<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1996
REGISTRATION NO. 333-13767
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHONETEL TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 4813 34-1462198
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) No.)
</TABLE>
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
(216) 241-2555
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
------------------------
TAMMY L. MARTIN, ESQ.
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER, GENERAL COUNSEL AND SECRETARY
PHONETEL TECHNOLOGIES, INC.
1127 EUCLID AVENUE, SUITE 650
CLEVELAND, OHIO 44115-1601
(216) 241-2555
(Name, Address and Telephone Number of Agent For Service)
------------------------
Copies to:
<TABLE>
<S> <C>
Stephen M. Banker, Esq. Norman R. Miller, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Wolin, Fuller, Ridley & Miller LLP
919 Third Avenue 3100 Bank One Center
New York, New York 10022 1717 Main Street
(212) 735-3000 Dallas, Texas 75201
(214) 939-4906
</TABLE>
------------------------
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 of
1933, 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE(3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value..... $ 31,250,000 $9,470
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant fee pursuant to rule 457(o) under the Securities Act of 1993.
(2) Includes shares issuable by the company which are subject to an
over-allotment option granted to the Underwriters.
(3) Of such registration fee, $8,182 was paid with the original filing of this
Registration Statement.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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.
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1996
PROSPECTUS
[PHONETEL LOGO]
6,750,000 SHARES
PHONETEL TECHNOLOGIES, INC.
COMMON STOCK
Of the 6,750,000 shares of Common Stock offered hereby (the "Offering"),
6,250,000 shares are being sold by PhoneTel Technologies, Inc. (the "Company"),
and 500,000 shares are being sold by certain shareholders of the Company (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders.
The Common Stock is listed on the American Stock Exchange, Inc. ("AMEX")
under the trading symbol "PHN." On December 11, 1996, the closing price of the
Common Stock on AMEX was $4.00 per share. See "Price Range of Common Stock."
The Company also intends to offer $110 million aggregate principal amount
of its Senior Notes due 2006 (the "Notes") by a separate prospectus (the
"Company Debt Offering"). The Offering is not conditioned upon consummation of
the Company Debt Offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
==========================================================================================================================
PROCEEDS
PRICE TO UNDERWRITING PROCEEDS TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................................. $ $ $
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Total(3)................................... $ $ $
==========================================================================================================================
<FN>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting certain expenses of the Offering payable by the Company
estimated at $ , including a nonaccountable expense allowance of
$100,000 payable to the Representative for due diligence and other
out-of-pocket expenses. See "Underwriting."
(3) The Company has granted the Underwriters a 45-day option to purchase up to
937,500 additional shares of Common Stock, solely to cover over-allotments,
if any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
</TABLE>
------------------------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates
representing the shares will be ready for delivery at the offices of Southcoast
Capital Corporation, New York, New York, on or about , 1996.
SOUTHCOAST CAPITAL
C o r p o r a t i o n
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
[INSERT MAP]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, INC.,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
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 of the Company, par value
$.01 per share (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 Common Stock offered hereby. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and, in each
instance, reference is made to such copy filed 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. 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. See "The Pending
Acquisitions." 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
8 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 Offering and the Company Debt Offering, the
Company would have achieved revenues of $59.5 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, the Pending Acquisitions
(collectively, the "Acquisitions"), the Offering and the Company Debt Offering,
the Company would have achieved revenues of $91.4 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 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
5
<PAGE> 7
customers and (ii) respond quickly to equipment malfunctions. The Company's
standard of performance is to repair malfunctions within 24 hours of their
occurrence.
Achieve market recognition. With the greater financial resources available to
the Company following the Company Debt Offering (as defined herein) and the
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
The Company has entered into an Agreement and Plan of Merger dated as of
November 21, 1996 (the "Cherokee Merger Agreement") with PhoneTel CCI, Inc.,
which is a wholly owned subsidiary of The Company, Cherokee Communications, Inc.
