ENCUMBRANCES
The terms and conditions of the New Credit Agreement and the Indenture to be
entered into by the Company are expected to 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" and "Description of the
Notes." The New Credit Agreement is expected to be secured and guaranteed by the
Subsidiary Guarantors. 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 the Company was 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 indebtedness under the New Credit
Agreement 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, including the Notes.
The Notes and the Subsidiary Guarantees will be senior obligations of the
Company and the Subsidiary Guarantors, respectively, ranking pari passu in right
of payment with all existing and future senior obligations of the Company and
the Subsidiary Guarantors, respectively, including indebtedness under the New
Credit Agreement and any refinancing thereof. However, the Notes and the
Subsidiary Guarantees will be unsecured obligations while substantially all of
the assets of the Company and the Subsidiary Guarantors will be pledged to
secure the obligations under the New Credit Agreement. Indebtedness under the
New Credit Agreement and any other secured indebtedness of the Company and the
Subsidiary Guarantors will effectively rank prior to the Notes and the
Subsidiary Guarantees to the extent of the collateral securing such indebtedness
in the event of a realization upon the collateral or a dissolution, liquidation,
reorganization or similar proceeding related to the Company or such Subsidiary
Guarantor. After any such realization or proceeding, there can be no assurance
that there will be sufficient available proceeds or other assets for holders of
the Notes to recover all or any portion of their claims against the Company or
the Subsidiary Guarantors under the Notes and the Indenture. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness -- The New Credit Agreement."
LIMITATION ON CHANGE OF CONTROL
A Change of Control under the Indenture is expected to result in a default under
the New Credit Agreement. The exercise by the holders of the Notes of their
right to require the Company to repurchase the Notes upon a Change of Control
could also cause a default under other indebtedness of the Company, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. The Company's ability to pay cash to the holders of
the Notes upon a repurchase may be limited by the Company's then existing
financial resources. See "Description of the Notes -- Change of Control" and
"Description of Certain Indebtedness."
13
<PAGE> 15
POSSIBLE NON-CONSUMMATION OF THE PENDING ACQUISITIONS
The consummation of the Cherokee Acquisition, which is expected 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 Acquisition, which is also
expected to occur in January 1997, is also subject to similar closing
conditions. Although management believes that all such conditions to consummate
the Pending Acquisitions will be satisfied, there can be no assurance that such
conditions will be satisfied or waived or that the closings will occur. The
Company is seeking an amendment to the Credit Agreement, in part to fund the
deposits required in connection with the Pending Acquisitions. The consummation
of the Offering is not conditioned upon the consummation of the Cherokee
Acquisition or the Texas Coinphone Acquisition. A portion of the Notes will be
subject to an offer to purchase by the Company at the Special Offer Price if the
Cherokee Acquisition is not consummated prior to , 1997. See
"Description of the Notes -- Special Offer to Purchase."
RISKS OF GROWTH STRATEGY
The Company's strategy is to grow by acquisitions and internal growth. The
Company is subject to various risks associated with an acquisition growth
strategy, including the risks that the Company will be unable to integrate and
manage successfully the acquired companies or to identify and acquire suitable
companies in the future or to integrate and manage successfully any additional
acquired companies. Since September 1, 1995, the Company has acquired 19,053
public pay telephones, which represent approximately 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 the 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
assurance 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
increasing the costs of making acquisitions. In addition, 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. 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. 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 of
acquired companies and internal expansion. The Company may incur additional debt
to finance its growth 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 integration 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 personnel. 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 employees. 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 "Business--Employees."
14
<PAGE> 16
SERVICE INTERRUPTIONS; EQUIPMENT FAILURE
The Company outsources its long distance service and operator 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 Telecommunications Service
Company ("Conquest"). Such operations require that the switching equipment and
the equipment of its long distance service and operator service providers be
operational 24 hours per day, 365 days per year. The Company's long distance
service providers 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 telephones 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,
providers of operator support, validation of credit card and calling card
billing information and 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 availability 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
telephone companies, some of which may have greater financial resources 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 at attractive prices or at all, thereby reducing the Company's
profits. The Company also competes with long distance companies that provide
operator service 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 Section 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 met the
requirements of the Telecommunications Act's fourteen point competitive
checklist, which includes, among other things, that the BOC has entered into an
approved interconnection agreement with at least one unaffiliated,
facilities-based competitor in some portion of the state pursuant to which such
competitor provides local telecommunications 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 condition.
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 introduce new services
that would satisfy an expanded range of customer needs.
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
15
<PAGE> 17
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 diversified on both a
geographical and customer account basis. Currently, it owns and operates public
pay telephones in 40 states and the District of Columbia (approximately 95% of
such public pay telephones are located in 17 states) through agreements with
both multi-station customers such as shopping centers, convenience stores,
service stations, grocery stores, restaurants, truck stops and bus terminals as
well as with single station customers. After giving effect to the consummation
of the Pending Acquisitions, the Company will own and operate public pay
telephones in 42 states, the District of Columbia and Mexico (approximately 96%
of such public pay telephones are located in 21 states).
The Company owns and operates the public pay telephones for certain properties
owned by Simon DeBartolo Group, Inc. ("Simon DeBartolo"). The Company derived
approximately 15% and 7% of its total revenues for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively, from the
operation of these public pay telephones. As the Company expands its installed
public pay telephone base through additional acquisitions and internal growth,
it expects that the percentage of total revenues derived from Simon DeBartolo
will continue to decline. There can be no assurance that the agreements covering
these phones will be renewed upon expiration. Other than Simon DeBartolo, no
single customer generated more than 5% of the Company's total revenues for the
year ended December 31, 1995 or the nine months ended September 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 revenues
for the year ended December 31, 1995 or the nine months ended September 30,
1996.
FRAUDULENT CONVEYANCE RISKS
The Company's obligations under the Notes will be guaranteed, jointly and
severally, on a senior basis by each of the Subsidiary Guarantors. Various
fraudulent conveyance laws have been enacted for the protection of creditors and
may be applied by a court on behalf of any unpaid creditor or a representative
of the Company's creditors in a lawsuit to subordinate or avoid the Notes or any
Subsidiary Guarantee in favor of other existing or future creditors of the
Company or a Subsidiary Guarantor. To the extent that a court were to find that:
(i) the indebtedness represented by the Notes or a Subsidiary Guarantee was
incurred with intent to hinder, delay or defraud any present or future creditor
of the Company or the Subsidiary Guarantor, as the case may be, or contemplated
insolvency with a design to prefer one or more creditors to the exclusion in
whole or in part of others or (ii) the Company or a Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for issuing the Notes
or a Subsidiary Guarantee, as the case may be, and the Company or a Subsidiary
Guarantor (a) was insolvent, (b) was rendered insolvent by reason of the
issuance of the Notes or a Subsidiary Guarantee, (c) was engaged or about to
engage in business or a transaction for which the remaining assets of the
Company or such Subsidiary Guarantor constitute unreasonably small capital to
carry on its business, (d) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they mature or (e) was a defendant
in an action for money damages or had a judgment for money damages docketed
against it (if in either case, after final judgment, the judgment is
unsatisfied), then in each such case, a court could avoid or subordinate the
Notes or a Subsidiary Guarantee in favor of other creditors of the Company or a
Subsidiary Guarantor, as the case may be. Among other things, a legal challenge
of the Notes or a Subsidiary Guarantee on fraudulent conveyance grounds may
focus on the benefits, if any, realized by the Company or the Subsidiary
Guarantor as a result of the issuance by the Company of the Notes.
To the extent that any Subsidiary Guarantee were to be avoided as a fraudulent
conveyance or held unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of such Subsidiary Guarantor and would
be creditors solely of the Company and any Subsidiary Guarantor whose Subsidiary
Guarantee was not avoided or held unenforceable. In such event, the claims of
the holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject to the prior payment of all liabilities of such Subsidiary
Guarantor. There can be no assurance that, after providing for all prior claims,
there would be sufficient assets to satisfy the claims of the holders of the
Notes relating to any voided Subsidiary Guarantee.
Based upon financial and other information currently available to it, the
Company believes that the Notes and the Subsidiary Guarantees are being incurred
for proper purposes and in good faith, and that the Company and each of the
Subsidiary Guarantors (i) is solvent and will continue to be solvent after
issuing the Notes or its Subsidiary Guarantee, as the case may be, (ii) will
have sufficient capital for carrying on its business after such issuance and
(iii) will be able to pay its debts as they mature. There can be no assurance
that the assumptions and methodologies used by the Company in reaching its
conclusions about its solvency would be adopted by a court or that a court would
concur with those conclusions.
16
<PAGE> 18
LACK OF PUBLIC MARKET
There is currently no trading market for the Notes. The Company does not intend
to list the Notes on any securities exchange. The Company has been advised by
the Underwriters that the Underwriters currently intend to make a market in the
Notes; however, the Underwriters are not obligated to do so and may discontinue
any such market making activities at any time without notice. No assurance can
be given as to the development or liquidity of any trading market for the Notes.
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, without
limitation, those relating to the Company's services and ability to generate
additional revenues, are "forward 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 conditions 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 addition,
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 independent public pay telephone operator in the United States. At
September 30, 1996, Cherokee owned and operated 12,344 installed public pay
telephones in 14 states, of which approximately 85% were located in Texas, New
Mexico, Utah, Montana and Colorado. Upon consummation 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
installed 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 enclosure 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 Acquisitions, the Company will own and
operate 38,421 installed public pay telephones, 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 execution 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 purchase approximately $35.0 million aggregate
principal amount of the Notes at the Special Offer Price if the Cherokee
Acquisition is not consummated prior to , 1997. See "Risk
Factors--Possible Non-Consummation of the Pending Acquisitions" and "Description
of the Notes--Special Offer to Purchase."
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 forfeited by the Company if the Company breaches its obligations
under the purchase agreement or the Cherokee Acquisition otherwise fails to
close by January 31, 1997. The Cherokee Letter of Intent also provides 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 would 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
17
<PAGE> 19
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 million. 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 indemnification 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 to
be applied to the concurrent consummation of 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 installed 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 Acquisition is not consummated as a result of the Company's actions.
The Texas Coinphone Letter of Intent provides 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 would 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 sufficient 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 with respect to the condition and operation of
Texas Coinphone's business.
18
<PAGE> 20
USE OF PROCEEDS
The proceeds to the Company from the Offering are estimated to be approximately
$106.4 million (net of underwriting discounts and commissions). The Company
intends to use the proceeds of the Offering, together with the estimated
proceeds of $23.3 million from the Concurrent Offering (net of underwriting
discounts and commissions), to (i) finance the approximately $55.7 million
purchase price (subject to certain adjustments), including related fees and
expenses, relating to the Cherokee Acquisition and the $3.7 million purchase
price (subject to certain adjustments), including related fees and expenses,
relating to the Texas Coinphone Acquisition, (ii) retire all of the outstanding
debt under the Company's Credit Agreement (of which $41.0 million was
outstanding at September 30, 1996 and up to $43.0 million is expected to be
outstanding at the date of this Prospectus), (iii) repay approximately $7.8
million of capital lease obligations, (iv) repay approximately $3.3 million of
notes payable owed to the sellers of POA (the "POA Sellers' Notes") and (v) pay
related fees and expenses of approximately $3.8 million. The Company will use
the balance of the proceeds of approximately $14.4 million for working capital
and other general corporate purposes, including acquisitions (subject to
restrictions expected to be contained in the New Credit Agreement) and the
possible redemption of the mandatorily redeemable 14% Preferred having an
aggregate stated value and redemption price of approximately $5.5 million. If,
however, the Cherokee Acquisition is not consummated by , 1997,
the Company will be required to offer to repurchase $35.0 million aggregate
principal amount of the Notes at the Special Offer Price which is equal to 101%
of the principal amount of the Notes plus accrued and unpaid interest to the
Final Special Offer Purchase Date. See "Description of the Notes -- Special
Offer to Purchase."
A portion of the borrowings being repaid under the Credit Agreement matures on
April 30, 1997, while another portion matures on December 31, 1997 and the
remainder matures on June 30, 1999, and all borrowings thereunder bear interest
at the prime rate plus 5%. The capital lease obligations will expire in January
2002 and currently bear interest at 13% per annum (which rate increases to 14%
effective January 1997). The POA Sellers' Notes mature in either May 2002 or
June 2002, and currently bear interest at 10% per annum (which rate increases to
14% effective January 1997). See "The Pending Acquisitions -- The Cherokee
Acquisition" for a description of the Cherokee Acquisition, "The Pending
Acquisitions -- The Texas Coinphone Acquisition" for a description of the Texas
Coinphone Acquisition, "Description of Certain Indebtedness" for descriptions of
the Credit Agreement and the New Credit Agreement and "Description of Capital
Stock -- Preferred Stock -- 14% Preferred" for a description of the 14%
Preferred.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect to the
Offering and Concurrent Offering as if such transactions had occurred on
September 30, 1996 and assuming the $35.0 million held in escrow for five months
is then utilized to purchase Notes from the bondholders and (iii) on a pro forma
basis as set forth in the preceding clause (ii) (except for the repurchase by
the Company of the $35.0 million of Notes from the bondholders) and as adjusted
to reflect the Pending Acquisitions, as if such transactions had occurred on
September 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 SEPTEMBER 30, 1996
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
Total long-term debt (including current installments):
Credit Agreement, net (1) $ 35,771,044 -- --
New Credit Agreement (2) -- -- --
% Senior Notes due 2006 -- $ 75,000,000 $110,000,000
Notes payable (including obligations under capital leases) 13,749,758 2,677,337 3,238,904
------------ ------------ ------------
Total long-term debt (including current installments) 49,520,802 77,677,337 113,238,904
------------ ------------ ------------
Mandatorily redeemable preferred stock:
14% cumulative redeemable convertible preferred stock: $60
stated value; 200,000 shares authorized; 107,918.19 shares
issued and outstanding; 8,397.83 shares reserved for
issuance upon declaration of dividends (3) 6,539,053 6,539,053 6,539,053
------------ ------------ ------------
Non-mandatorily redeemable preferred stock, common stock and
other shareholders' equity:
Series A special convertible preferred stock: $0.20 par
value; 250,000 shares authorized; no shares issued -- -- --
Series B special convertible preferred stock: $0.20 par
value; 250,000 shares authorized; no shares issued -- -- --
Common stock: $.01 par value; 50,000,000 shares authorized;
7,639,709 shares issued and outstanding, actual;
14,389,709 shares issued and outstanding, pro forma;
14,389,709 shares issued and outstanding, pro forma, as
adjusted (4) 76,397 143,897 143,897
Additional paid-in capital 40,541,544 62,979,044 62,979,044
Accumulated deficit (5) (28,973,186) (38,778,467) (38,778,467)
------------ ------------ ------------
Total non-mandatorily redeemable preferred stock, common
stock and other shareholders' equity 11,644,755 24,344,474 24,344,474
------------ ------------ ------------
Total capitalization $ 67,704,610 $108,560,864 $144,122,431
============ ============ ============
</TABLE>
- ---------------
(1) Excludes $5,228,956 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 September 30, 1996 was
$41,000,000.
(2) Upon consummation of the Offering and the Concurrent Offering, the Company
does not expect to have any borrowings under the New Credit Agreement.
(3) The redemption amount of $6,978,963 (plus accrued dividends) is due on June
30, 2000. The Company may elect, at its option, to redeem approximately
$5,500,000 of the 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 the 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.
20
<PAGE> 22
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 nine months ended September 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 nine months ended September 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 year ended December 31,
1995 and the nine months ended September 30, 1996, as adjusted to give pro forma
effect to (i) in the case of statement of operations data, (a) the 1995
Acquisitions, the 1996 Acquisitions, the Concurrent Offering and the Offering as
if such transactions had been consummated at the beginning of the respective
period and assuming $35 million is escrowed for five months and then utilized to
purchase Notes from the bondholders and (b) the Acquisitions, the Offering and
the Concurrent Offering as if such transactions had been consummated at the
beginning of the respective period and (ii) in the case of balance sheet data,
(a) the Concurrent Offering and the Offering as if such transactions had been
consummated on September 30, 1996 and assuming $35 million is escrowed for five
months and then utilized to purchase Notes from bondholders and (b) the Pending
Acquisitions, the Offering and the Concurrent Offering as if such transactions
had been consummated on September 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.
21
<PAGE> 23
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1995 SEPTEMBER 30,
--------------------------------- ---------------------------------- ------------
PRO FORMA FOR
1995 AND 1996
PRO FORMA FOR ACQUISITIONS,
1995 AND 1996 PENDING ACQUIS-
ACQUISITIONS, ITIONS,
CONCURRENT CONCURRENT
OFFERING AND OFFERING AND
1993 1994 1995 OFFERING(1) OFFERING(2) 1995
--------- --------- --------- --------------- ---------------- ---------
(unaudited) (unaudited)
Dollars in thousands, except per share data
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $11,070 $15,866 $18,718 $59,610 $91,496 $11,957
Costs and expenses 11,683 17,180 24,007 68,734 101,106 15,203
Loss from operations (613) (1,314) (5,289) (9,124) (9,609) (3,246)
Interest expense 175 388 837 12,070 14,520 304
Loss before extraordinary item (779) (1,695) (6,110) (20,479) (24,505) (3,538)
Net loss (779) (1,695) (6,110) -- -- (3,538)
Net loss applicable to common (986) (1,987) (6,419) (21,132) (25,158) (3,770)
shareholders (5)
Net loss per common share (5) (0.96) (1.35) (3.29) (1.74) (2.08) (2.22)
Weighted average number of common 1,031,384 1,470,188 1,950,561 12,113,084 12,113,084 1,695,280
shares
FINANCIAL RATIOS AND OPERATING DATA:
EBITDA (6) $283 $922 $1,264 $10,382 $21,245 $337
EBITDA margin (7) 2.56% 5.81% 6.75% 17.42% 23.22% 2.82%
Ratio of EBITDA to interest expense 1.62 2.38 1.51 .86 1.46 1.11
Number of public pay telephones in 2,350 4,891 9,458 24,074 37,763 8,344
service
Ratio of earnings to fixed charges (8) -- -- -- -- -- --
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
PRO FORMA
FOR 1996
PRO FORMA ACQUISITIONS,
FOR 1996 PENDING
ACQUISITIONS, ACQUISITIONS,
CONCURRENT CONCURRENT
OFFERING AND OFFERING AND
1996 OFFERING(3) OFFERING(4)
--------- ------------ ------------
Dollars in thousands, except per share
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $28,315 $45,379 $70,447
Costs and expenses 37,156 54,354 81,389
Loss from operations (8,840) (8,975) (10,942)
Interest expense 4,140 9,127 10,527
Loss before extraordinary item (12,980) (17,297) (21,534)
Net loss (13,247) -- --
Net loss applicable to common (15,519) (17,567) (21,803)
shareholders (5)
Net loss per common share (5) (3.60) (1.31) (1.63)
Weighted average number of common 4,305,130 13,376,413 13,376,413
shares
FINANCIAL RATIOS AND OPERATING DATA:
EBITDA (6) $5,554 $9,766 $16,055
EBITDA margin (7) 19.62% 21.52% 22.79%
Ratio of EBITDA to interest expense 1.34 1.07 1.53
Number of public pay telephones in 24,732 24,732 38,421
service
Ratio of earnings to fixed charges (8) -- -- --
<CAPTION>
--------------------------------------
AS OF SEPTEMBER 30, 1996
--------------------------------------
PRO FORMA FOR PRO FORMA FOR
OFFERING PENDING ACQUISITIONS
AND CONCURRENT OFFERING AND
ACTUAL OFFERING(9) CONCURRENT OFFERING(10)
-------- ------------ ----------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $74,940 $115,797 $151,751
Long-term debt and obligations under capital leases
(including current installments) 49,521(11) 77,677 113,239
14% Mandatorily redeemable preferred stock 6,539 6,539 6,539
Non-mandatorily redeemable preferred stock, common stock and other 11,645 24,344 23,344
shareholders' equity
Working capital (deficit) (12) (11,319) 32,889 9,789
</TABLE>
- ---------------
(1) Gives effect to the 1996 Acquisitions, the 1995 Acquisitions, the
Concurrent Offering and the Offering, as if such transactions had occurred
on January 1, 1995, and assuming $35 million is held in escrow for five
months and is 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.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, and the
Pending Acquisitions (collectively, the "Acquisitions"), the Concurrent
Offering and the 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. Because Cherokee's fiscal year ends on September 30, the
historical and pro forma information relating to Cherokee is for the nine
month period ended June 30, 1996.
(3) Gives effect to the 1996 Acquisitions, the Concurrent Offering and the
Offering, as if such transactions had occurred on January 1, 1996, and
assuming $35 million is held in escrow for five months and is 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.
(4) Gives effect to the 1996 Acquisitions, the Pending Acquisitions, the
Concurrent Offering and the 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. Because Cherokee's fiscal year ends on
September 30, the historical and pro forma information relating to Cherokee
is for the nine month period ended June 30, 1996 and as of June 30, 1996.
(5) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption of the
10% Preferred (as defined herein), the 8% Preferred (as defined herein) and
the 7% Preferred (as defined herein) realized in March 1996.
(6) 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.
(7) 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.
(8) Earnings of the Company have been inadequate to cover fixed charges. The
dollar amount of earnings required to attain a ratio of one-to-one for the
years ended December 31, 1993, 1994, 1995 and the nine months ended
September 30, 1995 and September 30, 1996 were $778,875, $1,695,122,
$6,109,697, $3,537,757 and $12,980,078, respectively. The dollar amount of
earnings required to attain a ratio of one-to-one for the year ended
December 31, 1995 and the nine months ended September 30, 1996 after giving
pro forma effect to the 1995 and 1996 Acquisitions, the Offering and
Concurrent Offering were $20,756,716 and $17,297,007, respectively. The
dollar amount of earnings required to attain a ratio of one-to-one for the
22
<PAGE> 24
year ended December 31, 1995 and the nine months ended September 30, 1996
after giving pro forma effect to the 1995 and 1996 Acquisitions, Pending
Acquisitions, Concurrent Offering and Offering were $23,383,752 and
$21,552,937, respectively. For purposes of this computation, earnings are
defined as income (loss) before income taxes and fixed charges. Fixed
charges are defined as the sum of (i) interest costs (including capitalized
interest expense); (ii) amortization of deferred financing costs and (iii)
an estimated portion of rent expense representing interest costs.
(9) Gives effect to the Offering and the Concurrent Offering, as if such
transactions had occurred on September 30, 1996 and assuming the $35
million is held in escrow for five months and is then utilized to purchase
Notes from the bondholders.
(10) Gives effect to the Pending Acquisitions, and the Offering and the
Concurrent Offering, as if such transactions had occurred on September 30,
1996. Because Cherokee's fiscal year ends on September 30, the historical
and pro forma information relating to Cherokee is as of June 30, 1996.
(11) Excludes $5,228,956 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.
(12) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
23
<PAGE> 25
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined, condensed financial statements
adjust the historical statements of operations data for the year ended December
31, 1995 and the nine months ended September 30, 1996 to give effect to (i) the
acquisition of World on September 22, 1995, Public Telephone on October 15,
1995, IPP and Paramount on March 15, 1996, POA effective August 1, 1996 and
Amtel on September 13, 1996; (ii) the Pending Acquisitions (which are to be
funded with the proceeds from the Offering and Concurrent Offering); (iii) the
funds borrowed under the Credit Agreement; (iv) the sale by the Company of $25
million of Common Stock pursuant to the Concurrent Offering; and (v) the sale by
the Company of $110 million in Senior Notes pursuant to this Offering and the
application of the estimated net proceeds therefrom as set forth under "Use of
Proceeds." The following unaudited pro forma combined condensed balance sheet as
of September 30, 1996 adjusts the historical balance sheet to give effect to (i)
the Pending Acquisitions; (ii) the sale by the Company of $25 million of Common
Stock pursuant to the Concurrent Offering; and (iii) the sale by the Company of
$110 million of Notes pursuant to this Offering and the application of the
estimated net proceeds therefrom as set forth under "Use of Proceeds." Because
Cherokee's fiscal year ends on September 30, the historical and pro forma
information relating to Cherokee is for the nine month period ended June 30,
1996 and as of June 30, 1996. All purchase price allocations for the
Acquisitions are preliminary in nature and are subject to change within the
twelve months following each acquisition based on refinements as actual data
becomes available. The pro forma adjustments are included in the unaudited pro
forma balance sheet as if the transactions had occurred on September 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.
24
<PAGE> 26
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
---------------------------------------------------------------------
WORLD,
PUBLIC PRO FORMA
TELEPHONE, ADJUSTMENTS
IPP AND FOR 1995
PHONETEL PARAMOUNT AND 1996
TECHNOLOGIES (a) AMTEL POA ACQUISITIONS
----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $12,130,189 $14,398,568 $ 9,689,179 $ 3,747,247 $ (295,000)
Non-coin 3,776,501 3,847,874 5,459,411 4,418,667 (964,000)
Other 2,811,293 242,481 1,910,550 49,221 (1,612,000)
----------- ----------- ----------- ----------- -----------
18,717,983 18,488,923 17,059,140 8,215,135 (2,871,000)(b)
----------- ----------- ----------- ----------- -----------
Operating expenses:
Line and transmission charges 5,475,699 6,377,191 6,862,015 3,599,271 (1,695,000)(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 (3,027,000)(e)
Depreciation and amortization 4,383,049 2,059,628 1,621,029 1,218,095 8,529,000(f)
Selling, general and administrative 3,200,742 5,229,060 15,103,091 1,911,624 (14,310,000)(g)
Other unusual charges and contractual settlements 2,169,503 -- -- -- --
----------- ----------- ----------- ----------- -----------
24,006,881 17,874,388 30,226,966 8,196,182 (11,570,000)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations (5,288,898) 614,535 (13,167,826) 18,953 8,699,000
----------- ----------- ----------- ----------- -----------
Other income (expense)
Interest expense -- related parties -- -- -- -- (7,009,000)(h)
Interest expense -- others (836,911) (1,109,102) (7,429,502) (971,141) 7,525,000(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) 1,485,909
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and extraordinary item (6,109,697) (880,401) (21,567,237) (1,020,290) 10,184,909
Income taxes (benefit) -- 38,100 4,000 (277,720) (42,100)(k)
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item $(6,109,697) $ (918,501) $(21,571,237) $ (742,570) $ 10,227,009
=========== =========== =========== =========== ===========
Earnings per share calculation:
Preferred dividend requirement (309,668) (343,567) -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item applicable
to common shareholders $(6,419,365) $(1,262,068) $(21,571,237) $ (742,570) $ 10,227,009
=========== =========== =========== =========== ===========
Loss per common share before extraordinary item $ (3.29)
===========
Weighted average number of shares 1,950,561 1,083,694 2,162,163 166,666
=========== =========== =========== ===========
<CAPTION>
PRO FORMA
FOR
PRO FORMA 1995 AND
ADJUSTMENTS 1996
FOR ACQUISITONS,
CONCURRENT CONCURRENT
OFFERING OFFERING TEXAS
AND AND COIN-
OFFERING OFFERING CHEROKEE PHONE
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues
Coin calls -- $ 39,670,183 $ 14,036,665 $ 846,210
Non-coin -- 16,538,453 15,944,498 553,337
Other -- 3,401,545 505,581 --
----------- ----------- ----------- ----------
-- 59,610,181 30,486,744 1,399,547
----------- ----------- ----------- ----------
Operating expenses:
Line and transmission charges -- 20,619,176 9,673,772 513,036
Location commissions -- 9,861,680 4,909,445 135,746
Other operating expenses -- 7,138,740 2,016,935 280,706
Depreciation and amortization -- 17,810,801 4,298,090 151,926
Selling, general and administrative -- 11,134,517 5,520,405 357,197
Other unusual charges and contractual settlements -- 2,169,503 -- --
----------- ----------- ----------- ----------
-- 68,734,417 26,418,647 1,438,611
----------- ----------- ----------- ----------
Income (loss) from operations -- (9,124,236) 4,068,097 (39,064)
----------- ----------- ----------- ----------
Other income (expense)
Interest expense -- related parties $ 7,009,000(l) -- -- --
Interest expense -- others (9,248,000)(m) (12,069,656) (1,631,416) (57,561)
Interest income 875,000(n) 911,198 57,278 21,563
Reorganization expenses -- -- -- --
Other -- (474,022) 1,125,630 281,501
----------- ----------- ----------- ----------
Total other income (expense) (1,364,000) (11,632,480) (448,508) 245,503
----------- ----------- ----------- ----------
Income (loss) before income taxes and extraordinary item (1,364,000) (20,756,716) 3,619,589 206,439
Income taxes (benefit) -- (277,720) 1,399,140 --
----------- ----------- ----------- ----------
Income (loss) before extraordinary item $ (1,364,000) $(20,478,996) $ 2,220,449 $ 206,439
=========== =========== =========== ==========
Earnings per share calculation:
Preferred dividend requirement -- (653,235) -- --
----------- ----------- ----------- ----------
Income (loss) before extraordinary item applicable
to common shareholders $ (1,364,000) $(21,132,231)(p) $ 2,220,449 $ 206,439
=========== =========== =========== ==========
Loss per common share before extraordinary item $ (1.74)(p)
===========
Weighted average number of shares 6,750,000(o) 12,113,084
=========== ===========
<CAPTION>
PRO FORMA
FOR 1995
AND 1996
ACQUISITIONS,
PRO FORMA PENDING
ADJUSTMENTS PRO FORMA CONCURRENT
FOR ADJUSTMENTS OFFERING
PENDING FOR AND
ACQUISITIONS THE OFFERING OFFERING
--------------- --------------- ------------
<S> <C> <C> <C>
Revenues
Coin calls -- -- $ 54,553,058
Non-coin -- -- 33,036,288
Other -- -- 3,907,126
----------- ----------- -----------
-- -- 91,496,472
----------- ----------- -----------
Operating expenses:
Line and transmission charges -- -- 30,805,984
Location commissions -- -- 14,906,871
Other operating expenses $ (128,000)(q) -- 9,308,381
Depreciation and amortization 5,772,000(r) -- 28,032,817
Selling, general and administrative (1,130,000)(s) -- 15,882,119
Other unusual charges and contractual settlements -- -- 2,169,503
----------- ----------- -----------
4,514,000 -- 101,105,675
----------- ----------- -----------
Income (loss) from operations (4,514,000) -- (9,609,203)
----------- ----------- -----------
Other income (expense)
Interest expense -- related parties -- -- --
Interest expense -- others 1,689,000 (t) $(2,450,000)(w) (14,519,633)
Interest income (21,563)(u) (875,000)(x) 93,476
Reorganization expenses -- -- --
Other (281,501)(v) -- 651,608
----------- ----------- -----------
Total other income (expense) 1,385,936 (3,325,000) (13,774,549)
----------- ----------- -----------
Income (loss) before income taxes and extraordinary item (3,128,064) (3,325,000) (23,383,752)
Income taxes (benefit) -- -- 1,121,420
----------- ----------- -----------
Income (loss) before extraordinary item $(3,128,064) $(3,325,000) $(24,505,172)
=========== =========== ===========
Earnings per share calculation:
Preferred dividend requirement -- -- (653,235)
----------- ----------- -----------
Income (loss) before extraordinary item applicable to common
shareholders $(3,128,064) $(3,325,000) $(25,158,407)
=========== =========== ===========
Loss per common share before extraordinary item $ (2.08)
===========
Weighted average number of shares 12,113,084
===========
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operation are an integral part of these financial statements
25
<PAGE> 27
FOOTNOTES TO THE UNAUDITED 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 21, OCTOBER 14, DECEMBER 31,
1995 1995 1995 COMBINED
--------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Coin calls $ 2,791,016 $ 1,376,867 $ 10,230,665 $ 14,398,568
Non-coin 3,467,687 380,187 -- 3,847,874
Other 58,345 184,136 -- 242,481
---------- ---------- ----------- -----------
6,317,048 1,941,190 10,230,685 18,488,923
---------- ---------- ----------- -----------
Operating expenses:
Line and 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 and amortization 855,059 268,262 936,307 2,059,628
Selling, general and 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 (loss) 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)
---------- ---------- ----------- -----------
Total other income (expense) (590,146) (623,216) (281,574) (1,494,936)
---------- ---------- ----------- -----------
Income (loss) before income taxes (989,356) (388,961) 497,916 (880,401)
Income taxes -- -- 38,100 38,100
---------- ---------- ----------- -----------
Net income (loss) $ (989,356) $ (388,961) $ 459,816 $ (918,501)
========== ========== =========== ===========
</TABLE>
(b) Represents the estimated reduction in revenues for assets not acquired.
<TABLE>
<S> <C>
---------
Amtel $2,859,000
POA 12,000
----------
$2,871,000
==========
</TABLE>
(c) Represents estimated reduction in line and transmission charges at Amtel to
reflect lower volumes and better rates.
(d) Represents estimated lower location commissions due to assets not acquired.
<TABLE>
<S> <C>
---------
Amtel $ 800,000
Public Telephone 267,000
----------
$1,067,000
=========
</TABLE>
(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.
<TABLE>
<S> <C>
---------
World, Public Telephone, IPP and Paramount $ 800,000
Amtel 2,132,000
POA 95,000
----------
$3,027,000
==========
</TABLE>
26
<PAGE> 28
(f) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets.
<TABLE>
<CAPTION>
---------------------------
LIVES
AMOUNT TANGIBLE INTANGIBLE
----------- -------- ----------
(MONTHS)
<S> <C> <C> <C>
World, Public Telephone, IPP and Paramount $ 6,117,000 60 24-60
Amtel 1,008,000 60 54
POA 1,404,000 60 60-72
-----------
$ 8,529,000
==========
</TABLE>
(g) Represents estimated reductions in selling, general and administrative
expenses resulting primarily from eliminating certain offices, executives
and administrative personnel, costs associated with operations not acquired
(principally Amtel), and elimination of costs associated with the bankruptcy
of Amtel.
<TABLE>
<CAPTION>
----------
<S> <C>
World, Public Telephone, IPP and Paramount $ 2,004,000
Amtel 11,361,000
POA 945,000
-----------
$14,310,000
===========
</TABLE>
(h) Represents additional interest expense for borrowings under the Credit
Agreement.
<TABLE>
<CAPTION>
-----------------------------
AMOUNT INTEREST PRO FORMA
BORROWED RATE EXPENSE
----------- -------- -----------
<S> <C> <C> <C>
To fund the acquisitions of World, Public Telephone, IPP and Paramount $32,223,484 13.25% $ 4,270,000
To fund the acquisitions of Amtel and POA and to pay related expenses and
other obligations 8,776,516 13.25% 1,163,000
Accretion of original issue debt discount 1,576,000
----------
$ 7,009,000
==========
</TABLE>
(i) Represents reduction in interest expense to reflect elimination of separate
company borrowings, offset by interest expense on the POA Sellers' Notes.
<TABLE>
<CAPTION>
---------
<S> <C>
World, Public Telephone, IPP and Paramount $ 650,000
Amtel 7,430,000
POA (555,000)
----------
$7,525,000
==========
</TABLE>
(j) Represents elimination of Amtel reorganization expenses subsequent to
Amtel's filing of bankruptcy and elimination of non-
recurring loss on disposal of assets at Amtel.
(k) Represents elimination of income tax expense.
(l) Represents elimination of interest expense incurred under the Credit
Agreement.
(m) Represents increase in interest expense.
<TABLE>
<CAPTION>
-----------------------------------------
AMOUNT INTEREST MONTHS INTEREST
OUTSTANDING RATE OUTSTANDING EXPENSE
------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Debt pursuant to the Offering (during the 5 months funds are held in
escrow) $ 110,000,000 12% 5 $ 5,500,000
Debt pursuant to the Offering assuming escrow is utilized to purchase
Notes from bondholders. 75,000,000 12% 7 5,250,000
Interest savings on the POA Sellers' notes and repayment of capital
leases. (1,502,000)
------------
$ 9,248,000
==========
</TABLE>
27
<PAGE> 29
(n) Represents interest income estimated to be earned on the escrow balance of
$35,000,000, assuming the balance is retained in escrow for five months and
earns interest income at 6%.
(o) Represents 6,250,000 shares of Common Stock which may be sold pursuant to
the Concurrent Offering (assuming an offering price of $4.00 per share), and
the exercise of warrants to purchase, in the aggregate, 25,000 shares of
Series A Preferred and the immediate conversion of the shares of Series A
Preferred into 500,000 shares of Common Stock.
(p) 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; (ii) an extraordinary loss of $267,281 realized
on the restructuring of the Company's debt on March 15, 1996; and (iii) an
estimated extraordinary loss of $9,805,281 to be realized on the early
retirement of the borrowings under the Credit Agreement.
(q) Represents the estimated reduction in other operating expenses primarily to
eliminate redundant operations and operations personnel.
<TABLE>
<CAPTION>
----------
<S> <C>
Cherokee $ 40,000
Texas Coinphone 88,000
-----------
$ 128,000
===========
</TABLE>
(r) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets for the Pending Acquisitions.
<TABLE>
<CAPTION>
---------------------------------
LIVES
AMOUNT TANGIBLE INTANGIBLE
---------- -------- -----------
(MONTHS)
<S> <C> <C> <C>
Cherokee $5,243,000 60 60-82
Texas Coinphone 529,000 60 72
----------
$5,772,000
==========
</TABLE>
(s) Represents estimated reductions in selling, general and administrative
expenses to reflect the elimination of certain offices, executives and
administrative personnel.
<TABLE>
<CAPTION>
----------
<S> <C>
Cherokee $ 1,000,000
Texas Coinphone 130,000
-----------
$ 1,130,000
==========
</TABLE>
(t) Represents reduction in interest expense to reflect elimination of separate
company borrowings.
<TABLE>
<CAPTION>
----------
<S> <C>
Cherokee $ 1,631,000
Texas Coinphone 58,000
-----------
$ 1,689,000
===========
</TABLE>
(u) Represents elimination of Texas Coinphone interest income.
(v) Represents elimination of Texas Coinphone other income which relates to
assets not acquired.
(w) Represents additional interest expense assuming consummation of the Pending
Acquisitions and $110,000,000 is outstanding for a full year (additional
$35,000,000 at 12% for seven months).
(x) Represents elimination of interest income on escrow balance assuming
consummation of the Pending Acquisitions.
28
<PAGE> 30
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR
PRO FORMA CONCURRENT
ADJUSTMENTS OFFERING
PHONETEL IPP AND FOR 1996 AND
TECHNOLOGIES PARAMOUNT(a) AMTEL(b) POA(c) ACQUISITIONS OFFERING
------------ ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Coin calls $ 16,988,697 $ 2,473,567 $ 6,653,874 $1,769,257 -- --
Non-coin 9,308,538 -- 3,464,990 1,795,827 -- --
Other 2,018,191 15,113 87,968 831,179 $ (28,000) --
----------- ---------- ---------- ---------- ---------- -----------
28,315,426 2,488,680 10,206,832 4,396,263 (28,000)(d) --
----------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Line and transmission charges 6,800,782 585,463 3,440,664 814,759 -- --
Location commissions 4,101,195 376,269 2,322,097 509,461 -- --
Other operating expenses 8,102,314 356,816 456,092 1,237,567 (247,000)(e) --
Depreciation and amortization 8,876,238 183,931 1,101,916 695,490 2,442,000(f) --
Selling, general and
administrative 3,757,559 492,244 3,161,957 1,149,506 (1,881,000)(g) --
Other unusual charges and
contractual settlements 5,517,753 -- -- -- -- --
----------- ---------- ---------- ---------- ---------- -----------
37,155,841 1,994,723 10,482,726 4,406,783 314,000 --
----------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations (8,840,415) 493,957 (275,894) (10,520) (342,000) --
----------- ---------- ---------- ---------- ---------- -----------
Other income (expense):
Interest expense -- related
parties (3,588,420) -- -- -- (815,000)(h) $ 4,375,000(l)
Interest expense -- others (551,243) (30,881) (8,508) (388,768) (453,000)(i) (7,666,000)(m)
Interest income -- -- 2,248 4,111 -- 875,000(n)
Reorganization expenses -- -- (1,105,843) -- 1,105,843(j) --
Other -- (12,638) (1,342,615) (64,036) 1,342,615(j) --
----------- ---------- ---------- ---------- ---------- -----------
Total other income (expense) (4,139,663) (43,519) (2,454,718) (448,693) 1,180,458 (2,416,000)
----------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes and extraordinary item (12,980,078) 450,438 (2,730,612) (459,213) 838,458 (2,416,000)
Income taxes -- -- 5,667 -- (5,667)(k) --
----------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
extraordinary item $(12,980,078) $ 450,438 $(2,736,279) $ (459,213) $ 844,125 $(2,416,000)
=========== ========== ========== ========== ========== ===========
Earnings per share calculation:
Preferred divided requirement (269,565) -- -- -- -- --
----------- ---------- ---------- ---------- ---------- -----------
Income (loss) before
extraordinary item
applicable to common
shareholders $(13,249,643) $ 450,438 $(2,736,279) $ (459,213) $ 844,125 $(2,416,000)
=========== ========== ========== ========== ========== ===========
Loss per common share before
extraordinary item $ (3.08)
===========
Weighted average number of
shares 4,305,130 154,330 2,037,324 129,629 6,750,000(o)
=========== ========== ========== ========== ===========
<CAPTION>
PRO FORMA
FOR 1996
ACQUISITIONS,
PENDING PENDING
FOR 1996 ACQUISITIONS,
ACQUISITONS, PRO FORMA PRO FORMA CONCURRENT
CONCURRENT TEXAS ADJUSTMENTS ADJUSTMENTS OFFERING
OFFERING AND COIN- FOR PENDING FOR AND
OFFERING CHEROKEE PHONE ACQUISITIONS OFFERING OFFERING
-------------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Coin calls $27,885,395 $12,571,961 $ 910,263 -- -- $ 41,367,619
Non-coin 14,569,355 10,325,599 403,573 -- -- 25,298,527
Other 2,924,451 817,273 39,485 -- -- 3,781,209
----------- ---------- -------- --------- ----------- ------------
45,379,201 23,714,833 1,353,321 -- -- 70,447,355
----------- ---------- -------- --------- ----------- ------------
Operating expenses:
Line and transmission charges 11,641,668 6,451,165 459,477 -- -- 18,552,310
Location commissions 7,309,022 3,885,956 153,801 -- -- 11,348,779
Other operating expenses 9,905,789 3,371,481 85,843 $ (142,000)(q) -- 13,221,113
Depreciation and amortization 13,299,575 3,831,645 56,398 4,386,000(r) -- 21,573,618
Selling, general and
administrative 6,680,266 4,909,963 432,635 (847,000)(s) -- 11,175,864
Other unusual charges and
contractual settlements 5,517,753 -- -- -- -- 5,517,753
----------- ---------- -------- --------- ----------- ------------
54,354,073 22,450,210 1,188,154 3,397,000 -- 81,389,437
----------- ---------- -------- --------- ----------- ------------
Income (loss) from operations (8,974,872) 1,264,623 165,167 (3,397,000) -- (10,942,082)
----------- ---------- -------- --------- ----------- ------------
Other income (expense):
Interest expense -- related
parties (28,420) -- -- -- -- (28,420)
Interest expense -- others (9,098,400) (1,358,917) (51,325) 1,410,242(t) $(1,400,000)(v) (10,498,400)
Interest income 881,359 3,645 -- -- (875,000)(w) 10,004
Reorganization expenses -- -- -- -- -- --
Other (76,674) (17,365) 123,236 (123,236)(u) -- (94,039)
---------- ---------- -------- --------- ----------- ------------
Total other income (expense) (8,322,135) (1,372,637) 71,911 1,287,006 (2,275,000) (10,610,855)
----------- ---------- -------- --------- ----------- ------------
Income (loss) before income
taxes and extraordinary item (17,297,007) (108,014) 237,078 (2,109,994) (2,275,000) (21,552,937)
Income taxes -- (19,188) -- -- -- (19,188)
----------- ---------- -------- --------- ----------- ------------
Income (loss) before
extraordinary item $ (17,297,007) $ (88,826) $ 237,078 $ (2,109,994) $(2,275,000) $(21,533,749)
=========== ========== ======== ========= =========== ============
Earnings per share calculation:
Preferred divided requirement (269,565) -- -- -- -- (269,565)
---------- ---------- -------- --------- ----------- ------------
Income (loss) before
extraordinary item
applicable to common
shareholders $ (17,566,572)(p) $ (88,826) $ 237,078 $ (2,109,994) $(2,275,000) $(21,803,314)
=========== ========== ======== ========= =========== ============
Loss per common share before
extraordinary item $ (1.31)(p) $ (1.63)
=========== ============
Weighted average number of
shares 13,376,413 13,376,413
=========== ============
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations are an integral part of these financial statements.
29
<PAGE> 31
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(a) Represents the operations of IPP and Paramount for the period from January
1, 1996 through March 14, 1996.
<TABLE>
<CAPTION>
-----------------------------------
IPP PARAMOUNT COMBINED
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Coin calls $ 841,346 $1,632,221 $2,473,567
Non-coin -- -- --
Other 15,113 -- 15,113
--------- ---------- ----------
856,459 1,632,221 2,488,680
--------- ---------- ----------
Operating expenses:
Line and 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 and amortization 102,013 81,918 183,931
Selling, general and administrative 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)
--------- ---------- ----------
Total other income (expense) (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
========= ========== ==========
</TABLE>
(b) Represents the operations of Amtel for the period January 1, 1996 through
September 12, 1996.
(c) Represents the operations of POA for the period January 1, 1996 through July
31, 1996.
(d) Represents the estimated reduction in revenues previously generated from
assets not acquired in the acquisition of POA.
(e) Represents the estimated reduction in other operating expenses primarily
resulting from eliminating certain offices, redundant personnel and costs of
operations not acquired (principally Amtel).
<TABLE>
<CAPTION>
---------
<S> <C>
Amtel $ 35,000
POA 212,000
----------
$ 247,000
=========
</TABLE>
(f) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets.
<TABLE>
<CAPTION>
--------------------------
LIVES
---------------------
AMOUNT TANGIBLE INTANGIBLE
---------- -------- ----------
<S> <C> <C> <C>
IPP and Paramount $ 745,000 60 60
Amtel 761,000 60 54
POA 936,000 60 60-72
----------
$2,442,000
==========
</TABLE>
30
<PAGE> 32
(g) Represents estimated reductions in selling, general and administrative
expenses principally resulting from elimination of pre-petition expenses at
Amtel and redundant personnel.
<TABLE>
<CAPTION>
---------
<S> <C>
IPP and Paramount $ 239,000
Amtel 1,153,000
POA 489,000
----------
$1,881,000
==========
</TABLE>
(h) Represents additional interest expense for borrowings under the Credit
Agreement to fund the acquisitions of Amtel and POA, net of $57,000 recorded
by the Company from the dates of acquisition through September 30, 1996.
<TABLE>
<CAPTION>
----------------------------------------------------
PRO
AMOUNT INTEREST FORMA
BORROWED RATE EXPENSE
- ---------- -------- ---------
<S> <C> <C>
$8,776,546 13.25% $ 815,000
========== ===== ========
</TABLE>
(i) Represents reduction in interest expense to reflect elimination of separate
company borrowings offset by interest expense on the POA Sellers' Notes.
<TABLE>
<CAPTION>
--------
<S> <C>
Amtel $ 9,000
POA (462,000)
---------
$(453,000)
=========
</TABLE>
(j) Represents elimination of Amtel reorganization expenses subsequent to
Amtel's filing of bankruptcy and elimination of non-recurring loss on
disposal of assets at Amtel.
(k) Represents elimination of income tax expense.
(l) Represents elimination of interest expense incurred under the Credit
Agreement.
(m) Represents increase in interest expense.
<TABLE>
<CAPTION>
-------------------------------------------------
AMOUNT INTEREST MONTHS INTEREST
OUTSTANDING RATE OUTSTANDING EXPENSE
----------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Debt pursuant to the Offering (during the five months funds are held
in escrow) $110,000,000 12% 5 $5,500,000
Debt pursuant to the Offering assuming escrow amount is then
utilized to purchase Notes from bondholders 75,000,000 12% 4 3,000,000
Interest saved on the POA Sellers' Notes and capital leases (834,000)
----------
$7,666,000
==========
</TABLE>
(n) Represents interest income estimated to be earned on the escrow balance of
$35,000,000, assuming the balance is held in escrow for five months and
earns interest income at 6%.
(o) Represents 6,250,000 shares of Common Stock which may be sold pursuant to
the Concurrent Offering (assuming an offering price of $4.00 per share) and
the exercise of warrants to purchase, in the aggregate, 25,000 shares of
Series A Preferred and the immediate conversion of the shares of Series A
Preferred into 500,000 shares of Common Stock.
(p) 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, the 8%
Preferred, and the 7% Preferred; (ii) an extraordinary loss of $267,281
realized on the restructuring of the Company's debt on March 15, 1996; and
(iii) an estimated extraordinary loss of $9,805,281 to be realized on the
early retirement of the borrowings under the Credit Agreement.
(q) Represents the estimated reduction in other operating expenses to eliminate
redundant operations and duplicate operational personnel.
<TABLE>
<CAPTION>
-------
<S> <C>
Cherokee $ 76,000
Texas Coinphone 66,000
--------
$142,000
========
</TABLE>
(r) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets for the Pending Acquisitions.
<TABLE>
<CAPTION>
---------------------------------
LIVES
-----------------------
AMOUNT TANGIBLE INTANGIBLE
---------- -------- ----------
(MONTHS)
<S> <C> <C> <C>
Cherokee $3,932,000 60 60-82
Texas Coinphone 445,000 60 72
----------
$4,375,000
==========
</TABLE>
31
<PAGE> 33
(s) Represents estimated reductions in selling, general and administrative
expenses to reflect the elimination of certain offices and personnel in
duplicate functions.
<TABLE>
<CAPTION>
-------
<S> <C>
Cherokee $795,000
Texas Coinphone 52,000
--------
$847,000
========
</TABLE>
(t) Represents reduction in interest expense to reflect elimination of separate
company borrowings.
<TABLE>
<CAPTION>
---------
<S> <C>
Cherokee $1,358,917
Texas Coinphone 51,325
----------
$1,410,242
==========
</TABLE>
(u) Represents 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 the full nine month period
(additional $35,000,000 at 12% for four months).
(w) Represents elimination of interest income on escrow balance assuming
consummation of the Pending Acquisitions.
32
<PAGE> 34
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1996
------------------------------------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS PRO FORMA
FOR FOR PRO FORMA
CONCURRENT CONCURRENT ADJUSTMENTS
PHONETEL OFFERING AND OFFERING AND TEXAS FOR PENDING
TECHNOLOGIES OFFERING OFFERING CHEROKEE COINPHONE ACQUISITIONS
------------ ------------ -------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 655,734 $38,832,579 (a) $ 39,488,313 $ 364,691 $ 80,895 $(59,488,227)(g)
Accounts receivable,
net 2,423,060 -- 2,423,060 3,712,950 55,140 (3,768,090)(h)
Other current assets 247,426 -- 247,426 210,439 -- --
----------- ----------- ------------ ----------- ---------- -----------
Total current assets 3,326,220 38,832,579 42,158,799 4,288,080 136,035 (63,256,317)
Property and
equipment, net 31,682,061 -- 31,682,061 16,354,960 1,143,869 2,806,003(i)
Intangible assets,
net 39,226,619 2,023,675 (b) 41,250,294 4,048,701 -- 35,101,273(i)
Other assets 705,473 -- 705,473 665,044 35,420 (369,142)(h)
----------- ----------- ------------ ----------- ---------- -----------
$74,940,373 $40,856,254 $115,796,627 $25,356,785 $1,315,324 $(25,718,183)
=========== =========== ============ =========== ========== ===========
Liabilities and Equity
Current liabilities:
Current long-term
debt
Payable to related
parties $ 5,234,953 $(4,717,707 )(c) $ 517,246 -- -- --
Payable to others 1,370,673 -- 1,370,673 $ 2,982,325 $ 183,300 $ (3,165,625)(j)
Current portion
capital leases 803,336 (656,947 )(d) 146,389 977,433 -- (977,433)(k)
Accounts payable 2,969,681 -- 2,969,681 754,048 39,472 (793,520)(l)
Accrued expenses 3,149,690 -- 3,149,690 2,979,962 21,590 (2,951,552)(l)
Deferred revenues 600,000 -- 600,000 -- -- --
Other unusual items
and
contractual
settlements 516,392 -- 516,392 -- -- --
----------- ----------- ------------ ----------- ---------- -----------
Total current
liabilities 14,644,725 (5,374,654 ) 9,270,071 7,693,768 244,362 (7,888,130)
Long-term debt:
Payable to related
parties 31,053,337 (31,053,337 )(c) -- -- -- --
Payable to others 3,832,781 71,677,579 (e) 75,510,360 10,636,237 626,910 (10,701,580)(j)
Capital leases 7,225,722 (7,093,053 )(d) 132,669 -- 40,578 (40,578)(k)
Deferred taxes -- -- -- 342,359 -- --
14% preferred
mandatorily
redeemable at
$6,978,963 6,539,053 -- 6,539,053 -- -- --
Other shareholders'
equity:
Preferred stock -- -- -- 2,400,000 -- (2,400,000)(m)
Common stock 76,397 67,500 (f) 143,897 351,903 166,395 (518,298)(m)
Additional paid in
capital 40,541,544 22,437,500 (f) 62,979,044 1,097,630 -- (1,097,630)(m)
Retained earnings
(accumulated
deficit) (28,973,186 ) (9,805,281 ) (f) (38,778,467) 2,834,888 237,079 (3,071,967)(m)
----------- ----------- ------------ ----------- ---------- -----------
Total other equity 11,644,755 12,699,719 24,344,474 6,684,421 403,474 (7,087,895)
----------- ----------- ------------ ----------- ---------- -----------
$74,940,373 $40,856,254 $115,796,627 $25,356,785 $1,315,324 $(25,718,183)
=========== =========== ============ =========== ========== ===========
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1996
------------------------------------------------------------------------------------------------
PRO FORMA
FOR
PENDING
PRO FORMA ACQUISITIONS,
ADJUSTMENTS CONCURRENT
FOR OFFERING AND
OFFERING OFFERING
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash $35,000,000(n) $ 15,445,672
Accounts receivable,
net -- 2,423,060
Other current assets -- 457,865
----------- ------------
Total current assets 35,000,000 18,326,597
Property and
equipment, net -- 51,986,893
Intangible assets,
net -- 80,400,268
Other assets -- 1,036,795
----------- ------------
$35,000,000 $151,750,553
=========== ============
Liabilities and Equity
Current liabilities:
Current long-term
debt
Payable to related
parties $ 517,246
Payable to others -- 1,370,673
Current portion
capital leases -- 146,389
Accounts payable -- 2,969,681
Accrued expenses -- 3,199,690
Deferred revenues -- 600,000
Other unusual items
and
contractual
settlements -- 516,392
----------- ------------
Total current
liabilities -- 9,320,071
Long-term debt:
Payable to related
parties -- --
Payable to others $35,000,000(n) 111,071,927
Capital leases -- 132,669
Deferred taxes -- 342,359
14% preferred
mandatorily
redeemable at
$6,978,963 -- 6,539,053
Other shareholders'
equity:
Preferred stock -- --
Common stock -- 143,897
Additional paid in
capital -- 62,979,044
Retained earnings
(accumulated
deficit) -- (38,778,467)
----------- ------------
Total other equity -- 24,344,474
----------- ------------
$35,000,000 $151,750,553
=========== ============
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed Balance
Sheet are an integral part of these financial statements.