("Cherokee"), and all of the shareholders of Cherokee. Pursuant to the Cherokee
Merger Agreement, the Company will acquire approximately 14,000 public pay
telephones (located primarily in Texas, New Mexico, Utah, Montana and Colorado),
of which 13,350 will be installed and 650 will be subject to contracts
permitting installation, and certain other assets. 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 payable in two installments in
January 1998 and 1999 if certain new regulatory changes are not implemented. 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 closings of the Pending Acquisitions are expected to occur in January 1997,
although there can be no assurance that either acquisition will be consummated
or, if consummated, as to the final terms thereof. The Company expects to use a
portion of the net proceeds from the Company Debt Offering to finance the
Pending Acquisitions. If the Company Debt Offering is not consummated and no
alternative financing is arranged, the Company will be unable to complete the
Pending Acquisitions. The closing of this Offering is not conditioned upon
completion of the Pending Acquisitions.
6
<PAGE> 8
THE COMPANY DEBT OFFERING
The Company also expects to offer to the public $110.0 million of Senior Notes
due 2006 (the "Notes"), which will be guaranteed by all of the Company's
subsidiaries (the "Company Debt Offering"), for estimated net proceeds to the
Company therefrom of approximately $104.15 million. The Company intends to use
the net proceeds from the Company Debt Offering to finance the Pending
Acquisitions, to repay all of the remaining outstanding debt under the Credit
Agreement, to repay certain capital lease obligations and other indebtedness and
for working capital and other general corporate purposes, including the possible
redemption of approximately $5.5 million of its mandatorily redeemable 14%
Preferred (as defined herein). The closing of the Company Debt Offering is
expected to occur in December 1996, although there can be no assurance that such
offering will be consummated. The consummation of the Offering is not
conditioned upon the consummation of the Company Debt Offering. If the Company
Debt Offering is not consummated, the Company may require additional sources of
financing other than the New Credit Agreement.
The Company will be required to make an offer to purchase $35.0 million
aggregate principal amount of the Notes on the Special Offer Date (as defined
herein) at the Special Offer Price (as defined herein) if the Cherokee
Acquisition is not consummated prior to , 1997 (90 days after the
issuance of the Notes). A portion of the net proceeds of the Company Debt
Offering equal to the amount sufficient to permit the Company to purchase $35.0
million aggregate principal amount of the Notes on the Special Offer Date at the
Special Offer Price (such amount referred to herein as the "Trust Funds"), in
the form of cash, treasury securities and certain other cash equivalents, will
be deposited with the Trustee (as defined herein) for the benefit of the holders
of the Notes. See "Risk Factors -- Possible Non-Consummation of the Pending
Acquisitions and the Company Debt Offering" and "Description of Certain
Indebtedness -- The Notes."
SOURCES AND USES OF FUNDS
The following table sets forth the estimated sources and uses of the proceeds to
be received by the Company from the Offering and, if consummated, the Company
Debt Offering (determined as of November 30, 1996):
<TABLE>
<CAPTION>
------
In millions AMOUNT
------
<S> <C>
SOURCES OF FUNDS:
Offering.............................................................................. $25.0
Company Debt Offering................................................................. 110.0
------
Total sources of funds.............................................................. $135.0
======
USES OF FUNDS:
Cherokee Acquisition (1).............................................................. $61.2
Texas Coinphone Acquisition........................................................... 3.7
Repay Credit Agreement................................................................ 43.0
Repay capitalized lease obligations................................................... 7.8
Repay POA Sellers' Notes.............................................................. 3.3
Related fees and expenses (2)......................................................... 8.4
Working capital and general corporate purposes (3).................................... 7.6
------
Total uses of funds......................................................... $135.0
======
</TABLE>
- ---------------
(1) Represents the purchase price of $54 million (net of a $520,000 deposit)
plus related fees and expenses of approximately $1.1 million, a $625,000
initial payment for the non-competition agreements and $6.0 million to be
held in escrow pursuant to the terms of the Cherokee Merger Agreement to
fund the Rate Cap Amounts (as defined herein).
(2) Represents (i) estimated underwriting discount and other expenses of the
Offering of $2.5 million and (ii) estimated underwriting discount and other
expenses of the Company Debt Offering of $5.85 million.