33
<PAGE> 35
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 1996
(a) Represents adjustments to cash.
<TABLE>
<S> <C>
------------
Concurrent Offering proceeds, net of estimated expenses $ 22,500,000
Proceeds from exercise of Series A Preferred warrants 5,000
Offering proceeds, net of expenses 104,150,000
Fees to obtain New Credit Agreement (750,000)
Repayment of borrowings under Credit Agreement (41,000,000)
Repayment of POA Sellers' Notes (3,322,421)
Repayment of capital lease obligations (7,750,000)
Escrow of offering proceeds for Cherokee Acquisition (35,000,000)
------------
$ 38,832,579
============
</TABLE>
(b) Represents adjustments to the intangible assets.
<TABLE>
<S> <C>
------------
New Credit Agreement fees $ 750,000
Fees and expenses relating to the Offering 5,850,000
Write-off unamortized fees pertaining to the Credit Agreement (4,576,325)
------------
$ 2,023,675
============
</TABLE>
(c) Represents adjustments to current and long-term payable to related
parties.
<TABLE>
<S> <C>
------------
Repay current portion of borrowings under Credit Agreement $ (4,717,707)
============
Repay long-term portion of borrowings under Credit Agreement $(31,053,337)
============
</TABLE>
(d) Represents adjustments to current and long-term obligations under
capital leases.
<TABLE>
<S> <C>
------------
Repay obligations under capital leases, current portion $ (656,947)
============
Repay obligations under capital leases, long-term obligations $ (7,093,053)
============
</TABLE>
(e) Represents adjustments to long-term debt payable to others.
<TABLE>
<S> <C>
------------
Repayment of POA's Sellers' Notes $ (3,322,421)
Gross proceeds from Offering 110,000,000
Funds placed in escrow for Cherokee Acquisition (35,000,000)
------------
$ 71,677,579
============
</TABLE>
(f) Represents adjustments to other shareholders' equity.
<TABLE>
<S> <C>
------------
Common Stock
Issuance of 6,250,000 shares pursuant to the Concurrent Offering $ 62,500
Issuance of 500,000 shares pursuant to the exercise of 25,000 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 assumed offering price of $4.00 per
share, net of estimated transaction fees of $2,500,000 $ 22,437,500
============
Accumulated deficit
Warrant accretion -- extraordinary loss on early retirement of borrowings under the Credit Agreement $ (5,228,956)
Write-off of unamortized debt costs relating to the early retirement of borrowings under the Credit
Agreement (4,576,325)
------------
$ (9,805,281)
============
</TABLE>
(g) Represents adjustments to cash.
<TABLE>
<S> <C>
------------
Purchase of Cherokee $(55,725,000)
Less: Deferred taxes assumed 342,359
Cash not acquired in Cherokee Acquisition (364,691)
Purchase of Texas Coinphone (3,660,000)
Cash not acquired in Texas Coinphone Acquisition (80,895)
------------
$(59,488,227)
============
</TABLE>
34
<PAGE> 36
(h) Represents adjustments to accounts receivable, net and other assets to
eliminate assets
not acquired.
<TABLE>
<S> <C>
------------
Accounts receivable, net
Cherokee $ (3,712,950)
Texas Coinphone (55,140)
------------
$ (3,768,090)
============
Other assets
Cherokee $ (336,159)
Texas Coinphone (32,983)
------------
$ (369,142)
============
</TABLE>
(i) Represents adjustments to property and equipment, net and intangible
assets, net to reflect
purchase price allocations.
<TABLE>
<S> <C>
------------
Property and equipment
Cherokee $ 2,266,478
Texas Coinphone 539,525
------------
$ 2,806,003
============
Intangible assets
Telephone location contracts -- Cherokee $ 31,108,036
Non-competition agreements -- Cherokee 1,969,068
Telephone location contracts -- Texas Coinphone 2,024,169
------------
$ 35,101,273
============
</TABLE>
(j) Represents adjustments to current and long-term debt to others.
<TABLE>
<S> <C>
Current long-term debt not acquired ------------
Cherokee $ (2,982,325)
Texas Coinphone (183,300)
------------
$ (3,165,625)
============
Long term-debt not acquired
Cherokee $(10,636,237)
Texas Coinphone (626,910)
Present value of long-term portion of the non-compete liability for Cherokee 561,567
------------
$(10,701,580)
============
</TABLE>
(k) Represents adjustments to current and long-term capital leases.
<TABLE>
<S> <C>
------------
Current portion of capital leases of Cherokee not acquired $ (977,433)
============
Long-term capital leases of Texas Coinphone not acquired $ (40,578)
============
</TABLE>
(l) Represents adjustments to accounts payable and accrued expenses.
<TABLE>
<S> <C>
-------------
Accounts payable not assumed
Cherokee $ (754,048)
Texas Coinphone (39,472)
------------
$ (793,520)
============
Accrued expenses not assumed, net of acquisition expenses
Cherokee $ (2,979,962)
Texas Coinphone (21,590)
Acquisition expenses 50,000
------------
$ (2,951,552)
============
</TABLE>
35
<PAGE> 37
(m) Represents adjustments to the other shareholders' equity.
<TABLE>
<S> <C>
------------
Preferred stock of Cherokee redeemed prior to acquisition completion date $ (2,400,000)
============
Common stock eliminated
Cherokee $ (351,903)
Texas Coinphone (166,395)
------------
$ (518,298)
============
Paid-in capital of Cherokee eliminated $ (1,097,630)
============
Retained earnings eliminated
Cherokee $ (2,834,888)
Texas Coinphone (237,079)
------------
$ (3,071,967)
============
(n) The adjustments to cash and long-term debt payable to others represents the release of funds held in ------------
escrow, upon completion of the Cherokee Acquisition (see (e) above) $ 35,000,000
============
</TABLE>
36
<PAGE> 38
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 telephones. 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) provider 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 service providers and OSPs based on the volume of calls made as well as
the amount generated per call. Pursuant to recently promulgated FCC regulations,
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 6, 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 7, 1997 to October 6,
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 call 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 and
transmission charges, (ii) commissions paid to location providers 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
restrict 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 providers 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 accompanying increase in
the commissions payable to location providers. Moreover, revenues may be
diminished if the FCC prescribes lower benchmark rates for interstate operator
long distance calls. See "Business -- Governmental Regulations."
37
<PAGE> 39
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 information 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.
<TABLE>
<CAPTION>
---------------------------------------------
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------- SEPTEMBER 30,
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Coin calls 38.3% 53.1% 64.8% 64.3% 60.0%
Non-coin 54.9 33.5 20.2 27.6 32.9
Other 6.8 13.4 15.0 8.1 7.1
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Operating expenses:
Line and transmission charges 25.1 28.1 29.3 27.9 24.0
Location commissions 23.4 21.4 18.5 18.1 14.5
Other operating expenses 27.2 26.9 28.4 34.6 28.6
Depreciation and amortization 8.1 14.1 23.4 18.1 31.3
Selling, general and administrative expenses 21.7 17.9 17.1 16.6 13.3
Other unusual charges and contractual settlements -- -- 11.6 11.8 19.5
----- ----- ----- ----- -----
Total operating expenses 105.5 108.4 128.3 127.1 131.2
Other expenses 1.5 2.4 4.5 2.4 14.6
----- ----- ----- ----- -----
Loss before extraordinary item (7.0) (10.8) (32.8) (29.5) (45.8)
Extraordinary item -- -- -- -- (0.9)
----- ----- ----- ----- -----
Net loss (7.0)% (10.8)% (32.8)% (29.5)% (46.7)%
===== ===== ===== ===== =====
EBITDA 2.6% 5.8% 6.8% 2.8% 19.6%
===== ===== ===== ===== =====
</TABLE>
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995
Revenues. Total revenues increased $16,358,523, or 136.8% from $11,956,903 for
the nine months ended September 30, 1995, to $28,315,426 for the nine months
ended September 30, 1996. This increase is attributable primarily to an increase
in the number of installed public pay telephones, which increased by 16,473, or
194.5%, from 8,470 at September 30, 1995 to approximately 24,943 at September
30, 1996, with the majority of the increase occurring in the third and fourth
quarters of 1995 and the first and third quarters of 1996 due to the Company's
recent acquisitions.
Revenues from coin calls increased $9,298,911, or 120.9%, from $7,689,786 for
the nine months ended September 30, 1995 to $16,988,697 for the nine months
ended September 30, 1996. Non-coin revenues increased $6,006,569, or 181.9%,
from $3,301,969 for the nine months ended September 30, 1995 to $9,308,538 for
the nine months ended September 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 anywhere 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 revenue 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 $1,053,043, or 109.1%, from $965,148 for the nine
months ended September 30, 1995 to $2,018,191 for the nine months ended
September 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 $21,952,874, or 144.4%,
from $15,202,967 for the nine months ended September 30, 1995 to $37,155,841 for
the nine months ended September 30, 1996. Operating expenses represented 127.1%
of
38
<PAGE> 40
total revenues for the nine months ended September 30, 1995 and 131.2% of total
revenues for the nine months ended September 30, 1996. The percentage increase
was due to other unusual charges and contractual settlements and higher
depreciation and amortization as a result of recent acquisitions, offset in part
by lower operating expenses.
Line and transmission charges increased $3,459,970, or 103.6%, from $3,340,812
for the nine months ended September 30, 1995 to $6,800,782 for the nine months
ended September 30, 1996. Line and transmission charges represented 27.9% of
total revenues for the nine months ended September 30, 1995 and 24.0% of total
revenues for the nine months ended September 30, 1996, a decrease of 3.9%. The
dollar increase in line and transmission charges was, in part, due to additional
public pay telephones acquired from Public Telephone, IPP and Paramount, the
increases in coin calls resulting from the $0.75 Long Distance Call Program, and
to a lesser extent, the acquisitions of POA (completed September 16, 1996 with
an effective purchase date of August 1, 1996) and Amtel (completed September 13,
1996), 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 $1,937,731, or 89.6%, from $2,163,464 for the
nine months ended September 30, 1995 to $4,101,195 for the nine months ended
September 30, 1996. Location commissions represented 18.1% of total revenues for
the nine months ended September 30, 1995 and 14.5% of total revenues for the
nine months ended September 30, 1996, a decrease of 3.6%. The dollar increase is
due to location agreements from public pay telephones acquired in the
acquisitions of World, Public Telephone, IPP and Paramount, and to a lesser
extent the location agreements acquired in the acquisitions of POA and Amtel,
while the percentage decrease is due to such location agreements having lower
commission rates than those from the Company's existing public pay telephones.
Other operating expenses (consisting of personnel costs, rents, utilities,
repair and maintenance of the phones, operator services processing fees and
property and sales taxes), increased $3,969,464, or 96.0%, from $4,132,850 for
the nine months ended September 30, 1995 to $8,102,314 for the nine months ended
September 30, 1996. Other operating expenses represented 34.6% of total revenues
for the nine months ended September 30, 1995 and 28.6% of total revenues for the
nine months ended September 30, 1996, a decrease of 6.0%. 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, Public Telephone, IPP and Paramount, and, to a lesser
extent, the acquisitions of Amtel and POA, 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 those 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 elimination 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 the Amtel and POA 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 $6,711,416, or 310.0%, from $2,164,822
for the nine months ended September 30, 1995 to $8,876,238 for the nine months
ended September 30, 1996. Depreciation and amortization represented 18.1% of
total revenues for the nine months ended September 30, 1995 and 31.3% of total
revenues for the nine months ended September 30, 1996, an increase of 13.2%. 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 increased $1,775,070, or
89.5%, from $1,982,489 for the nine months ended September 30, 1995 to
$3,757,559 for the nine months ended September 30, 1996. SG&A represented 16.6%
of total revenues for the nine months ended September 30, 1995 and 13.3% of
total revenues for the nine months ended September 30, 1996, a decrease of 3.3%.
The dollar increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount, and to a lesser extent, the acquisitions of
Amtel and POA. The percentage decrease reflects the economies of scale resulting
from those acquisitions that the Company has already realized.
Other unusual charges and contractual settlements increased $4,099,223, or
289.0% from $1,418,530 for the nine months ended September 30, 1995 to
$5,517,753 for the nine months ended September 30, 1996. For the nine months
ended September 30, 1996, other unusual charges and contractual settlements
consists primarily of: (i) the settlement of contractual obligations under
certain employment contracts, $330,627; (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, $459,743; (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. Other unusual charges and
contractual settlements represented 11.9% of total revenues for the nine months
ended September 30, 1995, and 19.5% of total revenues for the nine months ended
September 30, 1996, an increase of 7.6%.
39
<PAGE> 41
Other income (expense). Other income (expense) is comprised of interest
incurred on debt with related parties and others net of interest income. Total
other expense (net of interest income) increased $3,847,970, or 1,319.2%, from
$291,693 for the nine months ended September 30, 1995 to $4,139,663 for the nine
months ended September 30, 1996. Other expenses represented 2.4% of total
revenues for the nine months ended September 30, 1995 and 14.6% of total
revenues for the nine months ended September 30, 1996, an increase of 12.2%. The
dollar and percentage increases were due to the financing obtained for the
acquisitions completed in 1996. Related party interest expense was $3,588,420
for the nine months ended September 30, 1996, representing 12.7% of total
revenues. Included in related party interest expense was non-cash interest
expense of $1,182,544, or 4.2% of total revenues for the nine months ended
September 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 0.9% of total revenues for the nine months ended September 30,
1996. The extraordinary loss related to non-recurring costs that were incurred
in connection with the restructuring 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 an increase to the accumulated deficit of
$2,002,386.
EBITDA. EBITDA (income before interest, taxes, depreciation and amortization,
other unusual charges and contractual settlements, and the extraordinary loss on
debt restructuring) increased $5,216,288 or 1,546.5%, from $337,288 for the nine
months ended September 30, 1995 to $5,553,576 for the nine months ended
September 30, 1996. Based on the changes discussed above, EBITDA represented
2.8% of total revenues for the nine months September 30, 1995 and 19.6% for the
nine months ended September 30, 1996, an increase of 16.8%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Total 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 attributable 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 and transmission 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 and transmission 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 represented 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 personnel costs, rent, utilities and
service related expenses attributable to the 1995 Acquisitions, the increase in
the Company's public pay telephone base, and the additional personnel to
accommodate the increased business.
40
<PAGE> 42
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 increases.
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 settlements 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, 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 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. Total 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 attributable 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 $755,256, or 12.4%, from $6,074,394 for the year
ended December 31, 1993 to $5,319,138 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 and transmission 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 and transmission 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 and
transmission 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 represented 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, utilities
and service
41
<PAGE> 43
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 increase 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 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 nine months ended
September 30, 1996 were $11,208, $2,380,216, ($579,133) and ($646,880),
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 increased $574,266 from $72,614 for the nine months ended September
30, 1995 to $646,880 for the nine months ended September 30, 1996, mostly due to
the larger loss in 1996 offset by the issuance of the Nominal Value Warrants (as
defined herein), 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 nine months ended September 30, 1996 were
$1,196,761, $3,214,302, $2,354,011 and $24,778,656, 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 nine months ended September 30, 1996 were
$859,846, $1,229,287, $3,167,850 and $25,367,808, respectively, which consisted
primarily of proceeds from the issuance of debt and equity offset by redemptions
and repurchases of preferred and common stock and repayments of debt.
Credit Agreement. On March 15, 1996, the Company entered into a Credit
Agreement (the "Credit Agreement") with Internationale Nederlanden (U.S.)
Capital Corporation ("ING") and Cerberus Partners, L.P. ("Cerberus" and,
together with ING, the "Lenders"), pursuant to which the Lenders agreed to lend
the Company up to $37,250,000. On March 15, 1996, the Company borrowed
$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 outstanding debt and
$3,173,931 of outstanding obligations under capital leases, to redeem the 10%
Preferred, 8% Preferred, and 7% Preferred, and to pay related transaction fees.
The additional borrowings of $1,692,500 were used for the Amtel acquisition
deposit of $1,300,000 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
42
<PAGE> 44
were outstanding and there was no additional borrowing availability under the
Credit Agreement. 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. At
September 30, 1996, the Company was in compliance with the covenants contained
in the Credit Agreement. 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 the 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 Offering and the Concurrent Offering to
repay the indebtedness under the Credit Agreement. Concurrently with such
repayment, the Company will terminate the Credit Agreement and expects to enter
into the New Credit Agreement, which is expected to provide for a senior credit
facility of $25 to $50 million. The Company does not expect that there will be
any borrowings outstanding under the New Credit Agreement immediately after
consummation of the Offering and the Concurrent Offering. See "Description of
Certain Indebtedness" for descriptions of the terms of the Credit Agreement and
the New Credit Agreement.
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 and Series B Preferred is convertible into 20
shares of the Company's Common Stock. The debt under the Credit Agreement was
initially recorded net of an allocation of the fair value of the Lenders'
Warrants, such fair value being determined using the Black-Scholes valuation
model. The Company recorded non-cash interest expense (accretion of debt) of
$621,536 for the three months ended September 30, 1996 and $1,182,544 for the
nine months ended September 30, 1996. 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 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 on March 15, 1996. The Company may redeem approximately
$5.5 million stated value of 14% Preferred with a portion of the net proceeds of
the Offering and the Concurrent Offering.
At September 30, 1996, long-term debt, including the current portion and
obligations under capital leases and including the portion allocated to the
Lenders' Warrants, was $54,749,758 and consisted of: (i) related party debt
(payable to the Lenders and two directors of the Company), including the current
portion and including the portion allocated to the Lenders' Warrants, of
$41,517,246, an increase of $39,784,746 as compared to $1,732,500 at December
31, 1995; (ii) capital leases of $8,029,058, an increase of $4,496,121 as
compared to $3,532,937 at December 31, 1995; (iii) the POA Sellers' Notes in the
amount of $3,322,421 (pursuant to the purchase agreement relating to the POA
Acquisition, the POA Sellers' Notes were reduced at September 30, 1996 by the
excess of acquired current liabilities over acquired current assets, or
$311,693, from the original face amount of $3,634,114); and (iv) other long-term
debt, including the current portion, of $1,569,340, a decrease of $7,027,073 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 at an
exercise price of $.01 per share ("Nominal Value Warrants") 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 related
party debt of the Company to the 14% Preferred. Certain holders of the 14%
Preferred are deemed related parties. The warrants expire on March 13, 2001. An
independent valuation company 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 nine months ended September 30, 1996.
In 1995, the Company sold, or issued in consideration for services rendered,
602,003 shares of its Common Stock to officers, directors, creditors and
affiliates of the Company and to others, including a predecessor of Southcoast
Capital Corporation, one of the Underwriters, at values ranging from $4.20 to
$6.01 per share. See "Underwriting." 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
43
<PAGE> 45
operating expenses and to make certain employee severance payments. This debt
was repaid on March 15, 1996 with borrowings under the Credit Agreement.
SEASONALITY
The Company completed two acquisitions which added approximately 4,400 public
pay telephones in 1995 and four acquisitions which added approximately 14,600
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 acquisitions. 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 $2,984,135, which were financed
through cash flow from operations and borrowings under the Credit Agreement.
Capital expenditures are principally for the expansion of the Company's
installed public pay telephone base, and include purchases of telephones,
related equipment, site contracts, operating equipment and computer hardware.
The Company expects to make capital expenditures of approximately $225,000
during the three months ended December 31, 1996 and approximately $4,100,000
during the year ended December 31, 1997.
Management believes, but cannot assure, that cash flows from operations and the
proceeds to the Company from the Offering and the Concurrent Offering will be
sufficient to meet the Company's cash requirements for working capital, capital
expenditures and debt service over the next twelve months.
44
<PAGE> 46
BUSINESS
GENERAL
The Company is currently the third largest independent public pay telephone
operator and the twelfth 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 38,421 installed public
pay telephones in 42 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
installed 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 19,053 public pay telephones through a
series of acquisitions by the Company of six 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 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 location providers to operate
public pay telephones at locations where significant demand exists for public
pay telephone services, such as shopping centers, convenience stores, service
stations, grocery stores, restaurants, truck stops and bus terminals.
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:
<TABLE>
<CAPTION>
------------------------------------------------------
ACTUAL PRO FORMA
PUBLIC PAY PERCENTAGE PUBLIC PAY PERCENTAGE
LOCATION TELEPHONES OF TOTAL TELEPHONES OF TOTAL
--------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Florida 5,127 20.7% 5,127 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
South Carolina 1,249 5.1 1,249 3.3
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
Arizona 219 * 700 1.8
Utah 26 * 2,245 5.9
Montana 25 * 1,025 2.7
New Mexico 4 * 2,409 6.3
Other** 2,941 11.9 4,316 11.2
------ ----- ------ -----
Total 24,732 100.0% 38,421 100.0%
====== ===== ====== =====
</TABLE>
- ---------------
* Under 1%.
** Includes all other states where the percentage of the total is less than 1%.
The public pay telephones to be acquired in the Cherokee Acquisition are located
primarily in Texas, New Mexico, Utah, Montana and Colorado. All of the public
pay telephones to be acquired in the Texas Coinphone Acquisition are located in
Texas.
On an actual basis, the Company had revenues and EBITDA of $28.3 million and
$5.6 million, respectively, for the nine months ended September 30, 1996. On the
same basis, the Company's EBITDA margins have increased to 19.6% for the nine
months ended September 30, 1996 from 2.8% for the nine months ended September
30, 1995. The increase in EBITDA margin is primarily due to the significant
increase in the number of installed public pay telephones and the elimination of
costs associated
45
<PAGE> 47
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 1995 Acquisitions and 1996 Acquisitions,
the Company would have achieved revenues of $59.6 million and $45.4 million for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, and EBITDA of $10.4 million and $9.8 million for the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
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 $70.4 million for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, and EBITDA of $21.2 million and
$16.1 million for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. See "Pro Forma Financial 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 board and management 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 while implementing 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 geographic presence and further its strategy of clustering its public
pay telephones more rapidly than with new installations. Because smaller
companies typically are not able to achieve the economies of scale realized by
the Company, when acquisitions are integrated, the Company can operate the
public pay telephones at lower operating costs than the seller. Accordingly, 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 acquisitions as well as
integrating such acquisitions. In addition, as the Company grows to become the
leading supplier of independent public pay telephone services in an area,
"fill-in" and contiguous 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 service providers and operator
service providers 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 information 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 fill-in and contiguous
acquisitions, the clustering of public pay telephones creates an opportunity to
generate savings through reduced field service and collection expenses, the
closing of duplicate offices, reduction in staff and general corporate overhead
expenses and reduced line and transmission expenses associated with interLATA
and intraLATA traffic.
Form strong relationships with service providers and suppliers. 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. 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 increases. By achieving close working
relationships with its OSPs and suppliers, the Company believes that it will be
in a position to negotiate more favorable agreements.
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 of the Company.
46
<PAGE> 48
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 telecommunications technology and trained field technicians as part of
its commitment to provide superior customer service. The technology used by the
Company enables it 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 Offering and the Concurrent 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
advertisements in trade magazines. The Company believes that achieving market
recognition 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 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% are operated by independent public pay
telephone companies. Within the United States, 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 divestiture 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 prohibited from 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 Telecommunications Act, the
BOCs may provide interLATA telecommunications 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 Telecommunications
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
251 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 exceptions, facilities-based local telephone
competition is present in its market, and that it has satisfied the 14-point
"competitive checklist" established by the Telecommunications Act which
includes, among other things, that the BOC or other LEC has entered into at
least one interconnection agreement. In addition, 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 Telecommunications 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 competitive operator service system developed which allowed OSPs,
including long distance companies such as MCI and Sprint, to handle non-
47
<PAGE> 49
coin calls and to offer independent public pay telephone 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 the acquisition 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
generate economies of scale. The Company intends to continue this acquisition
program upon the consummation of this 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 independent 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.
48
<PAGE> 50
The following table summarizes the Company's acquisitions completed by, or
pending at, October 31, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------
NUMBER OF
INSTALLED
PUBLIC
PAY TELEPHONES
DATE OF EXPECTED PRIMARY
COMPANY TO BE ACQUIRED EXPECTED ACQUISITION TO BE ACQUIRED AREAS SERVED
- --------------------------------------------------- -------------------- -------------- -------------------------
<S> <C> <C> <C>
Texas; New Mexico;
Cherokee Communications, Inc. (1) January 1997 13,500 Utah; Montana; Colorado;
Texas Coinphone (2) January 1997 1,200 Texas
------
Total 14,700
======
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------
NUMBER OF
INSTALLED
PUBLIC
PAY TELEPHONES PRIMARY
COMPANY ACQUIRED DATE OF ACQUISITION ACQUIRED AREAS SERVED
- -------------------------------------------------- -------------------- -------------- -------------------------
<S> <C> <C> <C>
Amtel Communications Services (3) September 13, 1996 6,872 California; Washington;
Oregon; Colorado
Payphones of America, Inc. (4) August 1, 1996 3,115 Missouri; Illinois;
Virginia; Florida
IPP (5) March 15, 1996 2,101 North Carolina;
South Carolina; Tennessee
Paramount Communications Systems, Inc. (6) March 15, 1996 2,528 Florida
Public Telephone Corporation (7) October 15, 1995 1,200 Illinois; Michigan
World Communications, Inc. (8) September 22, 1995 3,237 Missouri; Illinois;
Florida
Alpha Pay Phones -- IV L.P. (9) March 25, 1994 2,155 Texas
------
Total 21,208
======
</TABLE>
- ---------------
(1) See "The Pending Acquisitions-- The Cherokee Acquisition."
(2) See "The Pending Acquisitions-- The Texas Coinphone Acquisition."
(3) The purchase price paid by the Company for Amtel consisted of $7.0 million
in cash and 2,162,163 shares of Common Stock and approximately $675,122 in
related acquisition expenses. The purchase price was in consideration of the
installed phones acquired and approximately 728 public pay telephones and
related parts in inventory.
(4) The purchase price paid by the Company for POA consisted of $.5 million 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, two five-year non-competition and
consulting agreements with two of the sellers for an aggregate of
approximately $.3 million and approximately $166,748 in related acquisition
expenses.
(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 consisted of $9.6
million in cash, 8,333 shares of 14% Preferred, 179,996 Nominal Value
Warrants and the assumption of $0.7 million in liabilities which were paid
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 assumption 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 shareholders
which require cash payments and the issuance, in the aggregate, of 80,000
shares of 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 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.
49
<PAGE> 51
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 telephones in properties owned or
controlled by others where significant demand exists for public pay telephone
services, such as shopping malls, convenience stores, service stations, grocery
stores, restaurants, truck stops and bus terminals, at no cost to the location
provider. The Company then services and collects money from these public pay
telephones and pays the location provider 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 38,421 installed public pay
telephones.
The percentage of revenues paid by the Company to the location provider is
generally fixed for the term of the agreement 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 location
agreement. The Company can generally terminate a location 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 terminate such location agreement. The duration of the contract and
the commission arrangement depends on the location, number of telephones 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 hardware, 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 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 commissions from these
services based on the volume of calls made as well as on the amount of revenues
generated per call. In certain regions the Company may also install a
microprocessor-based automated operator system for select pay telephones that
allows the telephones 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 Telecommunications 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, 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 for the Company, net of related
expenses and processing fees, commencing November 6, 1996. However, there can be
no assurance that the rules and policies 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.
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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 of the three
largest manufacturers 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 maximizes 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 analysis 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 telephones, 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
acquisition strategy by enabling the Company to integrate efficiently 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
dedicated 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 independent 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 nine 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. 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, historical 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 diversified on both a
geographical and customer account basis. Currently, the Company owns and
operates public pay telephones in 40 states and the District of Columbia through
agreements with both multi-station customers such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck stops
and bus
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<PAGE> 53
terminals as well as with single station customers. After giving effect to the
consummation of the Pending Acquisitions, the Company will own and operate
public pay telephones in 42 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 7% of its
total revenues for the year ended December 31, 1995 and for the nine months
ended September 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
revenues derived from Simon DeBartolo will continue to decline. Other than Simon
DeBartolo, no single customer generated more than 5% of the Company's total
revenues for the year ended December 31, 1995 or the nine months ended September
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 revenues for the
year ended December 31, 1995 or the nine months ended September 30, 1996.
GOVERNMENTAL REGULATIONS
The operations of the public pay telephone industry are regulated primarily by
the public service or utility commissions 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 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 telecommunications businesses (including
the extent of competition, 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 authorities 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 certification
or registration, notice to end users of the identity of the service provider in
the form of postings or verbal announcements, requirements for rate quotes upon
request, call routing restrictions, and maximum price limitations. While not
necessarily 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 public pay telephones, it is 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 below under "-- Federal," the FCC adopted rules on
September 20, 1996 that preempt certain existing state regulations and 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 Telecommunications 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 "Operator
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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. Similarly, state
regulatory authorities, including, for example, Illinois, Florida, Georgia and
South Carolina, implemented intrastate dial-around compensation programs for
independent public pay telephone providers and other states are considering such
programs. In 1995, Section 276 of the Telecommunications Act was enacted, which
required the FCC to establish a per-call compensation plan to ensure that all
public pay telephone service providers 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-assisted 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
relationship 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 tentatively 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 providers 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 operator assisted 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 Telecommunications Act. Key elements
of the rulemaking include:
(a) Compensation. Currently, independent public pay telephone 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 6, 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 by 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, which
rate will be determined by the marketplace, not by regulation. Obtaining
fair compensation for these dial-around calls is particularly 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
compensation for dial-around calls until they have complied with the
Computer III non-structural safeguards and have ceased subsidizing their
public pay telephone operations (see below).
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The Section 276 requirement that public pay telephone operators 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 necessary,
those state regulations, such as entry and exit restrictions, 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 failures within the state that
would not allow market-based rates.
(b) BOC subsidization. BOCs and other LECs have traditionally 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 providers but not
on its 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
activity" so that costs from public pay telephone activities would be
separated from regulated non-public pay telephone 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 identical 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 dialed.
According to the FCC, intraLATA presubscription 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 provider, 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
providers (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.
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SERVICEMARK
The Company uses the servicemark "PhoneTel" on its telephones, 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
providers, 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 satisfactory. 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
gives the Company 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, Washington; Denver,
Colorado; Cicero, Indiana; Lincolnton, North Carolina; 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 legal proceedings which, individually or in
the aggregate, would have a material adverse effect on the Company's business,
results of operations or financial condition.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------
<S> <C> <C>
Peter G. Graf 59 Chairman, Chief Executive Officer and Director
Tammy L. Martin 32 Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary
Nickey B. Maxey 40 Chief Operating Officer and Director
Gary Pace 45 Senior Vice President, Acquisitions and
Regulatory Matters
Richard P. 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
</TABLE>
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 the founder and for more than five years
prior to the acquisition of IPP by the Company in March 1996, served as
President of each of International Pay Phones, Inc., a Tennessee company and
International Pay Phones, Inc., a South Carolina company. Since 1990, Mr. Maxey
has owned and operated Resort Hospitality Services of South Carolina, Resort
Hospitality Services of Tennessee and Resort Hospitality Services International,
a group of affiliated companies which are resellers of long-distance services.
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 P. 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 Acordia 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 1990. Mr. Henry has been the
President 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.
56
<PAGE> 58
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
Missouri, 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 Chief Executive Officer of, Fabric
Resources International for more than the past five years. Mr. Richman was the
co-founder and an officer of Cable Systems USA, an officer at Cellular Systems
USA and a director of USA Mobile Communications Holdings, Inc. Mr. Richman has
been a director of Cable Systems USA II since 1989.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a Compensation Committee and an Audit
Committee. Although neither committee 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 decisions 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 of $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, pursuant 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 executive services to the
Company without 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").
57
<PAGE> 59
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
LONG-TERM COMPENSATION
------------------------------------------------
PAYOUTS
ANNUAL COMPENSATION AWARDS ------------------------
---------------------------------------- --------------------- LONG-
OTHER RESTRICTED TERM
NAME AND ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
- ------------------------------------ ---- -------- ------- ------------ ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter G. Graf 1995 -- -- $ 5,000(1) -- 47,583 -- --
Chairman, Chief Executive Officer 1994 -- -- -- -- 24,705 -- --
and Director
Jerry H. Burger 1995 $ 74,293 $13,600 $ 13,600(2) -- 62,500 -- $212,000(3)
Former Chief Executive Officer 1994 $ 40,000 -- -- -- -- -- --
1993 $ 42,000 $75,000 $ 5,917(4) 43,333(5)
Bernard Mandel 1995 $147,544 $ 9,760 $ 9,760(6) -- 41,666 -- $146,500(7)
Former President, 1994 $ 88,894 -- $ 4,154(4) -- -- -- --
Chief Operating Officer 1993 $ 83,269 $25,000 $ 3,698(4) -- 10,000(8) -- --
and Secretary
Daniel J. Moos 1995 $ 95,000 $ 1,442 $ 12,800(9) -- 54,999(10) -- --(11)
Former Executive Vice President,
Chief Financial Officer,
and Treasurer
</TABLE>
- ---------------
(1) Represents fees payable to Mr. Graf as a non-employee director during 1995,
which fees have not been paid by the Company.
(2) Represents the value of 2,833 shares paid to Mr. Burger for services
provided.
(3) On September 15, 1995, the Company and Mr. Burger entered into a separation
agreement which provided for the termination 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 represents 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.
(4) Value of non-business use of Company automobile.
(5) 26,000 options expired in 1995.
(6) Represents the value of 2,033 shares paid to Mr. Mandel for services
provided.
(7) On September 15, 1995, the Company and Mr. Mandel entered into a separation
agreement which provided for the termination 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 compensation 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.
(8) Expired in 1995.
(9) Represents the value of 2,666 shares paid to Mr. Moos for services
provided.
(10) 33,000 options not vested at December 31, 1995.
(11) 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.
Pursuant 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 $10 million.
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<PAGE> 60
The following table sets forth certain information concerning individual grants
of stock options made during the year ended December 31, 1995 to each of the
named executive officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
---------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS/
OPTIONS/ SARs EXERCISE
SARs GRANTED TO OR BASE
NAME AND GRANTED EMPLOYEES IN PRICE
PRINCIPAL POSITION (#) FISCAL YEAR ($/Sh) EXPIRATION DATE
- ----------------------------------------------- ---------- ------------ --------- -----------------
<S> <C> <C> <C> <C>
Peter G. Graf 41,833 6.3% $ 5.70 December 31, 1997
Chairman, Chief Executive 5,750 0.9% $ 6.00 August 15, 2000
Officer and Director
Jerry H. Burger 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 President, Chief Operating
Officer and Secretary
Daniel J. Moos 54,999(4) 8.3% $ 6.00(2) August 2, 1998
Former Executive Vice President,
Chief Financial Officer and Treasurer
</TABLE>
- ---------------
(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 $3.72 per share.
(3) Excludes 25,537 additional options issued pursuant to anti-dilution
provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-dilution
provisions.
The following table sets forth certain information about unexercised stock
options held by the named executive officers at December 31, 1995. No stock
options were exercised by such persons during 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED MONEY
OPTIONS/SARs OPTIONS/SARs
AT FY-END AT FY-END
SHARES (#) ($)
NAME AND ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Peter G. Graf -- -- 75,064 $ 31,316
Chairman, Chief Executive
Officer and Director
Jerry H. Burger -- -- 127,361 $ 31,840
Former Chief Executive Officer
Bernard Mandel -- -- 66,666 $ 91,667
Former President, Chief Operating
Officer and Secretary
Daniel J. Moos -- -- 54,999 $ 13,750
Former Executive Vice President,
Chief Financial Officer and Treasurer
</TABLE>
59
<PAGE> 61
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 Concurrent 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 Commission and other
information known by the Company.
<TABLE>
<CAPTION>
-------------------------------------
NUMBER OF SHARES
OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED CLASS
- ------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
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
Joseph Abrams (7)(16) 195,536 2.50%
Director
85 Old Farm Road
Bedminster, NJ 07921
NAMED EXECUTIVE OFFICERS
Jerry H. 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 Operating Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos (10) 100,707 1.30%
Former Executive Vice President, Chief Financial Officer &
Treasurer
7399 Stow Road
Hudson, OH 44236
Executive Officers and Directors as a group (10 persons) (11)(17) 2,961,473 34.62%
</TABLE>
60
<PAGE> 62
<TABLE>
<CAPTION>
-------------------------------------
NUMBER OF SHARES
OF COMMON STOCK
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED CLASS
- ------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
5% BENEFICIAL OWNERS
Internationale Nederlanden
(U.S.) Capital Corporation (12) (18) 4,464,907 36.89%
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P. (13)(18) 4,464,907 36.89%
950 Third Avenue, 20th floor
New York, NY 10022
ACI -- HDT Supply Company, et al., 2,162,163 28.30%
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
Southcoast Capital Corporation (16)(17) 475,108 5.90%
277 Park Avenue
New York, NY 10172
</TABLE>
- ---------------
(1) Includes warrants to purchase 75,064 shares of Common Stock through March
13, 2001 and 14% Preferred which is convertible 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 members.
(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 convertible 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 convertible 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-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.
(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 transactions
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 Preferred, 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 Concurrent Offering. Assuming ING sells
250,000 shares of Common Stock in the Concurrent Offering and all of the
indebtedness under the Credit Agreement is repaid with a portion of the net
proceeds of the Offering, ING will beneficially own 1,798,240 shares of
Common Stock, which would represent 23.68% of the Common Stock outstanding
after consummation of the Concurrent Offering. See note (18) below.
(13) Includes Lenders' Warrants to purchase the Series A Preferred, 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 Concurrent Offering. Assuming Cerberus
sells 250,000 shares of Common Stock in the Concurrent Offering and all of
the indebtedness under the Credit Agreement is repaid with a portion of the
net proceeds of the Offering, Cerberus will beneficially own 1,798,240
shares of Common Stock, which would represent 23.68% of the Common Stock
outstanding after consummation of the Concurrent Offering. See note (18)
below.
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<PAGE> 63
(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 distribute 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 convertible through June 30, 2000 into
107,782 shares of Common Stock.
(18) Cerberus and ING may each sell up to 250,000 shares of Common Stock in the
Concurrent Offering. Notwithstanding the lock-up agreement entered into
with the underwriters in the Concurrent Offering, in such event, Cerberus
or ING will be permitted to sell after 45 days following the effective date
of the registration statement relating to the Concurrent 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 or ING in the
Concurrent Offering. See "Description of Capital Stock -- Registration
Rights and Lock-Ups."
62
<PAGE> 64
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 Offering and the Concurrent
Offering to redeem all of the 14% Preferred other than the shares of 14%
Preferred beneficially owned by Peter G. Graf.
<TABLE>
<CAPTION>
-------------------------------
<S> <C> <C>
VALUE OF
DEBT/PREFERRED
SURRENDERED
AND STATED NUMBER OF
VALUE OF 14% NOMINAL 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
Southcoast Capital Corporation 600,000 143,994
5% Owner
</TABLE>
In December, 1995, Mr. Graf loaned $325,000 to the Company. Such amount is
subordinated to the Company's other indebtedness and accrues interest at the
rate of prime plus 5%. No interest was paid in connection with this loan during
1996. In October 1996, Mr. Graf loaned the Company an additional $267,000 under
similar terms.
In March 1995, a predecessor of Southcoast Capital Corporation ("Southcoast"),
which is a 5% or more stockholder and one of the Underwriters, was paid fees
consisting of (i) $600,000 in cash, (ii) $600,000 of 14% Preferred and (iii)
Nominal Value Warrants to purchase 143,944 shares of Common Stock of the Company
at an exercise price of $.01 per share for providing financial advisory services
to the Company in connection with the Credit Agreement. In addition, in December
1995, a predecessor of Southcoast 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 a working capital loan. Southcoast will also receive
approximately $810,000 in customary fees for providing financial advisory
services to the Company in connection with the Cherokee Acquisition as well as
an investment banking fee for acting as an underwriter in connection with the
Concurrent Offering. See "Underwriting."
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 Agreement.
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
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<PAGE> 65
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 Offering and the Concurrent Offering, there will be
outstanding (i) 14,389,709 shares of Common Stock, (ii) 116,316.05 shares of 14%
Preferred, (iii) Lenders' Warrants to purchase 179,824 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 Offering and the
Concurrent Offering and the application of the net proceeds therefrom, there
would be no debt outstanding under the Credit Agreement or the New Credit
Agreement 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 outstanding 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
determined 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 issuance of Preferred Stock could be used to dilute the share
ownership of a person or entity seeking to obtain control of the Company.
Additionally, future issuances of any series of Preferred 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 outstanding 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 authorized, 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
64
<PAGE> 66
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 Preferred 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 authorized, 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 Offering and the Concurrent Offering. See "Use of Proceeds."
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 Preferred 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 distribution 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 Preferred 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
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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 nonassessable Common Stock, subject to certain
antidilution adjustments.
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 Offering and the Concurrent
Offering to redeem shares of 14% Preferred having a liquidation preference of
approximately $5.5 million. See "Use of Proceeds."
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 following 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) conversion of 116,316.05
shares of 14% Preferred into 1,163,161 shares of Common Stock; (iii) exercise of
983,805 Nominal Value Warrants at an exercise price of $.01 per share; (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
Holders of the 14% Preferred, the Lenders' Warrants, the Nominal Value Warrants
and other warrants and options exercisable for shares of Common Stock and
certain existing holders of Common Stock who, in the aggregate, own or have the
right to acquire an aggregate of approximately 13,005,110 shares of Common Stock
(the "Registrable Securities"), have entered into registration rights agreements
with the Company. These registration rights agreements provide that when the
Company proposes to register the sale of shares of Common Stock under the
Securities Act for its own account or otherwise, holders of Registrable
Securities are entitled to include their shares in such registration, subject to
the right of any managing underwriter of any such offering to exclude some or
all of the Registrable Securities from such registration and to certain other
conditions. In addition to such incidental registration rights, certain holders
of Registrable Securities have the right to demand registration under the
Securities Act of their Registrable Securities. The Company has agreed that in
the event of any registration of Registrable Securities that it will bear all
registration expenses, other than those which certain registration rights
agreements had assigned to the shareholders, and will indemnify the holder
thereof against certain liabilities incurred in connection with such
registration, including liabilities arising under the Securities Act.
The Company has obtained waivers of the foregoing registration rights in
connection with the Concurrent Offering from the holders of approximately 92% of
the Registrable Securities having such piggyback registration rights as a result
of the filing of the registration statement relating to the Concurrent Offering.
However, in order to satisfy its obligations under the registration rights
agreements, the Company has filed a shelf registration statement (the "Shelf
Registration Statement") to register under the Securities Act the sale of all of
the Registrable Securities.
Notwithstanding the filing of the Shelf Registration Statement, ING and Cerberus
(who hold approximately 69% of the shares of Registrable Securities) may each
sell 250,000 shares as part of the Concurrent Offering or otherwise following 45
days after the effective date of the registration statement relating to the
Concurrent Offering (the "Effective Date"). ING and Cerberus have agreed not to
transfer, sell or otherwise dispose of any other shares of Common Stock without
the consent of Southcoast, 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. Thereafter, ING
and Cerberus may transfer, sell or otherwise dispose of any of their shares of
Common Stock in accordance with applicable securities laws. In addition, other
shareholders of the Company who hold approximately 25% of the Registrable
Securities 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
Concurrent Offering without the consent of Southcoast.
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In connection with the Concurrent 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 of the Concurrent Offering without the prior written consent of
Southcoast, 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 installed 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 including, 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 $41.0 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 Offering, the Company will retire all of the outstanding
indebtedness under the Credit Agreement and expects to enter into the New Credit
Agreement. The Credit Agreement provides for a 1% prepayment fee in the event of
prepayment prior to March 1997.
THE NEW CREDIT AGREEMENT
The Company is negotiating with several lenders to enter into the New Credit
Agreement. However, there can be no assurance 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
indebtedness 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 will also restrict certain activities of the Subsidiary Guarantors. The New
Credit Agreement is also expected to contain provisions requiring the Company to
maintain certain financial ratios.
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DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued under an Indenture (the "Indenture"), to be dated as of
, 1996, by and among the Company, the Subsidiary Guarantors, and
, as trustee (the "Trustee"). The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939 (the "Trust Indenture Act"), as in effect on
the date of the Indenture. The Notes are subject to all such terms, and holders
of Notes are referred to the Indenture and the Trust Indenture Act for a
statement of those terms.
The following is a summary of the material provisions of the Notes and the
Indenture. This summary 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 proposed form of Indenture has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
The definitions of terms used in the following summary, if not defined in such
summary, are set forth below under "--Certain Definitions." References to the
Company in this "Description of Notes" section refer to PhoneTel Technologies,
Inc.
MATURITY AND INTEREST
The Notes will be general unsecured obligations of the Company limited in
aggregate principal amount to $ and will mature on ,
2006. Interest on the Notes will accrue at the rate of % per annum and will be
payable semi-annually in arrears on and in each year,
commencing on , 1997, to holders of record on the immediately
preceding and , respectively. Interest on the Notes will accrue from
the most recent date on which interest has been paid or, if no interest has been
paid, from the date of the original issuance of the Notes (the "Issue Date").
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose in the City of New
York or, at the option of the Company, payment of interest may be made by check
mailed to the holders of the Notes at their respective addresses as set forth in
the register of holders of Notes. Until otherwise designated by the Company, the
Company's office or agency in the City of New York will be the office of the
Trustee maintained for such purpose. The Notes will be issued in fully
registered form, without coupons, and in denominations of $1,000 and integral
multiples thereof.
RANKING
The indebtedness of the Company evidenced by the Notes will rank senior in right
of payment to all indebtedness of the Company expressly subordinated in right of
payment to the Notes and pari passu in right of payment with all other existing
and future senior indebtedness of the Company. At the Issue Date, there will not
be any outstanding indebtedness ranking junior in right of payment to the Notes.
The Notes will be effectively subordinated to all secured indebtedness of the
Company to the extent of the collateral pledged to secure such indebtedness,
including the Credit Facility, which will be secured by all of the assets of the
Company. See "Risk Factors--Restrictions Imposed by Terms of the Company's
Indebtedness; Impact of Asset Encumbrances" and "Description of Certain
Indebtedness."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be guaranteed, jointly
and severally and fully and unconditionally, on a senior unsecured basis (the
"Subsidiary Guarantees") by the Subsidiary Guarantors. The obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee will be unconditional and
absolute, irrespective of any invalidity, illegality, unenforceability of any
Note or the Indenture or any extension, compromise, waiver or release in respect
of any obligation of the Company or any other Subsidiary Guarantor under any
Note or the Indenture, or any modification or amendment of or supplement to the
Indenture.
Upon the sale or disposition (whether by merger, stock purchase, asset sale or
otherwise) of a Subsidiary Guarantor (or substantially all of its assets) to an
entity which is not a Subsidiary of the Company, which sale or other disposition
is otherwise in compliance with the Indenture, such Subsidiary Guarantor shall
be deemed released from all its obligations under its Subsidiary Guarantee;
provided that any such termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure,
other Indebtedness of the Company shall also terminate upon such release, sale
or transfer.
In addition, each Subsidiary Guarantor may consolidate with or merge into or
sell its assets to the Company or another Subsidiary Guarantor without
limitation. Subject to the provisions of the immediately preceding paragraph,
the Indenture will further provide that a Subsidiary Guarantor may consolidate
with or merge into or sell its assets to a corporation other than the Company or
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another Subsidiary Guarantor (whether or not affiliated with such Subsidiary
Guarantor), provided that (a) if the surviving person is not the Subsidiary
Guarantor, the surviving person agrees to assume such Subsidiary Guarantor's
obligations under its Subsidiary Guarantee and all its obligations under the
Indenture and (b) such transaction does not (i) violate any covenants set forth
in the Indenture or (ii) result in a Default or Event of Default under the
Indenture immediately thereafter that is continuing.
SPECIAL OFFER TO PURCHASE
If the Cherokee Acquisition is not consummated prior to , 1997, the
date that is 90 days from the Issue Date (the "Special Offer Notice Date"), the
Company will be obligated to make an offer to purchase (the "Special Offer") at
a price (the "Special Offer Price") equal to 101% of the principal amount of the
Notes, plus accrued and unpaid interest to the Special Offer Purchase Date, an
aggregate principal amount of Notes equal to $35 million.
Pursuant to the Indenture, if the Cherokee Acquisition shall not have been
consummated on or prior to the Issue Date, on the Issue Date the Company will
deposit with the Trustee, in the form of cash or Cash Equivalents, $35 million
of the net proceeds from the sale of the Notes plus an additional amount
sufficient to consummate the Special Offer on the Final Special Offer Purchase
Date (as defined herein) at the Special Offer Price. All amounts so deposited
with the Trustee (collectively, the "Trust Funds") will be pledged to and held
by the Trustee pursuant to the Indenture as security for the Notes. The
Indenture will provide that if, prior to the Special Offer Notice Date, the
Company delivers to the Trustee the documentation required under the Indenture,
then the Trustee will release the Trust Funds to the Company for application to
the concurrent consummation of the Cherokee Acquisition. Upon release of the
Trust Funds, all of the Notes remaining outstanding immediately thereafter will
be unsecured obligations of the Company.
Pending release of the Trust Funds as provided in the Indenture, the Trust Funds
will be invested in cash and Cash Equivalents and any investment income
therefrom remaining will be available to the Company following release of the
Trust Funds. If an offer to purchase Notes is made on the Special Offer Notice
Date, tendered Notes will be purchased with the Trust Funds and any portion of
the Trust Funds remaining after the consummation of the offer to purchase will
be returned to the Company.
On the Special Offer Notice Date, the Company shall mail to each holder of Notes
at such holder's registered address a notice stating: (i) that the Cherokee
Acquisition has not occurred and that the Company is offering to purchase up to
$35 million aggregate principal amount of Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase (the "Special Offer Purchase Date"), which
shall be a business day, specified in such notice, that is not earlier than 30
days or later than 60 days (the "Final Special Offer Purchase Date") from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest as of
the Special Offer Purchase Date, (iii) that any Note not tendered will continue
to accrue interest, (iv) that, unless the Company defaults in the payment of the
purchase price for the Notes payable pursuant to the Special Offer, any Notes
accepted for payment pursuant to the Special Offer shall cease to accrue
interest on and after the Special Offer Purchase Date, (v) the procedures,
consistent with the Indenture, to be followed by a holder of Notes in order to
accept a Special Offer or to withdraw such acceptance, and (vi) such other
information as may be required by the Indenture and applicable laws and
regulations.
On the Special Offer Purchase Date, the Company will (i) accept for payment $35
million aggregate principal amount of Notes or such lesser amount as is tendered
pursuant to the Special Offer and (ii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Special Offer and the Trustee will
apply the Trust Funds to consummate the Special Offer. If less than all Notes
tendered pursuant to the Special Offer are accepted for payment by the Company
for any reason consistent with the Indenture, selection of the Notes to be
purchased by the Company shall be in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate; provided that Notes
accepted for payment in part shall only be purchased in integral multiples of
$1,000. The paying agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Notes plus any accrued and unpaid interest thereon, and the Trustee shall
promptly authenticate and mail to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part for any reason
consistent with the Indenture shall be promptly returned to the holder of such
Note. On and after the Special Offer Purchase Date, interest will cease to
accrue on the Notes or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The Company will
announce the results of the Special Offer to holders of the Notes on or as soon
as practicable after the Special Offer Purchase Date.
The Company will comply with the applicable tender offer rules, including the
requirements of Rule 14e-1 under the Exchange Act, and all other applicable
securities laws and regulations in connection with any Special Offer.
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REDEMPTION
Optional Redemption. Except as described below, the Notes are not redeemable at
the Company's option prior to , 2001. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, at the
redemption prices (expressed as percentages of the principal amount of the
Notes) set forth below, plus accrued and unpaid interest to the date of
redemption, if redeemed during the twelve-month period beginning on of
the years indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------------------------------------------------ ----------
<S> <C>
2001 %
2002 %
2003 %
2004 and thereafter 100.0%
</TABLE>
Notwithstanding the foregoing, at any time prior to , 1999, the
Company, at its option, may redeem from time to time up to % of the aggregate
principal amount of the Notes originally issued, with the net proceeds of one or
more Equity Offerings, other than the Concurrent Offering (and the exercise by
the underwriters of the Concurrent Offering of any over-allotment option granted
by the Company to such underwriters in connection therewith) at a redemption
price equal to % of the principal amount thereof, together with accrued and
unpaid interest to the date of redemption; provided, however, that at least $75
million in aggregate principal amount of the Notes remains outstanding
immediately after any such redemption.
Selection and Notice. If less than all of the Notes are to be redeemed at any
time, selection of the Notes to be redeemed will be made by the Company in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
securities exchange, on a pro rata basis, by lot or by any other method as the
Trustee shall deem fair and appropriate; provided that a redemption pursuant to
the provisions relating to Equity Offerings will be on a pro rata basis. Notes
redeemed in part shall only be redeemed in integral multiples of $1,000. Notices
of any redemption shall be mailed by first class mail at least 30 but not more
than 60 days before the redemption date to each holder of Notes to be redeemed
at such holder's registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note shall state the portion of
the principal amount thereof to be redeemed, and the Trustee shall authenticate
and mail to the holder of the original Note a new Note in principal amount equal
to the unredeemed portion of the original Note promptly after the original Note
has been cancelled. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (as defined herein), the Company will make
an offer to purchase all of the then outstanding Notes at a purchase price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest to the date of purchase, in accordance with the terms set forth
below (a "Change of Control Offer").
Within 30 days following the occurrence of any Change of Control, the Company
shall mail to each holder of Notes at such holder's registered address a notice
stating: (i) that a Change of Control has occurred and that such holder has the
right to require the Company to purchase all or a portion (equal to $1,000 or an
integral multiple thereof) of such holder's Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase (the "Change of Control Purchase Date"), which
shall be a business day, specified in such notice, that is not earlier than 30
days or later than 60 days from the date such notice is mailed, (ii) the amount
of accrued and unpaid interest as of the Change of Control Purchase Date, (iii)
that any Note not tendered will continue to accrue interest, (iv) that, unless
the Company defaults in the payment of the purchase price for the Notes payable
pursuant to the Change of Control Offer, any Notes accepted for payment pursuant
to the Change of Control Offer shall cease to accrue interest on and after the
Change of Control Purchase Date, (v) the procedures, consistent with the
Indenture, to be followed by a holder of Notes in order to accept a Change of
Control Offer or to withdraw such acceptance, and (vi) such other information as
may be required by the Indenture and applicable laws and regulations.
On the Change of Control Purchase Date, the Company will (i) accept for payment
all Notes or portions thereof tendered pursuant to the Change of Control Offer,
(ii) deposit with the paying agent the aggregate purchase price of all Notes or
portions thereof accepted for payment and any accrued and unpaid interest on
such Notes as of the Change of Control Purchase Date, and (iii) deliver or cause
to be delivered to the Trustee all Notes tendered pursuant to the Change of
Control Offer. The paying agent shall promptly mail to each holder of Notes or
portions thereof accepted for payment an amount equal to the purchase price for
such Notes plus any accrued and unpaid interest thereon, and the Trustee shall
promptly authenticate and mail to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part for any reason
consistent with the Indenture shall be promptly returned to the holder
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of such Note. On and after a Change of Control Purchase Date, interest will
cease to accrue on the Notes or portions thereof accepted for payment, unless
the Company defaults in the payment of the purchase price therefor. The Company
will announce the results of the Change of Control Offer to holders of the Notes
on or as soon as practicable after the Change of Control Purchase Date.