(3) The Company may elect, at its option, to use a portion of the proceeds to
redeem approximately $5.5 million of the 14% Preferred in lieu of using such
funds for working capital purposes.
7
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
By the Company............................... 6,250,000 shares
By the Selling Shareholders.................. 500,000 shares
Common Stock to be Outstanding after the
Offering (1)................................. 14,389,709 shares
Use of Proceeds to the Company................. To pay a portion of the indebtedness under the Credit
Agreement (as defined herein) and for working capital
and other general corporate purposes.
AMEX Symbol.................................... "PHN"
</TABLE>
- ---------------
(1) Based on the shares outstanding at November 30, 1996. Does not include an
aggregate of 12,724,117 shares of Common Stock reserved at November 30, 1996
for issuance under the following circumstances: (i) the exercise of warrants
to purchase shares of Series A Preferred (as defined herein), which are
immediately convertible into Common Stock, (ii) the conversion of the 14%
Preferred into Common Stock, (iii) the exercise of the Nominal Value
Warrants (as defined herein) and certain other warrants, (iv) the exercise
of outstanding options and (v) the conversion of certain outstanding
indebtedness under the Credit Agreement into shares of Series B Preferred
(as defined herein), which are immediately convertible into Common Stock.
See "Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Capital Stock -- Equity Securities Reserved for Issuance."
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."
8
<PAGE> 10
SUMMARY 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
PRO FORMA FOR 1996
1995 AND ACQUISITIONS,
PRO FORMA FOR 1996 PENDING
1995 AND ACQUISITIONS, ACQUISITIONS,
1996 OFFERING OFFERING
ACQUISITIONS AND AND
AND COMPANY DEBT COMPANY DEBT
1993 1994 1995 OFFERING (1) OFFERING (2) OFFERING (3) 1995
--------- --------- --------- ------------- ------------- ------------- ---------
Dollars in thousands, except per share data (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $11,070 $15,866 $18,718 $59,515 $ 59,515 $ 91,401 $11,957
Costs and expenses 11,683 17,180 24,007 68,734 68,734 101,106 15,203
Loss from operations (613) (1,314) (5,289) (9,219) (9,219) (9,704) (3,246)
Interest expense 175 388 837 8,771 12,070 14,520 304
Loss before extraordinary
item (779) (1,695) (6,110) (18,055) (20,479) (24,505) (3,538)
Net loss (779) (1,695) (6,110) -- -- -- (3,538)
Net loss applicable to
common shareholders (7) (986) (1,987) (6,419) (18,708) (21,132) (25,158) (3,770)
Net loss per common share
(7) (0.96) (1.35) (3.29) (1.54) (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 12,113,084 1,695,280
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA (8) $283 $922 $1,264 $10,380 $10,380 $21,243 $337
EBITDA margin (9) 2.56% 5.81% 6.75% 17.44% 17.44% 23.24% 2.82%
Ratio of EBITDA to interest
expense 1.62 2.38 1.51 1.18 .86 1.46 1.11
Number of public pay
telephones
in service 2,350 4,891 9,458 24,074 24,074 37,763 8,344
<CAPTION>
-------------------------------------------------------------
NINE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 1996
------------- ---------------------------------------------
PRO FORMA FOR
1996
PRO FORMA FOR ACQUISITIONS,
FOR 1996 PENDING
PRO FORMA ACQUISITIONS, ACQUISITIONS,
FOR 1996 OFFERING OFFERING
ACQUISITIONS AND AND
AND COMPANY DEBT COMPANY DEBT
1996 OFFERING (4) OFFERING (5) OFFERING (6)
--------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $28,315 $45,379 $45,379 $70,448
Costs and expenses 37,156 54,354 54,354 81,390
Loss from operations (8,840) (8,975) (8,975) (10,942)
Interest expense 4,140 5,041 9,127 10,527
Loss before extraordinary
item (12,980) (14,086) (17,297) (21,534)
Net loss (13,247) -- -- --
Net loss applicable to
common shareholders (7) (15,519) (14,356) (17,567) (21,803)
Net loss per common share
(7) (3.60) (1.07) (1.31) (1.63)
Weighted average number of
common shares 4,305,130 13,376,413 13,376,413 13,376,413
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA (8) $5,554 $9,766 $9,776 $16,055
EBITDA margin (9) 19.62% 21.52% 21.52% 22.79%
Ratio of EBITDA to interest
expense 1.34 1.94 1.07 1.53
Number of public pay
telephones
in service 24,732 24,732 24,732 38,421
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1996