The Credit Facility, which is secured by certain assets of the Company and the
Subsidiary Guarantors, contains, and other debt that may be incurred in the
future could contain, prohibitions of certain events that would constitute a
Change of Control. Moreover, the exercise by the holders of their right to
require the Company to repurchase the Notes could cause a default under such
indebtedness even if the Change of Control itself does not, due to the financial
effect of such repurchase on the Company. The breach of any such prohibitions or
any such default could result in a default and subsequent acceleration of any
such debt and the enforcement of available remedies thereunder. Finally, the
Company's ability to pay cash to the holders of Notes upon a repurchase in the
event of a Change of Control may be limited by the Company's then existing
financial resources.
The Company will comply with the applicable tender offer rules, including the
requirements of Rule 14e-1 under the Exchange Act, and all other applicable
securities laws and regulations in connection with any Change of Control Offer.
COVENANTS
Limitation on Incurrence of Indebtedness. The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries to, issue, create,
incur, assume or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ("incur") any Indebtedness (including Acquired
Debt), except for Permitted Indebtedness; unless, at the time of and immediately
after giving pro forma effect to such incurrence, the Consolidated Fixed Charge
Coverage Ratio of the Company and its Subsidiaries would be greater than (x) 1.5
to 1.0 if the Indebtedness is incurred prior to , 1997, (y) 2.25 to
1.0 if the Indebtedness is incurred prior to , 1998 or (z) 2.5 to
1.0 if the Indebtedness is incurred on or after , 1998.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company incurred under the Credit Facility in an
aggregate principal amount at any time outstanding not to exceed the sum of
(1) 80% of the net amount of accounts receivable (as determined under GAAP)
of the Company and the Subsidiaries plus (2) an amount equal to $1,300
multiplied by the number of Eligible Pay Telephones (as defined in the
Credit Facility as in effect on the Issue Date), in each case as determined
in good faith by the Company at the time of each incurrence of Indebtedness
under the Credit Facility; provided that in no event shall the aggregate
principal amount of Indebtedness outstanding at any one time under the
Credit Facility permitted pursuant to this clause (i) exceed $25 million
less the aggregate amount of any principal payments thereunder constituting
permanent reductions of such Indebtedness pursuant to and in accordance
with the covenant described under "--Limitation on Asset Sales"; and
provided, further, that in no event shall the aggregate principal amount of
Indebtedness outstanding at any one time under the Credit Facility pursuant
to this clause (i) which was incurred for working capital purposes exceed
$15 million;
(ii) Indebtedness of the Company under the Notes and the Indenture and
of any Subsidiary Guarantor represented by a Subsidiary Guarantee and other
Indebtedness of the Company and the Subsidiary Guarantors outstanding on
the Issue Date;
(iii) Indebtedness owed by any Subsidiary to the Company or to a
Subsidiary Guarantor, or owed by the Company to any Subsidiary Guarantor;
provided that any such Indebtedness shall be held by a Person which is
either the Company or a Subsidiary Guarantor and provided, further, that
(A) any such Indebtedness of a Subsidiary shall not be subordinated to any
other Indebtedness of such Subsidiary and (B) any such Indebtedness owed to
a Subsidiary Guarantor shall be unsecured and shall be subordinated to the
payment when due of the Notes and, provided, further, that an incurrence of
additional Indebtedness which is not permitted under this clause (iii)
shall be deemed to have occurred upon either (a) the transfer or other
disposition of any such Indebtedness to a Person other than the Company or
a Subsidiary or (b) the sale, lease, transfer or other disposition of
shares of Capital Stock (including by consolidation or merger) of any such
Subsidiary to a Person other than the Company or a Subsidiary Guarantor
such that such Subsidiary ceases to be a Subsidiary Guarantor;
(iv) Indebtedness of the Company or any Subsidiary Guarantor consisting
of guarantees of any Indebtedness of the Company or any Subsidiary
Guarantor which Indebtedness has been incurred in accordance with the
provisions of the Indenture;
(v) Indebtedness arising with respect to Interest Rate Agreement
Obligations incurred for the purpose of fixing or hedging interest rate
risk with respect to any floating rate Indebtedness that is permitted by
the terms of the Indenture to be outstanding; provided, however, that the
notional principal amount of such Interest Rate Agreement Obligation does
not exceed the principal amount of the Indebtedness to which such Interest
Rate Agreement Obligation relates; and
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(vi) Indebtedness of the Company or a Subsidiary incurred in connection
with or given in exchange for the renewal, extension, substitution,
refunding, defeasance, refinancing or replacement of any Indebtedness
permitted to be incurred or outstanding under the Consolidated Fixed Charge
Coverage Ratio of the first paragraph of this covenant or pursuant to
clause (ii) above ("Refinancing Indebtedness"); provided that (a) the
principal amount of such Refinancing Indebtedness shall not exceed the
principal amount of the Indebtedness so renewed, extended, substituted,
refunded, defeased, refinanced or replaced (plus the premiums or other
payments paid in connection therewith (which shall not exceed the stated
amount of any premium or other payments required to be paid in connection
with such a refinancing pursuant to the terms of the Indebtedness being
renewed, extended, substituted, refunded, defeased, refinanced or replaced)
and the expenses incurred in connection therewith); (b) the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being renewed, extended, substituted, refunded, defeased, refinanced or
replaced; and (c) such Refinancing Indebtedness shall not rank senior to,
and shall be at least as subordinated, in right of payment to the Notes or
the Subsidiary Guarantees, as the case may be, as the Indebtedness being
renewed, extended, substituted, refunded, defeased, refinanced or replaced.
Limitation on Restricted Payments. The Indenture will provide that the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined by the Board of
Directors of the Company in good faith and which determination shall be
conclusive and evidenced by a board resolution), (i) no Default or Event of
Default (and no event that, after notice or lapse of time, or both, would become
an "event of default" under the terms of any other Indebtedness of the Company
or its Subsidiaries) shall have occurred and be continuing or would occur as a
consequence thereof, (ii) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio contained
in the first paragraph under "--Limitation on Incurrence of Indebtedness" and
(iii) the aggregate amount of all Restricted Payments made after the Issue Date
shall not exceed the sum of (a) 50% of cumulative Consolidated Net Income of the
Company (or, in the case such cumulative Consolidated Net Income shall be
negative, less 100% of such deficit) since the end of the fiscal quarter in
which the Issue Date occurs through the last day of the most recent fiscal
quarter, plus (b) the aggregate amount of all net cash proceeds received after
the Issue Date by the Company (but excluding the net cash proceeds received by
the Company from the Concurrent Offering and the exercise of the over-allotment
option related thereto) from the issuance and sale (other than to a Subsidiary
of the Company) of Capital Stock of the Company (other than Disqualified Stock)
and the principal amount of Indebtedness of the Company or any Subsidiary
Guarantor that had been converted into or exchanged for Capital Stock of the
Company and, in either case, to the extent that such proceeds are not used to
redeem, repurchase, retire or otherwise acquire Capital Stock or any
Indebtedness of the Company or any Subsidiary of the Company pursuant to clause
(ii) of the next paragraph, plus (c) in the case of the disposition or repayment
of any Investment for cash, which Investment constituted a Restricted Payment
made after the Issue Date, an amount equal to the lesser of the return of
capital with respect to such Investment and the cost of such Investment, in
either case, reduced (but not below zero) by the excess, if any, of the cost of
the disposition of such Investment over the gain, if any, realized by the
Company or such Subsidiary in respect of such disposition.
The foregoing provisions will not prohibit, so long as there is no Default or
Event of Default continuing, the following actions (collectively, "Permitted
Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture, and such payment shall be deemed to
have been paid on such date of declaration for purposes of clause (iii) of
the preceding paragraph;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Capital Stock or any Indebtedness of the Company in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of Capital Stock of the Company
(other than any Disqualified Stock);
(iii) the repurchase, redemption or other repayment of any Subordinated
Debt of the Company or a Subsidiary Guarantor in exchange for, by
conversion into or solely out of the proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of Subordinated
Debt of the Company or such Subsidiary Guarantor with a Weighted Average
Life to Maturity equal to or greater than the then remaining Weighted
Average Life to Maturity of the Subordinated Debt repurchased, redeemed or
repaid;
(iv) the redemption, repurchase, retirement, defeasance or other
acquisition of Capital Stock of the Company or any options or stock
appreciation rights related to Capital Stock of the Company held by
officers or employees (or their estates or beneficiaries of estates) upon
death, disability, retirement or termination of employment; provided that
the amount of Permitted Payments made under this clause (iv) shall not
exceed $1 million per annum;
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(v) any redemption of the 14% Preferred (i) having an aggregate stated
value of $5.5 million out of the proceeds of the issuance of the Notes or
the Concurrent Offering or (ii) at its stated maturity out of the proceeds
of a concurrent issuance of Capital Stock (other than Disqualified Stock);
and
(vi) Restricted Investments received as consideration in connection with
an Asset Sale made in compliance with the Indenture.
In computing the amount of Restricted Payments for purposes of clause (iii) of
the first paragraph of this covenant, Restricted Payments made under clauses
(iv) and (vi) of the preceding paragraph shall be included and Restricted
Payments made under clauses (i), (ii), (iii) and (v) of the preceding paragraph
shall not be included.
Limitation on Asset Sales. The Indenture will provide that the Company will
not, and will not permit any of its Subsidiaries to, make any Asset Sale unless
(i) the Company or such Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market value
(determined by the Board of Directors of the Company in good faith, which
determination shall be evidenced by a board resolution) of the assets or other
property sold or disposed of in the Asset Sale, and (ii) at least 75% of such
consideration is in the form of cash or Cash Equivalents; provided that for
purposes of this covenant "cash" shall include the amount of any liabilities
(other than liabilities that are by their terms subordinated to the Notes or any
Subsidiary Guarantee) of the Company or such Subsidiary (as shown on the
Company's or such Subsidiary's most recent balance sheet or in the notes
thereto) that are assumed by the transferee of any such assets or other property
in such Asset Sale (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis under which there is no further
recourse to the Company or any of its Subsidiaries with respect to such
liabilities.
Within 270 days after any Asset Sale, the Company may elect to apply or cause to
be applied the Net Proceeds from such Asset Sale to (a) repay amounts
outstanding under the Credit Facility, and permanently reduce the commitments or
amounts available to be borrowed thereunder by the same amount, (b) repay
amounts outstanding under Other Senior Debt that is secured by the asset being
sold, to the extent repayment is required by the terms of the agreement
governing the same, (c) use no more than the Other Senior Debt Pro Rata Share of
such Net Cash Proceeds to repay amounts outstanding under Other Senior Debt
and/or (d) make an investment in, or acquire assets directly or reasonably
related to, the business of the Company and its Subsidiaries existing on the
Issue Date. Pending the final application of any such Net Proceeds, the Company
may temporarily reduce amounts outstanding under the Credit Facility or
temporarily invest such Net Proceeds in any manner permitted by the Indenture.
Any Net Proceeds from an Asset Sale not applied or invested as provided in the
first sentence of this paragraph within 270 days of such Asset Sale will be
deemed to constitute "Excess Proceeds" on the 271st day after such Asset Sale.
Not later than 10 business days after any date (an "Asset Sale Offer Trigger
Date") that the aggregate amount of Excess Proceeds exceeds $10,000,000, the
Company shall commence an offer to purchase the maximum principal amount of
Notes that may be purchased out of all such Excess Proceeds (an "Asset Sale
Offer") at a price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase. The offer to purchase shall
remain open for a minimum of 20 business days or such longer period as is
required by law. To the extent that any Excess Proceeds remain after completion
of an Asset Sale Offer, the Company may use the remaining amount for general
corporate purposes and such amount shall no longer constitute "Excess Proceeds."
Within 10 business days following any Asset Sale Offer Trigger Date, the Company
shall mail to each holder of Notes at such holder's registered address a notice
stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the
Company is offering to purchase the maximum principal amount of Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash equal to 100%
of the principal amount thereof, plus accrued and unpaid interest to the date of
purchase (the "Asset Sale Offer Purchase Date"), which shall be a business day,
specified in such notice, that is not earlier than 30 days or later than 60 days
from the date such notice is mailed, (ii) the amount of accrued and unpaid
interest as of the Asset Sale Offer Purchase Date, (iii) that any Note not
tendered will continue to accrue interest, (iv) that, unless the Company
defaults in the payment of the purchase price for the Notes payable pursuant to
the Asset Sale Offer, any Notes accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Asset Sale Offer Purchase Date,
(v) the procedures, consistent with the Indenture, to be followed by a holder of
Notes in order to accept an Asset Sale Offer or to withdraw such acceptance, and
(vi) such other information as may be required by the Indenture and applicable
laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for payment
the maximum principal amount of Notes or portions thereof tendered pursuant to
the Asset Sale Offer that can be purchased out of Excess Proceeds from such
Asset Sale, (ii) deposit with the Paying Agent the aggregate purchase price of
all Notes or portions thereof accepted for payment and any accrued and unpaid
interest on such Notes as of the Asset Sale Offer Purchase Date, and (iii)
deliver or cause to be delivered to the Trustee all Notes tendered pursuant to
the Asset Sale Offer. If less than all Notes tendered pursuant to the Asset Sale
Offer are
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accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Notes to be purchased by the Company shall be in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that Notes accepted for payment in part shall only be
purchased in integral multiples of $1,000. The paying agent shall promptly mail
to each holder of Notes or portions thereof accepted for payment an amount equal
to the purchase price for such Notes plus any accrued and unpaid interest
thereon, and the Trustee shall promptly authenticate and mail to such holder of
Notes accepted for payment in part a new Note equal in principal amount to any
unpurchased portion of the Notes, and any Note not accepted for payment in whole
or in part shall be promptly returned to the holder of such Note. On and after
an Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will announce the results of
the Asset Sale Offer to holders of the Notes on or as soon as practicable after
the Asset Sale Offer Purchase Date.
The Company will comply with the applicable tender offer rules, including the
requirements of Rule 14e-1 under the Exchange Act, and all other applicable
securities laws and regulations in connection with any Asset Sale Offer.
Limitation on Liens. The Indenture will provide that the Company will not, and
will not permit any Subsidiary to, directly or indirectly, create, incur, assume
or suffer to exist any Lien (other than Permitted Liens) on any asset now owned
or hereafter acquired, or any income or profits therefrom or assign or convey
any right to receive income therefrom to secure any Indebtedness unless
simultaneously therewith (a) if the Lien is created by the Company, the Notes
and (b) if the Lien is created by a Subsidiary, the Subsidiary Guarantees are,
in each case, secured equally and ratably, in the case of Liens securing
Indebtedness that is not Subordinated Debt, and on a senior priority basis, in
the case of Liens securing Subordinated Debt.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Subsidiary of the Company to (i) pay dividends
or make any other distributions to the Company or any other Subsidiary of the
Company on its Capital Stock or with respect to any other interest or
participation in, or measured by, its profits, or pay any Indebtedness owed to
the Company or any other Subsidiary of the Company, (ii) make loans or advances
to the Company or any other Subsidiary of the Company, or (iii) transfer any of
its properties or assets to the Company or any other Subsidiary of the Company
(collectively, "Payment Restrictions"), except for such encumbrances or
restrictions existing under or by reason of (a) the Credit Facility as in effect
on the Issue Date, and any amendments, restatements, renewals, replacements or
refinancings thereof; provided that such amendments, restatements, renewals,
replacements or refinancings are no more restrictive in the aggregate with
respect to such dividend and other payment restrictions than those contained in
the Credit Facility immediately prior to any such amendment, restatement,
renewal, replacement or refinancing, (b) applicable law, (c) any instrument
governing Indebtedness or Capital Stock of an Acquired Person acquired by the
Company or any of its Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with such
acquisition); provided that such restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Acquired Person, (d)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (e) purchase money
Indebtedness for property acquired in the ordinary course of business that only
impose restrictions on the property so acquired, (f) an agreement for the sale
or disposition of the Capital Stock or assets of such Subsidiary; provided that
such restriction is only applicable to such Subsidiary or assets, as applicable,
and such sale or disposition otherwise is permitted under the covenant described
under "--Covenants --Limitation on Asset Sales"; and provided, further, that
such restriction or encumbrance shall be effective only for a period from the
execution and delivery of such agreement through a termination date not later
than 270 days after such execution and delivery, (g) Refinancing Indebtedness
permitted under the Indenture; provided that the restrictions contained in the
agreements governing such Refinancing Indebtedness are not more restrictive in
the aggregate than those contained in the agreements governing the Indebtedness
being refinanced immediately prior to such refinancing, (h) any agreement in
effect on the Issue Date and (i) provisions in security agreements relating to
secured Indebtedness of a Subsidiary to the extent such provisions restrict the
transfer of the property that is the subject of such security agreements.
Limitation on Transactions with Interested Persons. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
or suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company or any beneficial owner of five
percent or more of any class of Capital Stock of the Company or any Subsidiary
or any officer or director of the foregoing (each, an "Interested Person")
unless (i) such transaction or series of transactions is on terms that are no
less favorable to the Company or such Subsidiary, as the case may be, than would
be available in a comparable transaction in arm's-length dealings with an
unrelated third party, and (ii) (a) with respect to any transaction or series of
transactions involving aggregate payments in excess of $100,000, the Company
delivers an officers certificate to the Trustee certifying that such transaction
or series of related transactions complies with clause (i) above and such
transaction or series of related transactions has been approved by a majority
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of the members of the Board of Directors of the Company (and approved by a
majority of the Independent Directors or, in the event there is only one
Independent Director, by such Independent Director), and (b) with respect to any
transaction or series of transactions involving aggregate payments in excess of
$2,000,000, the Company delivers to the Trustee an opinion to the effect that
such transaction or series of transactions is fair to the Company or such
Subsidiary from a financial point of view issued by an investment banking firm
of national standing. Notwithstanding the foregoing, this provision will not
apply to (i) employment agreements or compensation or employee benefit
arrangements with (including, without limitation, any stock options granted to)
any officer, director or employee of the Company entered into in the ordinary
course of business (including customary benefits thereunder), (ii) any
transaction entered into by or among the Company or any Subsidiary Guarantor and
one or more Subsidiary Guarantors, (iii) transactions pursuant to agreements
existing on the Issue Date, including, without limitation, the Credit Facility
and (iv) loans or advances to officers of the Company for bona fide business
purposes of the Company in the ordinary course of business not in the excess of
$500,000 in the aggregate at any one time outstanding.
Limitation on Issuance and Sale of Preferred Stock of Subsidiaries. The Company
(a) will not, and will not permit any Subsidiary of the Company to, transfer,
convey, sell or otherwise dispose of any shares of Preferred Stock of such
Subsidiary or any other Subsidiary (other than to the Company or a Subsidiary
Guarantor) and (b) will not permit any Subsidiary of the Company to issue shares
of its Capital Stock, or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, its Preferred Stock to any
Person other than to the Company or a Subsidiary Guarantor.
Future Subsidiary Guarantors. The Indenture will provide that the Company shall
cause each Subsidiary of the Company formed or acquired after the Issue Date to
issue a Subsidiary Guarantee and execute and deliver an indenture supplemental
to the Indenture as a Subsidiary Guarantor.
Provision of Financial Statements. The Indenture will provide that, whether or
not the Company is then subject to Section 13(a) or 15(d) of the Exchange Act,
the Company will file with the Commission, so long as the Notes are outstanding,
the annual reports, quarterly reports and other periodic reports which the
Company would have been required to file with the Commission pursuant to such
Section 13(a) or 15(d) if the Company were so subject, and such documents shall
be filed with the Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so subject. The Company will also in any event (i)
within 15 days of each Required Filing Date, (a) transmit by mail to all holders
of Notes, as their names and addresses appear in the Note register, without cost
to such holders and (b) file with the Trustee copies of the annual reports,
quarterly reports and other periodic reports which the Company would have been
required to file with the Commission pursuant to Section 13(a) or 15(d) of the
Exchange Act if the Company were subject to such Sections and (ii) if filing
such documents by the Company with the Commission is prohibited under the
Exchange Act, promptly upon written request and payment of the reasonable cost
of duplication and delivery, supply copies of such documents to any prospective
holder at the Company's cost.
Limitation on Lines of Business. The Indenture will provide that the Company
will not, and will not permit any Subsidiary to, engage in or conduct any
business other than the ownership and operation of public pay telephones and
lines of business integral or ancillary thereto; provided that the primary
business of the Company and its Subsidiaries shall continue to be the ownership
and operation of public pay telephones.
Additional Covenants. The Indenture also contains covenants with respect to the
following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) maintenance of
corporate existence; (iv) payment of taxes and other claims; (v) maintenance of
properties; and (vi) maintenance of insurance.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture will provide that the Company shall not consolidate or merge with
or into (whether or not the Company is the Surviving Person), or, directly or
indirectly through one or more Subsidiaries, sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another Person or Persons (other
than a Subsidiary Guarantor) unless (i) the Surviving Person is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Notes and the Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) at the time of and immediately after such Disposition, no Default
or Event of Default shall have occurred and be continuing; and (iv) the
Surviving Person will (A) have Consolidated Net Worth (immediately after giving
effect to the Disposition on a pro forma basis) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction, and
(B) at the time of such Disposition and after giving pro forma effect thereto,
the Surviving Person would be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio contained
in the first paragraph of the covenant described under "--Covenants--Limitation
on Incurrence of Indebtedness."
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In the event of any transaction (other than a lease) described in and complying
with the conditions listed in the immediately preceding paragraph in which the
Company is not the Surviving Person and the Surviving Person is to assume all
the obligations of the Company under the Notes and the Indenture pursuant to a
supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company, and the
Company would be discharged from its obligations under the Indenture and the
Notes; provided that solely for the purpose of calculating amounts described in
clause (iii) under "--Covenants--Limitation on Restricted Payments," any such
Surviving Person shall only be deemed to have succeeded to and be substituted
for the Company with respect to the period subsequent to the effective time of
such transaction (and the Company (before giving effect to such transaction)
shall be deemed to be the "Company" for such purposes for all prior periods).
EVENTS OF DEFAULT
The Indenture will provide that each of the following constitutes an Event of
Default:
(i) a default for 30 days in the payment when due of interest on any
Note (whether or not prohibited by the subordination provisions of the
Indenture);
(ii) a default in the payment when due of principal on any Note, whether
upon maturity, acceleration, optional or mandatory redemption, required
repurchase or otherwise;
(iii) failure to perform or comply with any covenant, agreement or
warranty in the Indenture (other than the defaults specified in clauses (i)
and (ii) above) which failure continues for 30 days after written notice
thereof has been given to the Company by the Trustee or to the Company and
the Trustee by the holders of at least 25% in aggregate principal amount of
the then outstanding Notes;
(iv) except as permitted by the Indenture, any Subsidiary Guarantee
shall for any reason cease to be, or it shall be asserted by any Subsidiary
Guarantor or the Company not to be, in full force and effect and
enforceable in accordance with its terms;
(v) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Subsidiary of the
Company then has outstanding Indebtedness in excess of $5 million in the
aggregate and, if not already matured at its final maturity in accordance
with its terms, such Indebtedness shall have been accelerated;
(vi) one or more judgments, orders or decrees for the payment of money
in excess of $5 million either individually or in the aggregate shall be
entered against the Company or any Subsidiary of the Company or any of
their respective properties and which judgments, orders or decrees are not
paid, discharged, bonded or stayed for a period of 60 days after their
entry;
(vii) any holder or holders of at least $5 million in aggregate
principal amount of Indebtedness of the Company or any Subsidiary of the
Company after a default under such Indebtedness (a) shall notify the
Company or the Trustee of the intended sale or disposition of any assets of
the Company or any Subsidiary of the Company with an aggregate fair market
value (as determined in good faith by the Company's Board of Directors,
which determination shall be evidenced by a board resolution), individually
or in the aggregate, of at least $5 million that have been pledged to or
for the benefit of such holder or holders to secure such Indebtedness or
(b) shall commence proceedings, or take any action (including by way of
set-off), to retain in satisfaction of such Indebtedness, or to collect on,
seize, dispose of or apply in satisfaction of such Indebtedness, such
assets of the Company or any Subsidiary of the Company (including funds on
deposit or held pursuant to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Subsidiary of the Company in an involuntary case or proceeding under
any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company or any Subsidiary of the Company bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company or any Subsidiary of the Company under any applicable federal
or state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or any
Subsidiary of the Company or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their affairs, and
any such decree or order for relief shall continue to be in effect, or any
such other decree or order shall be unstayed and in effect, for a period of
60 days; or
(ix) (a) the Company or any Subsidiary of the Company commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent, (b) the
Company or any Subsidiary of the Company consents to the entry of a decree
or order for relief in respect of the Company or such Subsidiary of the
Company in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, (c) the Company or any Subsidiary of the Company
files a petition or
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answer or consent seeking reorganization or relief under any applicable
federal or state law, (d) the Company or any Subsidiary of the Company (x)
consents to the filing of such petition or the appointment of or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or such Subsidiary of
the Company or of any substantial part of their respective property, (y)
makes an assignment for the benefit of creditors or (z) admits in writing
its inability to pay its debts generally as they become due or (e) the
Company or any Subsidiary of the Company takes any corporate action in
furtherance of any such actions in this paragraph (ix).
If any Event of Default (other than as specified in clause (viii) or (ix) of the
preceding paragraph with respect to the Company or any Subsidiary) occurs and is
continuing, the Trustee or the holders of at least 25% in aggregate principal
amount of the then outstanding Notes may, and the Trustee at the request of such
holders shall, declare all the Notes to be due and payable immediately. In the
case of an Event of Default arising from the events specified in clause (viii)
or (ix) of the preceding paragraph with respect to the Company or any
Subsidiary, the principal of, premium, if any, and any accrued and unpaid
interest on all outstanding Notes shall ipso facto become immediately due and
payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. The holders of a majority in aggregate principal
amount of the Notes then outstanding by notice to the Trustee may on behalf of
the holders of all the Notes waive any existing Default or Event of Default and
its consequences under the Indenture except (i) a continuing Default or Event of
Default in the payment of the principal of, or premium, if any, or interest on,
the Notes (which may only be waived with the consent of each holder of Notes
affected), or (ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each Note affected. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal, premium or interest) if
it determines that withholding notice is in their interest.
The Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and the Company is required, upon becoming aware
of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
DEFEASANCE
The Company may, at its option and at any time, elect to have the obligations of
the Company discharged with respect to the outstanding Notes and the Subsidiary
Guarantees ("legal defeasance"). Such legal defeasance means that the Company
and the Subsidiary Guarantors shall be deemed to have paid and discharged the
entire indebtedness represented by the outstanding Notes and the Subsidiary
Guarantees and to have satisfied all other obligations under the Notes and the
Subsidiary Guarantees and the Indenture, except for (i) the rights of holders of
the outstanding Notes to receive, solely from the trust fund described below,
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee under the Indenture and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and the
Subsidiary Guarantors released with respect to certain covenants that are
described in the Indenture ("covenant defeasance") and any omission to comply
with such obligations shall not constitute a Default or an Event of Default with
respect to the Notes.
In order to exercise either legal defeasance or covenant defeasance, (i) the
Company shall irrevocably deposit with the Trustee, as trust funds in trust for
the benefit of the holders of the Notes, cash in United States dollars, U.S.
Government Obligations, or a combination thereof, maturing as to principal and
interest in such amounts as will be sufficient, without consideration of any
reinvestment of such interest, in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm, to pay and discharge the principal of, premium, if any, and interest on
the outstanding Notes on the stated maturity of such principal or installment of
principal or interest; (ii) in the case of legal defeasance, the Company shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the holders of the Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such legal defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such legal defeasance had not occurred; (iii) in the case of covenant
defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the holders of the Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
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same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clauses (viii) and (ix)
under the first paragraph under "--Events of Default" are concerned, at any time
during the period ending on the 91st day after the date of deposit; (v) such
legal defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any other material
agreement or instrument to which the Company is a party or by which it is bound;
(vi) the Company shall have delivered to the Trustee an opinion of counsel to
the effect that (A) the trust funds will not be subject to any rights of holders
of other Indebtedness, including, without limitation, those arising under the
Indenture, after the 91st day following the deposit and (B) after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company shall have delivered to the
Trustee an officers' certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of the Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; (viii) no event or condition
shall exist that would prevent the Company from making payments of the principal
of, premium, if any, and interest on the Notes on the date of such deposit or at
any time ending on the 91st day after the date of such deposit; and (ix) the
Company shall have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to either the legal defeasance or the covenant defeasance, as the case
may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving rights
of registration, transfer or exchange of the Notes, as expressly provided for in
the Indenture) as to all outstanding Notes when (i) either (a) all the Notes
theretofore authenticated and delivered (except lost, stolen or destroyed Notes
which have been replaced or paid) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered for cancellation have
become due and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee an amount in United States dollars sufficient to pay
and discharge the entire indebtedness on the Notes not theretofore delivered to
the Trustee for cancellation, for the principal of, premium, if any, and
interest to the date of payment; (ii) the Company has paid or caused to be paid
all other sums payable under the Indenture by the Company; and (iii) the Company
has delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture or the Notes may be made by the
Company, the Subsidiary Guarantors and the Trustee with the written consent of
the holders of not less than a majority in aggregate principal amount of the
then outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby: (i) change the stated maturity of the principal of, or any
installment of interest on, any Note, or reduce the principal amount thereof or
the rate of interest thereon or any premium payable upon the redemption thereof,
or change the coin or currency or the manner in which the principal of any Note
or any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the stated maturity
thereof (or, in the case of redemption, on or after the redemption date); (ii)
extend the time for payment of interest on the Notes; (iii) alter the redemption
provisions in the Notes or the Indenture in a manner adverse to any holder of
the Notes; (iv) amend, change or modify the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control or
modify any of the provisions or definitions with respect thereto; (v) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any amended or supplemental indenture or the consent of
whose holders is required for any waiver of compliance with any provision of the
Indenture or any Default thereunder and their consequences provided for in the
Indenture; (vi) modify any of the provisions of the Indenture relating to any
amended or supplemental indentures requiring the consent of holders or relating
to the waiver of past defaults or relating to the waiver of any covenant, except
to increase the percentage of outstanding Notes required for such actions or to
provide that any other provision of the Indenture cannot be modified or waived
without the consent of the holder of each Note affected thereby; (vii) except as
otherwise permitted under "--Merger, Consolidation and Sale of Assets," consent
to the assignment or transfer by the Company of any of its rights and
obligations under the Indenture; (viii) alter the ranking of the Notes or the
Subsidiary Guarantees in a manner adverse to the holders of the Notes; or (ix)
amend, change or modify the obligation of the Company to make and consummate a
Special Offer or any of the definitions related thereto in a manner adverse to
any holder of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes, the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture or the Notes to (i) cure any ambiguity, defect or inconsistency, (ii)
provide for uncertificated Notes in addition to or in place of certificated
Notes, (iii) provide for the assumption of the Company's obligations to the
holders of the Notes in the event of any Disposition involving the Company that
is permitted under the provisions of
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"--Merger, Consolidation and Sale of Assets" in which the Company is not the
Surviving Person, (iv) make any change that would provide any additional rights
or benefits to the holders of the Notes or does not adversely affect the
interests of any holder or (v) comply with the requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act.
THE TRUSTEE
In the event that the Trustee becomes a creditor of the Company, the Indenture
contains certain limitations on the rights of the Trustee to obtain payment of
claims in certain cases or to realize on certain property received in respect of
any such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue as Trustee, or resign.
The holders of a majority in aggregate principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that, in case an Event of Default has
occurred and has not been cured, the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. The Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any holder of Notes,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be represented by one or more fully registered global notes (each
a "Global Note"). Each Global Note will be deposited on the date of the closing
of the sale of Notes offered hereby with, or on behalf of, the Depository Trust
Company ("DTC") and registered in the name of a nominee of DTC.
THE GLOBAL NOTE
Ownership of beneficial interests in a Global Note will be limited to persons
that have accounts with DTC ("participants") or persons that may hold interests
through participants. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of a Global Note, DTC will credit the
accounts of participants designated by the Underwriters with the respective
principal amount of the Global Note beneficially owned by such participant and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC or its nominee
(with respect to interests of participants) and the records of participants
(with respect to interest of persons holding through participants).
So long as DTC, or its nominee, is the registered owner or holder of the Notes,
DTC or such nominee will be considered the sole owner or holder of the Notes
represented by the Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on the Global Note
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of the
principal of, premium (if any) and interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in any such Global
Note held through such participants will be governed by standing instructions
and customary practice, as is now the case with securities held for the accounts
of customers registered to the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way in
accordance with DTC rules and will be settled in same day funds. The laws of
some states may require that certain purchasers of securities take physical
delivery of such securities in certificated form. Such laws may impair the
ability to own, transfer or pledge beneficial interests in a Global Note. If a
holder requires physical delivery of a certificated note for any reason,
including to sell Notes to persons in states which require physical delivery of
such securities or to pledge such securities, such holder must transfer its
interest in the applicable Global Note in accordance with the normal procedures
of DTC and with respect to the Notes, with the procedures set forth in the
Indenture.
DTC has advised the Company that it will take any action permitted to be taken
by a holder of Notes only at the direction of one or more participants to whose
account interests in the Global Note are credited and only in respect of such
portion of the aggregate
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principal amount of Notes as to which such participant or participants has or
have given such direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for certificated notes representing
the Notes, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain other
organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for any
Global Note and a successor depositary is not appointed by the Company within 30
days, certificated notes will be issued in exchange for Global Notes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for the definition of all other terms used in the
Indenture.
"Acquired Debt" means, with respect to any specified Person, Indebtedness of any
other Person (the "Acquired Person") existing at the time the Acquired Person
merges with or into, or becomes a Subsidiary of, such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, the
Acquired Person merging with or into, or becoming a Subsidiary of, such
specified Person.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with") of any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Acquisition" means (a) an Investment by the Company or any Subsidiary in
any other Person pursuant to which such Person shall become a Subsidiary or
shall be merged with or into the Company or any Subsidiary, (b) the acquisition
by the Company or any Subsidiary of the assets of any Person which constitute
all or substantially all of the assets of such Person or any division or line
(whether based on product or geography) of business of such Person or (c) the
acquisition by the Company or any Subsidiary of any public pay telephones from
any Person other than the manufacturer (or an Affiliate thereof or special
purpose finance entity related thereto) of such telephones in a transaction
involving consideration having a fair market value equal to or greater than
$250,000.
"Asset Sale" means (i) any sale, lease, conveyance or other disposition by the
Company or any Subsidiary of the Company of any assets (including by way of a
sale-and-leaseback) other than in the ordinary course of business (provided that
the sale, lease, conveyance or other disposition of all or substantially all of
the assets of the Company shall not be an "Asset Sale" but instead shall be
governed by the provisions of the Indenture described under "--Merger,
Consolidation and Sale of Assets"), or (ii) the issuance or sale of Capital
Stock of any Subsidiary of the Company, in each case, whether in a single
transaction or a series of related transactions, to any Person (other than to
the Company or a Subsidiary Guarantor); provided that the term "Asset Sale"
shall not include (i) any simultaneous exchanges of public pay telephones and
related location agreements of the Company or any Subsidiaries for public pay
telephones and related location agreements of another person with equivalent
Fair Market Value; provided that the number of pay telephones so exchanged in
any calendar year shall not exceed 10% of (A) the sum of the number of pay
telephones owned by the Company and its Subsidiaries on January 1 of such year
and the number of pay telephones acquired by the Company and its Subsidiaries
since January 1 of such year less (B) the number of pay telephones sold since
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January 1 of such year, and (ii) any disposition or dispositions during any
twelve-month period of assets or property having a fair market value of less
than $250,000 in the aggregate.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors, or any amendment to, succession to or change in any such law.
"Capital Lease Obligations" of any Person means the obligations to pay rent or
other amounts under a lease of (or other Indebtedness arrangements conveying the
right to use) real or personal property of such Person which are required to be
classified and accounted for as a capital lease or liability on the face of a
balance sheet of such Person in accordance with GAAP. The amount of such
obligations shall be the capitalized amount thereof in accordance with GAAP and
the stated maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) corporate stock or other equity participations,
including partnership interests, whether general or limited, of such Person,
including any Preferred Stock.
"Cash Equivalents" means (i) marketable direct obligations issued or guaranteed
by the United States of America, or any governmental entity or agency or
political subdivision thereof (provided, that the full faith and credit of the
United States of America is pledged in support thereof) maturing within one year
of the date of purchase; (ii) commercial paper issued by corporations, each of
which shall have a consolidated net worth of at least $500,000,000, maturing
within 180 days from the date of the original issue thereof, and rated "P-1" or
better by Moody's Investors Service or "A-1" or better by Standard & Poor's
Corporation or an equivalent rating or better by any other nationally recognized
securities rating agency; (iii) certificates of deposit issued or acceptances
accepted by or guaranteed by any bank or trust company organized under the laws
of the Untied States of America or any state thereof or the District of
Columbia, in each case having capital, surplus and undivided profits totalling
more than $500,000,000, maturing within one year of the date of purchase and
(iv) money market accounts with a bank or trust company of a type described in
clause (iii).
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than the Permitted Holders, becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person or group shall be deemed to have
beneficial ownership of all shares of Capital Stock that such person or
group has the right to acquire regardless of when such right is first
exercisable), directly or indirectly, of more than 35% of the total voting
power represented by the outstanding Voting Stock of the Company;
(b) the Company merges with or into another Person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially
all of its assets to any Person, or any Person merges with or into the
Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for
cash, securities or other property, other than any such transaction where
(x) the outstanding Voting Stock of the Company is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving
or transferee corporation and (y) immediately after such transaction no
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), disregarding the Permitted Holders, is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except
that a person or group shall be deemed to have beneficial ownership of all
shares of Capital Stock that such person or group has the right to acquire
regardless of when such right is first exercisable), directly or
indirectly, of more than 35% of the total voting power represented by the
outstanding Voting Stock of the surviving or transferee corporation;
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by (x) a vote of at least a majority of the directors
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved (as described in this clause (x) or in the following clause (y))
or (y) Permitted Holders that are "beneficial owners" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act) of a majority of the total voting
power represented by the outstanding Voting Stock of the Company) cease for
any reason to constitute a majority of the Board then in office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation.
"Consolidated EBITDA" is defined to mean, for any period, the sum of the amounts
for such period of (i) Consolidated Net Income, (ii) Consolidated Interest
Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Consolidated Net
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Income (other than income taxes (either positive or negative) attributable to
extraordinary and non-recurring gains or losses or sales of assets), (iv)
depreciation expense, to the extent such amount was deducted in calculating
Consolidated Net Income, (v) amortization expense, to the extent such amount was
deducted in calculating Consolidated Net Income, and (vi) all other non-cash
items reducing Consolidated Net Income, less all non-cash items increasing
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Subsidiaries in conformity with GAAP; provided that, if any
Subsidiary is not a Wholly-Owned Subsidiary, Consolidated EBITDA shall be
reduced (to the extent not otherwise reduced in accordance with GAAP) by an
amount equal to (A) the amount of the Consolidated Net Income attributable to
such Subsidiary multiplied by (B) the quotient of (1) the number of shares of
outstanding common stock of such Subsidiary not owned on the last day of such
period by the Company or any of its Subsidiaries divided by (2) the total number
of shares of outstanding common stock of such Subsidiary on the last day of such
period.
"Consolidated Fixed Charge Coverage Ratio" means, on any determination date (the
"Transaction Date"), the ratio of (i) Consolidated EBITDA for the four fiscal
quarters for which financial information in respect thereof is available
immediately prior to such Transaction Date (the "Reference Period") to (ii) the
aggregate Consolidated Fixed Charges during such Reference Period. In making the
foregoing calculation, (A) pro forma effect shall be given to (1) any
Indebtedness Incurred subsequent to the end of the Reference Period and prior to
the Transaction Date, (2) any Indebtedness Incurred during such Reference Period
to the extent such Indebtedness is outstanding at the Transaction Date, and (3)
any Indebtedness to be Incurred on the Transaction Date, in each case as if such
Indebtedness had been Incurred on the first day of such Reference Period and
after giving pro forma effect to the application of the proceeds thereof as if
such application had occurred on such first day, (B) Consolidated Interest
Expense attributable to interest on any Indebtedness (whether existing or being
Incurred) computed on a pro forma basis and bearing a floating interest rate
shall be computed as if the rate in effect on the Transaction Date (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months) had been
the applicable rate for the entire period, (C) there shall be excluded from
Consolidated Fixed Charges any Consolidated Fixed Charges related to any amount
of Indebtedness, Disqualified Stock, or obligations under leases that were
outstanding during such Reference Period or thereafter but that are not
outstanding or are to be repaid on the Transaction Date, except for Consolidated
Interest Expense accrued (as adjusted pursuant to clause (B) above) during such
Reference Period under a revolving credit or similar arrangement to the extent
of the commitment thereunder (or under any successor revolving credit or similar
arrangement) in effect on the Transaction Date, (D) pro forma effect shall be
given to Asset Sales and Asset Acquisitions (including giving pro forma effect
to the application of proceeds of any Asset Sales) that occur during such
Reference Period or thereafter and on or prior to the Transaction Date as if
they had occurred and such proceeds had been applied on the first day of such
Reference Period, (E) with respect to any such Reference Period commencing prior
to the Issue Date, the issuance of the Notes shall be deemed to have taken place
on the first day of such Reference Period, and (F) pro forma effect shall be
given to asset dispositions and asset acquisitions (including giving pro forma
effect to the application of proceeds of any asset disposition) that have been
made by any person that has become a Subsidiary or has been merged with or into
the Company or any Subsidiary during such Reference Period or subsequent to such
period and prior to the Transaction Date and that would have constituted Asset
Sales or Asset Acquisitions had such transactions occurred when such person was
a Subsidiary as if such asset dispositions or asset acquisitions were Asset
Sales or Asset Acquisitions that occurred on the first day of such Reference
Period; provided that to the extent that clause (D) or (F) of this sentence
requires that pro forma effect be given to an asset acquisition or asset
disposition, such pro forma calculation shall be based upon the four full fiscal
quarters immediately preceding the Transaction Date of the person, or division
or line of business of the person, or property, that is acquired or disposed of,
for which financial information is available.
"Consolidated Fixed Charges" is defined to mean, for any period, the sum
(without duplication) of (i) Consolidated Interest Expense for such period, (ii)
all but the principal component of rentals in respect of Capitalized Lease
Obligations paid, accrued, or scheduled to be paid or to be accrued by the
Company and its Subsidiaries during such period, and (iii) cash dividends
declared or paid in respect of any Preferred Stock of the Company and its
Subsidiaries during such period (other than dividends paid or payable to the
Company or a Wholly-Owned Subsidiary), in each case as determined on a
consolidated basis in accordance with GAAP consistently applied. For purposes of
this definition, the amount of any cash dividends declared or paid will be
deemed to be equal to the amount of such dividends multiplied by a fraction, the
numerator of which is one and the denominator of which is one minus the maximum
statutory combined Federal, state, local and foreign income tax rate then
applicable to the Company and its Subsidiaries (expressed as a decimal between
one and zero) on a consolidated basis.
"Consolidated Interest Expense" means, with respect to any period, the sum of
the interest expense of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
including, without limitation, (a) amortization of debt discount, (b) the net
payments, if any, under interest rate contracts (including amortization of
discounts), (c) the interest portion of any deferred payment obligation and (d)
accrued interest.
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"Consolidated Net Income" means, with respect to any period, the net income (or
loss) of the Company and its Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP consistently applied, adjusted, to
the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains and losses (net of fees and
expenses relating to the transaction giving rise thereto), (ii) the portion of
net income (or loss) of the Company and its Subsidiaries allocable to interests
in unconsolidated Persons, except to the extent of the amount of dividends or
distributions actually paid to the Company or its Subsidiaries by such other
Person during such period, (iii) net income (or loss) of any Person combined
with the Company or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) net gain but
not losses in respect of Asset Sales, or (v) the net income of any Subsidiary to
the extent that the declaration of dividends or similar distributions by that
Subsidiary of that income to the Company is not at the time permitted, directly
or indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person on any date, the
equity of the common and preferred stockholders of such Person and its
Subsidiaries as of such date, determined on a consolidated basis in accordance
with GAAP consistently applied.
"Credit Facility" means the credit agreement, to be entered into as of
, 1996, among the Company and the lenders named therein and
, as Agent, as the same may be amended, modified, renewed, refunded,
replaced or refinanced from time to time, including (i) any related notes,
letters of credit, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time, and (ii) any notes,
guarantees, collateral documents, instruments and agreements executed in
connection with any such amendment, modification, renewal, refunding,
replacement or refinancing.
"Default" means any event that is, or after the giving of notice or passage of
time or both would be, an Event of Default.
"Disposition" means, with respect to any Person, any merger, consolidation or
other business combination involving such Person (whether or not such Person is
the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the terms
of any security into which it is convertible or for which it is exchangeable),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the holder thereof, in whole or in part on or prior to the stated
maturity of the Notes.
"Equity Offering" means (i) an underwritten public offering of Capital Stock
(other than Disqualified Stock) of the Company subsequent to the Issue Date
(excluding Capital Stock which may be issued upon exercise of any over-allotment
option exercisable after the Issue Date and granted in connection with the
Concurrent Offering), pursuant to an effective registration statement filed
under the Securities Act, or (ii) any private placement of Capital Stock (other
than Disqualified Stock) of the Company subsequent to the Issue Date, in either
case the net proceeds of which to the Company (after deducting any underwriting
discounts and commissions) exceed $25.0 million.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset, the price (after taking
into account any liabilities relating to such asset) which could be negotiated
in an arm's length free market transaction, for cash, between a willing seller
and a willing buyer, neither of which is under pressure or compulsion to
complete the transaction; provided that, except with respect of any Asset Sale
which involves an asset or assets the value of which could reasonably be
expected to exceed $250,000, the Fair Market Value of any such asset or assets
shall be determined by the Board of Directors of the Company, acting in good
faith, and shall be evidenced by resolutions of the Board of Directors of the
Company delivered to the Trustee; and provided, further, that the fair market
value of a location agreement shall be the present value of the revenue to be
received by the Company under such agreement until the expiration of the term of
such agreement, without giving effect to any rights to renew or extend such
agreement, based on the actual amount of revenue, net of related costs
associated with the telephone or telephones covered by such agreement, received
by the Company under such agreement for the most recent fiscal quarter.
"GAAP" means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"guarantee" by any Person means any obligation, contingent or otherwise, of such
Person guaranteeing any Indebtedness of any other Person (the "primary obligor")
in any manner, whether directly or indirectly, and including, without
limitation, any obligation
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of such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or to purchase (or to advance or
supply funds for the purchase of) any security for the payment of such
Indebtedness, (ii) to purchase property, securities or services for the purpose
of assuring the holder of such Indebtedness of the payment of such Indebtedness,
or (iii) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness (and "guaranteed," "guaranteeing" and
"guarantor" shall have meanings correlative to the foregoing); provided,
however, that the guarantee by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Indebtedness" means, with respect to any Person, without duplication, and
whether or not contingent, (i) all indebtedness of such Person for borrowed
money or for the deferred purchase price of property or services or which is
evidenced by a note, bond, debenture or similar instrument, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person in
respect of letters of credit or bankers' acceptances issued or created for the
account of such Person, (iv) all Interest Rate Agreement Obligations of such
Person, (v) all liabilities secured by any Lien on any property owned by such
Person even if such Person has not assumed or otherwise become liable for the
payment thereof to the extent of the lesser of (x) the amount of the Obligation
so secured and (y) the fair market value of the property subject to such Lien,
(vi) all obligations to purchase, redeem, retire, or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (vii) to the extent not
included in (vi), all Disqualified Stock issued by such Person, valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends thereon, and (viii) to the extent not otherwise
included, any guarantee by such Person of any other Person's indebtedness or
other obligations described in clauses (i) through (vii) above. "Indebtedness"
of the Company and its Subsidiaries shall not include current trade payables
incurred in the ordinary course of business and payable in accordance with
customary practices, and non-interest bearing installment obligations and
accrued liabilities incurred in the ordinary course of business which are not
more than 90 days past due. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by the fair market value of, such Disqualified Stock,
such fair market value is to be determined in good faith by the board of
directors of the issuer of such Disqualified Stock.
"Independent Director" means a director of the Company other than a director (i)
who (apart from being a director of the Company or any Subsidiary) is an
employee or Affiliate of the Company or a Subsidiary or has held any such
position during the previous five years, (ii) who is a director, employee or
Affiliate of another party to the transaction in question or (iii) who has, or
who has been appointed to the Board of Directors by a shareholder who has, a
direct or indirect financial interest in the transaction in question.
"Insolvency or Liquidation Proceeding" means, with respect to any Person, any
liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Interest Rate Agreement Obligations" means, with respect to any Person, the
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investments" means, with respect to any Person, all investments by such Person
in other Persons (including Affiliates of such Person) in the form of loans,
guarantees, advances or capital contributions (excluding commission, travel,
relocation expenses and similar loans and advances to officers and employees
made in the ordinary course of business) purchases or other acquisitions for
consideration of Indebtedness, Capital Stock or other securities and all other
items that are or would be classified as investments on a balance sheet prepared
in accordance with GAAP. "Investments" shall exclude extensions of trade credit
by the Company and its Subsidiaries in the ordinary course of business in
accordance with normal trade practices of the Company or such Subsidiary, as the
case may be.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
any asset and any filing of, or agreement to give, any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate cash proceeds received by such Person and/or its Affiliates in respect
of such Asset Sale, which amount is equal to the excess, if any, of (i) the cash
received by such Person and/or its Affiliates (including any cash payments
received by way of deferred payment pursuant to, or monetization of, a note or
installment receivable or otherwise, but only as and when received) in
connection with such Asset Sale, over (ii) the sum of (a) the
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<PAGE> 86
amount of any Indebtedness that is secured by such asset and which is required
to be repaid by such Person in connection with such Asset Sale, plus (b) all
fees, commissions and other expenses incurred by such Person in connection with
such Asset Sale, plus (c) provision for taxes, including income taxes,
attributable to the Asset Sale or attributable to required prepayments or
repayments of Indebtedness with the proceeds of such Asset Sale, plus (d) a
reasonable reserve for the after-tax cost of any indemnification payments (fixed
or contingent) attributable to seller's indemnities to purchaser in respect of
such Asset Sale undertaken by the Company or any of its Subsidiaries in
connection with such Asset Sale plus (e) if such Person is a Subsidiary of the
Company, any dividends or distributions payable to holders of minority interests
in such Subsidiary from the proceeds of such Asset Sale.
"Other Senior Debt" means Indebtedness of the Company ranking pari passu in
right of payment with the Notes and Indebtedness of a Subsidiary Guarantor
ranking pari passu in right of payment with the Subsidiary Guarantees, in each
case, the terms of which require that Net Cash Proceeds be used to permanently
reduce (and thereby also reduce commitments relating to) such Indebtedness.
"Other Senior Debt Pro Rata Share" means a fraction, (i) the numerator of which
is the aggregate principal amount of Other Senior Debt outstanding on the date
Net Cash Proceeds are received and (ii) the denominator of which is the sum of
(x) the aggregate principal amount of Notes outstanding on such date and (y) the
aggregate principal amount of any Other Senior Debt outstanding on such date.
"Permitted Holders" means (i) Peter G. Graf; (ii) his spouse and lineal
descendants; (iii) in the event of the incompetence or death of any of the
Persons described in clauses (i) and (ii), such Person's estate, executor,
administrator, committee or other personal representative; (iv) any trusts
created for the benefit of the Persons described in clause (i) or (ii); (v) each
of International Nederlanden (U.S.) Capital Corporation and Cerberus Partners,
L.P.; or (vi) any Person controlled by any of the Persons described in clause
(i), (ii), (iv) or (v). For purposes of this definition, "control," as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through ownership of voting securities or by contract or
otherwise.
"Permitted Investments" means (i) any Investment in the Company or any
Subsidiary Guarantor; (ii) any Investments in Cash Equivalents; (iii) any
Investment in a Person (an "Acquired Person") if, as a result of such
Investment, (a) the Acquired Person becomes a Subsidiary Guarantor, or (b) the
Acquired Person either (1) is merged, consolidated or amalgamated with or into
the Company or a Subsidiary Guarantor and the Company or such Subsidiary
Guarantor is the Surviving Person, or (2) transfers or conveys substantially all
of its assets to, or is liquidated into, the Company or a Subsidiary Guarantor;
(iv) Investments in accounts and notes receivable acquired in the ordinary
course of business; (v) Interest Rate Agreement Obligations permitted pursuant
to the second paragraph under "--Covenants--Limitation on Incurrence of
Indebtedness"; (vi) loans to employees the proceeds of which are used to pay
taxes due in respect of stock grants to such employees in an amount not to
exceed in the aggregate $1,000,000 in each of calendar year 1997 and 1998 and
$750,000 in calendar year 1999; and (vii) Investments, not to exceed $2,500,000
at any time outstanding, in joint ventures in which Cherokee or any of its
Subsidiaries is a party as of the Issue Date and which relate solely to certain
public pay telephones located in Mexico that are to be acquired in connection
with the Cherokee Acquisition.
"Permitted Liens" means (i) (A) Liens on assets or property of the Company that
secure Indebtedness outstanding under the Credit Facility pursuant to clause (i)
of the second paragraph under "--Covenants--Limitation on Incurrence of
Indebtedness and (B) Liens securing up to $25 million of additional Indebtedness
outstanding under the Credit Facility incurred pursuant to the Consolidated
Fixed Coverage Ratio contained in the first paragraph of the covenant described
under "--Covenants--Limitation on Incurrence of Indebtedness" and (C) Liens
securing up to $25 million of additional Indebtedness, if the Consolidated Fixed
Charge Coverage Ratio at the time of such incurrence, after giving effect to
such Indebtedness is 3.0 to 1.0; (ii) Liens securing Indebtedness of a Person
existing at the time that such Person is merged into or consolidated with the
Company or a Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of such Person; (iii) Liens on property
acquired by the Company or a Subsidiary, provided that such Liens were in
existence prior to the contemplation of such acquisition and do not extend to
any other property; (iv) Liens in favor of the Company or any Subsidiary
Guarantor of the Company; (v) Liens incurred, or pledges and deposits in
connection with, workers' compensation, unemployment insurance and other social
security benefits, and leases, appeal bonds and other obligations of like nature
incurred by the Company or any Subsidiary of the Company in the ordinary course
of business; (vi) Liens imposed by law, including, without limitation,
mechanics', carriers', warehousemen's, materialmen's, suppliers' and vendors'
Liens, incurred by the Company or any Subsidiary of the Company in the ordinary
course of business; (vii) Liens for ad valorem, income or property taxes or
assessments and similar charges which either are not delinquent or are being
contested in good faith by appropriate proceedings for which the Company has set
aside on its books reserves to the extent required by GAAP; (viii) Liens created
under the Indenture; (ix) Liens securing Capital Lease Obligations on property
subject to the applicable lease; (x) Liens
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securing Interest Rate Agreement Obligations; and (xi) purchase money Liens
incurred in the ordinary course of business, provided that such Liens relate
only to the property or assets acquired and such Liens are created within 90
days of the acquisition of such property or assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" as applied to the Capital Stock of any Person, means Capital
Stock of any class or classes (however designated) which is preferred as to the
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over
Capital Stock of any other class of such Person.
"Restricted Investment" means an Investment other than a Permitted Investment.
"Restricted Payment" means (i) any dividend or other distribution declared or
paid on any Capital Stock of the Company or any of its Subsidiaries (other than
dividends or distributions payable solely in Capital Stock (other than
Disqualified Stock) of the Company or such Subsidiary or dividends or
distributions payable to the Company or any Subsidiary Guarantor); (ii) any
payment to purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any Subsidiary of the Company or other Affiliate of the
Company (other than any Capital Stock owned by the Company or any Subsidiary
Guarantor); (iii) any payment to purchase, redeem, defease or otherwise acquire
or retire for value any Subordinated Indebtedness prior to the scheduled
maturity thereof; or (iv) any Restricted Investment.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary if the instrument creating or evidencing such Indebtedness or
pursuant to which such Indebtedness is outstanding expressly provides that such
Indebtedness is subordinated in right of payment to the Notes or the Subsidiary
Guarantee of such Subsidiary Guarantor, as the case may be.
"Subsidiary" of any Person means (i) any corporation more than 50% of the
outstanding Voting Stock of which is owned or controlled, directly or
indirectly, by such Person or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries thereof, or (ii) any
limited partnership of which such Person or any Subsidiary of such Person is a
general partner, or (iii) any other Person (other than a corporation or limited
partnership) in which such Person, or one or more other Subsidiaries of such
Person, or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has more than 50% of the outstanding partnership or similar
interests or has the power, by contract or otherwise, to direct or cause the
direction of the policies, management and affairs thereof.
"Subsidiary Guarantor" means (i) each Subsidiary of the Company existing on the
Issue Date, (ii) each of the Company's Subsidiaries which becomes a guarantor of
the Notes in compliance with the provisions set forth under "--Covenants--Future
Subsidiary Guarantors," and (iii) each of the Company's Subsidiaries executing a
supplemental indenture in which such Subsidiary agrees to be bound by the terms
of the Indenture.
"Voting Stock" means, with respect to any Person, Capital Stock of such Person
of the class or classes pursuant to which the holders thereof have the general
voting power under ordinary circumstances to elect at least a majority of the
board of directors, managers or trustees of such Person (irrespective of whether
or not at the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, with respect to any Indebtedness at
any date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required scheduled payment of principal,
including payment as final maturity, in respect thereof, with (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding aggregate principal
amount of such Indebtedness.
"Wholly-Owned Subsidiary" means any Subsidiary of which 100% of the outstanding
Capital Stock is owned by the Company or another Wholly-Owned Subsidiary. For
the purposes of this definition, any director's qualifying shares or investments
by foreign nationals mandated by applicable law shall be disregarded in
determining ownership of a Subsidiary.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 1996 (the "Underwriting Agreement"), J.P. Morgan
Securities Inc. ("J.P. Morgan"), CIBC Wood Gundy Securities Corp. ("CIBC"), ING
Barings (U.S.) Securities Corporation ("ING Barings") and Southcoast
(collectively, the "Underwriters") have severally agreed to purchase from the
Company, and the Company has agreed to sell to them, severally, the principal
amount of Notes set forth opposite their names below. Under the terms and
conditions of the Underwriting Agreement, the Underwriters are obligated to take
and pay for the entire principal amount of the Notes if any Notes are purchased.
<TABLE>
<CAPTION>
-------------------
<S> <C>
PRINCIPAL AMOUNT
-------------------
J.P. Morgan Securities Inc. $
CIBC Wood Gundy Securities Corp.
ING Barings (U.S.) Securities Corporation
Southcoast Capital Corporation
-------------------
Total $ 110,000,000
==============
</TABLE>
The Underwriters propose initially to offer the Notes directly to the public at
the price set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession not in excess of % of the principal amount
of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of % of the principal amount of the Notes to
certain other dealers. After the initial public offering of the Notes, the
offering price and such concession may be changed.
ING, an affiliate of ING Barings, is the beneficial owner of approximately 36.9%
of the Common Stock of the Company and is a selling stockholder in the
Concurrent Offering, and Southcoast is the beneficial owner of approximately
5.9% of the Common Stock of the Company. See "Security Ownership of Certain
Beneficial Owners and Management." In addition, ING serves as a lender and/or
agent under the Credit Agreement, has received customary fees for acting in such
capacities, and, as a lender, is, as of September 30, 1996, the holder of
approximately $20.5 million of senior secured indebtedness of the Company. ING
will receive its proportionate share of any repayment by the Company of amounts
outstanding under the Credit Agreement from the proceeds of the Offering, which
repayment may, in the aggregate, exceed 10% of the net proceeds of the Offering.
See "Use of Proceeds." Southcoast will also receive customary fees for acting as
underwriter in connection with the Concurrent Offering and for providing
financial advisory services to the Company in connection with the Cherokee
Acquisition. In addition, a predecessor of Southcoast provided investment
banking and financial advisory services to the Company in the past for which it
received customary fees. See "Certain Transactions." Certain of the other
Underwriters and their affiliates, from time to time, also perform investment
banking and other financial services for the Company.
Because ING beneficially owns in excess of 10% of the Common Stock of the
Company and will receive in excess of 10% of the net proceeds of the Offering,
the underwriting arrangements for the Offering must comply with certain
requirements of Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"). In this regard, CIBC will act as, and
assume the responsibilities of, qualified independent underwriter in connection
with pricing the Offering and conducting due diligence. Further, the
Underwriters will not confirm sales of the Notes to any accounts over which they
exercise discretionary authority without the prior specific written approval of
the transaction by the customer.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
There is currently no trading market for the Notes. The Company does not intend
to list the Notes on any securities exchange. The Company has been advised by
the Underwriters that the Underwriters currently intend to make a market in the
Notes, however, the Underwriters are not obligated to do so and may discontinue
any such market making activities at any time without notice. No assurance can
be given as to the development or liquidity of any trading market for the Notes.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company by
Tammy L. Martin, Esq., General Counsel of the Company, and by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Cahill
Gordon & Reindel (a partnership including a professional corporation), New York,
New York. Skadden, Arps, Slate, Meagher & Flom LLP will rely on the opinion of
Tammy L. Martin, Esq. as to certain matters governed by Ohio law.
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EXPERTS
The consolidated financial statements of the Company as of December 31, 1994 and
1995 and for each of the three years in the period 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 Systems, 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 Systems, 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 Payphones, 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 Communications, 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.
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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 companies 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, destination, and amount of use of a
telecommunications service subscribed 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 telephone 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 providing 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 interstate 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.
A-1
<PAGE> 91
PHONETEL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
-----
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 September 30, 1996...... F-26
Consolidated Statements of Operations for the nine and three months ended
September 30, 1995 and 1996.................................................... F-27
Consolidated Statements of Cash Flows for the nine months ended September 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 as of December 31, 1995 and September 30, 1996............ F-29
Notes to Consolidated Financial Statements...................................... F-31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Audited Financial Statements -- 1995:
Report of Independent Accountants............................................... F-39
Balance Sheet as of December 31, 1995........................................... F-40
Statement of Income for the year ended December 31, 1995........................ F-41
Statement of Cash Flows for the year ended December 31, 1995.................... F-42
Statement of Changes in Shareholders' Equity for the year ended December 31,
1995........................................................................... F-43
Notes to Financial Statements................................................... F-44
Audited Financial Statements -- 1994:
Report of Independent Certified Public Accountants.............................. F-47
Balance Sheet as of December 31, 1994........................................... F-48
Statement of Income for the year ended December 31, 1994........................ F-49
Statement of Shareholders' Equity for the year ended December 31, 1994.......... F-50
Statement of Cash Flows for the year ended December 31, 1994.................... F-51
Notes to Financial Statements................................................... F-52
INTERNATIONAL PAY PHONES, INC. (SOUTH CAROLINA)
Audited Financial Statements -- 1995:
Independent Auditors' Report.................................................... F-55
Balance Sheet as of December 31, 1995........................................... F-56
Statement of Income and Retained Earnings for the year ended December 31,
1995........................................................................... F-57
Statement of Cash Flows for the year ended December 31, 1995.................... F-58
Notes to Financial Statements................................................... F-59
Audited Financial Statements -- 1994:
Independent Auditors' Report.................................................... F-64
Balance Sheet as of December 31, 1994........................................... F-65
Statement of Income and Retained Earnings for the year ended December 31,
1994........................................................................... F-66
Statement of Cash Flows for the year ended December 31, 1994.................... F-67
Notes to Financial Statements................................................... F-68
</TABLE>
F-1
<PAGE> 92
<TABLE>
<S> <C>
Page
-----
INTERNATIONAL PAY PHONES, INC. (TENNESSEE)
Audited Financial Statements:
Independent Auditors' Report.................................................... F-72
Balance Sheets as of December 31, 1995 and 1994................................. F-73
Statements of Earnings and Retained Earnings for the years ended December 31,
1995 and 1994.................................................................. F-74
Statements of Cash Flows for the years ended December 31, 1995 and 1994......... F-75
Notes to Financial Statements................................................... F-76
PAYPHONES OF AMERICA, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-79
Consolidated Balance Sheets as of December 31, 1995 and 1994.................... F-80
Consolidated Statements of Operations for the years ended December 31, 1995 and
1994........................................................................... F-81
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1994..................................................... F-82
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1994........................................................................... F-83
Notes to Financial Statements................................................... F-84
Unaudited Financial Statements:
Independent Accountants' Report................................................. F-91
Consolidated Balance Sheets as of June 30, 1996 and 1995........................ F-92
Consolidated Statements of Operations for the six months ended June 30, 1996 and
1995........................................................................... F-93
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995........................................................................... F-94
Notes to Consolidated Financial Statements...................................... F-95
AMTEL COMMUNICATIONS INC. AND COMBINED COMPANIES (DEBTOR-IN POSSESSION)
Audited Financial Statements:
Independent Auditors' Report.................................................... F-100
Combined Balance Sheets as of June 30, 1996 and December 31, 1995............... F-101
Combined Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-102
Combined Statements of Changes in Stockholder's Deficit for the six months ended
June 30, 1996 and the year ended December 31, 1995............................. F-103
Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-104
Notes to Financial Statements................................................... F-105
Audited Statement of Revenues and Direct Operating Expenses:
Independent Auditors' Report.................................................... F-109
Combined Statement of Revenues and Direct Operating Expenses for the three
months ended December 31, 1994................................................. F-110
Notes to Combined Statement of Revenues and Direct Operating Expenses........... F-111
CHEROKEE COMMUNICATIONS, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-113
Balance Sheets as of September 30, 1995 and 1994................................ F-114
Statements of Income for the years ended September 30, 1995, 1994 and 1993...... F-115
Statement of Shareholders' Equity for the years ended September 30, 1995, 1994
and 1993....................................................................... F-116
Statements of Cash Flows for the years ended September 30, 1995, 1994 and
1993........................................................................... F-117
Notes to Financial Statements................................................... F-118
Unaudited Financial Statements:
Condensed Balance Sheets as of September 30, 1995 and June 30, 1996............. F-126
Condensed Income Statements for the three and nine months ended June 30, 1996
and 1995....................................................................... F-127
Condensed Statements of Cash Flows for the nine months ended June 30, 1996 and
1995........................................................................... F-128
Notes to Financial Statements................................................... F-129
</TABLE>
F-2
<PAGE> 93
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> 94
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> 95
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> 96
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> 97
PHONETEL 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> 98
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> 99
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> 100
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 Utility 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> 101
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> 102
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> 103
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> 104
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> 105
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
----------- -----------
7. LONG-TERM DEBT (CONTINUED)
<S> <C> <C>
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> 106
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> 107
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> <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> 108
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
------------ ------------
10. SHAREHOLDERS' EQUITY (CONTINUED)
<S> <C> <C>
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER (UNAUDITED)
31, SEPTEMBER 30,
1995 1996
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 713,462 $ 655,734
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $100,961, respectively......................... 901,508 2,423,060
Other current assets............................................. 185,634 247,426
----------- -----------
Total current assets.......................................... 1,800,604 3,326,220
Property and equipment, net........................................ 14,099,111 31,682,061
Intangible assets, net............................................. 11,592,157 39,226,619
Other assets....................................................... 1,425,384 705,473
----------- -----------
$28,917,256 $ 74,940,373
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt -- related parties............. -- $ 5,234,953
Current portion of long-term debt -- others...................... $ 1,010,412 1,370,673
Current portion of obligations under capital leases.............. 288,972 803,336
Accounts payable................................................. 2,772,306 2,969,681
Accrued expenses................................................. 1,610,100 3,149,690
Deferred revenues................................................ -- 600,000
Other unusual charges and contractual settlements................ 962,338 516,392
----------- -----------
Total current liabilities..................................... 6,644,128 14,644,725
Long-term debt -- related parties (amounts due at
maturity $1,732,500 and $29,000,000, respectively)............... 1,732,500 31,053,337
Long-term debt -- others........................................... 7,586,001 3,832,781
Obligations under capital leases................................... 3,243,965 7,225,722
14% cumulative preferred stock mandatorily redeemable
(redemption amount $6,742,960, due June 30, 2000)................ -- 6,539,053
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity...................... 9,710,662 11,644,755
----------- -----------
$28,917,256 $ 74,940,373
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 117
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER THREE MONTHS ENDED
30, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls.......................... $ 7,689,786 $ 16,988,697 $ 2,694,457 $ 6,577,353
Non-coin............................ 3,301,969 9,308,538 996,474 4,016,008
Other............................... 965,148 2,018,191 387,910 916,555
----------- ------------ --------- -----------
11,956,903 28,315,426 4,078,841 11,509,916
----------- ------------ --------- -----------
OPERATING EXPENSES:
Line and transmission charges....... 3,340,812 6,800,782 1,240,385 2,934,575
Location commissions................ 2,163,464 4,101,195 647,099 1,564,465
Other operating expenses............ 4,132,850 8,102,314 1,450,140 3,054,863
Depreciation and amortization....... 2,164,822 8,876,238 732,331 3,563,353
Selling, general & administrative... 1,982,489 3,757,559 637,062 1,358,835
Other unusual charges and
contractual settlements.......... 1,418,530 5,517,753 1,418,530 183,239
----------- ------------ --------- -----------
15,202,967 37,155,841 6,125,547 12,659,330
----------- ------------ --------- -----------
Loss from operations.................. (3,246,064) (8,840,415) (2,046,706) (1,149,414)
----------- ------------ --------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- related
parties.......................... -- (3,588,420) -- (1,771,530)
Interest expense -- others.......... (340,105) (551,243) (83,875) (278,998)
Interest income..................... 12,412 -- 5,824 --
----------- ------------ --------- -----------
(291,693) (4,139,663) (78,051) (2,050,528)
----------- ------------ --------- -----------
Loss before extraordinary item........ (3,537,757) (12,980,078) (2,124,757) (3,199,942)
Extraordinary item:
Loss on debt restructuring.......... -- (267,281) -- --
----------- ------------ --------- -----------
NET LOSS.............................. $(3,537,757) $(13,247,359) $(2,124,757) $(3,199,942)
=========== ============ ========= ===========
Earnings per share calculation:
Preferred dividend payable in
cash............................. (232,251) -- (77,417) --
Preferred dividend payable in
kind............................. -- (211,293) -- (100,671)
Accretion of 14% Preferred to its
redemption value................. -- (58,272) -- (34,153)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred..................... -- (2,002,386) -- --
----------- ------------ --------- -----------
Net loss applicable to
common shareholders................. $(3,770,008) $(15,519,310) $(2,202,174) $(3,334,766)
=========== ============ ========= ===========
Net loss per common share before
extraordinary item.................. $ (2.22) $ (3.54) $ (1.15) $ (0.58)
=========== ============ ========= ===========
Net loss per common share............. $ (2.22) $ (3.60) $ (1.15) $ (0.58)
=========== ============ ========= ===========
Weighted average number of shares..... 1,695,280 4,305,130 1,909,997 5,746,785
=========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 118
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $(3,537,757) $(13,247,359)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Depreciation and amortization............................... 2,164,822 8,876,238
Issuance of Nominal Value Warrants.......................... -- 3,886,140
Stock issued in lieu of cash payments....................... 90,552 20,619
Accretion of related parties debt........................... -- 1,182,544
Accretion of other debt..................................... -- 45,921
Non-cash interest expense................................... -- 7,012
Loss on debt restructuring.................................. -- 338,546
Loss on disposal of assets.................................. -- 2,544
Increase in allowance for doubtful accounts................. 4,000 60,961
Amortization of deferred revenues........................... -- (600,000)
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable....................................... (453,438) (1,063,630)
Other current assets...................................... 114,207 (61,792)
Accounts payable.......................................... 564,682 (500,520)
Accrued expenses.......................................... (209,515) 851,842
Other unusual charges and contractual settlements......... 1,189,833 (445,946)
----------- ------------
(72,614) (646,880)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc................... -- (4,827,480)
Acquisition of Paramount Communications Systems................ -- (9,780,644)
Acquisition of Pay Phones of America, Inc...................... -- (200,000)
Acquisition of Amtel Communications............................ -- (7,222,496)
Acquisition of World and Public Telephone...................... (50,828) (350,568)
Deferred charges on pending acquisitions....................... (868,496) (73,226)
Deferred charges on pending stock and debt offerings........... -- (114,235)
Deferred revenues -- signing bonus............................. -- 1,200,000
Purchases of intangible assets................................. (206,683) (625,153)
Change in other assets......................................... (82,051) (426,372)
Proceeds from sale of assets................................... -- 500
Purchases of property and equipment............................ (120,703) (2,358,982)
----------- ------------
(1,328,761) (24,778,656)
----------- ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances................................... 1,400,000 --
Proceeds from related party debt............................... -- 41,000,000
Proceeds from shareholder debt................................. -- 575,000
Principal payments on borrowings............................... (1,313,060) (10,539,531)
Proceeds from issuance of preferred and common stock and
other....................................................... 1,850,412 --
Dividends paid................................................. (40,375) --
Debt financing costs........................................... -- (4,473,107)
Redemption of 10% Preferred and 8% Preferred................... -- (1,117,371)
Equity financing costs......................................... (83,212) (87,535)
Proceeds from warrant and option exercises..................... 35,000 10,352
----------- ------------
1,848,765 25,367,808
----------- ------------
(Decrease) increase in cash...................................... 447,390 (57,728)
Cash at beginning of period...................................... 478,756 713,462
----------- ------------
Cash at end of period............................................ $ 926,146 $ 655,734
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 119
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 NINE MONTHS ENDED
31, SEPTEMBER 30,
1995 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.................... -- -- 8,397.86 211,294
Accretion of carrying value to amount
payable at redemption, June 30, 2000...... -- -- -- 58,272
------- ---------- ---------- -----------
TOTAL MANDATORILY REDEEMABLE
PREFERRED STOCK.............................. -- -- 116,316.05 $ 6,539,053
======= ========== ========== ===========
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> 120
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)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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 1,035,137 10,351
Conversion of debt to equity.............. 30,231 303 -- --
Acquisition of World Communications,
Inc.................................... 402,500 4,025 -- --
Acquisition of Public Telephone
Corporation............................ 304,879 3,049 -- --
Acquisition of International Payphones.... -- -- 555,589 5,555
Acquisition of Payphones of America....... -- -- 166,666 1,667
Acquisition of Amtel Communications....... -- -- 2,162,163 21,622
Acquisition escrow deposits............... 23,810 238 (23,810) (238)
Redemption of 10% Non-Voting Preferred.... -- -- 884,214 8,842
--------- ------------ --------- ------------
Balance at end of period.................. 2,855,350 $ 28,554 7,639,709 $ 76,397
========= =========
------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............. $ 8,755,364 $ 16,649,559
Issuance of stock for services............ 528,532 20,574
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) (87,535)
Acquisition of International Payphones.... -- 2,790,042
Acquisition of Paramount Communications... -- 443,510
Acquisition of Payphones of America....... -- 309,999
Acquisition of Amtel Communications....... -- 4,616,218
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 $ 40,541,544
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year.............. $ (7,303,804) $(13,453,876)
Net loss for the period................... (6,109,697) (13,247,359)
Dividends paid on 7% and 8% Preferred..... (40,375) --
14% Preferred dividend payable-in-kind.... -- (211,293)
Accretion of 14% Preferred carrying
value.................................. -- (58,272)
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) $(28,973,186)
------------ ------------
TOTAL NON-MANDATORILY REDEEMABLE PREFERRED
STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY...................... $ 9,710,662 $ 11,644,755
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 121
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 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 for the year ended December 31, 1995.
Certain amounts relating to the three and nine months ended September 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 September 16, 1996, the Company completed the acquisition of the
outstanding stock of Payphones of America, Inc. ("POA"), pursuant to which the
Company acquired 3,115 installed public pay telephones, $373,283 in current
assets and $727,323 in current liabilities for a purchase price, consisting of:
(i) $500,000 in cash; (ii) 166,666 unregistered shares of the Company's Common
Stock, par value $0.01 ("Common Stock"), with a value of $311,665, or $1.87 per
share; (iii) assumption of capital lease obligations of $7,750,000; (iv) notes
payable to the selling shareholders in the face amount of $3,634,114 (pursuant
to the purchase agreement, the notes payable are to be reduced for the excess of
acquired current liabilities over acquired current assets, or $311,693,
resulting in a net amount due of $3,322,421); (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, valued at $307,264; and (vii) $166,748 in related
acquisition expenses.
On September 13, 1996, the Company completed the acquisition of certain
assets from 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". The acquired assets included
6,872 installed public pay telephones and inventory of an additional 728 public
pay telephones and related parts inventory for a purchase price consisting of:
(i) $7,000,000 in cash; (ii) 2,162,163 shares of the Company's Common Stock,
with a value of $4,637,840, or $2.15 per share; and (iii) approximately $675,122
in related acquisition expenses.
The Amtel and POA acquisitions were recorded as purchases and the
differences between the aggregate fair values of the tangibles assets acquired
and the total purchase price, $13,546,504, (an intangible) was recorded as
acquired public pay telephone location contracts and non-competition agreements
($307,264 was assigned to the POA non-competition agreements) and will be
amortized over the estimated average remaining life of the acquired location
contracts (54 months for Amtel's contracts, 72 months for POA's contracts, and
60 months for POA's non-competition agreements). The results of operations of
POA and Amtel are included in the results of operations of the Company from
August 1, 1996 (the effective date of the POA acquisition) and September 13,
1996, respectively.
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 public pay
telephones for a purchase price consisting of: (i) $3,496,487 in cash; (ii)
555,589 unregistered shares of the Company's
F-31
<PAGE> 122
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
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-competition 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 public
pay 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 aggregate fair values of the tangibles assets acquired
and the total purchase price, $9,531,404, (an intangible) was recorded as
acquired public pay telephone location contracts and non-competition agreements
($110,000 was assigned to the IPP and Paramount non-competition agreements) and
will be amortized over the estimated average remaining life of the acquired
location contracts (60 months for IPP and Paramount's contracts and 60 months
for IPP and Paramount's non-competition agreements). The results of operations
of IPP and Paramount are included in the results of operations of the Company
from March 15, 1996.
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
public pay 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-competition
agreements with two of Public 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 public pay 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 aggregate fair values of the tangibles assets
acquired and the total purchase price, $9,305,168, (an intangible) was recorded
as acquired public pay telephone location contracts and non-competition
agreements ($798,479 was assigned to the Public Telephone non-competition
agreements and $315,286 was assigned to the World non-competition agreements)
and will be amortized over the estimated average remaining life of the acquired
location contracts (36 months for Public Telephone and World's contracts, 60
months for Public Telephone's non-competition agreements and 24 months for
World's non-competition agreements). The results of operations of Public
Telephone and World are included in the results of operations of the Company
from October 16, 1995 and September 22, 1995, respectively.
F-32
<PAGE> 123
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public Telephone, IPP, Paramount, Amtel and
POA acquisitions had occurred at the beginning of 1995 and as though the IPP,
Paramount, Amtel and POA acquisitions had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
PRO FORMA SELECTED RESULTS OF OPERATIONS DATA
------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER THREE MONTHS ENDED SEPTEMBER
30 30
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues....................... $ 44,595,053 $ 45,308,800 $ 15,006,667 $ 15,069,188
Net loss before extraordinary item... (13,871,600) (16,083,544) (5,643,428) (4,790,789)
Net loss applicable to common
shareholders....................... (14,501,750) (16,325,859) (5,853,478) (4,925,603)
Net loss per common share............ (2.74) (2.46) (1.07) (0.65)
</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
depreciation and amortization of tangible and intangible assets, reductions in
certain operating, other, and 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
The Company has entered into a letter of intent dated October 16, 1996, to
acquire all of the capital stock of Cherokee Communications, Inc. ("Cherokee")
for a purchase price of $54,000,000 plus related fees and expenses, subject to
certain purchase price adjustments, which may include an increase of up to
$6,000,000 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 addition,
the Company will pay $1,250,000 in connection with certain non-competition
agreements. Cherokee, headquartered in Jacksonville, Texas, is the fifth largest
independent 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.
The Company has entered into a letter of intent dated October 9, 1996 to
acquire 1,200 installed public pay telephones from Texas Coinphone (collectively
with Cherokee the "Pending Acquisitions") for a purchase price of approximately
$3,700,000, subject to certain purchase price adjustments. Texas Coinphone owns
and operates approximately 1,200 public pay telephones in Dallas, Houston, and
San Antonio, Texas.
The Company expects to fund the acquisitions of Cherokee and Texas
Coinphone with the proceeds from a contemplated debt offering expected to be
completed in the fourth quarter of 1996.
F-33
<PAGE> 124
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and September 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Telephones, boards, enclosures and cases...... 3-7 $ 16,386,987 $ 36,992,307
Furniture, fixtures and other equipment....... 3-5 989,300 1,752,387
Leasehold improvements........................ 2-5 231,466 246,609
------------ -------------
17,607,753 38,991,303
Less: accumulated depreciation.............. (3,508,642) (7,309,242)
------------ -------------
$ 14,099,111 $ 31,682,061
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
As of December 31, 1995 and September 30, 1996, intangible assets consisted
of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD DECEMBER 31, SEPTEMBER 30,
(IN MONTHS) 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Value assigned to location contracts acquired
and installation of public pay telephones.... 36-120 $ 13,403,126 $ 39,627,197
Debt restructuring costs....................... 40 -- 5,802,908
Non-competition agreements..................... 24-60 1,513,765 2,090,690
State operating certifications................. 60 466,796 498,470
------------ -------------
15,383,687 48,019,265
Less: accumulated amortization................. (3,791,530) (8,792,646)
------------ -------------
$ 11,592,157 $ 39,226,619
========== ==========
</TABLE>
5. LONG-TERM DEBT -- RELATED PARTIES
On March 15, 1996, the Company entered into a Credit Agreement (the "Credit
Agreement") with Internationale Nederlanden (U.S.) Capital Corporation ("ING")
and Cerberus Partners, L.P. ("Cerberus" and, together with ING, the "Lenders"),
pursuant to which the Lenders agreed to lend the Company up to $37,250,000. On
March 15, 1996, the Company borrowed $30,530,954 pursuant to the Credit
Agreement. During the second quarter of 1996, the Company borrowed an additional
$1,692,500 under 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 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 transaction fees. The additional borrowings of $1,692,500 were used for
the Amtel acquisition deposit ($1,300,000) 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 availability under the Credit Agreement.
F-34
<PAGE> 125
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
5. LONG-TERM DEBT -- RELATED PARTIES (CONTINUED)
The Credit Agreement 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 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
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 Agreement 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 borrowed under
the Credit Agreement at September 30, 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 public pay telephones, excluding those
acquired from POA which are pledged to another creditor, are pledged as
collateral to the Credit Agreement.
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. At September 30, 1996
the Company was in compliance with the covenants.
A portion of the borrowings under the Credit Agreement (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, 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 the aggregate and referred
to herein as the "Lenders' Warrants"), which would collectively allow them to
purchase up to 204,824 shares of Series A Special Convertible Preferred Stock
("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 debt under the Credit Agreement was initially recorded net of
an allocation of the fair value of the Lenders' Warrants, such fair value being
determined using the Black-Scholes valuation model. The Company recorded
non-cash interest expense (accretion of debt) of $621,536 for the three months
ended September 30, 1996 and $1,182,544 for the nine months ended September 30,
1996.
F-35
<PAGE> 126
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and September 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock ($60 -- $ 6,539,053
stated value -- 200,000 shares authorized; 107,918.19
shares issued and outstanding at September 30, 1996;
cumulative dividends issuable of 8,397.86 shares, valued
at $211,294; mandatory redemption amount of $6,978,963
due June 30, 2000)......................................
</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 three and nine months ended September 30, 1996, the
carrying value of the 14% Preferred was increased by $34,153 and $58,272,
respectively, 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 September 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock ($10 $ 5,305,340 --
stated value -- 550,000 shares authorized; 530,534
shares issued and outstanding at December 31, 1995,
redeemed on June 28, 1996)..............................
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 1 --
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996)...............................................
8% Cumulative Redeemable Preferred Stock ($100 stated 981,084 --
value -- 16,000 shares authorized; 12,200 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996)...............................................
7% Cumulative Convertible Redeemable Preferred Stock ($100 200,000 --
stated value -- 2,500 shares authorized, issued and
outstanding at December 31, 1995, redeemed on March 15,
1996)...................................................
</TABLE>
F-36
<PAGE> 127
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Common Stock 28,554 76,397
($0.01 par value -- 50,000,000 shares authorized;
2,855,350 and 7,639,709 shares issued and outstanding at
December 31, 1995 and September 30, 1996)...............
Additional paid-in capital................................ 16,649,559 40,541,544
Accumulated deficit....................................... (13,453,876) (28,973,186)
------------ -------------
$ 9,710,662 $ 11,644,755
========== ==========
</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 Agreement, the Company
redeemed the 10% Cumulative Redeemable Preferred Stock ("10% Preferred"), 8%
Preferred, and 7% Preferred. The redemption price was comprised of 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. The warrants expire on
March 13, 2001. An independent valuation company estimated the fair 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 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% Cumulative Non-voting Redeemable Preferred Stock
("10% Redeemable Preferred"). Each share of 10% Redeemable 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%
Redeemable Preferred into 884,214 shares of Common Stock.
8. SUBSEQUENT EVENTS
On October 9, 1996, the Company filed a Registration Statement on Form SB-2
with the Securities and Exchange Commission ("SEC") relating to the proposed
offering of approximately $25,000,000 of Common Stock by the Company. On October
31, 1996, the Company filed a Registration Statement on Form SB-2 with
F-37
<PAGE> 128
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
8. SUBSEQUENT EVENTS (CONTINUED)
the SEC relating to the proposed offering of approximately $110,000,000 of
senior unsecured notes. The Company anticipates completing both offerings during
the fourth quarter of 1996. There can be no assurances, however that either
offering will be completed or that the terms will remain the same.
The registration statements relating to these offerings filed with the SEC
have not yet become effective, and the securities may not be sold nor may offers
to buy be accepted prior to the time the applicable registration statements
become effective. This Form 10-QSB 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.
F-38
<PAGE> 129
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-39
<PAGE> 130
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-40
<PAGE> 131
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-41
<PAGE> 132
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-42
<PAGE> 133
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-43
<PAGE> 134
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-44
<PAGE> 135
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-45
<PAGE> 136
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-46
<PAGE> 137
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/ KMPG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-47
<PAGE> 138
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-48
<PAGE> 139
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-49
<PAGE> 140
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-50
<PAGE> 141
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-51
<PAGE> 142
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-52
<PAGE> 143
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-53
<PAGE> 144
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-54
<PAGE> 145
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 PA
Lincolnton, North Carolina
F-55
<PAGE> 146
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-56
<PAGE> 147
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-57
<PAGE> 148
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-58
<PAGE> 149
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 Auditors' Report.
F-59
<PAGE> 150
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 Auditors' Report.
F-60
<PAGE> 151
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 Auditors' Report.
F-61
<PAGE> 152
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 Auditors' Report.
F-62
<PAGE> 153
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 Auditors' Report.
F-63
<PAGE> 154
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-64
<PAGE> 155
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-65
<PAGE> 156
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-66
<PAGE> 157
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-67
<PAGE> 158
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-68
<PAGE> 159
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-69
<PAGE> 160
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-70
<PAGE> 161
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-71
<PAGE> 162
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-72
<PAGE> 163
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-73
<PAGE> 164
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-74
<PAGE> 165
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-75
<PAGE> 166
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-76
<PAGE> 167
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-77
<PAGE> 168
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-78
<PAGE> 169
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.
/s/ KERBER, ECK & BRECKELL LLP
St. Louis, Missouri
January 30, 1996 (except for Note L, as
to which the date is February 7, 1996)
F-79
<PAGE> 170
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-80
<PAGE> 171
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-81
<PAGE> 172
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-82
<PAGE> 173
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-83
<PAGE> 174
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-84
<PAGE> 175
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-85
<PAGE> 176
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-86
<PAGE> 177
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-87
<PAGE> 178
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
- ------- --------- -------- -----------------
<C> <C> <C> <S>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
F-88
<PAGE> 179
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-89
<PAGE> 180
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-90
<PAGE> 181
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-91
<PAGE> 182
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-92
<PAGE> 183
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-93
<PAGE> 184
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-94
<PAGE> 185
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-95
<PAGE> 186
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-96
<PAGE> 187
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-97
<PAGE> 188
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-98
<PAGE> 189
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
- ------- ---------- -------- -----------------
<C> <C> <C> <S>
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-99
<PAGE> 190
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.
/s/ Harlan & Boettger
San Diego, California
August 23, 1996
F-100
<PAGE> 191
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-101
<PAGE> 192
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-102
<PAGE> 193
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-103
<PAGE> 194
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-104
<PAGE> 195
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-105
<PAGE> 196
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-106
<PAGE> 197
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-107
<PAGE> 198
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-108
<PAGE> 199
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.
/s/ Harlan & Boettger
San Diego, California
August 23, 1996
F-109
<PAGE> 200
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-110
<PAGE> 201
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-111
<PAGE> 202
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-112
<PAGE> 203
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-113
<PAGE> 204
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-114
<PAGE> 205
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-115
<PAGE> 206
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-116
<PAGE> 207
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-117
<PAGE> 208
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-118
<PAGE> 209
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-119
<PAGE> 210
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-120
<PAGE> 211
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-121
<PAGE> 212
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-122
<PAGE> 213
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-123
<PAGE> 214
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-124
<PAGE> 215
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-125
<PAGE> 216
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-126
<PAGE> 217
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-127
<PAGE> 218
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-128
<PAGE> 219
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-129
<PAGE> 220
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-130
<PAGE> 221
[PHONETEL TECHNOLGIES INC. LOGO]
<PAGE> 222
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) PhoneTel Technologies, Inc. and Payphones of America, Inc.
Each of PhoneTel Technologies, Inc. (the "Company") and Payphones of America,
Inc. is an Ohio corporation. 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 connection 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 affirmative 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 reasonable
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 corporation 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 corporation
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 protection 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. The Company has purchased such insurance
for the benefit of its directors and officers.
Reference is made to the form of Underwriting Agreement, filed as Exhibit 1.1 to
this Registration Statement, which provides for indemnification of the directors
and officers signing this Registration Statement and certain controlling persons
of the Company against certain liabilities, including those arising under the
Securities Act of 1933, as amended (the "Securities Act"), in certain instances
by the Underwriters.
(b) Public Telephone Corporation
Public Telephone Corporation ("Public") is an Indiana corporation. Chapter 37 of
the Indiana Corporation Law, as amended (the "ICL") grants to each Indiana
corporation broad powers to indemnify directors, officers, employees or agents
against expenses incurred in certain proceedings if the conduct in question was
found to be in good faith and was reasonably believed to be in the corporation's
best interests. The ICL provides, however, that this indemnification should not
be deemed exclusive of any other indemnification rights provided by the articles
of incorporation, by-laws, resolution or other authorization adopted by a
majority vote of the voting shares then issued and outstanding. Article XI of
Public's By-laws provide for indemnification to the fullest extent permitted by
law, of any director, officer, employee or agent of Public or any person serving
at the request of Public as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
(c) World Communications, Inc.
World Communications, Inc. is a Missouri corporation ("World"). Article X of the
By-laws of World provides that World shall indemnify its officers and directors
and any person serving at the request of World as an officer or director of any
corporation or enterprise to the fullest extent permitted by law. Such right of
indemnification shall inure to the benefit of the heirs, executors,
administrators and personal representatives of such persons.
II-1
<PAGE> 223
Section 351.355(1) of the Revised Statutes of Missouri provides that a
corporation may indemnify a director, officer, employee or agent of the
corporation in any action, suit or proceeding other than an action by or in the
right of the corporation, against expenses (including attorneys' fees),
judgments, fines and settlement amounts actually and reasonably incurred by him
in connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful. Section 351.355(2) provides that the
corporation may indemnify any such person in any action or suit by or in the
right of the corporation against expenses (including attorney's fees and
settlement amounts actually and reasonably incurred by him in connection with
the defense or settlement of the action or suit if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, except that he may not be indemnified in respect of any matter
in which he has been adjudged liable for negligence or misconduct in the
performance of his duty to the corporation, unless authorized by the court.
Section 351.355(3) provides that a corporation shall indemnify any such person
against expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the action, suit or proceeding if he has been successful
in defense of such action, suit or proceeding and if such action, suit or
proceeding is one for which the corporation may indemnify him under Section
351.355(1) or (2). Section 351.355(7) provides that a corporation shall have the
power to give any further indemnity to any such person, in addition to the
indemnity otherwise authorized under Section 351.355, provided such further
indemnity is either (i) authorized, directed or provided for in the articles of
incorporation of the corporation or any duly adopted amendment thereof or (ii)
if authorized, directed or provided for in any by-law or agreement of the
corporation which has been adopted by a vote of the shareholders of the
corporation, provided that no such indemnity shall indemnify any person from or
on account of such person's conduct which was finally adjudged to have been
knowingly fraudulent, deliberately dishonest or willful misconduct.
(d) Paramount Communications Systems, Inc. and Northern Florida Telephone
Corporation
Each of Paramount Communications Systems, Inc. ("Paramount") and Northern
Florida Telephone Corporation ("Northern") is a Florida corporation. Article XII
of Northern's Articles of Incorporation and Article X of Northern's By-laws
provide that Northern shall indemnify its officers and directors to the fullest
extent permitted by law. Such indemnification shall inure to the benefit of the
heirs, executors and administrators of such persons. Article 13 of Paramount's
Articles of Incorporation provides that Paramount shall indemnify its officers
and directors to the fullest extent permitted by law.
Section 607.0850 of the Florida Business Corporation Act (the "FBCA") permits a
Florida corporation to indemnify its directors and officers to the extent
provided for in such statute. Such indemnification provisions, however, do not
eliminate the duty of care of a director, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Florida law. In addition, each director will continue to
be subject to liability for a (a) violation of criminal law, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (b) transaction from which the
director derived an improper benefit, (c) voting for or assenting to an unlawful
distribution and (d) willful misconduct or a conscious disregard for the best
interests of the corporation in a proceeding by or in the right of the
corporation to procure a judgment in its favor in a proceeding by or in the
right of a shareholder.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
Except for the Securities and Exchange Commission registration fee, all fees and
expenses are estimated and will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $33,334
NASD Filing Fee 11,500
Blue Sky Fees and Expenses (including counsel) *
Printing Expenses *
Accounting Fees and Expenses *
Legal Fees and Expenses *
Trustee's Fees and Expenses *
Rating Agency Expenses *
Miscellaneous *
-------
Total $ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
II-2
<PAGE> 224
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 pursuant 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, respectively, 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 public pay telephones, enclosures and the associated
location contracts. The value of said shares issued was $103,004. All of the
aforementioned 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 placement 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
director 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
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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 aforementioned shares were issued
pursuant to the exemption from registration 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 services 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 valued in the amount of $340,000 rendered 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 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 connection 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 pursuant 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 consideration
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 exemption 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 acquisition. 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 registration 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
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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 consideration 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-possession 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 consideration 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 registration provided under Section 4(2) of the Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
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 Regulations.(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 September 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)**
3.13 Articles of Incorporation of Public Telephone Corporation, as amended.*
3.14 By-laws of Public Telephone Corporation, as amended.*
3.15 Articles of Incorporation of World Communications, Inc., as amended.*
3.16 By-laws of World Communications, Inc., as amended.*
3.17 Articles of Incorporation of Paramount Communications Systems, Inc., as amended.*
3.18 By-laws of Paramount Communications Systems, Inc., as amended.*
3.19 Articles of Incorporation of Northern Florida Telephone Corporation, as amended.*
3.20 By-laws of Northern Florida Telephone Corporation, as amended.*
3.21 Articles of Incorporation of Payphones of America, Inc., as amended.*
3.22 By-laws of Payphones of America, Inc., as amended.*
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 hereby (including the form of Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the Notes registered hereby.*
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding validity of the Notes offered
hereby.*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S>
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 Technologies, Inc. and DeBartolo, Inc.(4)**
10.6 Extension of Stock Option Agreement between PhoneTel Technologies, Inc. and The Edward J.
DeBartolo Corporation.(8)**
10.7 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc. and Jerry
Burger, together with amendments thereto.(13)**
10.8 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc. and Bernard
Mandel, together 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 Technologies, 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 Agreement 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 receive options to acquire 5,000 shares of Common Stock of PhoneTel Technologies,
Inc.(9)**
10.15 Stock Option Agreement and Registration Rights Agreement between PhoneTel Technologies, Inc.
and George H. Henry dated March 24, 1992.(5)**
10.16 Amendment No. 1 to Amended and Restated Loan Agreement 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 Technologies, Inc., Alpha Pay Phones-IV, L.P.,
American Telecommunications 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 option 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 respect 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. relative 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)**
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S>
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 identified 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 Technologies, Inc.(8)**
10.29 Letter Agreement dated February 23, 1995 between PhoneTel Technologies, Inc. and certain
lenders identified 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 relative 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 purchase 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 November 15, 1994.(9)**
10.34 Stock Option Agreement with Donald Vella with respect to 20,000 shares of Common Stock of
PhoneTel Technologies, 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 aggregate, to
purchase a total of 49,412 shares of PhoneTel Technologies, Inc. Common Stock.(9)**
10.36 Warrant Agreements with Richard Thatcher 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 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 aggregate, to
purchase a total of 41,177 shares of PhoneTel Technologies, Inc. Common Stock.(9)**
10.38 Warrant Agreements with Gerald Waldshutz 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 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 aggregate, to purchase a
total of 41,177 shares of PhoneTel Technologies, Inc. Common Stock.(9)**
10.40 Warrant Agreements with Steven Richman 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 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 aggregate, to
purchase a total of 49,412 shares of PhoneTel Technologies, Inc. Common Stock.(9)**
10.42 Warrant Agreements with Janice Fuelhart 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 1,250 shares of PhoneTel Technologies, Inc. Common
Stock.(9)**
</TABLE>
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<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S>
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 aggregate, 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 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 45,000 shares of PhoneTel Technologies, 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 September 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., a 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., a Tennessee corporation, and all amendments thereto.(12)**
10.53 Share Purchase Agreement dated as of November 16, 1995, between PhoneTel Technologies, Inc.
and Paramount Communications Systems, Inc., and all amendments 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 Corporation, 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 granting Internationale Nederlanden (U.S.)
Capital Corporation 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 granting Cerberus Partners, L.P. the right to
purchase 102,412 shares of Series A Special Convertible Preferred 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)**
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<C> <S>
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.(15)
10.68 Second Amendment to Credit Agreement dated as of June 1996.(14)**
10.69 Third Amendment to Credit Agreement dated as of August 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 September 13, 1996.(14)**
10.72 Sixth Amendment to Credit Agreement dated as of October 8, 1996.(15)
10.73 Asset Purchase Agreement among PhoneTel Technologies, Inc., an Ohio Corporation as Buyer and
ACI-HDT Supply Company, a California corporation, Amtel Communications Services, a California
corporation, Amtel Communications 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)**
12.1 Computation of Ratio of Earnings to Fixed Charges.
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).*
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.2 hereto).*
24.1 Powers of Attorney (included on signature pages to the Registration Statement).**
25.1 Statement of Eligibility and Qualification on Form T-1 of , as trustee
under the Indenture relating to the Notes.*
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference from the Registration Statement on Form S-18
(Registration No. 33-16962C) of PhoneTel Technologies, 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.
II-9
<PAGE> 231
(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.
(15) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended September 30, 1996.
ITEM 28. UNDERTAKINGS.
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 appropriate 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.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus 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 declared it effective.
(2) For determining any liability under the Securities Act of 1933,
treat each post-effective amendment that contains a form of prospectus as a
new registration statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-10
<PAGE> 232
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 Amendment No. 1
to the 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 18, 1996.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
----------------------
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- -----------------------
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- ------------------------------------- Executive Officer, and Director
Peter G. Graf
* Chief Operating Officer and Director November 18, 1996
- -------------------------------------
Nickey B. Maxey
* Director November 18, 1996
- -------------------------------------
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- ------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
* Director November 18, 1996
- -------------------------------------
Joseph Abrams
* Director November 18, 1996
- -------------------------------------
George Henry
* Director November 18, 1996
- -------------------------------------
Aron Katzman
* Director November 18, 1996
- -------------------------------------
Steven Richman
</TABLE>
- ---------------
* Tammy L. Martin, by signing her name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors of the
Registrant indicated above by asterisks, pursuant to powers of attorney duly
executed by such directors contained on the signature pages to the original
Registration Statement.
By: /s/ Tammy L. Martin
------------------------------------------
Tammy L. Martin
Attorney-in-Fact
II-11
<PAGE> 233
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 Amendment No. 1
to the 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 18, 1996.
PUBLIC TELEPHONE CORPORATION
By: /s/ Peter G. Graf
-------------------------------
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- -----------------------
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- ------------------------------------- Executive Officer, and Director
Peter G. Graf
/s/ Tammy L. Martin Director November 18, 1996
- -------------------------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- ------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
</TABLE>
II-12
<PAGE> 234
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 Amendment No. 1
to the 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 18, 1996.
WORLD COMMUNICATIONS, INC.
By: /s/ Peter G. Graf
----------------------
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- -----------------------
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- ------------------------------------- Executive Officer, and Director
Peter G. Graf
/s/ Tammy L. Martin Director November 18, 1996
- -------------------------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- ------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
</TABLE>
II-13
<PAGE> 235
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 Amendment No. 1
to the 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 18, 1996.
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
By: /s/ Peter G. Graf
----------------------------------------
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------- ------------------
<C> <S> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- --------------------------------------------- Executive
Peter G. Graf Officer, and Director
/s/ Tammy L. Martin Director November 18, 1996
- ---------------------------------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- --------------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
</TABLE>
II-14
<PAGE> 236
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 Amendment No. 1
to the 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 18, 1996.
NORTHERN FLORIDA TELEPHONE CORPORATION
By: /s/ Peter G. Graf
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------- ------------------
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- --------------------------------------------- Executive
Peter G. Graf Officer, and Director
/s/ Tammy L. Martin Director November 18, 1996
- ---------------------------------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- --------------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
</TABLE>
II-15
<PAGE> 237
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 Amendment No. 1
to the 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 18, 1996.
PAYPHONES OF AMERICA, INC.
By: /s/ Peter G. Graf
----------------------------------------
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------- ------------------
<C> <S> <C>
/s/ Peter G. Graf Chairman of the Board, Chief November 18, 1996
- --------------------------------------------- Executive Officer, and Director
Peter G. Graf
* Director November 18, 1996
- ---------------------------------------------
Charles Miller
/s/ Tammy L. Martin Director November 18, 1996
- ---------------------------------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer and Treasurer November 18, 1996
- --------------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
</TABLE>
- ---------------
* Tammy L. Martin, by signing her name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the director of the
Registrant indicated above by asterisks, pursuant to powers of attorney duly
executed by such director contained on the signature pages to the original
Registration Statement.
By: /s/ Tammy L. Martin
----------------------------------------
Tammy L. Martin
Attorney-in-Fact
II-16
<PAGE> 238
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
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 Regulations.(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 September 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)**
3.13 Articles of Incorporation of Public Telephone Corporation, as amended.*
3.14 By-laws of Public Telephone Corporation, as amended.*
3.15 Articles of Incorporation of World Communications, Inc., as amended.*
3.16 By-laws of World Communications, Inc., as amended.*
3.17 Articles of Incorporation of Paramount Communications Systems, Inc., as amended.*
3.18 By-laws of Paramount Communications Systems, Inc., as amended.*
3.19 Articles of Incorporation of Northern Florida Telephone Corporation, as amended.*
3.20 By-laws of Northern Florida Telephone Corporation, as amended.*
3.21 Articles of Incorporation of Payphones of America, Inc., as amended.*
3.22 By-laws of Payphones of America, Inc., as amended.*
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 hereby (including the form of
Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the Notes registered
hereby.*
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding validity of the Notes
offered 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 Technologies, Inc. and DeBartolo,
Inc.(4)**
10.6 Extension of Stock Option Agreement between PhoneTel Technologies, Inc. and The
Edward J. DeBartolo Corporation.(8)**
10.7 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc.
and Jerry Burger, together with amendments thereto.(13)**
10.8 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc.
and Bernard Mandel, together 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 Technologies, 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)**
</TABLE>
<PAGE> 239
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
10.13 Stock Option Agreement and Registration Rights Agreement 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 receive options to acquire 5,000 shares of Common Stock
of PhoneTel
Technologies, Inc.(9)**
10.15 Stock Option Agreement and Registration Rights Agreement between PhoneTel
Technologies, Inc. and George H. Henry dated March 24, 1992.(5)**
10.16 Amendment No. 1 to Amended and Restated Loan Agreement 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 Technologies, Inc., Alpha Pay Phones-IV,
L.P., American Telecommunications 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 option 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 respect 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. relative 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 identified 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 Technologies,
Inc.(8)**
10.29 Letter Agreement dated February 23, 1995 between PhoneTel Technologies, Inc. and
certain lenders identified 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 relative 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 purchase 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 November 15, 1994.(9)**
10.34 Stock Option Agreement with Donald Vella with respect to 20,000 shares of Common
Stock of PhoneTel Technologies, Inc. dated on or about November 15, 1994.(9)**
</TABLE>
<PAGE> 240
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
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 aggregate, to purchase a total of 49,412 shares of PhoneTel Technologies,
Inc. Common Stock.(9)**
10.36 Warrant Agreements with Richard Thatcher 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 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 aggregate, to purchase a total of 41,177 shares of PhoneTel Technologies,
Inc. Common Stock.(9)**
10.38 Warrant Agreements with Gerald Waldshutz 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 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 aggregate, to purchase a total of 41,177 shares of PhoneTel Technologies,
Inc. Common Stock.(9)**
10.40 Warrant Agreements with Steven Richman 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 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 aggregate, to purchase a total of 49,412 shares of PhoneTel Technologies,
Inc. Common Stock.(9)**
10.42 Warrant Agreements with Janice Fuelhart 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 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
aggregate, 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 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 45,000 shares of
PhoneTel Technologies, 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. PhoneTel II, Inc., and
World Communications, Inc.(10)**
10.49 Amendment to Agreement and Plan of Merger dated September 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., a 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., a Tennessee corporation, and
all amendments thereto.(12)**
10.53 Share Purchase Agreement dated as of November 16, 1995, between PhoneTel
Technologies, Inc. and Paramount Communications Systems, Inc., and all amendments
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)**
</TABLE>
<PAGE> 241
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
10.55 Security Agreement dated as of March 15, 1996 among PhoneTel Technologies, Inc.,
Public Telephone Corporation, 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 granting Internationale Nederlanden
(U.S.) Capital Corporation 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 granting Cerberus Partners, L.P. the
right to purchase 102,412 shares of Series A Special Convertible Preferred 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.(15)
10.66 Employment Agreement dated September 1, 1996 between PhoneTel Technologies, Inc.
and Richard Kebert.(15)
10.67 First Amendment to Credit Agreement dated as of April 11, 1996.(15)
10.68 Second Amendment to Credit Agreement dated as of June 1996.(14)**
10.69 Third Amendment to Credit Agreement dated as of August 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 September 13, 1996.(14)**
10.72 Sixth Amendment to Credit Agreement dated as of October 8, 1996.(15)
10.73 Asset Purchase Agreement among PhoneTel Technologies, Inc., an Ohio Corporation as
Buyer and ACI-HDT Supply Company, a California corporation, Amtel Communications
Services, a California corporation, Amtel Communications 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)**
12.1 Computation of Ratio of Earnings to Fixed Charges.
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).*
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.2
hereto).*
24.1 Powers of Attorney (included on signature pages to the Registration Statement).**
25.1 Statement of Eligibility and Qualification on Form T-1 of , as
trustee under the Indenture relating to the Notes.*
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 242
** Previously filed.
<TABLE>
<C> <S>
(1) Incorporated by reference from the Registration Statement on Form S-18 (Registration No. 33-16962C)
of PhoneTel Technologies, 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.
(15) Incorporated by reference from the Company's Form 10-QSB for the quarter ended September 30, 1996.
</TABLE>
<PAGE> 1
EXHIBIT 1.1
UNDERWRITING AGREEMENT
PhoneTel Technologies, Inc.
$[110,000,000]
% Senior Notes due 2006
November , 1996
J.P. MORGAN SECURITIES INC.
CIBC WOOD GUNDY SECURITIES CORP.
ING BARINGS (U.S.) SECURITIES, INC.
SOUTHCOAST CAPITAL CORPORATION
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
PhoneTel Technologies, Inc., an Ohio corporation (the "Company"),
proposes to issue and sell to the underwriters listed on Schedule I hereto
(collectively, the "Underwriters") $[110,000,000] aggregate principal amount of
its % Senior Notes due 2006 (the "Notes"). The Notes will be issued pursuant
to the provisions of an Indenture to be dated as of November , 1996 (the
"Indenture") among the Company, the Guarantors (as hereinafter defined) and
Marine Midland Bank, as Trustee (the "Trustee"). The Notes will be
unconditionally guaranteed, jointly and severally, on a senior unsecured basis
initially by the subsidiaries of the Company listed on Schedule II hereto (each
a "Guarantor" and collectively the "Guarantors"). Such guarantees are
hereinafter referred to as the "Guarantees," and the Notes and the Guarantees
are hereinafter referred to as the "Securities." The Company and the Guarantors
are collectively referred to herein as the "Registrants."
The Registrants have prepared and filed with the Securities and
Exchange Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Securities Act"), a registration
statement on Form SB-2 (File No. 333-15211), including a prospectus, relating to
the Securities. The registration statement as amended at the time when it shall
become
<PAGE> 2
effective, including any registration statements filed pursuant to Rule 462(b)
under the Securities Act to increase the size of the offering, and including in
each case information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A under the Securities Act, is
hereinafter referred to as the "Registration Statement," and the prospectus in
the form first used to confirm sales of Securities is hereinafter referred to as
the "Prospectus."
The Company is a party to (i) that certain Share Purchase Agreement,
dated as of , 1996, with Cherokee Communications, Inc. ("Cherokee") (the
"Cherokee Agreement") and (ii) that certain Asset Purchase Agreement dated as of
, 1996, with Texas Coinphone (the "Texas Coinphone Agreement" and,
together with the Cherokee Agreement, the "Acquisition Agreements"). The
acquisitions of Cherokee and Texas Coinphone are referred to herein,
collectively, as the "Pending Acquisitions."