----------------------------------------------------------------------------
PRO FORMA FOR PRO FORMA FOR THE PENDING
THE COMPANY DEBT ACQUISITIONS,
PRO FORMA OFFERING AND THE THE COMPANY DEBT OFFERING
ACTUAL FOR OFFERING (10) OFFERING (11) AND THE OFFERING (12)
-------- ----------------- ---------------- -------------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 74,940 $89,445 $115,367 $151,321
Long-term debt and obligations
under capital leases
(including current
installments) 49,146(13) 41,146 77,302 112,864
14% Mandatorily redeemable
preferred stock 6,539 6,539 6,539 6,539
Non-mandatorily redeemable
preferred stock, common stock
and other shareholders'
equity 11,645 34,150 23,914 23,914
Working capital (deficit) (14) (11,319) 3,186 33,209 6,327
</TABLE>
<PAGE> 11
- ---------------
(1) Gives effect to the acquisitions of International Pay Phones, Inc. of
Tennessee ("IPP TN") and of International Pay Phones, Inc. of South
Carolina "IPP SC" and, together with IPP TN, "IPP"), Paramount
Communications Systems, Inc. ("Paramount"), POA and Amtel (collectively,
the "1996 Acquisitions") and the acquisitions of World Communications, Inc.
("World") and Public Telephone Corporation ("Public Telephone") (together,
the "1995 Acquisitions") and the Offering, as if such transactions had
occurred on January 1, 1995. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, the Offering
and the Company Debt 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.
(3) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, and the
Pending Acquisitions (collectively, the "Acquisitions"), the Offering and
the Company Debt Offering, as if such transactions had occurred on January
1, 1995. Such unaudited pro forma financial data is not necessarily
indicative of the results of operations that might have occurred if the
transactions had taken place on such date or which might occur in any
future period. Because Cherokee's fiscal year ends on September 30, the
historical and pro forma information relating to Cherokee is for the nine
months ended June 30, 1996.
(4) Gives effect to the 1996 Acquisitions 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.
(5) Gives effect to the 1996 Acquisitions, the Offering and the Company Debt
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.
(6) Gives effect to the 1996 Acquisitions, the Pending Acquisitions, the
Offering and the Company Debt Offering, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period. Because Cherokee's fiscal year ends on
September 30, the historical and pro forma information relating to Cherokee
is for the nine months ended June 30, 1996.
(7) 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.
(8) EBITDA represents earnings before interest income, interest expense, income
taxes, depreciation, amortization and other unusual charges and settlements
of employment contracts. EBITDA is not intended to represent an alternative
to operating income (as determined in accordance with generally accepted
accounting principles) as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
as a measure of liquidity. The Company believes that EBITDA is a meaningful
measure of performance because it is commonly used in the public pay
telephone industry to analyze comparable public pay telephone companies on
the basis of operating performance, leverage and liquidity.
(9) EBITDA margin is calculated by dividing (a) EBITDA by (b) total revenues.
EBITDA margin is a measure commonly used in the Company's industry as an
indicator of the efficiency of the Company's operations.
(10) Gives effect to the Offering as if such transaction had occurred on
September 30, 1996.
(11) Gives effect to the Company Debt Offering and the Offering, as if such
transactions had occurred on September 30, 1996 and assuming $35 million is
held in escrow for five months and is then utilized to purchase Notes from
the bondholders.
(12) Gives effect to the Pending Acquisitions, the Company Debt Offering and the
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.
(13) 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.
(14) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
10
<PAGE> 12
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of risk.
In addition to the other information contained in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating the
Company and its business before purchasing any of the shares of Common Stock
offered hereby.