In connection with the offering of the Securities and the
consummation of the Acquisition Agreements, the Company is (i) offering
shares of its Common Stock, $.01 par value (the "Common Stock") (the "Concurrent
Public Offering"), (ii) repaying approximately $7.8 million in indebtedness
relating to certain capital leases, (iii) repaying approximately $3.7 million in
indebtedness relating to certain seller notes, (iv) repaying approximately $43.5
million aggregate principal amount outstanding under its existing senior secured
bank credit agreement (the "Credit Agreement") and (v) entering into a new
senior secured bank credit agreement (the "New Credit Agreement").
The Company hereby agrees with each Underwriter as follows:
1. The Company hereby agrees to issue and sell the Securities to the
several Underwriters as hereinafter provided, and each Underwriter, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase, severally and not jointly,
from the Company the respective principal amount of Securities set forth
opposite such Underwriter's name in Schedule I hereto at a price equal to %
of the principal amount of the Notes. The public offering price of the
Securities is not in excess of the price recommended by [CIBC Wood Gundy
Securities Corp. ("CIBC")], acting as a "qualified independent underwriter"
within the meaning of Rule 2720 of the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD").
<PAGE> 3
2. The Company understands that the Underwriters intend (i) to make
a public offering of the Securities as soon as they deem advisable after the
Registration Statement and this Agreement have become effective and the
Indenture has been qualified under the Trust Indenture Act of 1939, as amended,
and the rules and regulations of the Commission thereunder (collectively, the
"Trust Indenture Act") and (ii) initially to offer the Securities upon the terms
set forth in the Prospectus.
The Company hereby confirms its engagement of [CIBC] and [CIBC]
hereby confirms its agreement with the Company to render services as, a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the NASD with respect to the offering and sale of the
Securities. [CIBC], in its capacity as qualified independent underwriter, and
not otherwise, is referred to herein as the "QIU". As compensation for the
services of acting as the QIU hereunder, the Company agrees to pay $10,000 to
[CIBC] on the Closing Date.
3. Payment for the Securities shall be made to the Company or to its
order by check or wire transfer payable in same day funds (less the cost to J.P.
Morgan Securities Inc. of obtaining such same day funds, if any), in accordance
with written instructions to be provided by the Company at least one full
Business Day prior to the Closing Date, at the office of Cahill Gordon &
Reindel, 80 Pine Street, New York, New York at 10:00 A.M., New York City time,
on November , 1996, or at such other time on the same or such other date, not
later than the fifth Business Day thereafter, as the Underwriters and the
Company may agree upon in writing. The time and date of such payment for the
Securities are referred to herein as the "Closing Date." As used herein, the
term "Business Day" means any day other than a day on which banks are permitted
or required to be closed in New York City.
Payment for the Securities to be purchased on the Closing Date shall
be made against delivery to the account of J.P. Morgan Securities Inc., at The
Depository Trust Company, on behalf of the Underwriters, of one or more global
certificates for the Securities to be purchased on such date registered in such
names and in such denominations as the Underwriters shall request in writing not
later than two Business Days prior to the Closing Date, with any transfer taxes
payable in connection with the transfer to the Underwriters of the Securities
duly paid by the Company. The certificates for the Securities will be made
available for inspection by the Underwriters in New York, New York not later
<PAGE> 4
than 1:00 P.M., New York City time, on the Business Day prior to the Closing
Date.
4. The Company represents as to itself and the Guarantors, and each
Guarantor represents and warrants as to itself, to each of the Underwriters
that:
(a) no order preventing or suspending the use of any preliminary
prospectus filed as part of the Registration Statement has been issued by
the Commission, and each preliminary prospectus filed as part of the
Registration Statement, as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act, complied
when so filed in all material respects with the Securities Act, and did
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, provided, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and
in conformity with information relating to any Underwriter furnished to
any Registrant in writing by such Underwriter expressly for use therein;
(b) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of any Registrant, threatened by the
Commission; and the Registration Statement and the Prospectus (as amended
or supplemented if the Registrants shall have furnished any amendments or
supplements thereto) comply, and will comply as of the Closing Date, in
all material respects with the Securities Act and the Trust Indenture Act
and do not, and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the date of the
Prospectus and any amendment or supplement thereto, contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented at the Closing
Date, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; except that the foregoing
representations and warranties shall not apply to statements or omissions
in the Registration Statement, furnished to any Registrant in writing by
such Underwriter expressly for use therein or
<PAGE> 5
to the Statement of Eligibility on Form T-1 of the Trustee under the
Trust Indenture Act filed as an exhibit to the Registration Statement;
(c) none of the Company or any Guarantor has (i) taken, directly or
indirectly, any action designed to cause or result in, or that has
constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale or resale of the Notes or (ii) since the
filing of the Registration Statement (A) sold, bid for, purchased or paid
anyone any compensation for soliciting purchases of the Notes or (B) paid
or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company;
(d) the financial statements, and the related notes thereto,
included in the Registration Statement and the Prospectus present fairly
the consolidated financial position of (i) the Company and its
subsidiaries, (ii) each of the Acquired Companies (as defined below) for
whom financial statements are included and (iii) Cherokee, and the results
of their respective operations and the changes in their respective
consolidated cash flows as of the dates and for the periods indicated, and
said financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved; the "Acquired Companies" are (1) Paramount
Communications Systems, Inc. ("Paramount"), (2) International Pay Phones,
Inc. (South Carolina) ("IPP-SC"), (3) International Pay Phones, Inc.
(Tennessee) ("IPP-TN"), (4) Payphones of America, Inc. ("POA") and (5)
Amtel Communications, Inc. and Combined Companies (Debtor-in-Possession)
("Amtel"). The financial statement schedules included in the Registration
Statement include all the information required to be stated therein; the
summary and selected financial and related statistical data included in
the Registration Statement and the Prospectus present fairly the
information shown therein and have been prepared and compiled on a basis
consistent with the audited financial statements included therein; Price
Waterhouse LLP, whose reports on the audited financial statements of the
Company and its subsidiaries as of December 31, 1994 and 1995 and for the
three years ended December 31, 1995 and the audited financial statements
of Paramount as of December 31, 1995 and for the year then ended are
included in the Registration Statement and the Prospectus, are independent
accountants with respect to the Company and its
<PAGE> 6
subsidiaries and Paramount, as required by the Securities Act; KPMG Peat
Marwick LLP, whose report on the audited financial statements of Paramount
as of December 31, 1994 and for the year then ended is included in the
Registration Statement and Prospectus, are independent accountants with
respect to Paramount, as required by the Securities Act; Miller Sherrill
Blake, CPA, PA, whose report on the audited financial statements of IPP-SC
as of December 31, 1994 and 1995 and for the two years ended December 31,
1995, is included in the Registration Statement and Prospectus, are
independent accountants with respect to IPP-SC, as required by the
Securities Act; Ernest M. Sewell, CPA, whose report on the audited
financial statements of IPP-TN as of December 31, 1994 and 1995 and for
the two years ended December 31, 1995, is included in the Registration
Statement and Prospectus, is an independent accountant with respect to
IPP-TN, as required by the Securities Act; Kerber, Eck & Braeckel LLP,
whose report on the audited financial statements of POA as of December 31,
1994 and 1995 and for the two years ended December 31, 1995, is included
in the Registration Statement and Prospectus, are independent accountants
with respect to POA, as required by the Securities Act; Harlan & Boettger,
CPAs, whose report on the audited financial statements of Amtel as of
December 31, 1994 and 1995 and for the two years ended December 31, 1995,
is included in the Registration Statement and Prospectus, are independent
accountants with respect to Amtel, as required by the Securities Act;
Deloitte & Touche LLP, whose report on the audited financial statements of
Cherokee as of December 31, 1994 and 1995 and for the two years ended
December 31, 1995, is included in the Registration Statement and
Prospectus, are independent accountants with respect to Cherokee, as
required by the Securities Act;
(e) the pro forma financial statements (including the notes thereto)
and the other pro forma financial information included in the Prospectus
and Registration Statement (i) comply as to form in all material respects
with the applicable requirements of Regulation S-X promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); (ii)
have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and include
adjustments which give effect to events that are (A) directly attributable
to the transactions referred to therein, (B) expected to have a continuing
impact on the Company, and (C) factually supportable; and (iii) have been
properly computed on the bases described therein; the assumptions used in
the preparation of the pro forma
<PAGE> 7
financial statements and other pro forma financial information included in
the Prospectus and Registration Statement are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein;
(f) each of the Company and the Guarantors makes and keeps accurate
books and records reflecting its assets and maintains internal accounting
controls which provide reasonable assurance that (i) transactions are
executed in accordance with management's authorization, (ii) transactions
are recorded as necessary to permit preparation of the Company's
consolidated financial statements in accordance with generally accepted
accounting principles and to maintain accountability for the assets of the
Company, (iii) access to the assets of the Company and each of the
Guarantors is permitted only in accordance with management's
authorization, and (iv) the recorded accountability for assets of the
Company and each of the Guarantors is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences; and
(g) the Company has no subsidiaries other than those subsidiaries
listed on Schedule II hereto and all of the subsidiaries are Guarantors;
no Guarantor is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distributions on such
Guarantor's capital stock, from repaying to the Company any loans or
advances to such Guarantor or from transferring any of such Guarantor's
property or assets to the Company or to any other Guarantor.
(h) the Company has the authorized, issued and outstanding
capitalization set forth in the Registration Statement and Prospectus
under the heading "Capitalization;" all of the outstanding shares of
capital stock of the Company and each Guarantor have been duly authorized
and validly issued and are fully paid and nonassessable; except as
described in the Prospectus, there are no outstanding rights (including,
without limitation, preemptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital
stock or other equity interest in the Company or in any Guarantor, or any
contract, commitment, agreement, understanding or arrangement of any kind
relating to the issuance of any capital stock of the Company or any such
Guarantor, any such convertible or exchangeable securities or any such
rights, warrants or
<PAGE> 8
options; the Company beneficially owns, directly or indirectly, free and
clear of any mortgage, pledge, security interest, lien, claim or other
encumbrance, all of the outstanding capital stock of each Guarantor;
(i) all offers and sales of securities of the Company prior to the
date hereof were at all relevant times duly registered under the
Securities Act or exempt from the registration requirements of the
Securities Act, and were duly registered or the subject of an available
exemption from the registration requirements of the applicable state
securities or blue sky laws;
(j) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been (A) any
change in the Company's issued capital stock, warrants or options except
pursuant to (i) the terms of the instruments governing the same, (ii) the
exercise of such options or warrants, and (iii) the arrangements relating
to the Concurrent Public Offering, or (B) any material adverse change, or
any development involving a prospective material adverse change, in or
affecting the business, prospects, financial position, management,
stockholder's equity or results of operations of the Company and the
Guarantors, taken as a whole (a "Material Adverse Change");
(k) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, and except as disclosed
therein, (i) there have been no transactions entered into by the Company
or by any of the Guarantors, including those entered into in the ordinary
course of business, which are material to the Company and the Guarantors,
taken as a whole; and (ii) there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its capital
stock;
(l) each of the Company and the Guarantors has been duly
incorporated under the laws of its jurisdiction of incorporation; each of
the Company and the Guarantors is a validly existing corporation in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Registration Statement and the
Prospectus and is duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such
<PAGE> 9
qualification, except where the failure to be so qualified or in good
standing would not, individually or in the aggregate, have a material
adverse effect on the business, prospects, financial position, management,
stockholders' equity or results of operations of the Company and the
Guarantors, taken as a whole (a "Material Adverse Effect");
(m) this Agreement has been duly authorized, executed and delivered
by each of the Registrants;
(n) the execution and delivery of the Indenture has been duly and
validly authorized by the Company and each of the Guarantors and the
Indenture has been qualified under the Trust Indenture Act and, when
executed and delivered by the Company and each of the Guarantors (assuming
due authorization, execution and delivery thereof by the Trustee), the
Indenture will constitute a legal, valid and binding agreement of the
Company and each of the Guarantors enforceable against the Company and
each of the Guarantors in accordance with its terms except that the
enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) general principles
of equity and the discretion of the court before which any proceeding
therefor may be brought; and the Securities and the Indenture conform in
all material respects to the descriptions thereof in the Prospectus;
(o) the Notes have been duly authorized by the Company and the
Guarantees have been duly authorized by each of the Guarantors and, when
executed and authenticated in accordance with the terms of the Indenture
and delivered to and paid for by the Underwriters, the Notes will
constitute legal, valid and binding obligations of the Company and the
Guarantees will constitute legal, valid and binding obligations of each
Guarantor, in each case enforceable in accordance with their terms, except
that the enforcement thereof may be subject to (i) bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally and (ii) general principles
of equity and the discretion of the court before which any proceeding
therefor may be brought;
(p) the execution and delivery of the New Credit Agreement has been
duly and validly authorized by the Company and each of the Guarantors a
party thereto and, when executed and delivered by the Company and each of
the
<PAGE> 10
Guarantors a party thereto (assuming due authorization, execution and
delivery by the other parties thereto), the New Credit Agreement will
constitute a legal, valid and binding agreement of the Company and each of
the Guarantors a party thereto enforceable against the Company and each of
such Guarantors in accordance with its terms except that the enforcement
thereof may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights generally and (ii) general principles of equity and the
discretion of the court before which any proceeding therefor may be
brought;
(q) Cherokee has duly authorized, executed and delivered the
Cherokee Agreement and such agreement is a legal, valid and binding
agreement of Cherokee; Texas Coinphone has duly executed and delivered the
Texas Coinphone Agreement and such agreement is a legal, valid and binding
agreement of Texas Coinphone;
(r) the execution and delivery by the Company and each of the
Guarantors of, and the performance by the Company and each of the
Guarantors of all of the provisions of and their respective obligations
under, this Agreement, the Indenture, the Securities (including the
Guarantees) and the New Credit Agreement, and by the Company of the
Acquisition Agreements and the consummation by the Company and each of the
Guarantors of the transactions contemplated herein and therein, and the
issuance and sale by the Company of the Common Stock in the Concurrent
Public Offering (i) have been duly authorized by all necessary corporate
action on the part of the Company and each of the Guarantors (to the
extent a party thereto), (ii) do not and will not result in any violation
of the Articles of Incorporation (or other applicable charter document) or
any shareholder's agreement or the By-laws of the Company, any Guarantor,
Cherokee or Texas Coinphone (to the extent a party thereto), (iii) except
as would not have a Material Adverse Effect, do not and will not conflict
with, or result in a breach or violation of any of the terms or provisions
of, or constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, or give rise to any
right to accelerate the maturity or require the prepayment of any
indebtedness or the purchase of any capital stock under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company, any Guarantor, Cherokee or Texas
Coinphone under, (A) any contract, indenture, mortgage, deed of trust,
loan
<PAGE> 11
agreement, note, lease, partnership agreement or other agreement or
instrument to which any such person is a party or by which any of them may
be bound or to which any of their respective properties or assets may be
subject, (B) (assuming, in the case of the offer and sale of the
Securities, compliance with all applicable state securities or "Blue Sky"
laws) any law or statute, rule or regulation applicable to any such person
or any of their respective properties or assets (including, without
limitation, the Communications Act of 1934, as amended (the
"Communications Act"), the Telecommunications Act of 1996 (the
"Telecommunications Act") and the rules and regulations of the Federal
Communications Commission (the "FCC") under each of the foregoing and the
rules and regulations of any state or other regulatory agency or body with
jurisdiction over telecommunications matters in the jurisdictions in which
the Company, the Guarantors, Cherokee or Texas Coinphone operate or
provide telecommunications services (a "State Regulatory Agency")) or (C)
any judgment, order or decree of any government, governmental
instrumentality, agency, body or court, domestic or foreign, having
jurisdiction over any such person or any of their respective properties or
assets and (iv) except as would not have a Material Adverse Effect, do not
and will not result in the termination or revocation of any of the
permits, licenses, approvals, orders, certificates, franchises or
authorizations of state, federal or other governmental or regulatory
authorities, including those relating to the Communications Act, the
Telecommunications Act, the rules and regulations of the FCC or the rules
and regulations of any State Regulatory Agency, owned or held by the
Company, any of the Guarantors, Cherokee or Texas Coinphone or result in
any other material impairment of the rights of the holder of such permits,
licenses, approvals, orders, certificates, franchises or authorizations;
(s) the Company, the Guarantors, Cherokee and Texas Coinphone have
good and marketable title in fee simple to all items of real property and
good title to all assets owned by them that is material to the business of
the Company and the Guarantors, taken as a whole, as currently conducted
or as proposed to be conducted upon consummation of the Pending
Acquisitions, in each case free and clear of all liens, encumbrances and
defects, except such as are described in the Prospectus or such as do not
materially affect the value of such property or asset and do not interfere
with the use made or proposed to be made of such property or asset by the
Company and the Guarantors; and any real property, buildings or personal
property held
<PAGE> 12
under lease by the Company, the Guarantors, Cherokee and Texas Coinphone
that are material to the business of the Company and the Guarantors, taken
as a whole, as currently conducted or as proposed to be conducted upon
consummation of the Pending Acquisitions, are held by them under valid,
existing and enforceable leases with such exceptions as are not material
and do not interfere with the use made or proposed to be made of such
property by the Company and the Guarantors;
(t) no authorization, approval, consent, order, registration,
qualification or license of, or filing with, any government, governmental
instrumentality, agency (including, without limitation, the FCC and any
State Regulatory Agency), body or court, domestic or foreign, or third
party is required for the valid authorization, issuance, sale and delivery
of the Securities (including the Guarantees), and the Common Stock in the
Concurrent Public Offering, or the performance by the Company or any
Guarantor of all of its respective obligations under this Agreement, the
Indenture, the Securities (including the Guarantees), the New Credit
Agreement and the Acquisition Agreements, or the consummation by the
Company and each of the Guarantors of the transactions contemplated by
this Agreement, the Acquisition Agreements, the Indenture and the New
Credit Agreement (other than, in the case of the offering of the
Securities and the Concurrent Public Offering, as has been obtained under
the Securities Act or the Trust Indenture Act or as may be required under
the securities or Blue Sky laws of the various states of the United States
of America and other jurisdictions where qualification or registration of
the Securities or the Common Stock may be required);
(u) neither the Company nor any of the Guarantors is (i) in
violation of its Articles of Incorporation (or other applicable charter
document) or By-laws, (ii) in violation of any statute, judgment, decree,
order, rule or regulation applicable to any of them or any of their
respective properties or assets (including, without limitation, the
Communications Act, the Telecommunications Act, the rules and regulations
of the FCC under each of the foregoing and the rules and regulations of
any State Regulatory Agency), except for any such violation which would
not, individually or in the aggregate, have a Material Adverse Effect, or
(iii) in breach or violation of any of the terms or provisions of, or with
the giving of notice or lapse of time, or both, would be in default under,
any contract, indenture, mortgage, deed of trust, loan agreement, note,
lease, partnership agreement, or
<PAGE> 13
other agreement or instrument to which the Company or any Guarantor is a
party or by which any of them may be bound or to which any of their
properties or assets may be subject, except for such violations or
defaults that would not, individually or in the aggregate, have a Material
Adverse Effect;
(v) there are no legal or governmental proceedings pending to which
the Company, any of the Guarantors, Cherokee or Texas Coinphone is or may
be a party or to which any property of the Company, any of the Guarantors,
Cherokee or Texas Coinphone is or may be the subject of which, if
determined adversely to the Company or any of the Guarantors or any other
person, would individually or in the aggregate have a Material Adverse
Effect and, to the best knowledge of each Registrant, no such proceedings
are threatened or contemplated by governmental authorities or threatened
by others;
(w) there are no legal or governmental proceedings or contracts or
documents of a character required to be described or referred to in the
Registration Statement or the Prospectus, or to be filed as exhibits to
the Registration Statement, that are not described, referred to or filed
as required and the descriptions of any legal or governmental proceedings
or contracts or documents fairly summarize, in all material respects, such
legal or regulatory proceedings, contracts or documents;
(x) each of the Company, the Guarantors, Cherokee and Texas
Coinphone owns, possesses or has obtained all licenses, permits,
certificates, consents, orders, approvals and other authorizations from,
and has made all declarations and filings with, all federal, state, local
and other governmental authorities (including, without limitation, the FCC
and the State Regulatory Agencies), all self-regulatory organizations and
all courts and other tribunals, domestic or foreign, necessary to own or
lease, as the case may be, and to operate the properties and to carry on
the business of the Company and the Guarantors as conducted and as
proposed to be conducted upon consummation of the Pending Acquisitions and
each of them is in full force and effect, except in each case as otherwise
disclosed in the Registration Statement or where the failure to obtain
licenses, permits, certificates, consents, orders, approvals and other
authorizations, or to make all declarations and filings, would not,
individually or in the aggregate, have a Material Adverse Effect, and none
of the Company, the Guarantors, Cherokee or Texas Coinphone has received
any notice relating to
<PAGE> 14
revocation or modification of any such license, permit, certificate,
consent, order, approval or other authorization, except where such
revocation or modification would not, individually or in the aggregate,
have a Material Adverse Effect;
(y) no person has the right to require the Company to register any
securities for offering and sale under the Securities Act by reason of the
filing of the Registration Statement with the Commission or the issue and
sale of the Securities, or, except as disclosed in the Registration
Statement and Prospectus, by reason of the filing of the registration
statement relating to the Concurrent Public Offering;
(z) there are no employment or labor disputes or negotiations with
employees of the Company or any of the Guarantors which could have,
individually or in the aggregate, a Material Adverse Effect;
(aa) the Company and the Guarantors are in compliance with, and not
subject to any liability under, all applicable federal, state, local and
foreign laws, regulations, rules, codes, ordinances, directives, and
orders relating to pollution or to protection of public or employee health
or safety or to the environment, including, without limitation, those that
relate to any Hazardous Material (as hereinafter defined) ("Environmental
Laws"), except, in each case, where noncompliance or liability,
individually or in the aggregate, would not have a Material Adverse
Effect. The term "Hazardous Material" means any pollutant, contaminant or
waste, or any hazardous, dangerous, or toxic chemical, material, waste,
substance or constituent subject to regulation under any Environmental
Law;
(ab) the fair salable value of the assets of each Registrant exceeds
the amount that will be required to be paid on or in respect of its
existing debts and other liabilities (including contingent liabilities) as
they mature; the assets of each of the Registrants do not constitute
unreasonably small capital to carry out its business as conducted or as
proposed to be conducted; each Registrant does not intend to, and does not
believe that it will, incur debts beyond its ability to pay such debts as
they mature; upon the issuance of the Securities, the fair salable value
of the assets of each of the Registrants will exceed the amount that will
be required to be paid on or in respect of its existing debts and other
liabilities (including contingent liabilities) as
<PAGE> 15
they mature; and upon the issuance of the Securities, the assets of each
of the Registrants will not constitute unreasonably small capital to carry
out its business as now conducted or as proposed to be conducted;
(ac) each of the Company and the Guarantors owns or legally
possesses the patents, patent licenses, trademarks, service marks, trade
names, copyrights and know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures) (collectively, the "Intellectual Property")
employed by it in connection with the business conducted by it as of the
date hereof, except to the extent that the failure to own or legally
possess, any such Intellectual Property would not have, individually or in
the aggregate, a Material Adverse Effect, and neither the Company nor any
Guarantor has received any notice of infringement of or conflict with
asserted rights of others with respect to any Intellectual Property;
(ad) none of the Company or the Guarantors has any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company or any Guarantor ever has
made a contribution and in which any employee of the Company or any
Guarantor has ever been a participant. None of the Company or the
Guarantors participates in or makes contributions to any pension profit
sharing or other plan which is subject to ERISA;
(ae) Each of the Company and the Guarantors has filed all necessary
federal, state, local and foreign income and franchise tax returns, except
where the failure to file such returns would not have a Material Adverse
Effect, and has paid all taxes shown as due thereon; there is no tax
deficiency that has been asserted against the Company or any Guarantor
that would have a Material Adverse Effect;
(af) the Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become, an "investment
company" or any "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940;
<PAGE> 16
(ag) the Company has not done, and is not presently doing, business
with the government of Cuba or with any person or any affiliate located in
Cuba; and
(ah) the Trustee, on behalf of the holders of the Notes, on the
Closing Date and after the deposit with the Trustee of such amounts as are
required by the Indenture (the "Trust Funds"), will have a valid first
priority perfected security interest in the Trust Funds.
5. The Registrants, jointly and severally, covenant and agree with
each Underwriter as follows:
(a) to use their respective best efforts to cause the Registration
Statement to become effective (if the Registration Statement shall not
have been declared effective prior to the execution hereof) at the
earliest possible time and, if required, to file the Prospectus with the
Commission in the manner and within the time periods specified by Rule
424(b) and Rule 430A under the Securities Act;
(b) to deliver, at the expense of the Registrants, (i) five
conformed copies of the Registration Statement (as originally filed) and
each amendment thereto, including exhibits, to the Underwriters, and (ii)
during the period mentioned in Section 5(e), to each of the Underwriters
as many copies of the Prospectus (including all amendments and supplements
thereto) as the Underwriters may reasonably request;
(c) before filing any amendment or supplement to the Registration
Statement or the Prospectus, whether before or after the time the
Registration Statement becomes effective, to furnish to the Underwriters
and their counsel a copy of the proposed amendment or supplement for
review within a reasonable time prior to the proposed filing thereof and
not to file any such proposed amendment or supplement to which the
Underwriters or their counsel reasonably object;
(d) to advise the Underwriters promptly, and to confirm such advice
in writing, (i) when the Registration Statement shall become effective,
(ii) when any amendment to the Registration Statement shall have become
effective, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or
for any additional information, (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the
<PAGE> 17
Registration Statement or the initiation or, to the best of the Company's
knowledge, threat of any proceeding for that purpose and (v) of the
receipt by any Registrant of any notification with respect to any
suspension of the qualification of the Securities (including any
Guarantee) for offer and sale in any jurisdiction or the initiation or, to
the best of the Company's knowledge, threat of any proceeding for such
purpose; and to use their respective best efforts to prevent the issuance
of any such stop order or notification and, if issued, to obtain promptly
the withdrawal thereof;
(e) if, during such period of time after the first date of the
public offering of the Securities as in the opinion of counsel for the
Underwriters a prospectus relating to the Securities is required by law to
be delivered in connection with sales by an Underwriter or any dealer, any
event shall occur which is known to any of the Registrants or information
shall become known to any of the Registrants as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances at the time the
Prospectus is delivered to a purchaser, not misleading, or if it is
necessary to amend or supplement the Prospectus to comply with law,
forthwith to, at the sole expense of the Registrants, prepare and, subject
to Section 5(c) above, file with the Commission, and furnish to the
Underwriters and to the dealers (whose names and addresses the
Underwriters will furnish to the Registrants) to which Securities may have
been sold by the Underwriters and to any other dealers upon request such
amendments or supplements to the Prospectus as may be necessary so that
the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances at the time the Prospectus is delivered
to a purchaser, be misleading or so that the Prospectus will comply with
law;
(f) (i) to endeavor to qualify the Securities for offer and sale
under the securities or Blue Sky laws of such jurisdictions as the
Underwriters shall reasonably request and to continue such qualification
in effect so long as reasonably required for distribution of the
Securities and (ii) to pay all fees and expenses (including fees and
disbursements of counsel for the Underwriters) incurred in connection with
such qualification and in connection with the determination of the
eligibility of the Securities for investment under the laws of such
jurisdictions as the Underwriters may designate; provided that no
Registrant shall be required
<PAGE> 18
to file a general consent to service of process or to qualify as a
foreign corporation in any jurisdiction;
(g) to make generally available to the Registrants' security holders
and to the Underwriters as soon as practicable an earnings statement
(which need not be audited) covering a period of at least twelve months
beginning with the first fiscal quarter of the Registrants occurring after
the effective date of the Registration Statement which shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 of the
Commission promulgated thereunder;
(h) so long as the Securities are outstanding, to furnish to the
Underwriters copies of all reports or other communications (financial or
other) required to be furnished to holders of the Securities, and copies
of any reports and financial statements required to be furnished to or
filed with the Commission or any national securities exchange;
(i) to pay all costs and expenses incident to the performance of its
obligations hereunder, whether or not the transactions contemplated herein
are consummated or this Agreement is terminated pursuant to Section 8
hereof, including without limiting the generality of the foregoing, all
costs and expenses (i) incident to the preparation, issuance, execution,
authentication and delivery of the Securities (including any expenses of
the Trustee and the Trustee's counsel), (ii) incident to the preparation,
printing and filing under the Securities Act of the Registration
Statement, the Prospectus and any preliminary prospectus (including in
each case all exhibits, amendments and supplements thereto), (iii)
incurred in connection with the registration or qualification and
determination of eligibility for investment of the Securities under the
laws of such jurisdictions as the Underwriters may designate (including
fees and disbursements of Cahill Gordon & Reindel, counsel for the
Underwriters, in connection with such registration or qualification), (iv)
relating to any filing with, and determination of the fairness of the
underwriting terms and arrangements by, the NASD in connection with the
offering of the Securities (including the fees and expenses of [CIBC], as
QIU), (v) in connection with the printing (including word processing and
duplication costs) and delivery of this Agreement, the Indenture, all
other agreements relating to underwriting arrangements, Blue Sky
Memoranda, any legal investment surveys and the furnishing to the
Underwriters and dealers of copies of the
<PAGE> 19
Registration Statement and the Prospectus, including mailing and shipping,
as herein provided, and (vi) payable to rating agencies in connection with
the rating of the Securities;
(j) none of the Company or the Subsidiaries will (i) take, directly
or indirectly, prior to the termination of the underwriting syndicate
contemplated by this Agreement, any action designed to cause or to result
in, or that might reasonably be expected to constitute, the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of any of the Securities, (ii) sell, bid for, purchase
or pay anyone any compensation for soliciting purchases of the Securities
or (iii) pay or agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company;
(k) to use the net proceeds of the offering of Securities as set
forth in the Registration Statement and the Prospectus under the caption
"Use of Proceeds"; and
(l) to comply with the special offer provisions of the Indenture in
the event the Cherokee acquisition shall not have been consummated in
accordance with the terms of the Cherokee Agreement on or prior to
, 1997.
6. The several obligations of the Underwriters hereunder to purchase
the Securities are subject to the performance by the Registrants of their
obligations hereunder and to the following additional conditions:
(a) if the Registration Statement has not been declared effective
prior to the execution and delivery hereof, the Registration Statement
shall have become effective (or if a post-effective amendment is required
to be filed under the Securities Act, such post-effective amendment shall
have become effective) not later than 5:00 P.M., New York City time, on
the date hereof; and no stop order suspending the effectiveness of the
Registration Statement shall be in effect, and no proceedings for such
purpose shall be pending before or, to the knowledge of the Company,
threatened by the Commission; and any requests for additional information
shall have been complied with to the reasonable satisfaction of the
Underwriters;
(b) each of the representations and warranties of the Registrants
contained herein shall be true and correct
<PAGE> 20
on and as of the Closing Date as if made on and as of the Closing Date,
and the Registrants shall have complied with all agreements and all
conditions on their part to be performed or satisfied hereunder at or
prior to the Closing Date;
(c) subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any downgrading,
nor shall any notice have been given of (i) any intended or potential
downgrading or (ii) any review or possible change that does not indicate
an improvement in the rating accorded any securities of or guaranteed by
any of the Registrants by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act;
(d) since the respective dates as of which information is given in
the Prospectus, there shall not have been any Material Adverse Change,
otherwise than as set forth in the Prospectus, the effect of which in the
sole judgment of the Underwriters makes it impracticable or inadvisable to
proceed with the public offering or the delivery of the Securities on the
terms and in the manner contemplated in the Prospectus;
(e) on the Closing Date, the Underwriters shall have received from
each Registrant a certificate, addressed to the Underwriters and dated the
Closing Date, of two executive officers of each such Registrant
satisfactory to the Underwriters to the effect set forth in subsections
(a) through (c) of this Section 6 and to the further effect that since the
respective dates as of which information is given in the Prospectus there
has not occurred any Material Adverse Change, otherwise than as set forth
in the Prospectus;
(f) the Underwriters shall have received on the Closing Date a
signed opinion of Tammy L. Martin, Esq., General Counsel of the Company,
in form and substance satisfactory to Cahill Gordon & Reindel, counsel to
the Underwriters, dated the Closing Date and addressed to the
Underwriters, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Ohio with full power and authority (corporate and other) to
own, lease and operate their respective properties and to conduct
<PAGE> 21
their respective business as described in the Registration Statement
and the Prospectus;
(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
in each jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification other than
where the failure to be so qualified or in good standing would not
have a Material Adverse Effect;
(iii) each Subsidiary has been duly incorporated and is validly
existing as a corporation under the laws of its jurisdiction of
incorporation with full power and authority (corporate and other) to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus, and has
been duly qualified as a foreign corporation for the transaction of
business and is in good standing in each jurisdiction in which it
owns or leases properties or conducts any business so as to require
such qualification other than where the failure to be so qualified
or in good standing would not have a Material Adverse Effect;
(iv) the authorized, issued and outstanding capital stock of
the Company is as set forth in the Registration Statement and the
Prospectus;
(v) all the outstanding shares of capital stock of the Company
and each Subsidiary have been duly authorized and validly issued and
are fully paid and nonassessable, and are owned beneficially by the
Company free and clear of all liens, security interests, pledges,
charges, encumbrances, shareholders' agreements, voting trusts,
defects, equities or claims of any nature whatsoever. Other than the
Subsidiaries listed on Schedule II hereto, the Company does not own,
directly or indirectly, any capital stock or other equity securities
of any other corporation or any ownership interest in any
partnership, joint venture or other association;
(vi) Neither the Company nor any of the Subsidiaries is (A) in
violation of its charter or by-laws or (B) in breach or violation of
any of the terms or provisions of, or with the giving of notice or
lapse of time, or both, would be in default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to
<PAGE> 22
such counsel to which the Company or any of the Subsidiaries is a
party or by which it or any of them or any of their respective
properties is bound, or any applicable law or statute or any order,
rule or regulation of any court or governmental agency or body
having jurisdiction over the Company, the Subsidiaries or any of
their respective properties, except for violations and defaults
which individually or in the aggregate would not have a Material
Adverse Effect;
(vii) the Indenture has been duly and validly authorized,
executed and delivered by the Company and each of the Guarantors;
(viii) the Notes have been duly authorized by the Company and
the Guarantees have been duly authorized by each of the Guarantors;
(ix) the execution and delivery by the Company and each of the
Guarantors of, and the performance by the Company and each of the
Guarantors of their respective obligations under this Agreement, the
Indenture, the Securities (including the Guarantees), the New Credit
Agreement and the Acquisition Agreements (to the extent a party
thereto) and the consummation by the Company and each of the
Guarantors of the transactions herein and therein contemplated, and
the issuance and sale by the Company of the Common Stock in the
Concurrent Public Offering, (i) have been duly authorized by all
necessary corporate action on the part of the Company and each of
the Guarantors (to the extent applicable), (ii) do not and will not
result in any violation of the Articles of Incorporation or the
By-laws of the Company or any Guarantor and (iii) except as would
not have a Material Adverse Effect, do not and will not conflict
with, or result in a breach or violation of any of the terms or
provisions of, or constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under,
or give rise to any right to accelerate the maturity or require the
prepayment of any indebtedness or the purchase of any capital stock
under, or result in the creation or imposition of any lien, charge
or encumbrance upon any properties or assets of the Company or any
Guarantor under, (A) any contract, indenture, mortgage, deed of
trust, loan agreement, note, lease, partnership agreement or other
agreement or
<PAGE> 23
instrument known to such counsel to which the Company or any such
Guarantor is a party or by which any of them may be bound or to
which any of their respective properties or assets may be subject,
(B) any applicable law or statute, rule or regulation (other than
the securities or Blue Sky laws of the various states of the United
States of America) or (C) any judgment, order or decree known to
such counsel of any government, governmental instrumentality,
agency, body or court, domestic or foreign, having jurisdiction over
the Company or any such Guarantor or any of their respective
properties or assets;
(x) any real or personal property held under lease by the
Company or any of the Subsidiaries that are material (individually
or in the aggregate) to the Company or any Subsidiary, are held by
the Company or such Subsidiary, as the case may be, under valid,
subsisting and enforceable leases with such exceptions as would not
have a Material Adverse Effect; and
(xi) the execution and delivery of the New Credit Agreement has
been duly and validly authorized by the Company and the
Subsidiaries, to the extent applicable.
In rendering such opinion, such counsel, with regard to matters concerning
the application of laws of jurisdictions other than the federal laws of
the United States and the laws of the State of Ohio, may rely on such
opinions of local counsel as such counsel deems necessary, provided that
such opinions shall be addressed to the Underwriters and shall be
satisfactory, in form and substance, to Cahill Gordon & Reindel, counsel
to the Underwriters.
(g) the Underwriters shall have received on the Closing Date a
signed opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for
the Company, in form and substance satisfactory to Cahill Gordon &
Reindel, counsel to the Underwriters, dated the Closing Date and addressed
to the Underwriters, to the effect that:
(i) assuming due authorization, execution and delivery of the
Indenture by the Company, the Guarantors and the Trustee, the
Indenture is a legal, valid and binding agreement of the Company and
each of the Guarantors, enforceable against the Company and each of
the Guarantors in accordance with its
<PAGE> 24
terms, except that the enforcement thereof may be subject to (1)
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws now or hereafter in effect relating to
creditors' rights generally and (2) general principles of equity and
the discretion of the court before which any proceeding therefor may
be brought (regardless of whether enforcement is considered in a
proceeding in equity or at law);
(ii) assuming due authorization of the Notes by the Company and
of the Guarantees by the Guarantors, when the Notes and the
Guarantees are executed and authenticated in accordance with the
respective terms of the Indenture and delivered to and paid for by
the Underwriters, the Notes will constitute legal, valid and binding
obligations of the Company and the Guarantees will constitute legal,
valid and binding obligations of the Guarantors, in each case
enforceable in accordance with their respective terms, except that
the enforcement thereof may be subject to (1) bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or
similar laws now or hereafter in effect relating to creditors'
rights generally and (2) general principles of equity and the
discretion of the court before which any proceeding therefor may be
brought (regardless of whether enforcement is considered in a
proceeding in equity or at law);
(iii) the Securities and the Indenture conform as to legal
matters in all material respects to the descriptions thereof in the
Prospectus; the statements in the Registration Statement and
Prospectus under the headings "Prospectus Summary -- Recent
Developments -- Recent Regulatory Developments," "Risk Factors --
Government Regulation," "Business -- Government Regulations," and
"Business -- Legal Proceedings," insofar as such statements
constitute a summary of statutes, regulations, rules, legal matters,
documents or proceedings referred to therein, fairly present the
information set forth therein with respect to such statutes,
regulations, rules, legal matters, documents or proceedings;
(iv) to such counsel's knowledge, there are no legal,
regulatory or governmental proceedings pending or threatened to
which the Company, any of the Subsidiaries, Cherokee or Texas
Coinphone is or may
<PAGE> 25
be a party or to which any property of the Company or the
Subsidiaries, Cherokee or Texas Coinphone is or may be the subject
which, if determined adversely, could individually or in the
aggregate be expected to have a Material Adverse Effect; and such
counsel does not know of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be described or referred to in the
Registration Statement or the Prospectus which are not filed,
referred to or described as required;
(v) assuming due authorization, execution and delivery of the
New Credit Agreement by the Company, the Subsidiaries and by the
other parties thereto, the New Credit Agreement is a legal, valid
and binding agreement of the Company and the Subsidiaries party
thereto enforceable against such parties in accordance with its
terms, except that the enforcement thereof may be subject to (1)
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws now or hereafter in effect relating to
creditors' rights generally and (2) general principles of equity and
the discretion of the court before which any proceeding therefor may
be brought (regardless of whether enforcement is considered in a
proceeding in equity or at law);
(vi) the Company, each Subsidiary, Cherokee and Texas Coinphone
have obtained all consents, approvals, orders, certificates,
licenses, permits, franchises and other authorizations of and from,
and have made all declarations and filings with, all governmental
and regulatory authorities (including, without limitation, the FCC
and the State Regulatory Agencies), all self-regulatory
organizations, and all courts and other tribunals necessary to own,
lease, license, use and operate their respective properties and
assets and to conduct their respective businesses in the manner
described in the Registration Statement and Prospectus; the
approvals, certificates, licenses and permits listed on a schedule
attached to such opinion constitute all such approvals,
certificates, licenses and permits required by the FCC and the
appropriate State Regulatory Agencies; the execution and delivery by
the Company and each of the Guarantors of, and the performance by
the Company and each of the Guarantors of their respective
obligations under this Agreement, the Indenture, the Securities
(including the Guarantees), the New Credit
<PAGE> 26
Agreement and the Acquisition Agreements (to the extent a party
thereto) and the consummation by the Company and each of the
Guarantors of the transactions herein and therein contemplated, and
the issuance and sale by the Company of the Common Stock in the
Concurrent Public Offering, will not violate any such approval,
certification, license or permit;
(vii) None of the Company or the Guarantors is subject to any
state law or regulation which limits its ability to incur
indebtedness or to execute, deliver or perform its obligations under
this Agreement, the Indenture, the Securities (including the
Guarantee) or the New Credit Agreement;
(viii) no authorization, approval, consent, order, registration,
qualification or license of, or filing with, any government,
governmental instrumentality, agency, body or court, domestic or
foreign, or third party (other than as have been obtained under the
Securities Act or the Trust Indenture Act or as may be required
under the securities or Blue Sky laws of the various states of the
United States of America) is required for the valid authorization,
issuance, sale and delivery of the Securities (including the
Guarantees), the Common Stock in the Concurrent Public Offering or
the performance by the Company and each of the Guarantors of all of
their obligations under this Agreement, the Indenture, the
Securities (including the Guarantees), the New Credit Agreement and
the Acquisition Agreements, or the consummation by the Company and
each of the Guarantors of the transactions contemplated by this
Agreement;
(ix) the Registration Statement has been declared effective
under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto has been issued; the Indenture has been duly
qualified under the Trust Indenture Act; any required filing of the
Prospectus and any supplements thereto pursuant to Rule 424(b) has
been made in a manner and within the time period required by Rule
424(b);
(x) the Registration Statement and the Prospectus and any
amendments and supplements thereto (except for the financial
statements and other financial and statistical data included therein
or omitted therefrom as to which such counsel need not
<PAGE> 27
express an opinion) comply as to form in all material respects with
the requirements of the Securities Act and the Trust Indenture Act;
the Registrants satisfy all of the requirements to file a
Registration Statement on Form SB-2;
(xi) the Trustee, on behalf of the holders of the Notes, on the
Closing Date and upon receipt by the Trustee of a check or checks
representing the the Trust Funds, will have a valid first priority
security interest in the Trust Funds; and
(xii) the Company is not, and will not be as a result of the
consummation of any of the transactions contemplated by this
Agreement, an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company
Act of 1940.
At the time the foregoing opinion is delivered, Skadden, Arps,
Slate, Meagher & Flom LLP shall additionally state that it has
participated in conferences with officers and other representatives of the
Company and the Guarantors, representatives of the independent auditors
for each of the Company, the Acquired Companies, Cherokee and Texas
Coinphone and representatives of the Underwriters, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed, and, although it has not independently verified
and is not passing upon and assumes no responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and
Registration Statement (except to the extent specified in Section
6(g)(iii)), no facts have come to its attention which lead it to believe
that the Registration Statement as of its effective date contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus as of its date and as of the
Closing Date, contained or contains an untrue statement of a material fact
or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading (it being
understood that such firm need not express an opinion with respect to the
financial statements and the other financial and statistical data included
in or omitted from the Registration Statement and the Prospectus).
<PAGE> 28
(h) on the effective date of the Registration Statement and the
effective date of the most recently filed post-effective amendment, if
any, to the Registration Statement and also on the Closing Date, each of
the independent accountants specified in Section 4(d) shall have furnished
to the Underwriters letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to the Underwriters,
containing statements and information of the type customarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus;
(i) the Underwriters shall have received on and as of the Closing
Date an opinion dated the Closing Date of Cahill Gordon & Reindel, counsel
to the Underwriters, addressed to the Underwriters and in form and
substance satisfactory to the Underwriters with respect to the validity of
the Securities, the Indenture, the Registration Statement, the Prospectus
and other related matters as the Underwriters may reasonably request, and
such counsel shall have received from the Company such papers and
information as they may reasonably request to enable them to pass upon
such matters;
(j) on or prior to the Closing Date the Company shall have furnished
to the Underwriters such further certificates and documents as the
Underwriters or their counsel, Cahill Gordon & Reindel, shall reasonably
request;
(k) on or prior to the Closing Date, the Company shall have
consummated the Concurrent Public Offering and shall have received gross
proceeds therefrom of not less than $25 million;
(l) the Trust Funds shall have been deposited with the Trustee in
accordance with the terms of the Indenture on the Closing Date.
7. The Registrants, jointly and severally, agree to indemnify and
hold harmless each Underwriter, its officers and directors, and each person, if
any, who controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, damages and liabilities (including, without limitation, the
legal fees and other expenses incurred in connection with any suit, action or
proceeding or any claim asserted) arising out of or based upon
<PAGE> 29
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information relating to any Underwriter furnished to
any Registrant in writing by such Underwriter expressly for use therein;
provided, that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting such losses, claims, damages or liabilities purchased Notes, if
a copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished such underwriter any such amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Notes to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities.
The Registrants, jointly and severally, also agree to indemnify and
hold harmless the QIU, its officers and directors, and each person, if any, who
controls the QIU within the meaning of either Section 15 of the Securities Act
or Section 20 of the Exchange Act, from and against all losses, claims, damages
and liabilities (including, without limitation, the legal fees and other
expenses incurred in connection with any suit, action or proceedings or any
claim asserted) incurred as a result of the QIU performing the duties of its
engagement pursuant to Section 2.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless each of the Registrants, each of their directors, each of their
officers who signed the Registration Statement and each person who controls any
of the Registrants within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Registrants to each Underwriter, but only with reference to information
relating to such Underwriter furnished to any Registrant in writing by such
Underwriter expressly for use in the Registration Statement, the Prospectus, any
amendment or supplement thereto, or any preliminary prospectus. For purposes of
this Section 7 and Section 4(a) and 4(b) hereof, the only written information
<PAGE> 30
furnished by the Underwriters to any Registrant expressly for use in the
Registration Statement and the Prospectus is the information in the last
paragraph on the cover page of the Prospectus, and the paragraph preceding and
immediately following the table in the section titled "Underwriting" in the
Prospectus.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to the preceding
paragraphs, such person (the "Indemnified Person") shall promptly notify the
person against whom such indemnity may be sought (the "Indemnifying Person") in
writing, and the Indemnifying Person, upon request of the Indemnified Person,
shall retain counsel satisfactory to the Indemnified Person to represent the
Indemnified Person and any others the Indemnifying Person may designate in such
proceeding and shall pay the fees and expenses of such counsel related to such
proceeding. In any such proceeding, any Indemnified Person shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Person unless (i) the Indemnifying Person and
the Indemnified Person shall have mutually agreed to the contrary, (ii) the
Indemnifying Person after receipt of written notices from the Indemnified Party
requesting indemnification and the retention of counsel has failed within a
reasonable time to retain counsel satisfactory to the Indemnified Person or
(iii) the named parties in any such proceeding (including any impleaded parties)
include both the Indemnifying Person and the Indemnified Person and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that the
Indemnifying Person shall not, in connection with any proceeding or related
proceeding in the same jurisdiction, be liable for the fees and expenses of more
than one separate firm (in addition to any local counsel) for all Indemnified
Persons, and that all such fees and expenses shall be reimbursed as they are
incurred; provided, however, that if indemnity may be sought pursuant to the
second paragraph of this Section 7 in respect of such proceeding, then, in
addition to such separate firm for the Underwriters and such control persons of
the Underwriters, the indemnifying party shall be liable for the fees and
expenses of not more than one separate firm (in addition to any local counsel)
for the QIU and all persons, if any, who control the QIU within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act. Any
such separate firm for the Underwriters and such control persons of Underwriters
shall be designated in writing by J.P. Morgan Securities Inc., any such separate
firm for the
<PAGE> 31
QIU and such control persons of the QIU shall be designated in writing by [CIBC]
and any such separate firm for any of the Registrants, each director of the
Registrants, each officer of the Registrants who signed the Registration
Statement and such control persons of the Registrants shall be designated in
writing by the Company. The Indemnifying Person shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Indemnifying Person agrees to indemnify any Indemnified Person from and against
any loss or liability by reason of such settlement or judgment. No Indemnifying
Person shall, without the prior written consent of the Indemnified Person,
effect any settlement of any pending or threatened proceeding in respect of
which any Indemnified Person is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Person, unless such settlement
includes an unconditional written release, in form and substance satisfactory to
the Indemnified Person, of such Indemnified Person from all liability on claims
that are the subject matter of such proceeding.
If the indemnification provided for in this Section 7 is for any
reason unavailable to, or insufficient to hold harmless, an Indemnified Person
in respect of any losses, claims, damages or liabilities referred to therein,
then each Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such Indemnified Person as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Registrants on the one hand and the Underwriters and
the QIU on the other hand from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Registrants
on the one hand and the Underwriters and the QIU on the other in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Registrants on the one hand and the
Underwriters and the QIU on the other shall be deemed to be in the same
respective proportions as the net proceeds from the offering (before deducting
expenses) received by the Company and the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover of the Prospectus (or, in the case of the QIU, the fee received by
the QIU for performing the duties of its engagement
<PAGE> 32
pursuant to Section 2), bear to the aggregate public offering price of the
Securities. The relative fault of the Registrants on the one hand and the
Underwriters and the QIU on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Registrants, by the Underwriters or by the QIU and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Registrants and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters and the QIU were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Person as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Person in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, in no event shall an
Underwriter be required to contribute any amount in excess of the amount by
which the total price at which the Securities underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay or has paid by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective principal amounts of Securities set forth opposite their names
in Schedule I hereto, and not joint.
The indemnity and contribution agreements contained in this Section
7 are in addition to any liability which the Indemnifying Persons may otherwise
have to the Indemnified Persons referred to above.
The indemnity and contribution agreements contained in this Section
7 and the representations and warranties of the Registrants as set forth in this
Agreement shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by
<PAGE> 33
or on behalf of any Underwriter or the QIU or any person controlling any
Underwriter or the QIU or by or on behalf of any Registrant, officer or director
of any Registrant or any other person controlling any Registrant and (iii)
acceptance of and payment for any of the Securities.
8. Notwithstanding anything herein contained, this Agreement may be
terminated in the absolute discretion of the Underwriters, by notice given to
the Company, if after the execution and delivery of this Agreement and prior to
the Closing Date (i) trading generally shall have been suspended or materially
limited on or by, as the case may be, any of the New York Stock Exchange, the
American Stock Exchange, the National Association of Securities Dealers, Inc. or
the Chicago Board Options Exchange, (ii) trading of any securities of or
guaranteed by any of the Registrants shall have been suspended on any exchange
or in any over-the-counter market, (iii) a general moratorium on commercial
banking activities in New York shall have been declared by either Federal or New
York State authorities, or (iv) there shall have occurred any outbreak or
escalation of hostilities or any change in financial markets or any calamity or
crisis that, in the judgment of the Underwriters, is material and adverse and
which, in the judgment of the Underwriters, makes it impracticable to market the
Securities on the terms and in the manner contemplated in the Prospectus.
9. If this Agreement shall be terminated by the Underwriters because
of any failure or refusal on the part of any of the Registrants to comply with
the terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Registrant shall be unable to perform its obligations under this
Agreement or any condition to the Underwriters' obligations cannot be fulfilled,
the Registrants agree jointly and severally to reimburse the Underwriters and
the QIU for all out-of-pocket expenses (including the reasonable fees and
expenses of their counsel) reasonably incurred by the Underwriters and the QIU
in connection with this Agreement or the offering contemplated hereunder.
10. Any action by the Underwriters hereunder may be taken by the
Underwriters jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by J.P. Morgan Securities Inc. alone
shall be binding upon the Underwriters. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or telecopied. Notices to the Underwriters shall be given to the
Underwriters, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (facsimile number (212) 648-5705); Attention: Syndicate
<PAGE> 34
Department. Notices to any Registrant shall be given to the Company at 1127
Euclid Avenue, Suite 650, Cleveland, Ohio 44115-1601 (facsimile number (216)
241-2574; Attention: General Counsel, with a copy to Skadden, Arps, Slate,
Meagher & Flom LLP, 919 Third Avenue, New York, New York 10022, Attention:
Stephen M. Banker, Esq.
11. This Agreement shall inure to the benefit of and be binding upon
the Underwriters and the Registrants and any controlling person referred to
herein and their respective successors, heirs and legal representatives. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Underwriters and the
Registrants and their respective successors, heirs and legal representatives and
the controlling persons and officers and directors referred to in Section 7 and
their heirs and legal representatives, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision herein contained.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor merely by reason of such purchase.
12. This Agreement may be signed in counterparts, each of which
shall be an original and all of which together shall constitute one and the same
instrument.
13. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS
OF LAWS PROVISIONS THEREOF.
<PAGE> 35
If the foregoing is in accordance with your understanding, please
sign and return four counterparts hereof.
Very truly yours,
PHONETEL TECHNOLOGIES, INC.
By:
Name:
Title:
NORTHERN FLORIDA TELEPHONE
CORPORATION
PARAMOUNT COMMUNICATIONS SYSTEMS,
INC.
PAY PHONES OF AMERICA, INC.
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
For each of the above:
By:
Name:
Title:
<PAGE> 36
Accepted: , 1996
J.P. MORGAN SECURITIES INC.
CIBC WOOD GUNDY SECURITIES, CORP.
ING BARINGS (U.S.) SECURITIES, INC.
SOUTHCOAST CAPITAL CORPORATION
By: J.P. MORGAN SECURITIES INC.
By:____________________________
Name:
Title:
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
of Securities
Underwriter to be Purchased
- ----------- ---------------
<S> <C>
J.P. Morgan Securities Inc. ................ $
CIBC Wood Gundy Securities, Corp............ $
ING Barings (U.S.) Securities, Inc. ........ $
SouthCoast Capital Corporation ............. $
Total ............. $ [110,000,000]
</TABLE>
<PAGE> 38
SCHEDULE II
Subsidiaries of the Company
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation
- ---- -------------
<S> <C>
Northern Florida Telephone
Corporation ..................................... Florida
Paramount Communications Systems, Inc. ............ Florida
Payphones of America, Inc. ........................ Ohio
Public Telephone Corporation ...................... Indiana
World Communications, Inc. ........................ Missouri
</TABLE>
<PAGE> 1
EXHIBIT 4.3
================================================================================
PHONETEL TECHNOLOGIES, INC.,
As Issuer,
THE SUBSIDIARY GUARANTORS
named on Schedule I hereto
AND
As Trustee
INDENTURE
Dated as of , 1996
------------------
$110,000,000
% SENIOR NOTES DUE 2006
------------------
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
- ----------------------------------------------------------------------
310(a)(1).......................................... 7.10
(a)(2).......................................... 7.10
(a)(3).......................................... N.A.**
(a)(4).......................................... N.A.
(a)(5).......................................... 7.10
(b)............................................. 7.10
(c)............................................. N.A.
311(a)............................................. 7.11
(b)............................................. 7.11
(c)............................................. N.A.
312(a)............................................. 2.05
(b)............................................. 11.03
(c)............................................. 11.03
313(a)............................................. 7.06
(b)(1).......................................... 7.06
(b)(2).......................................... 7.06
(c)............................................. 7.06; 11.02
(d)............................................. 7.06
314(a)............................................. 4.02; 4.03;
............................................. 11.02
(b)............................................. 4.18
(c)(1).......................................... 11.04
(c)(2).......................................... 11.04
(c)(3).......................................... N.A.