SUBSTANTIAL LEVERAGE AND EFFECT ON ABILITY TO PAY INDEBTEDNESS
The Company has, and upon the consummation of the Company Debt Offering will
continue to have, substantial indebtedness. 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 Company Debt Offering and the
Offering, the Company's total indebtedness would have been $112.9 million, its
total assets would have been $151.3 million and its mandatorily redeemable
preferred stock and other equity would have been $30.5 million. The Company will
repay indebtedness under, and terminate, the Credit Agreement upon consummation
of the Company Debt Offering and is negotiating with lenders to enter into a new
$25 to $50 million senior credit facility (the "New Credit Agreement") following
consummation of the Company Debt Offering. There can be no assurance that the
New Credit Agreement will be executed. The completion of this Offering is not
conditioned upon the consummation of the Company Debt Offering or the execution
of the New Credit Agreement.
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 from the Company Debt Offering or the New Credit Agreement, 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,
although, there can be no assurance that the Company will be able to do so.
There can be no assurance that the Company will enter into the New Credit
Agreement or consummate the Company Debt Offering or that the New Credit
Agreement or the Indenture pursuant to which the Notes are issued will be on
terms favorable to the Company. If the Company Debt Offering is not consummated,
the Company may require additional sources of financing, other than the New
Credit Agreement. See "-- Possible Non-Consummation of the Pending Acquisitions
and the Company Debt Offering." If the Company is unable to generate sufficient
earnings and cash flow to meet its obligations with respect to its outstanding
indebtedness, including, if issued, 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 Credit Agreement or the New Credit Agreement, as
applicable, 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 asset sales. See "Description of Certain Indebtedness -- The New
Credit Agreement." For restrictions on debt refinancing and asset dispositions
under the Indenture, see "Description of Certain Indebtedness -- 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
11
<PAGE> 13
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 regulations adopted
by the FCC pursuant to Section 276 are expected to have a significant effect on
the public pay telephone industry. For a discussion of the potential effects of
Section 276 on the public pay telephone industry and competition within this
industry, including the FCC's regulations to implement Section 276, see
"Business -- Governmental Regulations -- Federal" and "-- Competition." A number
of parties have filed petitions for judicial review of these regulations in
federal courts of appeals. To date, the regulations remain in effect. 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 Company Debt Offering
and the 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
The terms and conditions of the Indenture will, and the terms and conditions of
the New Credit Agreement 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." Similar to the Credit Agreement, the
New Credit Agreement is expected to be secured and guaranteed by all of the
Company's subsidiaries. The Credit Agreement requires, and the New Credit
Agreement is expected to require, the Company to satisfy certain financial
covenants on a quarterly basis. The Company was not in compliance with various
financial covenants contained in the Credit Agreement at June 30, 1996 and
subsequently received a waiver of such non-compliance from the Lenders. The
Credit Agreement was amended on October 8, 1996 to make the covenants less
restrictive and 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 Credit Agreement or New Credit Agreement, as applicable, and other
indebtedness of the Company. In the event of any such default, the lenders could
elect to declare all amounts borrowed under the Credit Agreement or New Credit
Agreement, as applicable, together with accrued interest, to be due and payable.
If the Company were unable to pay such amounts, the lenders could proceed
against their collateral. If the indebtedness under the Credit Agreement or New
Credit Agreement, as applicable, were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other indebtedness of the Company.
POSSIBLE NON-CONSUMMATION OF THE PENDING ACQUISITIONS AND THE COMPANY DEBT
OFFERING
The consummation of the Cherokee Acquisition, which is expected to occur in
January 1997, is subject to certain closing conditions. The consummation of the
Texas Coinphone Acquisition, which is also expected to occur in January 1997, is
subject to certain conditions, including the negotiation and execution of a
definitive purchase agreement. The Texas Coinphone Letter of Intent expires on
December 13, 1996. If a definitive purchase agreement is not entered into by
such date, the Company intends to seek an extension thereof, or to negotiate a
definitive agreement on terms mutually acceptable to the Company and Texas
Coinphone. The Company expects to use a portion of the net proceeds from the
Company Debt Offering to finance the Pending Acquisitions. Although management
believes that all such conditions to consummate the Pending Acquisitions will be
satisfied, including the consummation of the Company Debt Offering, there can be
no assurance that such conditions will be satisfied or waived or that the
closings will occur. 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 Certain Indebtedness -- The Notes."
12
<PAGE> 14
If the Company Debt Offering is not consummated and no alternative financing is
arranged, the Company will be unable to complete the Pending Acquisitions.
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."
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.
13
<PAGE> 15
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,
provision 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 operations 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.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation could, together or
separately, discourage potential acquisition proposals, delay or prevent a
change in control of the Company and limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock.
These provisions include the authority of the Board of Directors to issue shares
of preferred stock with rights and privileges which could be senior to the
Common Stock, without obtaining shareholder approval. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate transactions, could have the effect of making it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
significant percentage of the outstanding voting stock of the Company. Although
the Company has the ability to use such provisions as anti-takeover measures,
the Company currently has no intention to issue such preferred stock in the
future. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICES
The Company can make no prediction as to the effect, if any, that sales of
additional shares of Common Stock or the availability of shares for future sale
will have on the market price of the Common Stock. Sales in the public market of
substantial amounts of the
14
<PAGE> 16
Common Stock (including shares issued upon the exercise of outstanding options
or warrants), or the perception that such sales could occur, could depress
prevailing market prices for the Common Stock. Such sales also may make it more
difficult for the Company to sell equity securities or equity-related securities
in the future at a time and price that the Company deems appropriate.
After giving effect to the Offering, the Company would have 14,389,709 shares of
Common Stock outstanding as of November 30, 1996. In addition, at November 30,
1996, an aggregate of 12,724,117 shares of Common Stock have been reserved for
issuance pursuant to (i) the exercise of options and warrants to purchase
2,464,477 shares of Common Stock, all of which were immediately exercisable, and
(ii) the conversion of shares of the Company's Series A Preferred (as defined
herein), Series B Preferred (as defined herein) and 14% Preferred (as defined
herein). The 6,750,000 shares of Common Stock, when sold hereby, together with
all of the 14,783,750 shares to be registered pursuant to the Shelf Registration
Statement (as defined below), when issued, and the 1,222,226 shares of Common
Stock currently outstanding which were either registered or sold pursuant to
Rule 144 as described below will be freely transferable without restriction
under the Securities Act, unless held by an affiliate of the Company. The
remaining outstanding shares of Common Stock held by existing stockholders are
"restricted securities" of the Company within the meaning of Rule 144 under the
Securities Act and may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration thereunder,
including the exemption contained in Rule 144, which contains certain volume and
other resale limitations. Pursuant to Rule 144(k), however, a person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at the time of sale and has not been an affiliate during the three
months immediately preceding the sale may sell such shares without regard to
such volume and other resale limitations of Rule 144 provided that a period of
at least three years has elapsed since the later of the date the securities were
acquired from the issuer or from an affiliate of the issuer.
Holders of the Company's options, warrants and convertible preferred stock and
certain holders of the Company's Common Stock have entered into registration
rights agreements with the Company and have demand and/or piggyback registration
rights under certain circumstances. The Company has obtained waivers of such
registration rights in connection with the Offering from the holders of
approximately 92% of the underlying shares of Common Stock having piggyback
registration rights as a result of the filing of the Registration Statement of
which this Prospectus forms a part. However, in order to satisfy its obligations
under such registration rights agreements, the Company has filed a shelf
registration statement (the "Shelf Registration Statement"). The Company expects
to register 14,783,750 shares of Common Stock, including the shares issuable
upon the exercise or conversion of such options, warrants and convertible
preferred stock pursuant to the Shelf Registration Statement. The Company
expects that the Shelf Registration Statement will be declared effective prior
to the consummation of the Offering. Upon effectiveness of the Shelf
Registration Statement, all of such shares of Common Stock, when issued, will be
eligible for sale without restriction under the Securities Act. However, each of
the Selling Shareholders, who hold approximately 69% of the underlying shares of
Common Stock having registration rights, and other holders of approximately 24%
of the underlying shares of Common Stock having registration rights have entered
into lock-up agreements with the representative of the Underwriters. See
"Underwriting."