(d)............................................. 4.18
(e)............................................. 11.05
(f)............................................. N.A.
315(a)............................................. 7.01
(b)............................................. 7.05
(c)............................................. 7.01
(d)............................................. 7.01
(e)............................................. 6.11
316(a)(last sentence).............................. 2.09
(a)(1)(A)....................................... 6.05
(a)(1)(B)....................................... 6.04
(a)(2).......................................... N.A.
(b)............................................. 6.04; 6.07
317(a)(1).......................................... 6.08
(a)(2).......................................... 6.09
(b)............................................. 2.04
318(a)............................................. 11.01
- ----------
* This Cross-Reference Table is not part of the Indenture.
** Not applicable.
<PAGE> 3
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. Definitions.................................... 1
SECTION 1.02. Other Definitions.............................. 17
SECTION 1.03. Incorporation by Reference of TIA ............. 18
SECTION 1.04. Rules of Construction.......................... 18
ARTICLE II
THE NOTES
SECTION 2.01. Form and Dating................................ 18
SECTION 2.02. Execution and Authentication................... 19
SECTION 2.03. Registrar; Paying Agent; Depositary............ 20
SECTION 2.04. Paying Agent to Hold Money in Trust............ 20
SECTION 2.05. Holder Lists................................... 21
SECTION 2.06. Transfer and Exchange.......................... 21
SECTION 2.07. Replacement Notes.............................. 22
SECTION 2.08. Outstanding Notes.............................. 22
SECTION 2.09. Treasury Notes................................. 23
SECTION 2.10. Temporary Notes................................ 23
SECTION 2.11. Cancellation................................... 23
SECTION 2.12. Defaulted Interest............................. 24
SECTION 2.13. Record Date.................................... 24
SECTION 2.14. CUSIP Number................................... 24
SECTION 2.15. Book-Entry Provisions for Global Notes......... 25
ARTICLE III
REDEMPTION
SECTION 3.01. Redemption Provisions.......................... 26
SECTION 3.02. Notice to Trustee.............................. 27
SECTION 3.03. Selection of Notes to Be Redeemed.............. 27
SECTION 3.04. Notice of Redemption........................... 28
SECTION 3.05. Effect of Notice of Redemption................. 29
SECTION 3.06. Deposit of Redemption Price.................... 29
SECTION 3.07. Notes Redeemed in Part......................... 29
-i-
<PAGE> 4
Page
ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Principal, Premium and Interest......... 30
SECTION 4.02. Provision of Financial Statements.................. 30
SECTION 4.03. Compliance Certificate............................. 31
SECTION 4.04. Stay, Extension and Usury Laws..................... 32
SECTION 4.05. Limitation on Restricted Payments.................. 32
SECTION 4.06. Corporate Existence................................ 34
SECTION 4.07. Limitation on Incurrence of Indebtedness........... 34
SECTION 4.08. Taxes.............................................. 36
SECTION 4.09. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries............. 37
SECTION 4.10. Maintenance of Office or Agency.................... 38
SECTION 4.11. Change of Control.................................. 38
SECTION 4.12. Special Offer upon Failure to Consummate Cherokee
Acquisition..................................... 40
SECTION 4.13. Limitation on Asset Sales.......................... 42
SECTION 4.14. Limitation on Issuance and Sale of Preferred
Stock of Subsidiaries........................... 44
SECTION 4.15. Future Subsidiary Guarantors....................... 45
SECTION 4.16. Maintenance of Properties.......................... 45
SECTION 4.17. Maintenance of Insurance........................... 45
SECTION 4.18. Deposit of Trust Funds with Trustee
Pending Consummation of Cherokee Acquisition.... 45
SECTION 4.19. Limitation on Transactions with Interested
Persons......................................... 47
SECTION 4.20. Limitation on Lines of Business.................... 48
ARTICLE V
SUCCESSORS
SECTION 5.01. Merger, Consolidation and Sale of Assets........... 48
SECTION 5.02. Surviving Person Substituted....................... 49
-ii-
<PAGE> 5
Page
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default...................................... 49
SECTION 6.02. Acceleration........................................... 51
SECTION 6.03. Other Remedies......................................... 52
SECTION 6.04. Waiver of Past Defaults................................ 52
SECTION 6.05. Control by Majority of Holders......................... 52
SECTION 6.06. Limitation of Suits by Holders......................... 53
SECTION 6.07. Rights of Holders to Receive Payment................... 53
SECTION 6.08. Collection Suit by Trustee............................. 53
SECTION 6.09. Trustee May File Proofs of Claim....................... 53
SECTION 6.10. Priorities............................................. 54
SECTION 6.11. Undertaking for Costs.................................. 55
ARTICLE VII
TRUSTEE
SECTION 7.01. Duties of Trustee...................................... 56
SECTION 7.02. Rights of Trustee...................................... 56
SECTION 7.03. Individual Rights of Trustee........................... 57
SECTION 7.04. Trustee's Disclaimer................................... 57
SECTION 7.05. Notice to Holders of Defaults and Events of Default.... 57
SECTION 7.06. Reports by Trustee to Holders.......................... 57
SECTION 7.07. Compensation and Indemnity............................. 58
SECTION 7.08. Replacement of Trustee................................. 59
SECTION 7.09. Successor Trustee by Merger, Etc....................... 60
SECTION 7.10. Eligibility; Disqualification.......................... 60
SECTION 7.11. Preferential Collection of Claims Against Company...... 60
ARTICLE VIII
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Notes; Defeasance............ 61
SECTION 8.02. Conditions to Defeasance............................... 62
SECTION 8.03. Application of Trust Money............................. 63
SECTION 8.04. Repayment to Company................................... 63
SECTION 8.05. Indemnity for U.S. Government Obligations.............. 63
SECTION 8.06. Reinstatement.......................................... 64
-iii-
<PAGE> 6
Page
ARTICLE IX
AMENDMENTS
SECTION 9.01. Amendments and Supplements Permitted
Without Consent of Holders......................... 64
SECTION 9.02. Amendments and Supplements Requiring
Consent of Holders ................................ 65
SECTION 9.03. Compliance with TIA................................... 66
SECTION 9.04. Revocation and Effect of Consents..................... 66
SECTION 9.05. Notation on or Exchange of Notes...................... 67
SECTION 9.06. Trustee Protected..................................... 67
ARTICLE X
SUBSIDIARY GUARANTEES
SECTION 10.01. Subsidiary Guarantees................................. 68
SECTION 10.02. Trustee to Include Paying Agents...................... 70
SECTION 10.03. Limits on Subsidiary Guarantees....................... 70
SECTION 10.04. Execution of Subsidiary Guarantee..................... 70
SECTION 10.05. Stay, Extension and Usury Laws........................ 71
SECTION 10.06. Payment............................................... 71
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act Controls.......................... 71
SECTION 11.02. Notices............................................... 72
SECTION 11.03. Communication by Holders with Other Holders........... 73
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.... 74
SECTION 11.05. Statements Required in Certificate or Opinion......... 74
SECTION 11.06. Rules by Trustee and Agents........................... 74
SECTION 11.07. Legal Holidays........................................ 74
SECTION 11.08. No Recourse Against Others............................ 75
SECTION 11.09. Counterparts.......................................... 75
SECTION 11.10. Initial Appointments, Compliance Certificates......... 75
SECTION 11.11. Governing Law......................................... 75
SECTION 11.12. No Adverse Interpretation of Other Agreements......... 75
SECTION 11.13. Successors............................................ 76
SECTION 11.14. Severability.......................................... 76
SECTION 11.15. Third Party Beneficiaries............................. 76
-iv-
<PAGE> 7
Page
SECTION 11.16. Table of Contents, Headings, Etc.......................... 76
SCHEDULE I .............SUBSIDIARY GUARANTORS EXISTING ON THE ISSUE DATE
EXHIBIT A .................................................FORM OF NOTE
EXHIBIT A-1 ...............FORM OF NOTATION ON NOTE RELATING TO GUARANTEE
EXHIBIT B ................................FORM OF BOOK-ENTRY LEGEND AND
SCHEDULE OF EXCHANGES OF GLOBAL NOTE
-v-
<PAGE> 8
THIS INDENTURE, dated as of , 1996, is by and among (i)
PhoneTel Technologies, Inc., an Ohio corporation (the "Company"), as issuer of
the % Senior Notes due 2006, (ii) each Subsidiary of the Company existing
on the Issue Date as set forth on Schedule I hereto, each of the Company's
Subsidiaries which becomes a guarantor of the Notes in compliance with Section
4.15 and each of the Company's Subsidiaries executing a supplemental indenture
in which such Subsidiary agrees to be bound by the terms of this Indenture, as
guarantors of the Company's obligations under this Indenture and the Notes (each
a "Subsidiary Guarantor"), and (iii) , as trustee (the
"Trustee").
The Company, each Subsidiary Guarantor and the Trustee agree
as follows for the benefit of each other and for the equal and ratable benefit
of the holders of the Notes:
ARTICLE I
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Debt" means, with respect to any specified Person,
Indebtedness of any other Person (the "Acquired Person") existing at the time
the Acquired Person merges with or into, or becomes a Subsidiary of, such
specified Person, including Indebtedness incurred in connection with, or in
contemplation of, the Acquired Person merging with or into, or becoming a
Subsidiary of, such specified Person.
"Affiliate" means, with respect to any specified Person, any
other Person directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person. For purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with") of any Person
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Agent" means any Registrar, Paying Agent, or co-registrar.
"Asset Acquisition" means (a) an Investment by the Company or
any Subsidiary in any other Person pursuant to which such Person shall become a
Subsidiary or shall be merged with or into the Company or any Subsidiary, (b)
the acquisition by the Company or any Subsidiary of the assets of any Person
which constitute all or substantially all of the assets of such Person or any
division or line (whether based on product or geography) of business of such
Person or (c) the acquisition by the Company or any Subsidiary of any public pay
telephones from any Person other than the manufacturer (or an Affiliate thereof
or special
<PAGE> 9
-2-
purpose finance entity related thereto) of such telephones in a transaction
involving consideration having a Fair Market Value equal to or greater than
$250,000.
"Asset Sale" means (i) any sale, lease, conveyance or other
disposition by the Company or any Subsidiary of the Company of any assets
(including by way of a sale-and-leaseback) other than in the ordinary course of
business (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company shall not be an "Asset Sale"
but instead shall be governed by the provisions of Section 5.01), or (ii) the
issuance or sale of Capital Stock of any Subsidiary of the Company, in each
case, whether in a single transaction or a series of related transactions, to
any Person (other than to the Company or a Subsidiary Guarantor), provided that
the term "Asset Sale" shall not include (i) any simultaneous exchange of public
pay telephones and related location agreements of the Company or any
Subsidiaries for public pay telephones and related location agreements of
another person with equivalent Fair Market Value; provided that the number of
pay telephones so exchanged in any calendar year shall not exceed 10% of (A) the
sum of the number of pay telephones owned by the Company and its Subsidiaries on
January 1 of such year and the number of pay telephones acquired by the Company
and its Subsidiaries since January 1 of such year less (B) the number of pay
telephones sold since January 1 of such year, and (ii) any disposition or
dispositions during any twelve-month period of assets or property having a fair
market value of less than $250,000 in the aggregate.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code
of 1978, as amended, or any similar United States federal or state law relating
to bankruptcy, insolvency, receivership, winding up, liquidation, reorganization
or relief of debtors, or any amendment to, succession to or change in any such
law.
"Board of Directors" means the Company's board of directors or
any authorized committee of such board of directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligations" of any Person means the
obligations to pay rent or other amounts under a lease of (or other Indebtedness
arrangements conveying the right to use) real or personal property of such
Person which are required to be classified and accounted for as a capital lease
or liability on the face of a balance sheet of such Person in accordance with
GAAP. The amount of such obligations shall be the capitalized amount thereof in
accordance with GAAP and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
<PAGE> 10
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"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate stock or other
equity participations, including partnership interests, whether general or
limited, of such Person, including any Preferred Stock.
"Cash Equivalents" means (i) marketable direct obligations
issued or guaranteed by the United States of America, or any governmental entity
or agency or political subdivision thereof (provided, that the full faith and
credit of the United States of America is pledged in support thereof) maturing
within one year of the date of purchase; (ii) commercial paper issued by
corporations, each of which shall have a consolidated net worth of at least $500
million, maturing within 180 days from the date of the original issue thereof,
and rated "P-1" or better by Moody's Investors Service or "A-1" or better by
Standard & Poor's Corporation or an equivalent rating or better by any other
nationally recognized securities rating agency; (iii) certificates of deposit
issued or acceptances accepted by or guaranteed by any bank or trust company
organized under the laws of the United States of America or any state thereof or
the District of Columbia, in each case having capital, surplus and undivided
profits totalling more than $500 million, maturing within one year of the date
of purchase; and (iv) money market accounts with a bank or trust company of a
type described in clause (iii).
"Change of Control" means the occurrence of any of the
following events:
(a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than the Permitted Holders,
becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person or group shall be deemed to have beneficial
ownership of all shares of Capital Stock that such person or group has the right
to acquire regardless of when such right is first exercisable), directly or
indirectly, of more than 35% of the total voting power represented by the
outstanding Voting Stock of the Company;
(b) the Company merges with or into another Person or sells,
assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets to any Person, or any Person merges with or into
the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where (x) the
outstanding Voting Stock of the Company is converted into or exchanged for
Voting Stock (other than Disqualified Stock) of the surviving or transferee
corporation and (y) immediately after such transaction no "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
disregarding the Permitted Holders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person or group
shall be deemed to have beneficial ownership of all shares of Capital Stock that
such person or group has the right to acquire regardless of when such right is
first exercisable), directly or indirectly,
<PAGE> 11
-4-
of more than 35% of the total voting power represented by the outstanding Voting
Stock of the surviving or transferee corporation;
(c) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by the Board of Directors of the
Company or whose nomination for election by the stockholders of the Company was
approved by (x) a vote of at least a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved (as described in
this clause (x) or in the following clause (y)) or (y) Permitted Holders that
are "beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act) of a majority of the total voting power represented by the outstanding
Voting Stock of the Company) cease for any reason to constitute a majority of
the Board then in office; or
(d) the Company is liquidated or dissolved or adopts a plan of
liquidation.
"Cherokee Acquisition" means the acquisition by the Company of
all of the capital stock of Cherokee Communications Inc. ("Cherokee") pursuant
to the Share Purchase Agreement dated as of __________________, 1996, between
the Company and Cherokee.
"Commission" means the Securities and Exchange Commission.
"Company" means PhoneTel Technologies, Inc., an Ohio
corporation, unless and until a successor replaces it in accordance with Article
V and thereafter means such successor.
"Concurrent Offering" means the public offering by the Company
of up to [ ] shares of its common stock, $.01 par value, as contemplated by the
related prospectus dated , 1996, including the sale of any such shares of common
stock in connection with the exercise of any over-allotment options granted to
the underwriters of such public offering.
"Consolidated EBITDA" is defined to mean, for any period, the
sum of the amounts for such period of (i) Consolidated Interest Expense, (ii)
Consolidated Fixed Charges, (iii) income taxes, to the extent such amount was
deducted in calculating Consolidated Net Income (other than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets), (iv) depreciation expense, to the extent such amount
was deducted in calculating Consolidated Net Income, (v) amortization expense,
to the extent such amount was deducted in calculating Consolidated Net Income,
and (vi) all other non-cash items reducing Consolidated Net Income, less all
non-cash items increasing Consolidated Net Income, all as determined on a
consolidated basis for the Company and its Subsidiaries in conformity with GAAP;
provided that, if any Subsidiary is not a Wholly-Owned Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in
<PAGE> 12
-5-
accordance with GAAP) by an amount equal to (A) the amount of the Consolidated
Net Income attributable to such Subsidiary multiplied by (B) the quotient of (1)
the number of shares of outstanding common stock of such Subsidiary not owned on
the last day of such period by the Company or any of its Subsidiaries divided by
(2) the total number of shares of outstanding common stock of such Subsidiary on
the last day of such period.
"Consolidated Fixed Charge Coverage Ratio" means, on any
determination date (the "Transaction Date"), the ratio of (i) Consolidated
EBITDA for the four fiscal quarters for which financial information in respect
thereof is available immediately prior to such Transaction Date (the "Reference
Period") to (ii) the aggregate Consolidated Fixed Charges during such Reference
Period. In making the foregoing calculation, (A) pro forma effect shall be given
to (1) any Indebtedness Incurred subsequent to the end of the Reference Period
and prior to the Transaction Date, (2) any Indebtedness Incurred during such
Reference Period to the extent such Indebtedness is outstanding at the
Transaction Date, and (3) any Indebtedness to be Incurred on the Transaction
Date, in each case as if such Indebtedness had been Incurred on the first day of
such Reference Period and after giving pro forma effect to the application of
the proceeds thereof as if such application had occurred on such first day, (B)
Consolidated Interest Expense attributable to interest on any Indebtedness
(whether existing or being Incurred) computed on a pro forma basis and bearing a
floating interest rate shall be computed as if the rate in effect on the
Transaction Date (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months) had been the applicable rate for the entire period, (C) there
shall be excluded from Consolidated Fixed Charges any Consolidated Fixed Charges
related to any amount of Indebtedness, Disqualified Stock, or obligations under
leases that were outstanding during such Reference Period or thereafter but that
are not outstanding or are to be repaid on the Transaction Date, except for
Consolidated Interest Expense accrued (as adjusted pursuant to clause (B) above)
during such Reference Period under a revolving credit or similar arrangement to
the extent of the commitment thereunder (or under any successor revolving credit
or similar arrangement) in effect on the Transaction Date, (D) pro forma effect
shall be given to Asset Sales and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Sales) that occur during such
Reference Period or thereafter and on or prior to the Transaction Date as if
they had occurred and such proceeds had been applied on the first day of such
Reference Period, (E) with respect to any such Reference Period commencing prior
to the Issue Date, the issuance of the Notes shall be deemed to have taken place
on the first day of such Reference Period, and (F) pro forma effect shall be
given to Asset Sales and Asset Acquisitions (including giving pro forma effect
to the application of proceeds of any Asset Sale) that have been made by any
Person that has become a Subsidiary or has been merged with or into the Company
or any Subsidiary during such Reference Period or subsequent to such period and
prior to the Transaction Date and that would have constituted Asset Sales or
Asset Acquisitions had such transactions occurred when such person was a
Subsidiary as if such asset dispositions or asset acquisitions were Asset Sales
or Asset Acquisitions that occurred on the
<PAGE> 13
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first day of such Reference Period; provided that to the extent that clause (D)
or (F) of this sentence requires that pro forma effect be given to an asset
acquisition or asset disposition, such pro forma calculation shall be based upon
the four full fiscal quarters immediately preceding the Transaction Date of the
person, or division or line of business of the person, or property, that is
acquired or disposed of, for which financial information is available.
"Consolidated Fixed Charges" is defined to mean, for any
period, the sum (without duplication) of (i) Consolidated Interest Expense for
such period, (ii) all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued, or scheduled to be paid or to be
accrued by the Company and its Subsidiaries during such period, and (iii) cash
dividends declared or paid in respect of any Preferred Stock of the Company and
its Subsidiaries during such period (other than dividends paid or payable to the
Company or a Wholly-Owned Subsidiary), in each case as determined on a
consolidated basis in accordance with GAAP consistently applied. For purposes of
this definition, the amount of any cash dividends declared or paid will be
deemed to be equal to the amount of such dividends multiplied by a fraction, the
numerator of which is one and the denominator of which is one minus the maximum
statutory combined Federal, state, local and foreign income tax rate then
applicable to the Company and its Subsidiaries (expressed as a decimal between
one and zero) on a consolidated basis.
"Consolidated Interest Expense" means, with respect to any
period, the interest expense of the Company and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP consistently
applied, including, without limitation, (a) amortization of debt discount, (b)
the net payments, if any, under interest rate contracts (including amortization
of discounts), (c) the interest portion of any deferred payment obligation and
(d) accrued interest.
"Consolidated Net Income" means, with respect to any period,
the net income (or loss) of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted, to the extent included in calculating such net income (or loss), by
excluding, without duplication, (i) all extraordinary gains and losses (net of
fees and expenses relating to the transaction giving rise thereto), (ii) the
portion of net income (or loss) of the Company and its Subsidiaries allocable to
interests in unconsolidated Persons, except to the extent of the amount of
dividends or distributions actually paid to the Company or its Subsidiaries by
such other Person during such period, (iii) net income (or loss) of any Person
combined with the Company or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) net gain
but not losses in respect of Asset Sales, or (v) the net income of any
Subsidiary to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income to the Company is not at the
time permitted, directly or indirectly, by operation of the terms of its charter
or any
<PAGE> 14
-7-
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person on
any date, the equity of the common and preferred stockholders of such Person and
its Subsidiaries as of such date, determined on a consolidated basis in
accordance with GAAP consistently applied.
"Corporate Trust Office" shall be at the address of the
Trustee specified in Section 11.02 or such other address as the Trustee may give
notice to the Company.
"Credit Facility" means the credit agreement, to be entered
into as of , 1996, among the Company and the lenders named
therein and , as, as the same may be amended,
modified, renewed, refunded, replaced or refinanced from time to time, including
(i) any related notes, letters of credit, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from time to time,
and (ii) any notes, guarantees, collateral documents, instruments and agreements
executed in connection with any such amendment, modification, renewal,
refunding, replacement or refinancing.
"Custodian" means any custodian, receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.
"Debt to Operating Cash Flow Ratio" means, with respect to any
date of determination, the ratio of (i) the aggregate principal amount of all
outstanding Indebtedness of the Company and its Subsidiaries as of such date on
a consolidated basis, to (ii) Operating Cash Flow of the Company and its
Subsidiaries on a consolidated basis for the four most recent full fiscal
quarters ending on or immediately prior to such date, determined on a pro forma
basis after giving pro forma effect to (a) the incurrence of all Indebtedness to
be incurred on such date and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness, as if such Indebtedness
was incurred, and the application of such proceeds occurred, at the beginning of
such four-quarter period; (b) the incurrence, repayment or retirement of any
other Indebtedness by the Company and its Subsidiaries since the first day of
such four-quarter period as if such Indebtedness was incurred, repaid or retired
at the beginning of such four-quarter period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average balance of such Indebtedness at the end
of each month during such four-quarter period); (c) in the case of Acquired
Debt, the related acquisition as if such acquisition had occurred at the
beginning of such four-quarter period; and (d) any acquisition or disposition by
the Company and its Subsidiaries of any company or any business or any assets
out of the ordinary course of business, or any related repayment of
Indebtedness, in each case since the first day of such four-quarter period,
assuming such acquisition or disposition had been consummated on the first
<PAGE> 15
-8-
day of such four-quarter period. In addition, the consolidated net income of a
Person with outstanding Indebtedness or Capital Stock providing for a Payment
Restriction which is permitted to exist by reason of clause (c) of Section 4.11
shall not be taken into account in determining whether any Indebtedness is
permitted to be incurred under this Indenture.]
"Default" means any event that is, or after the giving of
notice or passage of time or both would be, an Event of Default.
"Depositary" means, with respect to Notes issued in the form
of one or more Global Notes, DTC or another Person designated as Depositary by
the Company, which Person must be a clearing agency registered under Section 17A
of the Exchange Act.
"Disposition" means, with respect to any Person, any merger,
consolidation or other business combination involving such Person (whether or
not such Person is the Surviving Person) or the sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of such
Person's assets.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, in whole or in part on or
prior to the stated maturity of the Notes.
"Dollars" and "$" mean lawful money of the United States of
America.
"DTC" means The Depository Trust Company.
"Equity Offering" means (i) an underwritten public offering of
Capital Stock (other than Disqualified Stock) of the Company subsequent to the
Issue Date (excluding Capital Stock which may be issued upon exercise of any
over-allotment option exercisable after the Issue Date and granted in connection
with the Concurrent Offering), pursuant to an effective registration statement
filed under the Securities Act, or (ii) any private placement of Capital Stock
(other than Disqualified Stock) of the Company subsequent to the Issue Date, in
either case the net proceeds of which to the Company (after deducting any
underwriting discounts and commissions) exceed $25 million.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to any asset, the
price (after taking into account any liabilities relating to such asset) which
could be negotiated in an arm's length free market transaction, for cash,
between a willing seller and a willing buyer, neither of which is
<PAGE> 16
-9-
under pressure or compulsion to complete the transaction; provided that, except
with respect of any Asset Sale which involves an asset or assets the value of
which could reasonably be expected to exceed $250,000, the Fair Market Value of
any such asset or assets shall be determined by the Board of Directors of the
Company, acting in good faith, and shall be evidenced by resolutions of the
Board of Directors of the Company delivered to the Trustee; and provided,
further, that the fair market value of a location agreement shall be the present
value of the revenue to be received by the Company under such agreement until
the expiration of the term of such agreement, without giving effect to any
rights to renew or extend such agreement, based on the actual amount of
revenue, net of related costs associated with the telephone or telephones
covered by such agreement, received by the Company under such agreement for
the most recent fiscal quarter.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the Issue Date.
"Global Note" means a Note evidencing all or part of the Notes
issued to the Depositary in accordance with Section 2.15 and bearing the legend
described in Exhibit B.
"guarantee" by any Person means any obligation, contingent or
otherwise, of such Person guaranteeing any Indebtedness of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and including,
without limitation, any obligation of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purpose of) any security for the
payment of such Indebtedness, (ii) to purchase property, securities or services
for the purpose of assuring the holder of such Indebtedness of the payment of
such Indebtedness, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness (and "guaranteed,"
"guaranteeing" and "guarantor" shall have the meanings correlative to the
foregoing); provided, however, that the guarantee by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"Holder" means any person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, without
duplication, and whether or not contingent, (i) all indebtedness of such Person
for borrowed money or for the deferred purchase price of property or services or
which is evidenced by a note, bond, debenture or similar instrument, (ii) all
Capital Lease Obligations of such Person, (iii) all obligations of such Person
in respect of letters of credit or bankers' acceptances issued or created for
the account of such Person, (iv) all Interest Rate Agreement Obligations of such
<PAGE> 17
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Person, (v) all liabilities secured by any Lien on any property owned by such
Person even if such Person has not assumed or otherwise become liable for the
payment thereof to the extent of the lesser of (x) the amount of the Obligations
so secured and (y) the fair market value of the property subject to such Lien,
(vi) all obligations to purchase, redeem, retire, or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (vii) to the extent not
included in (vi), all Disqualified Stock issued by such Person, valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends thereon, and (viii) to the extent not otherwise
included, any guarantee by such Person of any other Person's indebtedness or
other obligations described in clauses (i) through (vii) above. "Indebtedness"
of the Company and its Subsidiaries shall not include current trade payables
incurred in the ordinary course of business and payable in accordance with
customary practices, and non-interest bearing installment obligations and
accrued liabilities incurred in the ordinary course of business which are not
more than 90 days past due. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Stock which does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture, and if such price
is based upon, or measured by the fair market value of, such Disqualified Stock,
such fair market value is to be determined in good faith by the board of
directors of the issuer of such Disqualified Stock.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Independent Director" means a director of the Company other
than a director (i) who (apart from being a director of the Company or any
Subsidiary) is an employee, associate or Affiliate of the Company or a
Subsidiary or has held any such position during the previous five years, (ii)
who is a director, employee, associate or Affiliate of another party to the
transaction in question, or (iii) who has, or who has been appointed to the
Board of Directors by a shareholder who has, a direct or indirect financial
interest in the transaction in question.
"Insolvency or Liquidation Proceeding" means, with respect to
any Person, any liquidation, dissolution or winding up of such Person, or any
bankruptcy, reorganization, insolvency, receivership or similar proceeding with
respect to such Person, whether voluntary or involuntary.
"Interest Rate Agreement Obligations" means, with respect to
any Person, the Obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
and (ii) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
<PAGE> 18
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"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates of such
Person) in the form of loans, guarantees, advances or capital contributions
(excluding commission, travel, relocation expenses and similar loans and
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Capital Stock
or other securities and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. "Investments"
shall exclude extensions of trade credit (including extensions of credit in
respect of equipment leases) by the Company and its Subsidiaries in the ordinary
course of business in accordance with normal trade practices of the Company or
such Subsidiary, as the case may be.
"Issue" means create, issue, assume, guarantee, incur or
otherwise become, directly or indirectly, liable for any Indebtedness or Capital
Stock, as applicable; provided, however, that any Indebtedness or Capital Stock
of a Person existing at the time such Person becomes a Subsidiary (whether by
designation, merger, consolidation, acquisition or otherwise) shall be deemed to
be issued by such Subsidiary at the time it becomes a Subsidiary. For this
definition, the terms "issuing," "issuer," "issuance" and "issued" have meanings
correlative to the foregoing.
"Issue Date" means the date of original issuance of the Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York, or in the city in which the
principal office of the Trustee is located, are not required to be open.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in any asset and any filing of, or agreement to give, any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction).
"Net Proceeds" means, with respect to any Asset Sale by any
Person, the aggregate cash proceeds received by such Person and/or its
Affiliates in respect of such Asset Sale, which amount is equal to the excess,
if any, of (i) the cash received by such Person and/or its Affiliates (including
any cash payments received by way of deferred payment pursuant to, or
monetization of, a note, an equity security or installment receivable or
otherwise, but only as and when received) in connection with such Asset Sale,
over (ii) the sum of (a) the amount of any Indebtedness that is secured by such
asset and which is required to be repaid by such Person in connection with such
Asset Sale, plus (b) all fees, commissions and other expenses incurred by such
Person in connection with such Asset Sale, plus (c) provision for taxes,
<PAGE> 19
-12-
including income taxes, attributable to the Asset Sale or attributable to
required prepayments or repayments of Indebtedness with the proceeds of such
Asset Sale, plus (d) a reasonable reserve for the after-tax cost of any
indemnification payments (fixed or contingent) attributable to seller's
indemnities to purchaser in respect of such Asset Sale undertaken by the Company
or any of its Subsidiaries in connection with such Asset Sale plus (e) if such
Person is a Subsidiary, any dividends or distributions payable to holders of
minority interests in such Subsidiary from the proceeds of such Asset Sale.
"Notes" means the % Senior Notes due 2006, including the
Subsidiary Guarantees, as amended or supplemented from time to time in
accordance with the terms hereof that are issued pursuant to this Indenture.
"Notes Custodian" means the Trustee, as custodian with respect
to the Notes in global form, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman, the
President, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary, any Assistant Secretary or any Vice-President of such Person.
"Officers' Certificate" means a certificate signed by two
Officers of the Company which shall include at least one of the Chairman, the
President or any Vice President.
"Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Company and its Subsidiaries for such period,
plus (i) extraordinary net losses and net losses realized on any sale of assets
during such period, to the extent such losses were deducted in computing
Consolidated Net Income, plus (ii) provision for taxes based on income or
profits, to the extent such provision for taxes was included in computing such
Consolidated Net Income, and any provision for taxes utilized in computing the
net losses under clause (i) hereof, plus (iii) Consolidated Interest Expense of
the Company and its Subsidiaries for such period to the extent deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization and
all other non-cash charges, to the extent such depreciation, amortization and
other non-cash charges were deducted in computing such Consolidated Net Income
(including amortization of goodwill and other intangibles), but excluding any
such charges which represent any accrual of, or a reserve for, cash charges for
a future period, minus (v) any cash payments contractually required to be made
with respect to [telephone] Contracts (to the extent not previously included in
computing such Consolidated Net Income),
<PAGE> 20
-13-
minus (vi) non-cash items increasing Consolidated Net Income (to the extent
included in computing such Consolidated Net Income).
"Opinion of Counsel" means a written opinion in form and
substance satisfactory to, and from legal counsel acceptable to, the Trustee
(such counsel may be an employee of or counsel to the Company or the Trustee).
"Other Senior Debt" means Indebtedness of the Company ranking
pari passu in right of payment with the Notes and Indebtedness of a Subsidiary
Guarantor ranking pari passu in right of payment with the Subsidiary Guarantees,
in each case, the terms of which require that Net Cash Proceeds be used to
permanently reduce (and thereby also reduce commitments relating to) such
Indebtedness.
"Other Senior Debt Pro Rata Share" means a fraction, (i) the
numerator of which is the aggregate principal amount of Other Senior Debt
outstanding on the date Net Cash Proceeds are received and (ii) the denominator
of which is the sum of (x) the aggregate principal amount of Notes outstanding
on such date and (y) the aggregate principal amount of any Other Senior Debt
outstanding on such date.
"Pari Passu Indebtedness" means any Indebtedness of the
Company or a Subsidiary Guarantor which ranks pari passu in right of payment
with the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the
case may be (whether or not such Indebtedness is secured by any Lien).
"Permitted Holders" means (i) [Peter Graf]; (ii) his spouse
and lineal descendants; (iii) in the event of the incompetence or death of any
of the Persons described in clauses (i) and (ii), such Person's estate,
executor, administrator, committee or other personal representative; (iv) any
trusts created for the benefit of the Persons described in clause (i) or (ii);
(v) each of Internationale Nederlanden (U.S.) Capital Corporation and Cerberus
Partners, L.P.; or (vi) any Person controlled by any of the Persons described in
clause (i), (ii), (iv) or (v). For purposes of this definition, "control," as
used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through ownership of voting securities or by
contract or otherwise.
"Permitted Investments" means (i) any Investment in the
Company or any Subsidiary Guarantor; (ii) any Investments in Cash Equivalents;
(iii) any Investment in a Person (an "Acquired Person") if, as a result of such
Investment, (a) the Acquired Person becomes a Subsidiary Guarantor, or (b) the
Acquired Person either (1) is merged, consolidated or amalgamated with or into
the Company or a Subsidiary Guarantor and the Company or such Subsidiary
Guarantor is the Surviving Person, or (2) transfers or conveys substantially all
of its
<PAGE> 21
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assets to, or is liquidated into, the Company or a Subsidiary Guarantor; (iv)
Investments in accounts and notes receivable acquired in the ordinary course of
business; (v) Interest Rate Agreement Obligations permitted pursuant to Section
4.07(b)(vi); (vi) loans to employees the proceeds of which are used to pay taxes
due in respect of stock grants to such employees in an amount not to exceed in
the aggregate $1 million in each of calendar year 1997 and 1998 and $750,000 in
calendar year 1999; and (vii) Investments, not to exceed $2,500,000 at any time
outstanding, in joint ventures in which Cherokee or any of its Subsidiaries is a
party as of the Issue Date and which relate solely to certain public pay
telephones located in Mexico that are to be acquired from Cherokee by the
Company in connection with the Cherokee Acquisition.
"Permitted Liens" means (i) (A) Liens on assets or property of
the Company that secure Indebtedness outstanding under the Credit Facility
pursuant to Section 4.07 and (B) Liens securing up to $25 million of additional
Indebtedness outstanding under the Credit Facility incurred pursuant to the
Consolidated Fixed Charge Coverage Ratio in Section 4.07 and (C) Liens securing
up to $25 million of additional Indebtedness, if the Consolidated Fixed Charge
Coverage Ratio at the time of such incurrence, after giving effect to such
Indebtedness, is 3.0 to 1.0; (ii) Liens securing Indebtedness of a Person
existing at the time that such Person is merged into or consolidated with the
Company or a Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of such Person; (iii) Liens on property
acquired by the Company or a Subsidiary; provided that such Liens were in
existence prior to the contemplation of such acquisition and do not extend to
any other property; (iv) Liens in favor of the Company or any Subsidiary of the
Company; (v) Liens incurred, or pledges and deposits in connection with,
workers' compensation, unemployment insurance and other social security
benefits, and leases, appeal bonds and other obligations of like nature incurred
by the Company or any Subsidiary of the Company in the ordinary course of
business; (vi) Liens imposed by law, including, without limitation, mechanics',
carriers', warehousemen's, materialmen's, suppliers' and vendors' Liens,
incurred by the Company or any Subsidiary of the Company in the ordinary course
of business; (vii) Liens for ad valorem, income or property taxes or assessments
and similar charges which either are not delinquent or are being contested in
good faith by appropriate proceedings for which the Company has set aside on its
books reserves to the extent required by GAAP; (viii) Liens created under this
Indenture; (ix) Liens securing Capital Lease Obligations on property subject to
the applicable lease; (x) Liens securing Interest Rate Agreement Obligations;
and (xi) purchase money Liens incurred in the ordinary course of business,
provided that such Liens relate only to the property or asset acquired and such
Liens are created within 90 days of the acquisition of such property or assets.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Physical Notes" has the meaning set forth in Section 2.15.
"Preferred Stock" as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of
<PAGE> 22
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dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Capital
Stock of any other class of such Person.
"Prospectus" means the final prospectus relating to the public
offering of the Notes dated , 1996.
"Purchase Money Indebtedness" means Indebtedness of the
Company and its Subsidiaries incurred in connection with the purchase of
property or assets for the business of the Company and its Subsidiaries.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Payment" means (i) any dividend or other
distribution declared or paid on any Capital Stock of the Company or any of its
Subsidiaries (other than dividends or distributions payable solely in Capital
Stock (other than Disqualified Stock) of the Company or such Subsidiary or
dividends or distributions payable to the Company or any Subsidiary Guarantor);
(ii) any payment to purchase, redeem or otherwise acquire or retire for value
any Capital Stock of the Company or any Subsidiary of the Company or other
Affiliate of the Company (other than any Capital Stock owned by the Company or
any Subsidiary Guarantor); (iii) any payment to purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Indebtedness prior to the
maturity thereof; or (iv) any Restricted Investment.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Offer Notice Date" means ___________________, 1997.
"Subordinated Indebtedness" means any Indebtedness of the
Company or a Subsidiary Guarantor if the instrument creating or evidencing such
Indebtedness or pursuant to which such Indebtedness is outstanding expressly
provides that such Indebtedness is subordinated in right of payment to the Notes
or the Subsidiary Guarantee of such Subsidiary Guarantor, as the case may be.
"Subsidiary" of any Person means (i) any corporation more than
50% of the outstanding Voting Stock of which is owned or controlled, directly or
indirectly, by such Person or by one or more other Subsidiaries of such Person,
or by such Person and one or more other Subsidiaries thereof, or (ii) any
limited partnership of which such Person or any Subsidiary of such Person is a
general partner, or (iii) any other Person (other than a corporation or limited
partnership) in which such Person, or one or more other Subsidiaries of such
Person, or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has more than 50% of the outstanding partnership or similar
interests or has the power, by contract or otherwise, to direct or cause the
direction of the policies, management and affairs thereof.
<PAGE> 23
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"Subsidiary Guarantees" means the guarantees of the Notes
issued by the Subsidiary Guarantors.
"Subsidiary Guarantor" means (i) each Subsidiary of the
Company existing on the Issue Date, (ii) each of the Company's Subsidiaries
which becomes a guarantor of the Notes in compliance with the provisions
pursuant to Section 4.17 and (iii) each of the Company's Subsidiaries executing
a supplemental indenture in which such Subsidiary agrees to be bound by the
terms of this Indenture.
"Surviving Person" means, with respect to any Person involved
in or that makes any Disposition, the Person formed by or surviving such
Disposition or the Person to which such Disposition is made.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of 1990,
and as in effect on the Issue Date.
"Trustee" means until a successor replaces
it in accordance with the applicable provisions of this Indenture and thereafter
means such successor.
"Trust Officer" means any officer within the Corporate Trust
and Agency Group of the Trustee, including, without limitation, any vice
president, assistant vice president, treasurer, assistant treasurer, assistant
secretary or special assistant secretary or any other officer of the Trustee
customarily performing functions similar to those performed by any of the
above-designated officers, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his or her knowledge of and familiarity with the particular subject.
"U.S. Government Obligations" means direct obligations of the
United States of America for the payment of which the full faith and credit of
the United States of America is pledged, provided that no U.S. Government
Obligation shall be callable at the Issuer's option prior to the stated maturity
date of the Notes.
"Voting Stock" means, with respect to any Person, Capital
Stock of such Person of the class or classes pursuant to which the holders
thereof have the general voting power under ordinary circumstances to elect at
least a majority of the board of directors, managers or trustees of such Person
(irrespective of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening of any
contingency).
"Weighted Average Life to Maturity" means, with respect to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or
<PAGE> 24
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other required scheduled payment of principal, including payment at final
maturity, in respect thereof, with (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of such
payment, by (ii) the then outstanding aggregate principal amount of such
Indebtedness.
"Wholly-Owned Subsidiary" means any Subsidiary of which 100%
of the outstanding Capital Stock is owned by the Company or another Wholly-Owned
Subsidiary. For purposes of this definition, any director's qualifying shares or
investments by foreign nationals mandated by applicable law shall be disregarded
in determining the ownership of a Subsidiary.
SECTION 1.02. Other Definitions.
DEFINED IN
TERM SECTION
"Asset Sale Offer"............................. 4.13
"Asset Sale Offer Purchase Date"............... 4.13
"Asset Sale Offer Trigger Date"................ 4.13
"Change of Control Offer"...................... 4.11
"Change of Control Purchase Date".............. 4.11
"Collateral Account"........................... 4.18
"Covenant Defeasance Option"................... 8.01
"Event of Default"............................. 6.01
"Excess Proceeds".............................. 4.13
"Final Special Offer Purchase Date"............ 4.12
"Incur"........................................ 4.07
"Interested Person"............................ 4.19
"Legal Defeasance Option"...................... 8.01
"Notice of Default"............................ 6.01
"Participants"................................. 2.15
"Paying Agent"................................. 2.03
"Payment Restriction".......................... 4.09
"Permitted Indebtedness"....................... 4.07
"Permitted Payments"........................... 4.05
"Purchase Date"................................ 3.08
"Refinancing Indebtedness"..................... 4.07
"Registrar".................................... 2.03
"Required Filing Dates"........................ 4.02
"Special Offer"................................ 4.12
"Special Offer Price".......................... 4.12
"Special Offer Purchase Date".................. 4.12
<PAGE> 25
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"Trustee Expenses"............................. 6.08
"Trust Funds".................................. 4.18
SECTION 1.03. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the Trust
Indenture Act of 1939, as amended, the provision is incorporated by reference
in, and made a part of, this Indenture. Any terms incorporated by reference in
this Indenture that are defined by the TIA, defined by the TIA's reference to
another statute or defined by Commission rule under the TIA have the meanings so
assigned to them therein.
SECTION 1.04. Rules of Construction.
Unless the context otherwise requires: (1) a term has the
meaning assigned to it in this Indenture; (2) an accounting term not otherwise
defined herein has the meaning assigned to it under GAAP; (3) "or" is not
exclusive; (4) words in the singular include the plural, and in the plural
include the singular; (5) provisions apply to successive events and
transactions; and (6) unless otherwise specified, any reference to a Section or
Article refers to such Section or Article of this Indenture.
ARTICLE II
THE NOTES
SECTION 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A, and the notation thereon
relating to the Subsidiary Guarantees shall be substantially in the form of
Exhibit A-1. The Notes may have notations, legends or endorsements required by
law, stock exchange rule or usage. The Company and the Trustee shall approve the
form of the Notes and any notation, legend or endorsement on them. Each Note
shall be dated the date of its issuance and shall show the date of its
authentication. Each Note shall bear the corporate seal of the Company which
shall be attested by the Secretary or an assistant secretary.
The terms and provisions contained in the Notes and the
Subsidiary Guarantees shall constitute, and are hereby expressly made, a part of
this Indenture and, to the extent applicable, the Company, the Subsidiary
Guarantors and the Trustee, by their execution and
<PAGE> 26
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delivery of this Indenture, expressly agree to such terms and provisions and to
be bound thereby.
SECTION 2.02. Execution and Authentication.
Two Officers of the Company shall sign each Note for the
Company by manual or facsimile signature. If an Officer whose signature is on a
Note no longer holds that office at the time the Note is authenticated, the Note
shall nevertheless be valid. Each Subsidiary Guarantor shall execute the
Subsidiary Guarantee in the manner set forth in Section 10.04.
A Note shall not be valid until authenticated by the manual
signature of the Trustee, and the Trustee's signature shall be conclusive
evidence that the Note has been authenticated under this Indenture. The form of
Trustee's certificate of authentication to be borne by the Notes shall be
substantially as set forth in Exhibit A. The Trustee may appoint an
authenticating agent acceptable to the Company to authenticate Notes. Unless
limited by the terms of such appointment, an authenticating agent may
authenticate Notes whenever the Trustee may do so. Each reference in this
Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or any of its Affiliates.
The Trustee shall authenticate Notes for original issue in the
aggregate principal amount of $110,000,000 upon receipt of (i) a written order
of the Company specifying the amount of Notes to be authenticated and the date
on which the Notes are to be authenticated and (ii) an Officers' Certificate and
an Opinion of Counsel, each complying with Section 314(c) of the TIA. The
aggregate principal amount of Notes outstanding at any time may not exceed
$110,000,000, except as provided in Section 2.07. Upon receipt of a written
order of the Company, the Trustee shall authenticate Notes in substitution of
Notes originally issued to reflect any name change of the Company.
The Notes shall initially be issued in the form of one or more
permanent Global Notes, substantially in the form set forth in Exhibit A. Global
Notes shall be registered in the name of a nominee of the Depositary and
deposited with the Trustee, at its New York office, in its capacity as Notes
Custodian, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. Each Global Note shall evidence such of the outstanding
Notes as shall be specified therein and each shall provide that it shall
evidence the aggregate principal amount of outstanding Notes from time to time
endorsed thereon, and that the aggregate principal amount of outstanding Notes
represented thereby may from time to time be reduced or increased, as
applicable, to reflect exchanges, redemptions, and other similar transactions.
Any endorsement of a Global Note to reflect the amount of any increase or
decrease in the amount
<PAGE> 27
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of outstanding Notes represented thereby shall be made by the Trustee or the
Notes Custodian, at the direction of the Trustee, in accordance with
instructions given by the Holder thereof.
The Notes shall be issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. Registrar; Paying Agent; Depositary.
The Company shall maintain an office or agency (the
"Registrar") where Notes may be presented for registration of transfer or for
exchange and an office or agency (the "Paying Agent") where Notes may be
presented for payment. The Registrar shall keep a register of the Notes and of
their transfer and exchange. The Company may appoint one or more co-registrars
and one or more additional paying agents. The term "Paying Agent" includes any
additional paying agent. The Company may change the Paying Agent, Registrar or
co-registrar without prior notice to any Holder. The Company shall notify the
Trustee and the Trustee shall notify the Holders of the name and address of any
Agent not a party to this Indenture. The Company shall enter into an appropriate
agency agreement with any Agent not a party to this Indenture, and such
agreement shall incorporate the provisions of the TIA and implement the
provisions of this Indenture that relate to such Agent.
The Company initially appoints the Trustee as Registrar,
Paying Agent and agent for service of notices and demands in connection with the
Notes. If the Company fails to appoint or maintain a Registrar and/or Paying
Agent, the Trustee shall act as such, and shall be entitled to appropriate
compensation in accordance with Section 7.07.
The Company initially appoints DTC to act as Depositary with
respect to any Global Notes and initially appoints the Trustee to act as Notes
Custodian with respect to any Global Notes.
SECTION 2.04. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of the Holders or the Trustee all money the Paying Agent holds for the
redemption or purchase of the Notes or for the payment of principal of, or
premium, if any, or interest on, the Notes, and will notify the Trustee of any
default by the Company in providing the Paying Agent with sufficient funds to
redeem or purchase Notes or make any payment on the Notes as and to the extent
required to be redeemed, purchased or paid under the terms of this Indenture.
While any such default continues, the Trustee may require the Paying Agent to
pay all money it holds to the Trustee.
<PAGE> 28
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The Company at any time may require the Paying Agent to pay all money it holds
to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other
than the Company or any of its Affiliates) shall have no further liability for
the money it delivered to the Trustee. If the Company or any of its Subsidiaries
acts as Paying Agent, it shall segregate and hold in a separate trust fund for
the Holders' benefit all money it holds as Paying Agent.
SECTION 2.05. Holder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of Holders and shall otherwise comply with Section 312(a) of the TIA.
If the Trustee is not the Registrar, the Company shall furnish to the Trustee,
semiannually at least fifteen Business Days before each interest payment date
and at such other times as the Trustee may request in writing, within 30 days
after receipt by the Company of any such request, a list in such form and as of
such date as the Trustee may reasonably require that sets forth the names and
addresses of, and the aggregate principal amount of Notes held by, each Holder,
and the Company shall otherwise comply with Section 312(a) of the TIA.
SECTION 2.06. Transfer and Exchange.
Subject to the provisions of Section 2.15, when Notes are
presented to the Registrar or a co-registrar with a request to register a
transfer or to exchange them for an equal principal amount of Notes of other
denominations, the Registrar shall register the transfer or make the exchange if
its requirements for such transaction are met; provided, however, that any Note
presented or surrendered for registration of transfer or exchange shall be duly
endorsed or accompanied by a written instruction of transfer in form
satisfactory to the Registrar and the Trustee duly executed by the Holder of
such Note or by its attorney duly authorized in writing. To permit registrations
of transfers and exchanges, the Company shall Issue (and the Subsidiary
Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and the
Trustee shall authenticate, Notes at the Registrar's request. The Trustee shall
notify the Company of all such registered transfers and exchanges within five
Business Days of the occurrence of such transfer or exchange.
Neither the Company nor the Registrar shall be required to
issue, register the transfer of or exchange any Note (i) during a period
beginning at the opening of business 15 days before the day of the mailing of
notice of any redemption from the Company and ending at the close of business on
the day the notice of redemption is sent to Holders, (ii) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, and (iii) during any Change of
Control Offer or Special
<PAGE> 29
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Offer or Asset Sale Offer if such Note is tendered pursuant to such Change of
Control Offer or Special Offer or Asset Sale Offer and not withdrawn.
No service charge shall be made for any registration of
transfer or exchange (except as otherwise expressly permitted herein), but the
Company may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than any such
transfer tax or similar governmental charge payable upon exchange pursuant to
Section 2.10, 3.07 or 9.05, which the Company shall pay).
Prior to due presentment for registration of transfer of any
Note, the Trustee, any Agent and the Company may deem and treat the Person in
whose name any Note is registered as the absolute owner of such Note (whether or
not such Note shall be overdue and notwithstanding any notation of ownership or
other writing on such Note made by anyone other than the Company, the Registrar
or any co-registrar) for the purpose of receiving payment of principal of, and
premium, if any, and interest on, such Note and for all other purposes, and
notice to the contrary shall not affect the Trustee, any Agent or the Company.
Any Holder of the Global Note shall, by acceptance of such
Global Note, agree that transfers of beneficial interests in such Global Note
may be effected only through a book-entry system (as described in Section 2.15)
maintained by the Depositary (or its agent), and that ownership of a beneficial
interest in the Global Note shall be required to be reflected in a book entry.
SECTION 2.07. Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or if the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the Trustee
shall, upon receipt of a written order signed by two Officers of the Company,
authenticate a replacement Note if the Trustee's requirements are met, and each
such replacement Note shall be an additional obligation of the Company. If the
Trustee or the Company requires, the Holder must supply an indemnity bond that
is sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent or any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company and the Trustee may
charge for its reasonable expenses in replacing a Note.
SECTION 2.08. Outstanding Notes.
The Notes outstanding at any time are all the Notes the
Trustee has authenticated except those it has cancelled, those delivered to it
for cancellation, and those described in this
<PAGE> 30
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Section 2.08 as not outstanding. If a Note is replaced pursuant to Section 2.07,
it ceases to be outstanding unless the Trustee receives proof satisfactory to it
that a bona fide purchaser holds the replaced Note. If the entire principal of,
and premium, if any, and accrued interest on, any Note is considered paid under
Section 4.01, it ceases to be outstanding and interest on it ceases to accrue.
Subject to Section 2.09, a Note does not cease to be outstanding because the
Company or any Affiliate of the Company holds such Note.
SECTION 2.09. Treasury Notes.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company or any Affiliate of the Company shall be considered as though
they are not outstanding; provided, however, that for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Notes that the Trustee knows are so owned shall be so
disregarded. Notwithstanding the foregoing, Notes that the Company or any
Affiliate of the Company offers to purchase or acquires pursuant to an exchange
offer, tender offer or otherwise shall not be deemed to be owned by the Company
or any Affiliate of the Company until legal title to such Notes passes to the
Company or such Affiliate, as the case may be.
SECTION 2.10. Temporary Notes.
Until definitive Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Notes. Temporary Notes
shall be substantially in the form of definitive Notes but may have variations
that the Company considers appropriate for temporary Notes. Without unreasonable
delay, the Company shall prepare and the Trustee, upon receipt of a written
order signed by two Officers of the Company, shall authenticate definitive Notes
in exchange for temporary Notes. Until such exchange, temporary Notes shall be
entitled to the same rights, benefits and privileges as definitive Notes.
SECTION 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar, any co-registrar, the Paying Agent, the Company and
its Subsidiaries shall forward to the Trustee any Notes surrendered to them for
registration of transfer, exchange, replacement, payment (including all Notes
called for redemption and all Notes accepted for payment pursuant to an Offer)
or cancellation, and the Trustee shall cancel all such Notes and shall destroy
all cancelled Notes (subject to the record retention requirements of the
Exchange Act) and deliver a certificate of their destruction to the Company
unless, by written order signed by two Officers
<PAGE> 31
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of the Company, the Company shall direct that cancelled Notes be returned to it.
The Company may not issue new Notes to replace any Notes that have been
cancelled by the Trustee or that have been delivered to the Trustee for
cancellation. If the Company or any Affiliate of the Company acquires any Notes
(other than by redemption pursuant to Section 3.01 or an Offer pursuant to
Section 4.11, 4.12 or 4.13), such acquisition shall not operate as a redemption
or satisfaction of the Indebtedness represented by such Notes unless and until
such Notes are delivered to the Trustee for cancellation.
SECTION 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to Holders on a subsequent
special record date, in each case at the rate provided in the Notes and Section
4.01. The Company shall, with the Trustee's consent, fix or cause to be fixed
each such special record date and payment date. At least 15 days before the
special record date, the Company (or, at the request of the Company, the Trustee
in the name of, and at the expense of, the Company) shall mail a notice that
states the special record date, the related payment date and the amount of
interest to be paid.
SECTION 2.13. Record Date
The record date for purposes of determining the identity of
holders of Notes entitled to vote or consent to any action by vote or consent
authorized or permitted under this Indenture shall be determined as provided for
in Section 316(c) of the TIA.
SECTION 2.14. CUSIP Number.
A "CUSIP" number will be printed on the Notes, and the Trustee
shall use the CUSIP number in notices of redemption, purchase or exchange as a
convenience to Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP number
printed in the notice or on the Notes and that reliance may be placed only on
the other identification numbers printed on the Notes. The Company will promptly
notify the Trustee of any change in the CUSIP number.
<PAGE> 32
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SECTION 2.15. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the
name of the Depositary or the nominee of such Depositary, (ii) be delivered to
the Trustee as custodian for such Depositary and (iii) bear legends as set forth
in Exhibit B.