In connection with the Offering, the Company and its executive officers and
directors have agreed pursuant to lock-up agreements that they will not offer or
sell any shares of Common Stock of the Company beneficially owned by them during
a period of 180 days (the "Lock-up Period") following the effective date of the
Registration Statement of which this prospectus forms a part (the "Effective
Date") without the prior written consent of Southcoast Capital Corporation,
except that the Company may issue shares of Common Stock upon the exercise of
options or in connection with acquisitions. After the Lock-up Period, all such
shares may be sold in accordance with Rule 144 under the Securities Act.
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for the Company's Common
Stock. Quarterly operating results of the Company, changes in general conditions
in the economy, the financial markets of the telecommunications industry or
other developments affecting the Company or its competitors, could cause the
market price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years, the stock market and, in particular, the
telecommunications industry segment, has experienced significant price and
volume fluctuations. This volatility has affected the market prices of
securities issued by many companies for reasons unrelated to their operating
performance.
SEASONALITY
The Company's revenues have fluctuated seasonally on a historical basis. The
Company's public pay telephones in the northern and western states, some of
which are located outdoors, typically experience reduced revenues in the first
quarter due to weather conditions, which may have a material adverse effect on
the Company's operating performance. Revenues are typically highest in the
fourth quarter because of the increased volume of calls made during the holiday
season.
15
<PAGE> 17
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.
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Common Stock. The
Company currently intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. The Credit Agreement restricts the Company's ability to pay
dividends, and the Company cannot pay dividends on the Common Stock unless
dividends are also paid on the Series A Preferred and the Series B Preferred.
See "Dividend Policy."
POSSIBLE CHANGE IN CONTROL
In connection with the Company's Credit Agreement dated March 15, 1996, as
amended (the "Credit Agreement"), with the Lenders, ING and Cerberus received
warrants to purchase a total of 204,824 shares of Series A Special Convertible
Preferred Stock ("Series A Preferred") which, in turn, are convertible into
4,096,480 shares of Common Stock. In addition, at November 30, 1996, $29,000,000
of the outstanding debt under the Credit Agreement is convertible into 241,667
shares of Series B Special Convertible Preferred Stock ("Series B Preferred")
which, in turn, is convertible into a total of 4,833,333 shares of Common Stock.
Prior to the consummation of the Offering, each of ING and Cerberus intend to
exercise warrants in an amount sufficient to purchase shares of Series A
Preferred that are convertible into an aggregate of 500,000 shares of Common
Stock, which shares will be sold in the Offering. Upon consummation of the
Offering, ING and Cerberus will still have the right to acquire 3,596,480 shares
of Common Stock upon exercise of the remaining warrants and 4,833,333 shares of
Common Stock assuming conversion of the outstanding debt under the Credit
Agreement, or ownership of 23.68% of the Company's Common Stock (based on the
amount outstanding as of November 30, 1996 after giving effect to the Offering).
Upon consummation of the Offering and the Company Debt Offering and the
repayment of all outstanding debt under the Credit Agreement, each of ING and
Cerberus will still have the right to acquire 1,798,240 shares of Common Stock
upon exercise of the remaining warrants, which would result in ownership of
12.65% of the Company's Common Stock (based on the amount outstanding as of
November 30, 1996 after giving effect to the Offering).
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus that reflect projections or expectations of future
financial or economic performance of the Company, and statements of the
Company's plans and objectives for future operations, including, 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.
16
<PAGE> 18
THE PENDING ACQUISITIONS
THE CHEROKEE ACQUISITION
The Company has entered into the Cherokee Merger Agreement 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 (the "Rate Cap Amounts") payable in two
installments due January 1998 and 1999 if the FCC fails to implement certain
rate caps, rate guidelines or third party preferences (the "Rate Caps") during
the first and second years after the closing, 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 13,350 will be installed and 650 will be
subject to contracts permitting installation), and a 50% interest in 300
installed public pay telephones in Monterrey, Mexico which are owned by a joint
venture. 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. 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 on the Special Offer
Date if the Cherokee Acquisition is not consummated prior to , 1997.