Members of, or participants in, the Depositary
("Participants") shall have no rights under this Indenture with respect to any
Global Note held on their behalf by the Depositary, or the Trustee as its
custodian, or under the Global Note, and the Depositary may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the absolute
owner of the Global Note for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Participants, the operation of customary practices
governing the exercise of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in
whole, but not in part, to the Depositary, its successors or their respective
nominees. Interests of beneficial owners in the Global Notes may be transferred
or exchanged for certificated notes ("Physical Notes") in accordance with the
rules and procedures of the Depositary. In addition, Physical Notes shall be
transferred to all beneficial owners in exchange for their beneficial interests
in Global Notes if (i) the Depositary notifies the Company that it is unwilling
or unable to continue as Depositary for any Global Note and a successor
depositary is not appointed by the Company within 30 days of such notice or (ii)
an Event of Default has occurred and is continuing and the Registrar has
received a request from the Depositary to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion
of the beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b), the Registrar shall (if one or more Physical Notes are to be
issued) reflect on its books and records the date and a decrease in the
principal amount of the Global Note in an amount equal to the principal amount
of the beneficial interest in the Global Note to be transferred or exchanged,
and the Company shall execute (and the Subsidiary Guarantors shall execute the
Subsidiary Guarantee endorsed thereon), and the Trustee, pursuant to
instructions set forth in an Officers' Certificate from the Company, shall
authenticate and deliver, one or more Physical Notes of like tenor and amount.
(d) In connection with the transfer or exchange of Global
Notes as an entirety to beneficial owners pursuant to paragraph (b), the Global
Notes shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute (and the Subsidiary Guarantors shall execute the
Subsidiary Guarantee endorsed thereon), and the Trustee, pursuant to
instructions set forth in an Officers' Certificate from the Company, shall
authenticate and
<PAGE> 33
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deliver, to each beneficial owner identified by the Depositary in exchange for
its beneficial interest in the Global Notes, an equal aggregate principal amount
of Physical Notes of authorized denominations.
(e) Upon consummation of any redemption pursuant to Section
3.01 or any Offer pursuant to Sections 4.11, 4.12 or 4.13, the Registrar shall
reflect on its book and records the date and a decrease in the principal amount
of the Global Note in an amount equal to the aggregate principal amount being
redeemed or purchased by the Company. The Global Note shall be deemed to be
surrendered to the Trustee by the Notes Custodian and the Company shall execute
(and the Subsidiary Guarantors shall execute the Subsidiary Guarantee endorsed
thereon), and the Trustee, pursuant to instructions set forth in an Officers'
Certificate from the Company, shall authenticate and deliver to the Notes
Custodian, a new Global Note reflecting such reduction in principal amount
outstanding.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Participants and persons that may hold
interests through Participants, to take any action which a Holder is entitled to
take under this Indenture or the Notes.
ARTICLE III
REDEMPTION
SECTION 3.01. Redemption Provisions.
The Notes are not redeemable at the Company's option prior to
, 2001. On and after such date, the Notes will be subject to
redemption at the option of the Company, in whole or in part, at the redemption
prices (expressed as percentages of the principal amount of the Notes) set forth
below, plus accrued and unpaid interest to the date fixed for redemption, if
redeemed during the twelve-month period beginning on [ ] of the years
indicated below.
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001........................................ %
2002........................................ %
2003........................................ %
2004 and thereafter......................... 100%
</TABLE>
Notwithstanding the foregoing, at any time prior to ,
1999, the Company, at its option, may redeem from time to time up to [ ]% of the
aggregate principal amount of
<PAGE> 34
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the Notes originally issued with the net cash proceeds of one or more Public
Equity Offerings, other than the Concurrent Offering at a redemption price equal
to [ ]% of the principal amount thereof, together with accrued and unpaid
interest to the date fixed for redemption; provided, however, that at least $75
million in aggregate principal amount of the Notes remains outstanding
immediately after any such redemption.
SECTION 3.02. Notice to Trustee.
If the Company elects to redeem Notes pursuant to Section
3.01, it shall furnish to the Trustee, at least 30 but not more than 60 days
before notice of any redemption is to be mailed to Holders, an Officers'
Certificate stating that the Company is redeeming Notes pursuant to Section
3.01, the date notice of redemption is to be mailed to Holders, the redemption
date, the aggregate principal amount of Notes to be redeemed, the redemption
price for such Notes, the amount of accrued and unpaid interest on such Notes as
of the redemption date and, if applicable, the manner in which Notes are to be
selected for redemption, in accordance with Section 3.03, if less than all
outstanding Notes are to be redeemed. If the Trustee is not the Registrar, the
Company shall, concurrently with delivery of its notice to the Trustee of a
redemption, cause the Registrar to deliver to the Trustee a certificate (upon
which the Trustee may rely) setting forth the name of, and the aggregate
principal amount of Notes held by each Holder.
The Company will also provide the Trustee with any additional
information that the Trustee reasonably requests in connection with any
redemption.
SECTION 3.03. Selection of Notes to Be Redeemed.
If less than all outstanding Notes are to be redeemed by the
Company, the Trustee, on behalf of the Company, shall select the outstanding
Notes to be redeemed in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on such an exchange the Trustee, on behalf of the Company,
shall select the outstanding Notes to be redeemed on a pro rata basis, by lot or
by any other method that the Trustee deems fair and appropriate; provided, that
a redemption pursuant to the provisions relating to Public Equity Offerings will
be on a pro rata basis. Notes redeemed in part shall only be redeemed in
integral multiples of $1,000. If the Company elects to mail notice of a
redemption to Holders, the Trustee shall at least five days prior to the date
notice of redemption is to be mailed, (i) select, on behalf of the Company, the
Notes to be redeemed from Notes outstanding not previously called for
redemption, and (ii) notify the Company of the names of each Holder of Notes
selected for redemption, the principal amount of Notes held by each such Holder
and the principal amount of such Holder's Notes that are to
<PAGE> 35
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be redeemed. The Trustee shall select for redemption Notes or portions of Notes
in principal amounts of $1,000 or integral multiples of $1,000. Except as
provided in the preceding sentence, provisions of this Indenture that apply to
Notes called for redemption also apply to portions of Notes called for
redemption. The Trustee shall notify the Company promptly of the Notes or
portions of Notes to be called for redemption. The Company shall notify the
Trustee of its acceptance for payment of the Notes selected for redemption.
SECTION 3.04. Notice of Redemption.
(a) At least 30 days but not more than 60 days before any
redemption date, the Company shall mail by first class mail a notice of
redemption to each Holder of Notes that are to be redeemed. With respect to any
redemption of Notes, the notice shall identify the Notes or portions thereof, if
applicable, to be redeemed and shall state: (1) the redemption date; (2) the
redemption price for the Notes and the amount of unpaid and accrued interest on
such Notes as of the date of redemption; (3) the paragraph of the Notes pursuant
to which the Notes called for redemption are being redeemed; (4) if any Note is
being redeemed in part, the portion of the principal amount of such Note to be
redeemed and that, after the redemption date, upon surrender of such Note, a new
Note or Notes in principal amount equal to the unredeemed portion will be
issued; (5) the name and address of the Paying Agent; (6) that Notes called for
redemption must be surrendered to the Paying Agent to collect the redemption
price for, and any accrued and unpaid interest on, such Notes; (7) that, unless
the Company defaults in making such redemption payment, interest on Notes called
for redemption ceases to accrue on and after the redemption date; and (8) that
no representation is made as to the correctness or accuracy of the CUSIP number
listed in such notice and printed on the Notes.
(b) At the Company's request, the Trustee shall (at the
Company's expense) give the notice of any redemption to Holders; provided,
however, that the Company shall deliver to the Trustee, at least 45 days prior
to the date of any optional redemption and at least 10 days prior to the date
that notice of such redemption is to be mailed to Holders, an Officers'
Certificate that (i) requests the Trustee to give notice of the redemption to
Holders, (ii) sets forth the information to be provided to Holders in the notice
of redemption, as set forth in the preceding paragraph, and (iii) sets forth the
aggregate principal amount of Notes to be redeemed and the amount of accrued and
unpaid interest thereon as of the redemption date. If the Trustee is not a
Registrar, the Company shall, concurrently with any such request, cause the
Registrar to deliver to the Trustee a certificate (upon which the Trustee may
rely) setting forth the name of, the address of, and the aggregate principal
amount of Notes held by, each Holder.
<PAGE> 36
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SECTION 3.05. Effect of Notice of Redemption.
Once notice of redemption is mailed, Notes called for
redemption become due and payable on the redemption date at the price set forth
in the Note.
SECTION 3.06. Deposit of Redemption Price.
(a) On or prior to any redemption date, the Company shall
deposit with the Trustee or with the Paying Agent money sufficient to pay the
redemption price of, and accrued interest on, all Notes to be redeemed on that
date. The Trustee or the Paying Agent shall return to the Company, no later than
five days after any redemption date, any money (including accrued interest) that
exceeds the amount necessary to pay the redemption price of, and accrued
interest on, all Notes redeemed.
(b) If the Company complies with Section 3.06(a), interest on
the Notes to be redeemed will cease to accrue on such Notes on the applicable
redemption date, whether or not such Notes are presented for payment. If a Note
is redeemed on or after an interest record date but on or prior to the related
interest payment date, then any accrued and unpaid interest shall be paid to the
Person in whose name such Note was registered at the close of business of such
record date. If any Note called for redemption shall not be so paid upon
surrender for redemption because of the failure of the Company to comply with
the preceding paragraph, to the extent lawful, the Company shall pay interest
(including Post-Petition Interest) on the overdue principal, premium, if any,
and interest from the redemption date until such principal, premium and interest
are paid, at a rate equal to 2% per annum in excess of the then applicable
interest rate on the Notes compounded semi-annually as provided in the Notes and
Section 4.01.
SECTION 3.07. Notes Redeemed in Part.
Subject to Section 2.15, upon surrender of a Note that is
redeemed in part, the Company shall issue and the Trustee shall authenticate for
the Holder at the Company's expense a new Note equal in principal amount to the
unredeemed portion of the Note surrendered.
<PAGE> 37
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ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Principal, Premium and Interest.
The Company shall pay the principal of, and premium, if any,
and interest on, the Notes on the dates and in the manner provided in the Notes.
Holders must surrender their Notes to the Paying Agent to collect principal
payments. Principal, premium, or interest shall be considered paid on the date
due if, by 11 a.m. Eastern Standard Time on such date, the Company has deposited
with the Paying Agent money in immediately available funds designated for and
sufficient to pay such principal, premium or interest. The Paying Agent shall
return to the Company, no later than five days following the date of payment,
any money (including accrued interest) that exceeds the amount then due and
payable on the Notes.
The Company shall pay interest (including Post-Petition
Interest) on overdue principal, premium and interest (without regard to any
applicable grace period) at a rate equal to 2% per annum in excess of the then
applicable interest rate on the Notes, compounded semiannually.
Payments of the principal of, premium (if any) and interest on
any Global Notes will be made to the Depositary or its nominee, as the case may
be, as the registered owner thereof. None of the Company, the Trustee nor any
Paying Agent will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in any Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
SECTION 4.02. Provision of Financial Statements.
Whether or not the Company is then subject to Section 13(a) or
15(d) of the Exchange Act, the Company will file with the Commission, so long as
any Notes are outstanding, the annual reports, quarterly reports and other
periodic reports which the Company would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) if the Company were so
subject, and such documents shall be filed with the Commission on or prior to
the respective dates (the "Required Filing Dates") by which the Company would
have been required so to file such documents if the Company were so subject. The
Company will also, in any event, (i) within 15 days of each Required Filing
Date, (a) transmit by mail to all holders of Notes, as their names and addresses
appear in the Note register, without cost to such holders and (b) file with the
Trustee copies of the annual reports, quarterly reports and other
<PAGE> 38
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periodic reports which the Company would have been required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company
were subject to such Sections and (ii) if filing such documents by the Company
with the Commission is prohibited under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective Holder at the Company's cost. In
addition, the Company will file with the Commission and with the Trustee, in
accordance with rules and regulations prescribed by the Commission, such
additional information, documents and reports with respect to compliance with
the conditions and covenants provided for herein as may be required by such
rules and regulations.
SECTION 4.03. Compliance Certificate.
The Company shall deliver to the Trustee, within 135 days
after the end of each fiscal year of the Company, an officers' certificate,
which shall be executed, on behalf of the Company by two Officers, at least one
of which shall be the principal executive officer, principal financial officer
or principal accounting officer of the Company, stating that (i) a review of the
activities of the Company and its Subsidiaries during the preceding fiscal year
has been made to determine whether the Company has kept, observed, performed and
fulfilled all of its obligations under this Indenture and the Notes, (ii) such
review was supervised by the Officers of the Company signing such certificate,
and (iii) that to the best knowledge of each Officer signing such certificate,
(a) the Company has kept, observed, performed and fulfilled each and every
condition and covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions of this
Indenture (or, if a Default or Event of Default occurred, describing all such
Defaults or Events of Default of which each such Officer may have knowledge and
what action the Company has taken or proposes to take with respect thereto), and
(b) no event has occurred and remains in existence by reason of which payments
on account of the principal of, or premium, if any, or interest on, the Notes
are prohibited or if such event has occurred, a description of the event and
what action the Company is taking or proposes to take with respect thereto. For
purposes of this paragraph, such compliance shall be determined without regard
to any period of grace or requirement of notice provided hereunder.
So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the annual financial
statements delivered pursuant to Section 4.02 shall be accompanied by a written
statement of the Company's independent public accountants (who shall be a firm
of established national reputation reasonably satisfactory to the Trustee) that
in making the examination necessary for certification of such financial
statements nothing has come to their attention that would lead them to believe
that the Company has violated any provision of Section 4.01, 4.05, 4.07, 4.08,
4.09, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17 or 4.18 or Article V or, if any
such violation has occurred, specifying the nature and
<PAGE> 39
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period of existence thereof, it being understood that such accountants shall not
be liable directly or indirectly to any Person for any failure to obtain
knowledge of any such violation.
The Company will, so long as any of the Notes are outstanding,
deliver to the Trustee, promptly after any Officer of the Company becomes aware
of any Default or Event of Default, an Officers' Certificate specifying such
Default or Event of Default and what action the Company is taking or proposes to
take with respect thereto.
The Company shall deliver to the Trustee such other
information or documents reasonably requested by the Trustee in connection with
the compliance by the Trustee or the Company with the TIA.
SECTION 4.04. Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
wherever enacted, now or at any time hereafter in force, that might affect the
covenants or the performance of its obligations under this Indenture and the
Notes; and the Company (to the extent it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and covenants that it will not,
by resort to any such law, hinder, delay or impede the execution of any power
granted to the Trustee pursuant to this Indenture, but will suffer and permit
the execution of every such power as though no such law has been enacted.
SECTION 4.05. Limitation on Restricted Payments.
(a) The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, make any Restricted Payment, unless at
the time of and immediately after giving effect to the proposed Restricted
Payment (with the value of any such Restricted Payment, if other than cash, to
be determined by the Board of Directors in good faith and which determination
shall be conclusive and evidenced by a board resolution), (i) no Default or
Event of Default (and no event that, after notice or lapse of time, or both,
would become an "event of default" under the terms of any Indebtedness of the
Company or its Subsidiaries) shall have occurred and be continuing or would
occur as a consequence thereof, (ii) the Company could incur at least $1.00 of
additional Indebtedness pursuant to the provisions of Section 4.07(a) and (iii)
the aggregate amount of all Restricted Payments made after the Issue Date shall
not exceed the sum of (a) 50% of Cumulative Consolidated Net Income of the
Company (or, in the case such Cumulative Consolidated Net Income shall be
negative, less 100% of such deficit) since the end of the fiscal quarter in
which the Issue Date occurs through the last day of the
<PAGE> 40
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most recent fiscal quarter, plus (b) the aggregate amount of all net cash
proceeds received after the Issue Date by the Company (but excluding the net
cash proceeds received by the Company from the Concurrent Offering) from the
issuance and sale (other than to a Subsidiary of the Company) of Capital Stock
of the Company (other than Disqualified Stock) and the principal amount of
Indebtedness of the Company or any Subsidiary Guarantor that had been converted
into or exchanged for Capital Stock of the Company and, in either case, to the
extent that such proceeds are not used to redeem, repurchase, retire or
otherwise acquire Capital Stock or any Indebtedness of the Company or any
Subsidiary pursuant to clause (ii) of Section 4.05(b), plus (c) in the case of
the disposition or repayment of any Investment for cash, which Investment
constituted a Restricted Payment made after the Issue Date, an amount equal to
the lesser of the return of capital with respect to such Investment and the cost
of such Investment, in either case, reduced (but not below zero) by the excess,
if any, of the cost of the disposition of such Investment over the gain, if any,
realized by the Company or such Subsidiary in respect of such disposition.
(b) The provisions of Section 4.05(a) will not prohibit, so
long as there is no Default or Event of Default continuing, the following
actions (collectively, "Permitted Payments"):
(i) the payment of any dividend within 60 days after the
date of declaration thereof, if at such declaration date such payment
would have been permitted under this Indenture, and such payment shall
be deemed to have been paid on such date of declaration for purposes of
clause (iii) of Section 4.05(a);
(ii) the redemption, repurchase, retirement, defeasance or
other acquisition of any Capital Stock or any Indebtedness of the
Company in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of Capital
Stock of the Company (other than any Disqualified Stock);
(iii) the repurchase, redemption or other repayment of any
Subordinated Debt of the Company or a Subsidiary Guarantor in exchange
for, by conversion into or solely out of the proceeds of the
substantially concurrent sale (other than to a Subsidiary of the
Company) of Subordinated Debt of the Company or such Subsidiary
Guarantor with a Weighted Average Life to Maturity equal to or greater
than the then remaining Weighted Average Life to Maturity of the
Subordinated Debt repurchased, redeemed or repaid;
(iv) the redemption, repurchase, retirement, defeasance or
other acquisition of Capital Stock of the Company or any options or
stock appreciation rights related to Capital Stock of the Company held
by officers or employees (or their estates or beneficiaries of estates)
upon death, disability, retirement or termination of employment;
<PAGE> 41
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provided that the amount of Permitted Payments made under this clause
(iv) shall not exceed $1 million per annum;
(v) any redemption of the Company's 14% Cumulative
Redeemable Convertible Preferred Stock (i) having an aggregate stated
value of $5.5 million out of the proceeds of the issuance of the Notes
or the Concurrent Offering or (ii) at its stated maturity out of the
proceeds of a concurrent issuance of Capital Stock (other than
Disqualified Stock); and
(vi) Restricted Investments received as consideration in
connection with an Asset Sale made in compliance with the Indenture.
(c) In computing the amount of Restricted Payments for
purposes of Section 4.05(a)(iii), Restricted Payments made under Sections
4.05(b)(iv) and 4.05(b)(vi) shall be included and Restricted Payments made under
Sections 4.05(b)(i), 4.05(b)(ii), 4.05(b)(iii) and Section 4.05(b)(v) shall be
excluded.
SECTION 4.06. Corporate Existence.
The Company will do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate existence and the
corporate, partnership or other existence of each of its Subsidiaries in
accordance with the respective organizational documents of each of its
Subsidiaries and the rights (charter and statutory), licenses and franchises of
the Company and each of its Subsidiaries; provided, however, that the Company
shall not be required to preserve any such right, license or franchise, or the
corporate, partnership or other existence of any Subsidiary, if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and its Subsidiaries taken as a
whole, and that the loss thereof is not adverse in any material respect to the
Holders.
SECTION 4.07. Limitation on Incurrence of Indebtedness.
(a) The Company will not, and will not permit any of its
Subsidiaries to, create, incur, assume or directly or indirectly guarantee or in
any other manner become directly or indirectly liable for ("Incur") any
Indebtedness (including Acquired Debt), except for Permitted Indebtedness unless
at the time of and immediately after giving pro forma effect to such incurrence,
the Consolidated Fixed Charge Coverage Ratio of the Company and its Subsidiaries
would be greater than (x) 1.5 to 1.0 if the Indebtedness is incurred prior to
, 1997, (y) 2.25 to 1.0 if the Indebtedness is incurred prior to
, 1998 or (z) 2.5 to 1.0 of the Indebtedness is incurred on or
after , 1998.
<PAGE> 42
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(b) Section 4.07(a) will not apply to the incurrence of any of
the following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company incurred under the Credit
Facility in an aggregate principal amount at any time outstanding not
to exceed the sum of (1) 80% of the net amount of accounts receivable
(as determined under GAAP) of the Company and the Subsidiaries plus (2)
an amount equal to $1,300 multiplied by the number of Eligible Pay
Telephones (as defined in the Credit Facility as in effect on the Issue
Date), in each case as determined in good faith by the Company at the
time of each incurrence of Indebtedness under the Credit Facility;
provided that in no event shall the aggregate principal amount of
Indebtedness outstanding at any one time under the Credit Facility
permitted pursuant to this clause (i) exceed $25 million less the
aggregate amount of any principal payments thereunder constituting
permanent reductions of such Indebtedness pursuant to and in accordance
with the covenant described under Section 4.13; and provided, further,
that in no event shall the aggregate principal amount of Indebtedness
outstanding at any one time under the Credit Facility pursuant to this
Section 4.07(b)(i) which was incurred for working capital purposes
exceed $15 million;
(ii) Indebtedness of the Company under the Notes and the
Indenture and of any Subsidiary Guarantor represented by a Subsidiary
Guarantee and other Indebtedness of the Company and the Subsidiary
Guarantors outstanding on the Issue Date;
(iii) Indebtedness owed by any Subsidiary to the Company or to
a Subsidiary Guarantor, or owed by the Company to any Subsidiary
Guarantor; provided that any such Indebtedness shall be held by a
Person which is either the Company or a Subsidiary Guarantor and
provided, further, that (A) any such Indebtedness of a Subsidiary shall
not be subordinated to any other Indebtedness of such Subsidiary and
(B) any such Indebtedness owed to a Subsidiary Guarantor shall be
unsecured and shall be subordinated to the payment when due of the
Notes and, provided, further, that an incurrence of additional
Indebtedness which is not permitted under this clause (iii) shall be
deemed to have occurred upon either (a) the transfer or other
disposition of any such Indebtedness to a Person other than the Company
or a Subsidiary or (b) the sale, lease, transfer or other disposition
of shares of Capital Stock (including by consolidation or merger) of
any such Subsidiary to a Person other than the Company or a Subsidiary
Guarantor such that such Subsidiary ceases to be a Subsidiary
Guarantor;
<PAGE> 43
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(iv) Indebtedness of the Company or any Subsidiary Guarantor
consisting of guarantees of any Indebtedness of the Company or any
Subsidiary Guarantor which Indebtedness has been incurred in accordance
with the provisions of the Indenture;
(v) Indebtedness arising with respect to Interest Rate
Agreement Obligations incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that
is permitted by the terms of the Indenture to be outstanding; provided,
however, that the notional principal amount of such Interest Rate
Agreement Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Rate Agreement Obligation relates;
and
(vi) Indebtedness of the Company or a Subsidiary incurred in
connection with or given in exchange for the renewal, extension,
substitution, refunding, defeasance, refinancing or replacement of any
Indebtedness permitted to be incurred or outstanding under the
Consolidated Fixed Charge Coverage Ratio of the first paragraph of this
covenant or pursuant to clause (ii) above ("Refinancing Indebtedness");
provided that (a) the principal amount of such Refinancing Indebtedness
shall not exceed the principal amount of the Indebtedness so renewed,
extended, substituted, refunded, defeased, refinanced or replaced (plus
the premiums or other payments paid in connection therewith (which
shall not exceed the stated amount of any premium or other payments
required to be paid in connection with such a refinancing pursuant to
the terms of the Indebtedness being renewed, extended, substituted,
refunded, defeased, refinanced or replaced) and the expenses incurred
in connection therewith); (b) the Refinancing Indebtedness shall have a
Weighted Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of the Indebtedness being renewed, extended,
substituted, refunded, defeased, refinanced or replaced; and (c) such
Refinancing Indebtedness shall not rank senior to, and shall be at
least as subordinated, in right of payment to the Notes or the
Subsidiary Guarantees, as the case may be, as the Indebtedness being
renewed, extended, substituted, refunded, defeased, refinanced or
replaced.
SECTION 4.08. Taxes.
The Company shall, and shall cause each of its Subsidiaries
to, pay prior to delinquency all taxes, assessments and governmental levies the
failure of which to pay could reasonably be expected to result in a material
adverse effect on the condition (financial or otherwise), business or results of
operations of the Company and its Subsidiaries taken as a whole, except for
those taxes contested in good faith by appropriate proceedings.
<PAGE> 44
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SECTION 4.09. Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries.
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (i) pay dividends or make any other distributions to the Company
or any other Subsidiary of the Company on its Capital Stock or with respect to
any other interest or participation in, or measured by, its profits, or pay any
Indebtedness owed to the Company or any other Subsidiary of the Company, (ii)
make loans or advances to the Company or any other Subsidiary of the Company, or
(iii) transfer any of its properties or assets to the Company or any other
Subsidiary of the Company (collectively, "Payment Restrictions"), except for
such encumbrances or restrictions existing under or by reason of (a) the Credit
Facility as in effect on the Issue Date and any amendments, restatements,
renewals, replacements or refinancings thereof; provided that such amendments,
restatements, renewals, replacements or refinancings are no more restrictive in
the aggregate with respect to such dividend and other payment restrictions than
those contained in the Credit Facility immediately prior to any such amendment,
restatement, renewal, replacement or refinancing, (b) applicable law, (c) any
instrument governing Indebtedness or Capital Stock of an Acquired Person
acquired by the Company or any of its Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with such acquisition); provided that such restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Acquired Person, (d) customary non-assignment provisions in leases entered
into in the ordinary course of business and consistent with past practices, (e)
Purchase Money Indebtedness for property acquired in the ordinary course of
business that only impose restrictions on the property so acquired, (f) an
agreement for the sale or disposition of the Capital Stock or assets of such
Subsidiary; provided that such restriction is only applicable to such Subsidiary
or assets, as applicable, and such sale or disposition otherwise is permitted
under the covenant described under Section 4.13; and provided, further, that
such restriction or encumbrance shall be effective only for a period from the
execution and delivery of such agreement through a termination date not later
than 270 days after such execution and delivery, (g) Refinancing Indebtedness
permitted under this Indenture; provided that the restrictions contained in the
agreements governing such Refinancing Indebtedness are no more restrictive in
the aggregate than those contained in the agreements governing the Indebtedness
being refinanced immediately prior to such refinancing, (h) any agreement in
effect on the Issue Date and (i) provisions in security agreements relating to
secured Indebtedness of a Subsidiary to the extent such provisions restrict the
transfer of the property that is the subject of such security agreements.
<PAGE> 45
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SECTION 4.10. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, the
City of New York, an office or an agency (which may be an office of any Agent)
where Notes may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Company will give prompt written notice to the
Trustee of any change in the location of such office or agency. If at any time
the Company shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any matter
relieve the Company of its obligations to maintain an office or agency in the
Borough of Manhattan, the City of New York, for such purposes. The Company will
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in accordance with
Section 2.03.
SECTION 4.11. Change of Control.
(a) In the event of a Change of Control, Company will make an
offer to purchase all of the then outstanding Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase, in accordance with the terms set forth below
in Section 4.11(b)-(e) (a "Change of Control Offer").
(b) Within 30 days following the occurrence of any Change of
Control, the Company shall mail to each Holder at such Holder's registered
address a notice stating: (i) that a Change of Control has occurred and that
such Holder has the right to require the Company to repurchase all or a portion
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes at a
purchase price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest to the date of purchase (the "Change of Control
Purchase Date"), which shall be a Business Day, specified in such notice, that
is not earlier than 30 days or later than 60 days from the date such notice is
mailed, (ii) the amount of accrued and unpaid interest as of the Change of
Control Purchase Date, (iii) that any Note not tendered will continue to accrue
interest, (iv) that, unless the Company defaults in the payment of the purchase
price for
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the Notes payable pursuant to the Change of Control Offer, any Notes accepted
for payment pursuant to the Change of Control Offer shall cease to accrue
interest after the Change of Control Purchase Date, (v) that Holders electing to
tender any Note or portion thereof will be required to surrender their Note,
with a form entitled "Option of Holder to Elect Purchase" completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day preceding the Change of Control Purchase Date,
provided, that, Holders electing to tender only a portion of any Note must
tender a principal amount of $1,000 or integral multiples thereof; (vi) that
Holders will be entitled to withdraw their election to tender Notes if the
Paying Agent receives, not later than the close of business on the third
Business Day preceding the Change of Control Purchase Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that,
subject to Section 2.15, Holders whose Notes are accepted for payment in part
will be issued new Notes equal in principal amount to the unpurchased portion of
Notes surrendered, provided, that, only Notes in a principal amount of $1,000 or
integral multiples thereof will be accepted for payment in part.
(c) The Company shall furnish to the Trustee, at least seven
Business Days before notice of the corresponding Change of Control Offer is to
be mailed to Holders, an Officers' Certificate setting forth that the Change of
Control Offer is being made pursuant to Section 4.11, the Change of Control
Purchase Date, the maximum principal amount of Notes the Company is offering to
purchase pursuant to such Change of Control Offer, the purchase price for such
Notes, the amount of accrued and unpaid interest on such Notes as of the Change
of Control Purchase Date and, the manner in which Notes are to be selected for
purchase, in accordance with Section 4.11(d), in the event less than all Notes
tendered are to be purchased.
The Company will also provide the Trustee with any additional
information that the Trustee reasonably requests in connection with any Change
of Control Offer.
(d) On the Change of Control Purchase Date, the Company will
(i) accept for payment all Notes or portions thereof tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent the aggregate
purchase price of all Notes or portions thereof accepted for payment and any
accrued and unpaid interest on such Notes as of the Change of Control Purchase
Date, and (iii) deliver or cause to be delivered to the Trustee all Notes
tendered pursuant to the Change of Control Offer. The Paying Agent shall
promptly mail to each Holder of Notes or portions thereof accepted for payment
an amount equal to the purchase price for such Notes plus any accrued and unpaid
interest thereon, and the Trustee shall promptly authenticate and mail to such
Holder of Notes accepted for payment in part a new Note equal in principal
amount to any unpurchased portion of the Notes, and any Note not accepted for
payment in whole or in part for any reason consistent with this Indenture shall
be promptly returned to the Holder of such Note. On and after a Change of
Control Purchase
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Date, interest will cease to accrue on the Notes or portions thereof accepted
for payment, unless the Company defaults in the payment of the purchase price
therefor. The Company will announce the results of the Change of Control Offer
to Holders of the Notes on or as soon as practicable after the Change of Control
Purchase Date.
(e) The Company will comply with the applicable tender offer
rules, including the requirements of Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer.
SECTION 4.12. Special Offer upon Failure to Consummate Cherokee Acquisition.
(a) In the event the Cherokee Acquisition is not consummated
prior to the Special Offer Notice Date, the Company will be obligated to make an
offer to purchase up to $35 million in Notes at a price equal to 101% of such
principal amount, plus accrued and unpaid interest to the date of purchase, in
accordance with the terms set forth below in Section 4.12(b)-(e) (a "Special
Offer").
(b) On the Special Offer Notice Date, the Company shall mail
to each Holder, at such Holder's registered address, a notice stating: (i) that
the Cherokee Acquisition has not occurred and the Company is offering to
purchase $35 million aggregate principal amount of Notes at a purchase price
(the "Special Offer Price") in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest to the date of purchase (the
"Special Offer Purchase Date"), which shall be a Business Day, specified in such
notice, that is not earlier than 30 days or later than 60 days (the "Final
Special Offer Purchase Date") from the date such notice is mailed, (ii) the
amount of accrued interest as of the specified Special Offer Purchase Date,
(iii) that any Note not tendered will continue to accrue interest, (iv) that
unless the Company defaults in the payment of the price for the Notes payable
pursuant to the Special Offer, any Notes accepted for payment pursuant to the
Special Offer shall cease to accrue interest after the Special Offer Purchase
Date, (v) that Holders electing to tender any Note or portion thereof will be
required to surrender their Note with a form entitled "Option of Holder to Elect
Purchase" completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day preceding the Special Offer
Purchase Date, provided, that, Holders electing to tender only a portion of any
Note must tender a principal amount of $1,000 or integral multiples thereof;
(vi) that Holders will be entitled to withdraw their election to tender Notes if
the Paying Agent receives, not later than the close of business on the third
Business Day preceding the Special Offer Purchase Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that,
subject to Section 2.15, Holders whose Notes are accepted for payment in part
will be issued new Notes equal in principal amount to the unpurchased
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portion of Notes surrendered, provided, that, only Notes in principal amount of
$1,000 or integral multiples thereof will be accepted for payment in part.
(c) The Company shall furnish to the Trustee, at least seven
Business Days before notice of the corresponding Special Offer is to be mailed
to Holders, an Officers' Certificate setting forth that the Special Offer is
being made pursuant to Section 4.12, the Special Offer Purchase Date, that the
Company is offering to purchase $35 million principal amount of Notes pursuant
to such Special Offer, the Special Offer Purchase Price for such Notes, the
amount of accrued and unpaid interest on such Notes as of the Special Offer
Purchase Date and, the manner in which Notes are to be selected for purchase, in
accordance with Section 4.12(d).
The Company will also provide the Trustee with any additional
information that the Trustee reasonably requests in connection with any Special
Offer.
(d) On the Special Offer Purchase Date, the Company will (i)
accept for payment $35 million aggregate principal amount of Notes or such
lesser amount as is tendered pursuant to the Special Offer and (ii) deliver or
cause to be delivered to the Trustee all Notes tendered pursuant to the Special
Offer and the Trustee will apply the Trust Funds to consummate the Special
Offer. If less than all Notes tendered pursuant to the Special Offer are
accepted for payment by the Company for any reason consistent with the
Indenture, selection of the Notes to be purchased by the Company shall be in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided that Notes accepted for payment in part shall only be
purchased in integral multiples of $1,000. The Paying Agent shall promptly mail
to each holder of Notes or portions thereof accepted for payment an amount equal
to the purchase price for such Notes plus any accrued and unpaid interest
thereon, and, subject to Section 2.15, the Trustee shall promptly authenticate
and mail to such holder of Notes accepted for payment in part a new Note equal
in principal amount to any unpurchased portion of the Notes, and any Note not
accepted for payment in whole or in part for any reason consistent with the
Indenture shall be promptly returned to the holder of such Note. On and after
the Special Offer Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will announce the results of
the Special Offer to holders of the Notes on or as soon as practicable after the
Special Offer Purchase Date.
(e) The Company will comply with the applicable tender offer
rules, including the requirements of Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Special
Offer.
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SECTION 4.13. Limitation on Asset Sales.
(a) The Company will not, and will not permit any of its
Subsidiaries to, make any Asset Sale unless (i) the Company or such Subsidiary,
as the case may be, receives consideration at the time of such Asset Sale at
least equal to the fair market value (determined by the Board of Directors in
good faith, which determination shall be evidenced by a board resolution) of the
assets or other property sold or disposed of in the Asset Sale, and (ii) at
least 75% of such consideration is in the form of cash or Cash Equivalents;
provided that for purposes of this covenant "cash" shall include the amount of
any liabilities (other than liabilities that are by their terms subordinated to
the Notes or any Subsidiary Guarantee) of the Company or such Subsidiary (as
shown on the Company's or such Subsidiary's most recent balance sheet or in the
notes thereto) that are assumed by the transferee of any such assets or other
property in such Asset Sale (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis under which there is no further
recourse to the Company or any of its Subsidiaries with respect to such
liabilities.
(b) Within 270 days after any Asset Sale, the Company may
elect to apply or cause to be applied the Net Proceeds from such Asset Sale to
(a) repay amounts outstanding under the Credit Facility, and permanently reduce
the commitments or amounts available to be borrowed thereunder by the same
amount, (b) repay amounts outstanding under Other Senior Debt that is secured by
the asset being sold, to the extent repayment is required by the terms of the
agreement governing the same, (c) use no more than the Other Senior Debt Pro
Rata Share of such Net Cash Proceeds to repay amounts outstanding under Other
Senior Debt and/or (d) make an investment in, or acquire assets directly or
reasonably related to, the business of the Company and its Subsidiaries existing
on the Issue Date. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce amounts outstanding under the Credit Facility or
temporarily invest such Net Proceeds in any manner permitted by the Indenture.
Any Net Proceeds from an Asset Sale not applied or invested as provided in the
first sentence of this paragraph within 270 days of such Asset Sale will be
deemed to constitute "Excess Proceeds" on the 271st day after such Asset Sale.
(c) Not later than 10 Business Days after any date (an "Asset
Sale Offer Trigger Date") that the aggregate amount of Excess Proceeds exceeds
$10,000,000, the Company shall commence an offer to purchase the maximum
principal amount of Notes that may be purchased out of all such Excess Proceeds
(an "Asset Sale Offer") at a price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase (the "Asset
Sale Offer Purchase Date"). The offer to purchase shall remain open for a
minimum of 20 business days or such longer period as is required by law. To the
extent that any Excess Proceeds remain after completion of an Asset Sale Offer,
the Company may use the
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remaining amount for general corporate purposes and such amount shall no longer
constitute "Excess Proceeds."
(d) Within 10 days following any Asset Sale Offer Trigger
Date, the Company shall mail to each holder of Notes at such holder's registered
address a notice stating: (i) that an Asset Sale Offer Trigger Date has occurred
and that the Company is offering to purchase the maximum principal amount of
Notes that may be purchased out of the Excess Proceeds at an offer price in cash
equal to 100% of the principal amount thereof, plus accrued and unpaid interest
to the Asset Sale Offer Purchase Date, which shall be a Business Day, specified
in such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest as of
the Asset Sale Offer Purchase Date, (iii) that any Note not tendered will
continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Asset Sale
Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall
cease to accrue interest after the Asset Sale Offer Purchase Date, (v) that
Holders electing to tender any Note or portion thereof will be required to
surrender their Note, with a form entitled "Option of Holder to Elect Purchase"
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day preceding the Asset Sale Offer
Purchase Date; provided that Holders electing to tender only a portion of any
Note must tender a principal amount of $1,000 or integral multiples thereof;
(vi) that Holders will be entitled to withdraw their election to tender Notes if
the Paying Agent receives, not later than the close of business on the third
Business Day preceding the Asset Sale Offer Purchase Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of Notes delivered for purchase, and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that,
subject to Section 2.15, Holders whose Notes are accepted for payment in part
will be issued new Notes equal in principal amount to the unpurchased portion of
Notes surrendered; provided that only Notes in a principal amount of $1,000 or
integral multiples thereof will be accepted for payment in part.
(e) The Company shall furnish to the Trustee, at least seven
Business Days before notice of the corresponding Asset Sale Offer is to be
mailed to Holders, an Officers' Certificate setting forth that the Asset Sale
Offer is being made pursuant to Section 4.13, the Asset Sale Offer Purchase
Date, the maximum principal amount of Notes the Company is offering to purchase
pursuant to such Asset Sale Offer, the purchase price for such Notes, the amount
of accrued and unpaid interest on such Notes as of the Asset Sale Offer Purchase
Date and, the manner in which Notes are to be selected for purchase, in
accordance with Section 4.13(f), in the event less than all Notes tendered are
to be purchased.
The Company will also provide the Trustee with any additional
information that the Trustee reasonably requests in connection with any Asset
Sale Offer.
<PAGE> 51
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(f) On the Asset Sale Offer Purchase Date, the Company will
(i) accept for payment the maximum principal amount of Notes or portions thereof
tendered pursuant to the Asset Sale Offer that can be purchased out of Excess
Proceeds from such Asset Sale, (ii) deposit with the Paying Agent the aggregate
purchase price of all Notes or portions thereof accepted for payment and any
accrued and unpaid interest on such Notes as of the Asset Sale Offer Purchase
Date, and (iii) deliver or cause to be delivered to the Trustee all Notes
tendered pursuant to the Asset Sale Offer. If less than all Notes tendered
pursuant to the Asset Sale Offer are to be purchased by the Company for any
reason consistent with this Indenture, the Trustee, on behalf of the Company,
shall select the outstanding Notes to be purchased by the Company in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not listed on such an exchange,
the Trustee on behalf of the Company, shall select the outstanding Notes to be
purchased, on a pro rata basis, by lot or by such method as the Trustee deems
fair and appropriate; provided that Notes purchased in part shall only be
purchased in integral multiples of $1,000. The Company shall notify the Trustee
of its acceptance for payment of Notes selected for purchase. The Paying Agent
shall promptly mail to each holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Notes plus any accrued
and unpaid interest thereon, and the Trustee shall promptly authenticate and
mail to such Holder of Notes accepted for payment in part a new Note equal in
principal amount to any unpurchased portion of the Notes, and any Note not
accepted for payment in whole or in part shall be promptly returned to the
Holder of such Note. On and after an Asset Sale Offer Purchase Date, interest
will cease to accrue on the Notes or portions thereof accepted for payment,
unless the Company defaults in the payment of the purchase price therefor. The
Company will announce the results of the Asset Sale Offer to Holders on or as
soon as practicable after the Asset Sale Offer Purchase Date.
(g) The Company will comply with the applicable tender offer
rules, including the requirements of Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Asset
Sale Offer.
SECTION 4.14. Limitation on Issuance and Sale of Preferred Stock of
Subsidiaries.
The Company (a) will not, and will not permit any Subsidiary
of the Company to, transfer, convey, sell or otherwise dispose of any shares of
Preferred Stock of such Subsidiary or any other Subsidiary (other than to the
Company or a Subsidiary Guarantor) and (b) will not permit any Subsidiary of the
Company to issue shares of its Preferred Stock, or securities convertible into,
or warrants, rights or options to subscribe for or purchase shares of, its
Capital Stock to any person other than to the Company or a Subsidiary Guarantor.
<PAGE> 52
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SECTION 4.15. Future Subsidiary Guarantors.
The Company shall cause each Subsidiary of the Company formed
or acquired after the Issue Date to issue a Subsidiary Guarantee and execute and
deliver an indenture supplemental to this Indenture as a Subsidiary Guarantor.
SECTION 4.16. Maintenance of Properties.
The Company will cause all properties used in the conduct of
its business or the business of any Subsidiary of the Company to be maintained
and kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company advantageously conducted at all times; provided, however, that
nothing in this Section shall prevent the Company or any Subsidiary of the
Company from discontinuing the operation or maintenance of any of such
properties if such discontinuance is, as determined by the Board of Directors in
good faith, desirable in the conduct of the business of the Company or of any of
its Subsidiaries.
SECTION 4.17. Maintenance of Insurance.
The Company shall, and shall cause each of its Subsidiaries
to, keep at all times all of their properties which are of an insurable nature
insured against loss or damage with insurers believed by the Company to be
responsible to the extent that property of similar character usually is so
insured by corporations similarly situated and owning like properties in
accordance with good business practice.
SECTION 4.18. Deposit of Trust Funds with Trustee Pending Consummation of
Cherokee Acquisition.
(a) On the Issue Date, the Company shall deposit with the
Trustee in the account specified in Section 4.18(b), in the form of cash or Cash
Equivalents, $35 million plus an additional amount sufficient to consummate the
Special Offer on the Final Special Offer Purchase Date at the Special Offer
Price (such deposited amounts collectively, the "Trust Funds").
(b) The Company shall deposit the Trust Funds into, and shall
maintain with the Trustee, an account (the "Collateral Account") designated
"Marine Midland Bank, as
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Trustee," which account shall be under the sole dominion and control of the
Trustee. Amounts on deposit in the Collateral Account shall be held as cash or
shall be invested and reinvested from time to time, as directed in writing by
the Company, in Cash Equivalents, which shall be held in the Collateral Account.
Any income, including any interest or capital gains received with respect to the
balance from time to time standing to the credit of the Collateral Account,
shall remain, or be deposited, in the Collateral Account. The Trustee shall have
the power to sell or liquidate the investments in the Collateral Account
whenever the Trustee shall be required pursuant to Section 4.18(d) to release
all or any portion of the amounts in the Collateral Account to permit the
consummation of the Cherokee Acquisition or to employ such amounts to effect a
Special Offer with respect to of the Notes. Subject to Article VII hereof, the
Trustee, solely in its individual capacity, hereby waives any rights it may have
in such individual capacity to the Collateral Account and all rights and
interest therein, including, without limitation, any such rights arising through
counterclaim, defense, recoupment, charge, lien or right of set-off. The Trustee
shall not have any liability for any loss suffered as a result of any investment
made as provided above, any liquidation of any such investment prior to its
maturity, or the failure of any authorized person of the Company to give the
Trustee written instruction to invest or reinvest the amounts in the Collateral
Account or any earnings thereon.
(c) In order to secure the full and punctual payment and
performance of the Company's obligation to offer to purchase Notes in the event
the Cherokee Acquisition is not consummated on or prior to the Special Offer
Notice Date, the Company hereby grants to the Trustee, for the benefit of the
Holders, a continuing security interest in and to the Trust Funds, whether now
owned or existing or hereafter acquired or arising.
(d) The Trustee shall hold the Trust Funds, for the benefit of
the Holders, until the earliest to occur of:
(A) (x) the date of consummation of the Cherokee Acquisition
as specified in an Officers' Certificate from the Company to the
Trustee (1) stating that the Cherokee Acquisition is to be consummated
on a date specified therein, which shall be at least two Business Days
(or such shorter period as the Company and the Trustee shall mutually
agree) after the date of such Officers' Certificate, (2) stating that
such consummation will be, in all material respects, in accordance
with the terms and conditions described in the Prospectus, and (3)
requesting the Trustee to release the Trust Funds on the date of such
consummation to the order of the Company or its assignee for
application to the concurrent consummation of the Cherokee
Acquisition; and (y) receipt by the Trustee of an Opinion of Counsel
to the effect that all conditions precedent described in the preceding
clause (x) have been satisfied; or
(B) the Special Offer Purchase Date, as specified in an
Officers' Certificate from the Company to the Trustee in accordance
with Section 4.12(c).
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(e) On the date of consummation of the Cherokee Acquisition,
and following such acquisition, the Holders' security interest in the Collateral
Account shall terminate and the Trustee shall release the Trust Funds in
immediately available funds to the order of the Company or its assigns, as
specified in the Officers' Certificate delivered pursuant to Section 4.18(d)(A).
(f) On the Special Offer Purchase Date as specified in an
Officers' Certificate delivered pursuant to Section 4.12(c), the Trustee shall
apply the Trust Funds to fund such Special Offer and the Holders' security
interest in the Collateral Account shall terminate on and as of such Special
Offer Purchase Date.
(g) Any amounts remaining in the Collateral Account after the
Special Offer Purchase Date shall be paid by the Trustee to the Company.
(h) The Company will comply with Sections 314(b) and 314(d)
of the TIA, as applicable, including, without limitation, providing an Opinion
of Counsel with respect to Section 3.14(b) and the certificates or opinions of
counsel with respect to Section 3.14(d), in connection with the deposit and
release of the Trust Funds.
SECTION 4.19. Limitation on Transactions with Interested Persons.
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without limitation,
the sale, purchase, exchange or lease of assets, property or services) with any
Affiliate of the Company or any beneficial owner of five percent or more of any
class of Capital Stock of the Company or any Subsidiary or any officer or
director of the foregoing (each, an "Interested Person") unless (i) such
transaction or series of transactions is on terms that are no less favorable to
the Company or such Subsidiary as the case may be, than would be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
and (ii) (a) with respect to any transaction or series of transactions involving
aggregate payments in excess of $100,000, the Company delivers an Officers'
Certificate to the Trustee certifying that such transaction or series of related
transactions complies with clause (i) above and such transaction or series of
related transactions has been approved by a majority of the members of the Board
of Directors of the Company (and approved by a majority of the Independent
Directors or, in the event there is only one Independent Director, by such
Independent Director, and (b) with respect to any transaction or series of
transactions involving aggregate payments in excess of $2 million, the Company
delivers to the Trustee an opinion to the effect that such transaction or series
of transactions is fair to the Company or such Subsidiary from a financial point
of view issued by an investment banking firm of national standing.
Notwithstanding the foregoing, this provision will not apply to (i) employment
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agreements or compensation or employee benefit arrangements with (including,
without limitation, any stock options granted to) any officer, director or
employee of the Company entered into in the ordinary course of business
(including customary benefits thereunder), (ii) any transaction entered into by
or among the Company or any Subsidiary Guarantor and one or more Subsidiary
Guarantors, (iii) transactions pursuant to agreements existing on the Issue
Date, including, without limitation, the Credit Facility and (iv) loans or
advances to officers of the Company for bona fide business purposes of the
Company in the ordinary course of business not in the excess of $500,000 in the
aggregate at any one time outstanding.
SECTION 4.20. Limitation on Lines of Business.
The Company will not, and will not permit any Subsidiary to,
engage in or conduct any business other than the ownership and operation of
public pay telephones and lines of business integral or ancillary thereto;
provided, that, the primary business of the Company and its Subsidiaries shall
continue to be the ownership and operation of public pay telephones.
ARTICLE V
SUCCESSORS
SECTION 5.01. Merger, Consolidation and Sale of Assets.
(a) The Company shall not consolidate or merge with or into
(whether or not the Company is the Surviving Person), or, directly or indirectly
through one or more Subsidiaries, sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets in one
or more related transactions, to another Person or Persons (other than a
Subsidiary Guarantor) unless (i) the Surviving Person is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under this Indenture and the Notes
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) at the time of and immediately after such Disposition, no Default
or Event of Default shall have occurred and be continuing; and (iv) the
Surviving Person will (A) have Consolidated Net Worth (immediately after giving
effect to the Disposition on a pro forma basis) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction, and
(B) at the time of such Disposition and after giving pro forma effect thereto,
the Surviving Person would be permitted to issue at least $1.00 of additional
Indebtedness pursuant to Section 4.07(a).
(b) Prior to the consummation of any proposed Disposition,
merger or consolidation of the Company or a Subsidiary Guarantor or the sale of
all or substantially all of
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the assets of the Company or a Subsidiary Guarantor, the Company shall deliver
to the Trustee an Officers Certificate stating that such transaction complies
with Article V of this Indenture and an Opinion of Counsel stating that such
transaction and the supplemental indenture, if required, comply with Article V
of this Indenture.
SECTION 5.02. Surviving Person Substituted.
In the event of any transaction (other than a lease) described
in and complying with the conditions listed in Section 5.01(a) in which the
Company or the Subsidiary Guarantor, as the case may be, is not the Surviving
Person and the Surviving Person is to assume all the obligations of the Company
or the Subsidiary Guarantor under the Notes, the Subsidiary Guarantee, as
applicable, and this Indenture pursuant to a supplemental indenture, such
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company or the Subsidiary Guarantor, and the
Company or the Subsidiary Guarantor would be discharged from its obligations
under this Indenture, the Notes or its Subsidiary Guarantee, as the case may be,
provided, that solely for the purpose of calculating amounts described in clause
(iii) of Section 4.05(a), any such Surviving Person shall only be deemed to have
succeeded to and be substituted for the Company with respect to the period
subsequent to the effective time of such transaction (and the Company (before
giving effect to such transaction) shall be deemed to be the "Company" for such
purposes for all prior periods).
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default.
(a) Each of the following constitutes an "Event of Default":
(i) a default for 30 days in the payment when due of
interest on any Note (whether or not prohibited by the subordination
provisions of this Indenture);
(ii) a default in the payment when due of principal on any
Note (whether or not prohibited by the subordination provisions of this
Indenture), whether upon maturity, acceleration, optional or mandatory
redemption, required repurchase or otherwise;
(iii) failure to perform or comply with any covenant,
agreement or warranty in this Indenture (other than the defaults
specified in clauses (i) and (ii) above) which failure continues for 30
days after written notice thereof has been given to the Company
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by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the then outstanding Notes;
(iv) except as permitted by this Indenture, any Subsidiary
Guarantee shall for any reason cease to be, or be asserted in writing
by any Subsidiary Guarantor or the Company not to be, in full force and
effect, and enforceable in accordance with its terms;
(v) the occurrence of one or more defaults under any
agreements, indentures or instruments under which the Company or any
Subsidiary of the Company then has outstanding Indebtedness in excess
of $5 million in the aggregate and, if not already matured at its final
maturity in accordance with its terms, such Indebtedness shall have
been accelerated;
(vi) one or more judgments, orders or decrees for the
payment of money in excess of $5 million, either individually or in the
aggregate shall be entered against the Company or any Subsidiary of the
Company or any of their respective properties and which judgments,
orders or decrees are not paid, discharged, bonded or stayed for a
period of 60 days after their entry;
(vii) any holder or holders of at least $5 million in
aggregate principal amount of Indebtedness of the Company or any
Subsidiary of the Company, after a default under such Indebtedness, (a)
shall notify the Company or the Trustee of the intended sale or
disposition of any assets of the Company or any Subsidiary of the
Company with an aggregate fair market value (as determined in good
faith by the Board of Directors, which determination shall be evidenced
by a board resolution), individually or in the aggregate, of at least
$5 million that have been pledged to or for the benefit of such holder
or holders to secure such Indebtedness or (b) shall commence
proceedings, or take any action (including by way of set off), to
retain in satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of such Indebtedness, such assets
of the Company or any Subsidiary of the Company (including funds on
deposit or held pursuant to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of
competent jurisdiction of (a) a decree or order for relief in respect
of the Company or any Subsidiary of the Company in an involuntary case
or proceeding under any applicable Bankruptcy Law or (b) a decree or
order adjudging the Company or any Subsidiary of the Company bankrupt
or insolvent, or seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Subsidiary of the
Company under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or
other similar official) of the Company or any Subsidiary of the Company
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or of any substantial part of their respective properties, or ordering
the winding up or liquidation of their affairs, and any such decree or
order for relief shall continue to be in effect, or any such other
decree or order shall be unstayed and in effect, for a period of 60
days; or
(ix) (a) the Company or any Subsidiary of the Company
commences a voluntary case or proceeding under any applicable
Bankruptcy Law or any other case or proceeding to be adjudicated
bankrupt or insolvent, (b) the Company or any Subsidiary of the Company
consents to the entry of a decree or order for relief in respect of the
Company or such Subsidiary of the Company in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the commencement
of any bankruptcy or insolvency case or proceeding against it, (c) the
Company or any Subsidiary of the Company files a petition or answer or
consent seeking reorganization or relief under any applicable federal
or state law, (d) the Company or any Subsidiary of the Company (x)
consents to the filing of such petition or the appointment of or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or such
Subsidiary of the Company or of any substantial part of their
respective property, (y) makes an assignment for the benefit of
creditors or (z) admits in writing its inability to pay its debts
generally as they become due or (e) the Company or any Subsidiary of
the Company takes any corporate action in furtherance of any such
actions in this paragraph (ix).
(b) Any notice of default delivered to the Company by the
Trustee or by Holders of Notes with a copy to the Trustee must specify the
Default, demand that it be remedied and state that the notice is a "Notice of
Default."
SECTION 6.02. Acceleration.
If any Event of Default (other than an Event of Default
specified under Section 6.01(a)(viii) or (ix) with respect to the Company or any
Subsidiary Guarantor) occurs and is continuing, the Trustee or the Holders of at
least 25% in aggregate principal amount of the then outstanding Notes may, and
the Trustee at the request of such Holders shall, declare all the Notes to be
due and payable immediately. In the case of an Event of Default arising from the
events specified in Sections 6.01(a)(viii) or (ix) with respect to the Company
or any Subsidiary Guarantor, the principal of, premium, if any, and any accrued
and unpaid interest on all outstanding Notes shall ipso facto become immediately
due and payable without further action or notice.
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SECTION 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal of, or
premium, if any, or interest on, the Notes or to enforce the performance of any
provision of the Notes or this Indenture. The Trustee may maintain a proceeding
even if it does not possess any of the Notes or does not produce any of them in
the proceeding. A delay or omission by the Trustee or any Holder in exercising
any right or remedy accruing upon an Event of Default shall not impair the right
or remedy or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 6.04. Waiver of Past Defaults.
The Holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under this Indenture except (i) a continuing Default or Event of
Default in the payment of the principal of, or premium, if any, or interest on,
the Notes (which may only be waived with the consent of each Holder of Notes
affected), or (ii) in respect of a covenant or provision which under this
Indenture cannot be modified or amended without the consent of each Holder of
Notes affected. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal, premium or interest) if
it determines that withholding notice is in their interest.
SECTION 6.05. Control by Majority of Holders.
Subject to Section 7.01(e), the Holders of a majority in
aggregate principal amount of the then outstanding Notes may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on it by this Indenture.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture, that the Trustee determines may be unduly prejudicial to the
rights of other Holders, or would involve the Trustee in personal liability.
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SECTION 6.06. Limitation of Suits by Holders.
A Holder may pursue a remedy with respect to this Indenture or
the Notes only if: (1) the Holder gives to the Trustee notice of a continuing
Event of Default; (2) the Holders of at least 25% in principal amount of the
then outstanding Notes make a request to the Trustee to pursue the remedy; (3)
such Holder or Holders offer to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense; (4) the Trustee does not comply
with the request within 60 days after receipt of the request and the offer of
indemnity; and (5) during such 60-day period the Holders of a majority in
aggregate principal amount of the then outstanding Notes do not give the Trustee
a direction inconsistent with the request. A Holder may not use this Indenture
to prejudice the rights of another Holder or to obtain a preference or priority
over another Holder. Holders of the Notes may not enforce this Indenture, except
as provided herein.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder to receive payment of principal of, and premium, if any, and
interest on, a Note, on or after a respective due date expressed in the Note, or
to bring suit for the enforcement of any such payment on or after such
respective date, shall not be impaired or affected without the consent of the
Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a)(i) or
(a)(ii) occurs and is continuing, the Trustee is authorized to recover judgment
in its own name and as trustee of an express trust against the Company for (i)
the principal, premium, if any, and interest remaining unpaid on the Notes, (ii)
interest on overdue principal and premium, if any, and, to the extent lawful,
interest, and (iii) such further amount as shall be sufficient to cover the
costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel
("Trustee Expenses").
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable to have the claims of the Trustee
(including any claim for Trustee Expenses and for amounts due under Section
7.07) and the Holders allowed in any Insolvency
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or Liquidation Proceeding relative to the Company (or any other obligor upon the
Notes), its creditors or its property and shall be entitled and empowered to
collect, receive and distribute to Holders any money or other property payable
or deliverable on any such claims and each Holder authorizes any Custodian in
any such Insolvency or Liquidation Proceeding to make such payments to the
Trustee, and if the Trustee shall consent to the making of such payments
directly to the Holders any such Custodian is hereby authorized to make such
payments directly to the Holders, and to pay to the Trustee any amount due to it
hereunder for Trustee Expenses, and any other amounts due the Trustee under
Section 7.07; provided, however, that the Trustee shall not be authorized to (i)
consent to, accept or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights of any
Holder, or (ii) vote in respect of the claim of any Holder in any such
Insolvency or Liquidation Proceeding. To the extent that the payment of any such
Trustee Expenses, and any other amounts due the Trustee under Section 7.07 out
of the estate in any such proceeding, shall be denied for any reason, payment of
the same shall be secured by a Lien on, and shall be paid out of, any and all
distributions, dividends, money, securities and other properties which the
Holders may be entitled to receive in such proceeding, whether in liquidation or
under any plan of reorganization or arrangement or otherwise.
SECTION 6.10. Priorities.
If the Trustee collects any money pursuant to this Article VI,
it shall pay out the money in the following order:
First: to the Trustee for Trustee Expenses for amounts due
under Section 7.07;
Second: to Holders for amounts due and unpaid on the Notes
for principal, premium, if any, and interest,
ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes
for principal, premium, if any, and interest,
respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders.
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SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a
Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.
ARTICLE VII
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default occurs (and has not been cured) the
Trustee shall (i) exercise the rights and powers vested in it by this Indenture,
and (ii) use the same degree of care and skill in exercising such rights and
powers as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs.
(b) Except during the continuance of an Event of Default: (i)
the Trustee's duties shall be determined solely by the express provisions of
this Indenture and the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others, and no implied covenants
or obligations shall be read into this Indenture against the Trustee; and (ii)
in the absence of bad faith on its part, the Trustee may conclusively rely, as
to the truth of the statements and the correctness of the opinions expressed
therein, upon certificates or opinions furnished to the Trustee and conforming
to the requirements of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether they conform to this Indenture's
requirements.
(c) The Trustee shall not be relieved from liability for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except, that: (i) this Section 7.01(c) does not limit the effect of
Section 7.01(b); (ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not
be liable with respect to any action it takes or omits to take in good faith in
accordance with a direction it receives pursuant to Section 6.05.
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(d) Every provision of this Indenture that in any way relates
to the Trustee shall be subject to paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture at the request of any Holders unless such Holders shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as it may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 7.02. Rights of Trustee.
(a) The Trustee may rely on any document it believes to be
genuine and to have been signed or presented by the proper Person. The Trustee
need not investigate any fact or matter stated in any such document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel; provided that such
action or omission does not constitute gross negligence. The Trustee may consult
with counsel and advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it under this Indenture in good faith and in reliance on
such advice or opinion.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits in good faith that it believes to be authorized or within its rights or
powers.
(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
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SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company or any of
its Affiliates with the same rights it would have if it were not Trustee.
However, if the Trustee acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
Trustee, or resign. Each Agent shall have the same rights as the Trustee under
this Section 7.03.
SECTION 7.04. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the Notes or
the Prospectus; it shall not be accountable for the Company's use of the
proceeds from the Notes or for any money paid to the Company or upon the
Company's direction under any provisions of this Indenture; it shall not be
responsible for the use or application of any money that any Paying Agent other
than the Trustee receives; and, it shall not be responsible for any statement or
recital in this Indenture or any statement in the Notes or any other document
executed in connection with the sale of the Notes or pursuant to this Indenture
other than its certificate of authentication.
SECTION 7.05. Notice to Holders of Defaults and Events of Default.
If a Default or Event of Default occurs and is continuing and
if it is known to the Trustee, the Trustee shall mail to Holders a notice of the
Default or Event of Default within 90 days after it occurs. Except in the case
of a Default or Event of Default in payment on any Note (including any failure
to redeem Notes called for redemption or any failure to purchase Notes tendered
pursuant to an Offer that are required to be purchased by the terms of this
Indenture), the Trustee may withhold the notice if and so long as the board of
directors, the executive committee or a committee of its Trust Officers
determines in good faith that withholding such notice is in the Holders'
interests.
SECTION 7.06. Reports by Trustee to Holders.
On or before June 15 in each year following the date hereof,
so long as any Notes are outstanding hereunder, the Trustee shall mail to
Holders a brief report dated as of such reporting date that complies with
Section 313(a) of the TIA (but if no event described in Section 313(a) of the
TIA has occurred within the twelve months preceding the reporting date,
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no report need be transmitted). The Trustee also shall comply with Section
313(b)(2) of the TIA. The Trustee shall also transmit by mail all reports as
required by Section 313(c) of the TIA.
Within 90 days after any Special Offer, or after the
consummation of the Cherokee Acquisition, if applicable, the Trustee shall mail
to Holders a brief report with respect to the release of the Trust Funds that
complies with Section 313(b) of the TIA.
A copy of each report at the time of its mailing to Holders
shall be filed with the Commission and each stock exchange, if any, on which the
Notes are listed. The Company shall notify the Trustee when the Notes are listed
on any stock exchange.
SECTION 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time
reasonable compensation for its services hereunder, as mutually agreed upon by
the Company and the Trustee. The Trustee's compensation shall not be limited by
any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, advances
and expenses it incurs or makes in addition to the compensation for its
services. Such expenses shall include the reasonable compensation, disbursements
and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee and each of its
directors, officers, employees, agents, representatives and counsel against any
and all losses, liabilities or expenses the Trustee incurs arising out of or in
connection with the acceptance or administration of its duties under this
Indenture, except as set forth below. The Trustee shall notify the Company
promptly of any claim for which it may seek indemnity; provided, however, that
failure by the Trustee to provide the Company with any such notice shall not
relieve the Company of any of its obligations under this Section 7.07. The
Trustee shall cooperate in the defense of any such claim. The Trustee may have
separate counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld.
The Company's obligations under this Section 7.07 shall
survive the satisfaction and discharge of this Indenture. The Company need not
reimburse any expense or indemnify against any loss or liability the Trustee
incurs as a result of its negligence or willful misconduct.
To secure payment of the Company's obligations under this
Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or
property the Trustee holds or collects, except the Trust Funds and any other
funds from time to time held in trust or as
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security to pay principal of, and premium, if any, and interest on, particular
Notes. Such Lien shall survive the satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(a)(viii) or (ix) occurs, the expenses
and the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute administrative expenses under any
Bankruptcy Law without any need to demonstrate substantial contribution under
Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.08.
The Trustee may resign and be discharged from the trust hereby
created by so notifying the Company. The Holders of a majority in aggregate
principal amount of the then outstanding Notes may remove the Trustee by so
notifying the Trustee and the Company. The Company may remove the Trustee if:
(i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged
a bankrupt or an insolvent or an order for relief is entered with respect to the
Trustee under any Bankruptcy Law; (iii) a Custodian or public officer takes
charge of the Trustee or its property; or (iv) the Trustee becomes incapable of
performing the services of the Trustee hereunder.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee; provided that the Holders of a majority in aggregate
principal amount of the then outstanding Notes may appoint a successor Trustee
to replace any successor Trustee appointed by Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring
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Trustee shall become effective and the successor Trustee shall have all the
rights, powers and duties of the Trustee under this Indenture. The successor
Trustee shall mail a notice of its appointment to Holders. The retiring Trustee
shall promptly transfer all property it holds as Trustee to the successor
Trustee; provided that all sums owing to the retiring Trustee hereunder have
been paid. Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue for the
retiring Trustee's benefit with respect to expenses and liabilities relating to
the retiring Trustee's activities prior to being replaced.
SECTION 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10. Eligibility; Disqualification.
The Trustee shall at all times (i) be a corporation organized
and doing business under the laws of the United States of America, of any state
thereof, or the District of Columbia authorized under such laws to exercise
corporate trust powers, (ii) be subject to supervision or examination by federal
or state authority, (iii) have a combined capital and surplus of at least $100
million as set forth in its most recently published annual report of condition,
and (iv) satisfy the requirements of Sections 310(a)(1),(2) and (5) of the TIA.
The Trustee is subject to Section 310(b) of the TIA.
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee is subject to Section 311(a) of the TIA, excluding
any creditor relationship listed in Section 311(b) of the TIA. A Trustee who has
resigned or been removed shall be subject to Section 311(a) of the TIA to the
extent indicated therein.
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ARTICLE VIII
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Notes; Defeasance.
(a) Subject to Sections 8.01(c), 8.02 and 8.06, this Indenture
shall cease to be of any further effect as to all outstanding Notes and
Subsidiary Guarantees after (i) either (a) all Notes heretofore authenticated
and delivered (other than Notes replaced pursuant to Section 2.07) have been
delivered to the Trustee for cancellation or (b) all Notes not previously
delivered for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee an amount in
United States dollars sufficient to pay and discharge the entire indebtedness on
such Notes not previously delivered to the Trustee for cancellation, for the
principal of, premium, if any, and interest to the date of repayment, (ii) the
Company has paid or caused to be paid all other sums payable under this
Indenture and (iii) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions precedent
under this Indenture relating to the satisfaction and discharge of this
Indenture have been complied with.
(b) Subject to Sections 8.01(c), 8.02, and 8.06, the Company
at any time may terminate (i) all its obligations under this Indenture and the
Notes ("Legal Defeasance Option"), or (ii) its obligations under Sections 4.02,
4.03, 4.05, 4.06, 4.07, 4.08, 4.09, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17,
4.18 and Article V ("Covenant Defeasance Option"). The Company may exercise its
Legal Defeasance Option notwithstanding its prior exercise of its Covenant
Defeasance Option.
If the Company exercises its Legal Defeasance Option, payment
of the Notes may not be accelerated because of an Event of Default. If the
Company exercises its Covenant Defeasance Option, payment of the Notes may not
be accelerated because of an Event of Default specified in Section 6.01(a)(iii).
Upon satisfaction of the conditions set forth in Section 8.02
and upon the Company's request (and at the Company's expense), the Trustee shall
acknowledge in writing the discharge of those obligations that the Company has
terminated.
(c) Notwithstanding Sections 8.01(a) and (b), the Company's
obligations under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 4.04, 4.10, 7.07,
7.08, 8.04, 8.05, and 8.06, and the obligations of the Trustee and the Paying
Agent under Section 8.04 shall survive until the Notes have been paid in full.
Thereafter, the Company's obligations under Sections 7.07 and 8.05 and the
obligations of the Company, Trustee and Paying Agent under Section 8.04 shall
survive.
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SECTION 8.02. Conditions to Defeasance.
In order to exercise either its Legal Defeasance Option and
give effect thereto ("Legal Defeasance") or its Covenant Defeasance Option and
give effect thereto ("Covenant Defeasance"), (i) the Company shall irrevocably
deposit with the Trustee, as trust funds in trust, for the benefit of the
Holders, cash in United States dollars, U.S. Government Obligations, or a
combination thereof, maturing as to principal and interest in such amounts as
will be sufficient, without consideration of any reinvestment of such interest,
in the opinion of a nationally recognized firm of independent public accountants
or a nationally recognized investment banking firm, to pay and discharge the
principal of, premium, if any, and interest on the outstanding Notes on the
stated maturity of such principal or installment of principal or interest; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an Opinion of Counsel confirming that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the date of this Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel confirming
that the Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as clauses (viii) and (ix) under Section 6.01 are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a Default under, this Indenture or any
other material agreement or instrument to which the Company is a party or by
which it is bound; (vi) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that (A) the trust funds will not be subject to
any rights of holders of Senior Debt or Guarantor Senior Debt of any Subsidiary
Guarantor, including, without limitation, those arising under this Indenture,
after the 91st day following the deposit and (B) after the 91st day following
the deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of the Notes over the other creditors of
the Company or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; (viii) no event or condition shall exist
that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Notes on the date of such deposit or at
<PAGE> 70
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any time ending on the 91st day after the date of such deposit; and (ix) the
Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided for
relating to either the Legal Defeasance or the Covenant Defeasance, as the case
may be, have been complied with.
SECTION 8.03. Application of Trust Money.
The Trustee or Paying Agent shall hold in trust money and/or
U.S. Government Obligations deposited with it pursuant to this Article VIII. The
Trustee or Paying Agent shall apply the deposited money and the money from U.S.
Government Obligations in accordance with this Indenture to the payment of
principal of, and premium, if any, and interest on, the Notes.
SECTION 8.04. Repayment to Company.
After the Notes have been paid in full, the Trustee and the
Paying Agent shall promptly turn over to the Company any excess money or
securities held by them upon the written direction of the Company.
Any money deposited with the Trustee or a Paying Agent
pursuant to this Article VIII for the payment of the principal of, premium, if
any, or interest on, any Note that remains unclaimed for two years after
becoming due and payable shall be paid to the Company on its request; and the
Holder of such Note shall thereafter, as an unsecured general creditor, look
only to the Company for payment thereof, and all liability of the Trustee or
such Paying Agent with respect to such money shall cease; provided, however,
that the Trustee or such Paying Agent, before being required to make any such
repayment, shall at the expense of the Company cause to be published once, in
The New York Times and The Wall Street Journal (national edition), notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such notification or
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.
SECTION 8.05. Indemnity for U.S. Government Obligations.
The Company shall pay and shall indemnify the Trustee and any
Paying Agent against any tax, fee or other charge imposed on or assessed against
cash and/or U.S. Government Obligations deposited with it pursuant to Section
4.18 or this Article VIII or imposed on or assessed against the principal and
interest received on such cash and/or U.S.
Government Obligations.
<PAGE> 71
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SECTION 8.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
U.S. Government Obligations in accordance with this Article VIII by reason of
any legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Notes shall
be revived and reinstated as though no deposit had occurred pursuant to this
Article VIII until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Article VIII; provided, however, that if the Company has made any payment of
principal of, or premium, if any, or interest on, any Notes because of the
reinstatement of its obligations under this Indenture and the Notes, the Company
shall be subrogated to the Holders' rights to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS
SECTION 9.01. Amendments and Supplements Permitted
Without Consent of Holders.
(a) Notwithstanding Section 9.02, the Company, the Subsidiary
Guarantors and the Trustee may amend or supplement this Indenture or the Notes
without the consent of any Holder to: (i) cure any ambiguity, defect or
inconsistency; (ii) provide for uncertificated Notes in addition to or in place
of certificated Notes; (iii) provide for the assumption of the Company's
obligations to the Holders in the event of any Disposition involving the Company
that is permitted under Article V in which the Company is not the Surviving
Person; (iv) make any change that would provide any additional rights or
benefits to Holders or does not adversely affect the interests of any Holder;
(v) comply with the requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the TIA; or (vi) add
additional Subsidiary Guarantors pursuant to Section 4.15.
(b) Upon the Company's request, after receipt by the Trustee
of a resolution of the Board of Directors authorizing the execution of any
amended or supplemental indenture, the Trustee shall join with the Company and
the Subsidiary Guarantors in the execution of any amended or supplemental
indenture authorized or permitted by the terms of this Indenture and to make any
future appropriate agreements and stipulations that may be contained in any such
amended or supplemental indenture, but the Trustee shall not be obligated to
enter into an
<PAGE> 72
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amended or supplemental indenture that affects its own rights, duties, or
immunities under this Indenture or otherwise.
SECTION 9.02. Amendments and Supplements Requiring
Consent of Holders.
(a) Except as otherwise provided in Sections 6.04, 9.01(a) and
9.02(c), this Indenture and the Notes may be amended or supplemented with the
written consent of the Holders of at least a majority in aggregate principal
amount of the then outstanding Notes (including consents obtained in connection
with a tender offer or exchange offer for the Notes), and any existing Default
or Event of Default or compliance with any provision of this Indenture or the
Notes may be waived with the consent of Holders of at least a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for the Notes).
(b) Upon the Company's request and after receipt by the
Trustee of a resolution of the Board of Directors authorizing the execution of
any supplemental indenture, evidence of the Holders' consent, and the documents
described in Section 9.06, the Trustee shall join with the Company and the
Subsidiary Guarantors in the execution of such amended or supplemental indenture
unless such amended or supplemental indenture affects the Trustee's own rights,
duties, or immunities under this Indenture or otherwise, in which case the
Trustee may in its discretion, but not be obligated to, enter into such amended
or supplemental indenture.
(c) No such modification or amendment may, without the consent
of the Holder of each outstanding Note affected thereby: (i) change the stated
maturity of the principal of, or any installment of interest on, any Note, or
reduce the principal amount thereof or the rate of interest thereon or any
premium payable upon the redemption thereof, or change the coin or currency or
the manner in which the principal of any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment after the stated maturity thereof (or, in the case of
redemption, on or after the redemption date); (ii) extend the time for payment
of interest on the Notes; (iii) alter the redemption provisions in the Notes or
this Indenture in a manner adverse to any Holder of the Notes; (iv) amend,
change or modify the obligation of the Company to make and consummate a Change
of Control Offer in the event of a Change of Control or modify any of the
provisions or definitions with respect thereto; (v) reduce the percentage in
principal amount of outstanding Notes, the consent of whose holders is required
for any amended or supplemental indenture or the consent of whose holders is
required for any waiver of compliance with any provision of this Indenture or
any Default hereunder and the consequences provided for hereunder; (vi) modify
any of the provisions of this Indenture relating to any amended or supplemental
<PAGE> 73
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indentures requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of any covenant, except to increase the
percentage of outstanding Notes required for such actions or to provide that any
other provision of this Indenture cannot be modified or waived without the
consent of the Holder of each Note affected thereby; (vii) except as otherwise
permitted under Section 5.01, consent to the assignment or transfer by the
Company of any of its rights and obligations under this Indenture; (viii) alter
the ranking of the Notes or the Subsidiary Guarantees in a manner adverse to
holders of the Notes; or (ix) amend, change or modify the obligation of the
Company to make and consummate a Special Offer or any of the definitions related
thereto in a manner adverse to any holder of Notes.
(d) It shall not be necessary for the consent of the Holders
under this Section 9.02 to approve the particular form of any proposed amendment
or waiver, but it shall be sufficient if such consent approves the substance
thereof. After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to each Holder affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such amended or supplemental
indenture or waiver.
SECTION 9.03. Compliance with TIA.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in an amended supplemental indenture that complies with the
TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
(a) Until an amendment, supplement or waiver becomes
effective, a consent to it by a Holder is a continuing consent by the Holder and
every subsequent Holder of a Note or portion of a Note that evidences the same
Indebtedness as the consenting Holder's Note, even if notation of the consent is
not made on any Note. However, any such Holder or subsequent Holder may revoke
the consent as to his or her Note or portion of a Note if the Trustee receives
the notice of revocation before the date on which the Trustee receives an
Officers' Certificate certifying that the Holders of the requisite principal
amount of Notes have consented to the amendment or waiver.
(b) The Company may, but shall not be obligated to, fix a
record date for the purpose of determining the Holders of Notes entitled to
consent to any amendment or waiver. If a record date is fixed, then
notwithstanding the provisions of the immediately preceding paragraph, those
Persons who were Holders of Notes at such record date (or their duly designated
proxies), and only those Persons, shall be entitled to consent to such amendment
or
<PAGE> 74
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waiver or to revoke any consent previously given, whether or not such Persons
continue to be Holders of Notes after such record date. No consent shall be
valid or effective for more than 90 days after such record date unless consents
from Holders of the principal amount of Notes required hereunder for such
amendment or waiver to be effective shall have also been given and not revoked
within such 90-day period.
(c) After an amendment or waiver becomes effective it shall
bind every Holder, unless it is of the type described in Section 9.02(c), in
which case the amendment or waiver shall only bind each Holder that consented to
it and every subsequent Holder of a Note that evidences the same debt as the
consenting Holder's Note.
SECTION 9.05. Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall authenticate
new Notes that reflect the amendment, supplement or waiver. Failure to make the
appropriate notation or issue a new Note shall not affect the validity and
effect of such amendment, supplement or waiver.
SECTION 9.06. Trustee Protected.
The Trustee shall sign any amendment or supplemental indenture
authorized pursuant to this Article IX if the amendment does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. If it does,
the Trustee may, but need not, sign it. In signing such amendment or
supplemental indenture, the Trustee shall be entitled to receive and, subject to
Section 7.01, shall be fully protected in relying upon, an Officers' Certificate
and Opinion of Counsel pursuant to Sections 11.04 and 11.05 as conclusive
evidence that such amendment or supplemental indenture is authorized or
permitted by this Indenture, that it is not inconsistent herewith, and that it
will be valid and binding upon the Company in accordance with its terms.
<PAGE> 75
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ARTICLE X
SUBSIDIARY GUARANTEES
SECTION 10.01. Subsidiary Guarantees.
(a) Each Subsidiary Guarantor hereby, jointly and severally,
unconditionally guarantees, on a senior unsecured basis, to each Holder of a
Note authenticated and delivered by the Trustee that: (i) the principal of,
premium, if any, and interest on the Notes will be promptly paid in full when
due, whether at maturity, by acceleration, redemption or otherwise, and interest
on the overdue principal of and interest on the Notes, if any, to the extent
lawful, and all other Obligations of the Company to the Holders or the Trustee
under this Indenture and the Notes will be promptly paid in full, all in
accordance with the terms of this Indenture and the Notes; and (ii) in case of
any extension of time of payment or renewal of any Notes or any of such other
Obligations, that the Notes will be promptly paid in full when due in accordance
with the terms of such extension or renewal, whether at stated maturity, by
acceleration or otherwise. In the event that the Company fails to pay any amount
guaranteed by the Subsidiary Guarantors for any reason whatsoever, the
Subsidiary Guarantors will be jointly and severally obligated to pay such amount
immediately. The Subsidiary Guarantors hereby further agree that their
Obligations under this Indenture and the Notes shall be unconditional and
absolute, regardless of the validity, regularity or enforceability of this
Indenture or the Notes, the absence of any action to enforce this Indenture or
the Notes, any waiver or consent by any Holder with respect to any provisions of
this Indenture or the Notes, any modification or amendment of, or supplement to,
this Indenture or the Notes, the recovery of any judgment against the Company or
any action to enforce any such judgment, or any other circumstance that might
otherwise constitute a legal or equitable discharge or defense of a Subsidiary
Guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment,
demand of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and covenants that its
Subsidiary Guarantee of the Company's Obligations under this Indenture and the
Notes will not be discharged except by complete performance by the Company or
another Guarantor of such Obligations. If any Holder or the Trustee is required
by any court or otherwise to return to the Company, any Subsidiary Guarantor or
a Custodian of the Company or a Subsidiary Guarantor any amount paid by the
Company or any Subsidiary Guarantor to the Trustee or such Holder, the
Subsidiary Guarantee of the Company's Obligations under this Indenture and the
Notes by each Subsidiary Guarantor shall, to the extent previously discharged as
a result of any such payment, be immediately reinstated and be in full force and
effect. Each Subsidiary Guarantor hereby acknowledges and agrees that, as
between the Subsidiary Guarantors, on the one hand, and the Holders and the
Trustee, on the other hand, (x) the maturity of the Company's Obligations under
this Indenture and the Notes may be accelerated
<PAGE> 76
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as provided in Article VI for purposes of the Subsidiary Guarantees
notwithstanding any stay, injunction or other prohibition preventing such
acceleration, and (y) in the event of any declaration of acceleration of the
Company's Obligations under this Indenture and the Notes as provided in Article
VI, such Obligations (whether or not due and payable) shall forthwith become due
and payable by the Subsidiary Guarantors for the purpose of the Subsidiary
Guarantees.
(b) Each Subsidiary Guarantor hereby waives all rights of
subrogation, contribution, reimbursement and indemnity, and all other rights,
that such Subsidiary Guarantor would have against the Company at any time as a
result of any payment in respect of its Subsidiary Guarantee (whether
contractual, under section 509 of the Bankruptcy Code, or otherwise).
(c) Each Subsidiary Guarantor that makes or is required to
make any payment in respect of its Subsidiary Guarantee shall be entitled to
seek contribution from the other Subsidiary Guarantors to the extent permitted
by applicable law; provided that each Subsidiary Guarantor agrees that any such
claim for contribution that such Subsidiary Guarantor may have against any other
Subsidiary Guarantor shall be subrogated to the prior payment in full in cash of
all Obligations owed to Holders under or in respect of the Notes.
(d) Upon the sale or disposition (whether by merger, stock
purchase, asset sale or otherwise) of a Subsidiary Guarantor (or substantially
all of its assets) to an entity which is not a Subsidiary of the Company, which
is otherwise in compliance with this Indenture, such Subsidiary Guarantor shall
be deemed released from all its obligations under its Subsidiary Guarantee;
provided that any such termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all of its guarantees of, and
under all of its pledges of assets or other security interests which secure,
other Indebtedness of the Company shall also terminate upon such release, sale
or transfer.
(e) Each Subsidiary Guarantor may consolidate with or merge
into or sell its assets to the Company or another Subsidiary Guarantor without
limitation. A Subsidiary Guarantor may consolidate with or merge into or sell
its assets to a corporation other than the Company or another Subsidiary
Guarantor (whether or not affiliated with such Subsidiary Guarantor, but subject
to the provisions described in Section 10.01(d)), provided that (a) if the
Surviving Person is not the Subsidiary Guarantor, the Surviving Person agrees to
assume such Subsidiary Guarantor's obligations under its Subsidiary Guarantee
and all its obligations under this Indenture and (b) such transaction does not
(i) violate any covenants set forth in this Indenture or (ii) result in a
Default or Event of Default under this Indenture immediately thereafter that is
continuing.
<PAGE> 77
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SECTION 10.02. Trustee to Include Paying Agents.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company, the term "Trustee" as used in this
Article X shall (unless the context shall otherwise require) be construed as
extending to and including such Paying Agent within its meaning as fully and for
all intents and purposes as if such Paying Agent were named in this Article X in
place of the Trustee.
SECTION 10.03. Limits on Subsidiary Guarantees.
Each Subsidiary Guarantor, and by its acceptance hereof each
Holder, hereby confirms that it is the intention of all such parties that the
guarantee by each Subsidiary Guarantor pursuant to its Subsidiary Guarantee not
constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy
Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act
or any similar Federal or state law. To effectuate the foregoing intention, the
Holders and each Subsidiary Guarantor hereby irrevocably agree that the
obligations of each Subsidiary Guarantor under the Subsidiary Guarantees shall
be limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of each Subsidiary Guarantor, result in the
obligations of each Subsidiary Guarantor under the Subsidiary Guarantees not
constituting such fraudulent transfer or conveyance.
SECTION 10.04. Execution of Subsidiary Guarantee.
To evidence its Subsidiary Guarantee set forth in this Article
X, each Subsidiary Guarantor hereby agrees to execute the Subsidiary Guarantee
in substantially the form included in Exhibit A, which shall be endorsed on each
Note ordered to be authenticated and delivered by the Trustee. Each Subsidiary
Guarantor hereby agrees that its Subsidiary Guarantee set forth in this Article
X shall remain in full force and effect notwithstanding any failure to endorse
on each Note a notation of such Subsidiary Guarantee. Each such Subsidiary
Guarantee shall be signed on behalf of each Subsidiary Guarantor by an Officer
(who shall have been duly authorized by all requisite corporate actions), and
the delivery of such Note by the Trustee, after the authentication thereof
hereunder, shall constitute due delivery of such Subsidiary Guarantee on behalf
of such Subsidiary Guarantor. Such signatures upon the Subsidiary Guarantee may
be by manual or facsimile signature of such Officer and may be imprinted or
otherwise reproduced on the Subsidiary Guarantee, and in case any such Officer
who shall have signed the Subsidiary Guarantee shall cease to be such Officer
before the Note on which such Subsidiary Guarantee is endorsed shall have been
authenticated and delivered by the Trustee or disposed of by the Company, such
Note nevertheless may be authenticated and delivered or
<PAGE> 78
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disposed of as though the person who signed the Subsidiary Guarantee had not
ceased to be such Officer of the Subsidiary Guarantor.
SECTION 10.05. Stay, Extension and Usury Laws.
Each Subsidiary Guarantor covenants (to the extent that it may
lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, that would
prohibit or forgive each Subsidiary Guarantor from performing its Subsidiary
Guarantee as contemplated herein or which might affect the covenants or the
performance of this Indenture and Notes; and each such Subsidiary Guarantor (to
the extent it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impede the execution of any power granted to the Trustee
pursuant to this Indenture, but will suffer and permit the execution of every
such power as though no such law has been enacted.
SECTION 10.06. Payment.
A payment on account of or with respect to any Subsidiary
Guarantee shall include, without limitation, any direct or indirect payment of
principal, premium or interest with respect to or in connection with any
optional redemption or purchase provisions, any direct or indirect payment
payable by reason of any other Indebtedness or Obligation being subordinated to
the Subsidiary Guarantees, and any direct or indirect payment or recovery on any
claim as a Holder relating to or arising out of this Indenture or any Subsidiary
Guarantee, or the issuance of any Subsidiary Guarantee, or the transactions
contemplated by this Indenture or referred to herein.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act Controls.
If any provisions of this Indenture limits, qualifies, or
conflicts with the duties imposed by operation of Section 318(c) of the TIA, the
imposed duties shall control.
<PAGE> 79
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SECTION 11.02. Notices.
Any notice or communication by the Company, any Subsidiary
Guarantor or the Trustee to the other is duly given if in writing and delivered
in person, mailed by registered or certified mail, postage prepaid, return
receipt requested or delivered by telecopier or overnight air courier
guaranteeing next day delivery to the other's address:
If to the Company or to any Subsidiary Guarantor:
PhoneTel Technologies, Inc.
1127 Euclid Avenue
Suite 650
Cleveland, Ohio 44115-1601
Attention: Tammy Martin
Telephone: (216) 623-2588
Facsimile: (216)
With a copy to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: Stephen Banker
Telephone: (212) 735-3000
Facsimile: (212)
If to the Trustee:
[
]
Attention:
Telephone:
Facsimile:
<PAGE> 80
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With a copy to:
[
]
Attention:
Telephone:
Facsimile:
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; the date receipt is acknowledged, if mailed by
registered or certified mail; when answered back, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first-class mail to his or her address shown on the register maintained by the
Registrar. Failure to mail a notice or communication to a Holder or any defect
in it shall not affect its sufficiency with respect to other Holders. If a
notice or communication is mailed in the manner provided above within the time
prescribed, it is duly given, whether or not the addressee receives it. If the
Company mails a notice or communication to Holders, it shall mail a copy to the
Trustee and each Agent at the same time.
SECTION 11.03. Communication by Holders with Other Holders.
Holders may communicate pursuant to Section 312(b) of the TIA
with other Holders with respect to their rights under this Indenture or the
Notes. The Company, the Trustee, the Registrar and any other Person shall have
the protection of Section 312(c) of the TIA.
<PAGE> 81
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SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee: (a) an Officers Certificate (which shall include the statements set
forth in Section 11.05) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been complied with; and (b) an Opinion of
Counsel (which shall include the statements set forth in Section 11.05) stating
that, in the opinion of such counsel, all such conditions precedent provided for
in this Indenture relating to the proposed action have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to Section 314(a)(4) of the TIA) shall include: (1) a
statement that the Person making such certificate or opinion has read such
covenant or condition; (2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based; (3) a statement that, in the opinion of
such Person, he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (4) a statement as to whether, in such
Person's opinion, such condition or covenant has been complied with.
SECTION 11.06. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
SECTION 11.07. Legal Holidays.
If a payment date is a Legal Holiday, payment may be made at
that place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
<PAGE> 82
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SECTION 11.08. No Recourse Against Others.
No director, officer, employee, incorporator or stockholder of
the Company or any Subsidiary Guarantor shall have any liability for any
obligation of the Company or any Subsidiary Guarantor under this Indenture, the
Notes or the Subsidiary Guarantees. Each Holder by accepting a Note (including
Subsidiary Guarantees) waives and releases such Persons from all such liability
and such waiver and release is part of the consideration for the issuance of the
Notes.
SECTION 11.09. Counterparts.
This Indenture may be executed in any number of counterparts
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
SECTION 11.10. Initial Appointments, Compliance Certificates.
The Company initially appoints the Trustee as Paying Agent,
Registrar and authenticating agent. The first compliance certificate to be
delivered by the Company to the Trustee pursuant to Section 4.03 shall be for
the fiscal year ending on December 31, 1996.
SECTION 11.11. Governing Law.
The laws of the State of New York shall govern this Indenture
and the Notes, without regard to the conflict of laws provisions thereof.
SECTION 11.12. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture,
loan or debt agreement of the Company or any of its Subsidiaries, and no other
indenture, loan or debt agreement may be used to interpret this Indenture.
<PAGE> 83
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SECTION 11.13. Successors.
All agreements of the Company in this Indenture and the Notes
shall bind any successor of the Company. All agreements of the Trustee in this
Indenture shall bind its successor.
SECTION 11.14. Severability.
If any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 11.15. Third Party Beneficiaries.
Holders of Senior Debt of the Company and Guarantor Senior
Debt of the Subsidiary Guarantors are third party beneficiaries of, and any of
them (or their Representative) shall have the right to enforce the provisions of
this Indenture that benefit such holders.
SECTION 11.16. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table, and headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture, and shall
in no way modify or restrict any of the terms or provisions of this Indenture.
<PAGE> 84
SIGNATURES
THE COMPANY:
PHONETEL TECHNOLOGIES, INC.
By:
----------------------------------
Name:
Title:
<PAGE> 85
THE SUBSIDIARY GUARANTORS:
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
PARAMOUNT COMMUNICATIONS SYSTEMS,
INC.
NORTHERN FLORIDA TELEPHONE
CORPORATION
PAYPHONES OF AMERICA, INC.
For each of the above:
By:
------------------------------------
Name:
Title:
<PAGE> 86
,
as Trustee
By:
---------------------------
Name:
Title:
<PAGE> 87
Schedule I
Subsidiary Guarantors Existing on the Issue Date
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
1. Public Telephone Corporation Indiana
2. World Communications, Inc. Missouri
3. Paramount Communications
Systems, Inc. Florida
4. Northern Florida Telephone
Corporation Florida
5. Payphones of America, Inc. Ohio
</TABLE>
<PAGE> 88
[FORM OF NOTE]
EXHIBIT A
(Face of Note)
CUSIP No. [ ]
PHONETEL TECHNOLOGIES, INC.
% Senior Note due 2006
No. ____________ $__________
PhoneTel Technologies, Inc., an Ohio corporation (hereinafter
called the "Company," which term includes any successor entity under the
Indenture hereinafter referred to), for value received, hereby promises to pay
to ________________ or registered assigns, the principal sum of
_______________________ Dollars on , 2006.
Interest Payment Dates: , and , commencing ,
1997
Record Dates:
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Note to be
signed manually or by facsimile by its duly authorized officers and a facsimile
of its seal to be affixed hereto or imprinted hereon.
[SEAL] PHONETEL TECHNOLOGIES, INC.
By:
-------------------------------
By:
-------------------------------
<PAGE> 89
CERTIFICATE OF AUTHENTICATION
This is one of the % Senior Notes due 2006 referred to in the within
mentioned Indenture.
, as Trustee
By: ______________________
Authorized Signatory
<PAGE> 90
(Back of Note)
% SENIOR NOTE DUE 2006
1. INTEREST. PhoneTel Technologies, Inc. (the "Company")
promises to pay interest on the principal amount of this Note at the rate and in
the manner specified below. Interest on this Note will accrue at % per annum
from the date this Note is issued until maturity and will be payable
semiannually in cash on and of each year, or if any
such day is not a Business Day on the next succeeding Business Day (each an
"Interest Payment Date"). Interest on this Note will accrue from the most recent
date on which interest has been paid or, if no interest has been paid, from the
date of original issuance; provided that the first Interest Payment Date shall
be , 1997. The Company shall pay interest on overdue principal
and premium, if any, from time to time on demand at the rate of 2% per annum in
excess of the interest rate then in effect and shall pay interest on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on this
Note (except defaulted interest) to the Person who is the registered Holder of
this Note at the close of business on the record date for the next Interest
Payment Date even if such Note is cancelled after such record date and on or
before such Interest Payment Date. Holders must surrender Notes to a Paying
Agent to collect principal payments on such Notes. The Company will pay
principal, premium, if any, and interest in money of the United States that at
the time of payment is legal tender for payment of public and private debts.
However, the Company may pay principal, premium, if any, and interest by check
payable in such money, and any such check may be mailed to a Holder's registered
address.
3. PAYING AGENT AND REGISTRAR. Marine Midland Bank (the
"Trustee") will initially act as the Paying Agent and Registrar. The Company may
appoint additional paying agents or co-registrars, and change the Paying Agent,
any additional paying agent, the Registrar or any co-registrar without prior
notice to any Holder. The Company or any of its Affiliates may act in any such
capacity.
4. INDENTURE. The Company issued the Notes under an Indenture,
dated as of , 1996 (the "Indenture"), by and among the Company, as
issuer of the Notes, each Subsidiary of the Company existing on the Issue Date
as set forth in Schedule I to the Indenture, each of the Company's Subsidiaries
which becomes a guarantor of the Notes in compliance with the provisions set
forth under Section 4.15 of the Indenture, and each of the Company's
Subsidiaries executing a supplemental indenture in which such Subsidiary agrees
to be bound by the terms of the Indenture as guarantors of the Company's
obligations under the Indenture and the Notes (each a "Subsidiary
<PAGE> 91
-2-
Guarantor") and the Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on
the date of the original issuance of the Notes (the "Trust Indenture Act"). The
Notes are subject to, and qualified by, all such terms, certain of which are
summarized herein, and Holders are referred to the Indenture and the Trust
Indenture Act for a statement of such terms (all capitalized terms not defined
herein shall have the meanings assigned them in the Indenture). The Notes are
unsecured general obligations of the Company limited to $ in aggregate
principal amount.
5. REDEMPTION PROVISIONS. The Notes are not redeemable at the
Company's option prior to , 2001. On and after such date, the Notes will
be subject to redemption at the option of the Company, in whole or in part, at
the redemption prices (expressed as percentages of the principal amount of the
Notes) set forth below, plus any accrued and unpaid interest to the date of
redemption, if redeemed during the twelve-month period beginning on [ ] of the
years indicated below:
<TABLE>
<CAPTION>
Year Percentage
<S> <C>
2001...................................... %
2002...................................... %
2003...................................... %
2004 and thereafter....................... 100%
</TABLE>
Notwithstanding the foregoing, at any time prior to ,
1999, the Company, at its option, may redeem up to [ ]% of the aggregate
principal amount of the Notes originally issued with the net cash proceeds of
one or more Public Equity Offerings, other than the Concurrent Offering, at a
redemption price equal to [ ]% of the principal amount thereof, together with
accrued and unpaid interest to the date of redemption; provided, however, that
at least $75 million in aggregate principal amount of the Notes remains
outstanding immediately after any such redemption.
6. MANDATORY OFFERS.
(a) Within 30 days after any Change of Control or any
Asset Sale Trigger Date, or on the Special Offer Notice Date, as the case may
be, the Company shall mail a notice to each Holder stating a number of items as
set forth in Sections 4.11 (with respect to Change of Control Offers) or 4.12
(with respect to a Special Offer) or 4.13 (with respect to Asset Sale Offers) of
the Indenture.
<PAGE> 92
-3-
(b) Holders may tender all or, subject to Section 8
below, any portion of their Notes in an Offer by completing the form below
entitled "OPTION OF HOLDER TO ELECT PURCHASE."
(c) Promptly after consummation of an Offer, (i) the
Paying Agent shall mail to each Holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for, plus any accrued and unpaid
interest on, such Notes, (ii) with respect to any tendered Note not accepted for
payment in whole or in part, the Trustee shall return such Note to the Holder
thereof, and (iii) with respect to any Note accepted for payment in part, the
Trustee shall authenticate and mail to each such Holder a new Note equal in
principal amount to the unpurchased portion of the tendered Note.
(d) The Company will (i) announce the results of the
Offer to Holders on or as soon as practicable after the Purchase Date, and (ii)
comply with the applicable tender offer rules, including the requirements of
Rule 14e-1 under the Securities Exchange Act of 1934, as amended, and all other
applicable securities laws and regulations in connection with any Offer.
7. NOTICE OF REDEMPTION. At least 30 days but not more than 60
days before any redemption date, the Company shall mail by first class mail a
notice of redemption to each Holder of Notes or portions thereof that are to be
redeemed.
8. NOTES TO BE REDEEMED OR PURCHASED. The Notes may be
redeemed or purchased in part, but only in whole multiples of $1,000 unless all
Notes held by a Holder are to be redeemed or purchased. On or after any date on
which Notes are redeemed or purchased, interest ceases to accrue on the Notes or
portions thereof called for redemption or accepted for purchase on such date.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples thereof. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. Holders seeking to transfer or exchange
their Notes may be required, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture.
Neither the Company nor the Registrar shall be required to
issue, register the transfer of or exchange any Note (i) during a period
beginning at the opening of business 15 days before the day of the mailing of
notice of any redemption from the Company and ending at the close of business on
the day the notice of redemption is sent to Holders, (ii) selected for
redemption, in whole or in part, except the unredeemed
<PAGE> 93
-4-
portion of any Note being redeemed in part may be transferred or exchanged, and
(iii) during any Change of Control Offer or Special Offer or Asset Sale Offer if
such Note is tendered pursuant to such Change of Control Offer or Special Offer
or Asset Sale Offer and not withdrawn.
10. PERSONS DEEMED OWNERS. The registered holder of a Note may
be treated as its owner for all purposes.
11. AMENDMENTS AND WAIVERS.
(a) Subject to certain exceptions, the Indenture and
the Notes may be amended or supplemented with the written consent of the Holders
of at least a majority in aggregate principal amount of the then outstanding
Notes, and any existing Default or Event of Default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
Holders of at least a majority in principal amount of the then outstanding
Notes.
(b) Notwithstanding Section 11(a) above, the Company
and the Trustee may amend or supplement the Indenture or the Notes without the
consent of any Holder to: cure any ambiguity, defect or inconsistency; provide
for uncertificated Notes in addition to or in place of certificated Notes;
provide for the assumption of the Company's obligations to the Holders in the
event of any Disposition involving the Company that is permitted under Article V
and in which the Company is not the Surviving Person; make any change that would
provide any additional rights or benefits to Holders or not adversely affect the
interests of any Holder; comply with the requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the Trust
Indenture Act; or provide for additional Subsidiary Guarantors.
(c) Certain provisions of the Indenture cannot be
amended, supplemented or waived without the consent of each Holder of Notes
affected.
12. DEFAULTS AND REMEDIES. Events of Default include: default
for 30 days in the payment when due of interest on the Notes; default in the
payment when due of principal on the Notes; failure to perform or comply with
certain covenants, agreements or warranties in the Indenture which failure
continues for 30 days after receipt of notice from the Trustee or Holders of at
least 25% of the outstanding Notes; defaults under and acceleration prior to
maturity, or failure to pay at maturity, of certain other Indebtedness; except
as permitted under the Indenture, any Subsidiary Guarantee shall cease for any
reason to be in full force and effect; certain judgments that remain
undischarged for a period of 60 days after their entry; dispositions by holders
of certain Indebtedness following a default under such Indebtedness of assets of
the Company or any Subsidiary
<PAGE> 94
-5-
pledged to secure such Indebtedness and certain events of bankruptcy or
insolvency involving the Company, any Subsidiary Guarantor or any other
Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes may declare all
outstanding Notes to be due and payable immediately in an amount equal to the
principal amount of and premium on, if any, such Notes, plus any accrued and
unpaid interest; provided, however, that in the case of an Event of Default
arising from certain events of bankruptcy or insolvency involving the Company or
any Subsidiary Guarantor, the principal amount of and premium on, if any, and
any accrued and unpaid interest on, the Notes becomes due and payable
immediately without further action or notice. Subject to certain exceptions,
Holders of a majority in aggregate principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on it
by the Indenture; provided that the Trustee may refuse to follow any direction
that conflicts with law or the Indenture, that the Trustee determines may be
unduly prejudicial to the rights of other Holders, or would involve the Trustee
in personal liability. The Trustee may withhold from Holders notice of any
continuing default (except a payment Default) if it determines that such
withholding is in their interests.
13. SUBSIDIARY GUARANTEES. Payment of principal, premium, if
any, and interest (including interest on overdue principal and overdue interest,
to the extent lawful) on the Notes and all other Obligations of the Company to
the Holders or the Trustee under the Indenture and the Notes is, jointly and
severally, unconditionally guaranteed by each of the Subsidiary Guarantors
pursuant to and subject to the terms of Article X of the Indenture.
14. TRUSTEE DEALINGS WITH COMPANY. The Trustee in its
individual or any other capacity may become the owner or pledgee of Notes and
may otherwise deal with the Company or any of its Affiliates with the same
rights it would have if it were not Trustee.
15. NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of the Company shall have any liability
for any obligation of the Company under the Indenture or the Notes. Each Holder
by accepting a Note waives and releases such Persons from all such liability,
and such waiver and release is part of the consideration for the issuance of the
Notes.
16. SUCCESSOR SUBSTITUTED. Upon the merger, consolidation or
other business combination involving the Company or one or more Subsidiary
Guarantors of the Company, or upon the sale, assignment, transfer, conveyance or
other disposition of all or substantially all of the Company's or a Subsidiary
Guarantor's properties and assets, the Surviving Person (if other than the
Company or a Subsidiary Guarantor, as the case may
<PAGE> 95
-6-
be) resulting from such disposition shall assume all of the obligations of the
Company or the Subsidiary Guarantor under the Notes, the Subsidiary Guarantee,
as applicable, and the Indenture and shall succeed to, and be substituted for,
and may exercise every right and power of, the Company or the Subsidiary
Guarantor under the Indenture with the same effect as if such Surviving Person
had been named as the Company or a Subsidiary Guarantor in the Indenture.
17. GOVERNING LAW. This Note shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflict of laws provisions thereof.
18. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
19. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT
(= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
20. CUSIP NUMBERS. Pursuant to a recommendation promulgated by
the Committee on Uniform Note Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and has directed the Trustee to use
CUSIP numbers in notices of redemption as a convenience to Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers printed on the securities.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture, which has in it the text of this
Note in larger type. Request may be made to: PhoneTel Technologies, Inc., 1127
Euclid Avenue, Suite 650, Cleveland, Ohio 44115-1601, Attention: [Investor
Relations].
<PAGE> 96
ASSIGNMENT FORM
To assign this Note, fill in the form below:
FOR VALUE RECEIVED the undersigned hereby sell(s), assigns(s)
and transfer(s) unto
________________________________________________________________________________
Please insert social security or other identifying number of assignee
________________________________________________________________________________
Please print or typewrite name and address including
zip code of assignee
________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing ______________________________ to transfer said Note on the books of
the Company.
The Agent may substitute another to act for him.
Date: ______________ Your Signature: ____________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee*:_______________________
- --------
* The Holder's signature must be guaranteed by an eligible guarantor that
is a member of one of the following recognized signature guarantee
programs: (A) The SECURITIES TRANSFER AGENTS MEDALLION PROGRAM; (B) The
NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE PROGRAM; or (C) The STOCK
EXCHANGES MEDALLION PROGRAM.
<PAGE> 97
EXHIBIT A-1
FORM OF NOTATION ON NOTE
RELATING TO GUARANTEE
Each Subsidiary Guarantor, jointly and severally,
unconditionally guarantees, to the extent set forth in the Indenture and subject
to the provisions of the Indenture that: (i) the principal of, premium, if any,
and interest on the Notes will be promptly paid in full when due, whether at
maturity, by acceleration, redemption or otherwise, and interest on the overdue
principal of and interest on the Notes, if any, to the extent lawful, and all
other Obligations of the Company to the Holders or the Trustee under the
Indenture and the Notes will be promptly paid in full, all in accordance with
the terms of the Indenture and the Notes; and (ii) in case of any extension of
time of payment or renewal of any Notes or any of such other Obligations, that
the Notes will be promptly paid in full when due in accordance with the terms of
such extension or renewal, whether at stated maturity, by acceleration or
otherwise.
The obligations of each Subsidiary Guarantor to the Holders of
Notes and the Trustee pursuant to this guarantee and the Indenture are set forth
in Article X of the Indenture, to which reference is hereby made.
Subsidiary Guarantors:
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
PARAMOUNT COMMUNICATIONS SYSTEMS
INC.
NORTHERN FLORIDA TELEPHONE
CORPORATION
PAYPHONES OF AMERICA, INC.
For each of the above:
By:
-------------------------------
Name:
Title:
<PAGE> 98
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Note purchased by the Company
pursuant to Section 4.11 of the Indenture, check the box: / /
If you elect to have this Note purchased by the Company
pursuant to Section 4.12 of the Indenture, check the box: / /
If you elect to have this Note purchased by the Company
pursuant to Section 4.13 of the Indenture, check the box: / /
If you elect to have only part of this Note purchased by the
Company pursuant to Section 4.11 or 4.12 or 4.13 of the Indenture, state the
amount (multiples of $1,000 only):
$_________________
Date: _________________ Your Signature: _____________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee:* _______________________
Your Signature: _____________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee: ________________________
- --------
* The Holder's signature must be guaranteed by an eligible guarantor that
is a member of one of the following recognized signature guarantee
programs: (A) The SECURITIES TRANSFER AGENTS MEDALLION PROGRAM; (B) The
NEW YORK STOCK EXCHANGE MEDALLION SIGNATURE PROGRAM; or (C) The STOCK
EXCHANGES MEDALLION PROGRAM.
<PAGE> 99
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY NOTES
Any Global Note authenticated and delivered hereunder shall
bear a legend in substantially the following form:
THIS SECURITY IS A GLOBAL NOTE WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS
SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE
DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY
BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION
("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE,
OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC),
ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE
& CO., HAS AN INTEREST HEREIN.
<PAGE> 100
SCHEDULE OF EXCHANGES
The following exchanges of a part of this Global Notes for Physical
Note have been made:
<TABLE>
<CAPTION>
Amount of increase Principal Amount of Signature of
Amount of decrease in Principal this Global Note authorized officer
Date of in Principal Amount Amount of this following such of Trustee or Note
Exchange of this Global Note Global Note decrease (or increase) Custodian
- -------- ------------------- ----------- ---------------------- ---------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PHONETEL TECHNOLOGIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Nine Months Ended
September 30
Pro Forma for
1995 and 1996
Pro Forma for Acquisitions,
1995 and 1996 Pending
Acquisitions, Acquisitions,
Year Ended December 31 Concurrent Concurrent
---------------------------------- Offering and Offering and
1993 1994 1995 Offering Offering 1995 1996
--------- ---------- ---------- --------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax loss from
continuing operations (778,875) (1,695,122) (6,109,697) (21,056,716) (24,033,752) (3,537,757) (12,980,078)
Fixed Charges:
Interest expense 174,994 388,215 836,911 12,019,656 15,169,633 304,105 4,139,663
Rentals:
Operating leases-
buildings, vehicles and
equipment - 33% 87,242 110,545 120,097 120,097 120,097 90,072 156,477
--------------------------------------------------------------------------------------------------
Total fixed charges 262,236 498,760 957,008 12,139,753 15,289,730 394,177 4,296,140
Loss before income
taxes and fixed charges (516,639) (1,196,362) (5,152,689) (8,916,963) (8,744,022) (3,143,580) (8,683,938)
==================================================================================================
Ratio of earnings to
fixed charges (2.0) (2.4) (5.4) (0.7) (0.6) (8.0) (2.0)
==================================================================================================
Earnings did not cover
fixed charges by - 778,875 1,695,122 6,109,697 21,056,716 24,033,752 3,537,757 12,980,078
<CAPTION>
Pro Forma
for 1996
Pro Forma Acquisitions
for 1996 Pending
Acquisitions, Acquisitions
Concurrent Concurrent
Offering and Offering and
Offering Offering
-------------- --------------
<S> <C> <C>
Pre-tax loss from
continuing operations (16,951,007) (22,345,144)
Fixed Charges:
Interest expense 8,426,820 10,526,820
Rentals:
Operating leases-
buildings, vehicles and
equipment - 33% 156,477 156,477
-------------------------------
Total fixed charges 8,583,297 10,683,297
Loss before income
taxes and fixed charges (8,367,710) (11,661,847)
===============================
Ratio of earnings to
fixed charges (1.0) (1.1)
===============================
Earnings did not cover
fixed charges by - 16,951,007 22,345,144
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-13767) 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
references to us under the headings "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
November 15, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 1 to the Registration Statement on Form SB-2 (No. 333-13767) of
our report dated May 17, 1996 relating to the financial statements of Paramount
Communications Systems, Inc., which appears in such Prospectus. We also consent
to the references to us under the headings "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
November 15, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in Amendment No. 1 to Form SB-2 in the Prospectus
constituting part of this Stock Registration Statement 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 15, 1996
<PAGE> 1
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 15, 1996
<PAGE> 1
EXHIBIT 23.5
November 15, 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
<PAGE> 1
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 15, 1996
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 1 to 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 15, 1996
<PAGE> 1
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 14, 1996