See "Risk Factors -- Possible Non-Consummation of the Pending Acquisitions and
the Company Debt Offering" and "Description of Certain Indebtedness -- The
Notes."
Pursuant to the Cherokee Merger Agreement and the escrow agreement entered into
in connection with the Cherokee Merger Agreement, the Company has deposited
$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 Cherokee Merger Agreement or the Cherokee
Acquisition otherwise fails to close by January 31, 1997 for any reason other
than a material breach of the Cherokee Merger Agreement by Cherokee or its
selling shareholders. The Cherokee Merger Agreement also provides that at the
closing the Company will deposit an additional $480,000 into an escrow account,
such additional deposit, together with the original deposit, which equal $1
million in the aggregate, will be held in escrow to fund certain indemnification
arrangements. To the extent not utilized to fund such payments, the escrowed
funds would be released to the sellers 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. In addition, pursuant to The Cherokee
Merger Agreement the Company will be required at closing to deposit into escrow
the following amounts: (i) $624,999 to fund certain of the Company's obligations
with respect to the employment and non-competition agreements to be entered into
with three key employees of Cherokee, which escrowed funds will be released to
such employees 120 days after the closing of the Cherokee Acquisition unless
such employees are no longer entitled to such funds under the terms of the
employment and non-competition agreements and (ii) $6,000,000 to fund the Rate
Cap Amounts, which escrowed funds will be released to Cherokee and/or PhoneTel
depending on the terms of the Rate Caps, if any, that are implemented by the
FCC.
Pursuant to the Cherokee Merger Agreement, the sellers in the Cherokee
Acquisition have each agreed to be personally liable for any breach of their own
representations and warranties, and to varying extents, for breach of Cherokee's
representations, warranties and covenants and for certain other liabilities, in
each case (with certain exceptions), for losses in the aggregate 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 liabilities of
Cherokee assumed by the Company or that the sellers will satisfy their personal
indemnification obligations to the Company.
Pursuant to the Cherokee Merger Agreement, 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 Merger Agreement includes 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.
17
<PAGE> 19
THE TEXAS COINPHONE ACQUISITION
The Company has entered into a letter of intent dated October 9, 1996, as
amended on November 25, 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
conditions, including the negotiation and execution of a purchase agreement. The
Texas Coinphone Acquisition is currently expected to close in January 1997;
however, there can be no assurance 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 certain 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 amounts.
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. The Texas Coinphone Letter of Intent expires on
December 13, 1996. If a definitive purchase agreement is not entered into by
such date, the Company intends to seek an extension thereof, or to negotiate a
definitive agreement on terms mutually acceptable to the Company and Texas
Coinphone.
ACQUISITION FINANCING
The Company expects to use a portion of the net proceeds from the Company Debt
Offering to finance the Pending Acquisitions. If the Company Debt Offering is
not consummated and no alternative financing is arranged, the Company will be
unable to complete the Pending Acquisitions.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $22.5 million ($25.9 million if the Underwriters' overallotment
option is exercised in full). Of this amount, the Company intends to use
approximately $8.0 million to repay a portion of the outstanding debt under the
Company's Credit Agreement (of which $43.0 million was outstanding at November
30, 1996). The Company will use the balance of the net proceeds for working
capital and other general corporate purposes, including for acquisitions
(subject to obtaining the Lenders' approval pursuant to the Credit Agreement.)
Borrowings being repaid under the Credit Agreement mature on April 30, 1997,
July 30, 1997, December 31, 1997 and June 30, 1999, and all borrowings
thereunder bear interest at the prime rate plus 5%. See "Description of Certain
Indebtedness -- The Credit Agreement" for a description of the Credit Agreement.
The Company will not receive any of the proceeds from the sale of Common Stock
by the Selling Shareholders. See "Pro Forma Financial Data."
18
<PAGE> 20
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 as if such transaction had occurred on September 30, 1996, (iii) on a
pro forma basis to give effect to the Offering and the Company Debt Offering and
assuming $35.0 million is held in escrow for five months and is then utilized to
purchase Notes from the bondholders as if such transactions had occurred on
September 30, 1996 and (iv) on a pro forma basis as set forth in the preceding
clause (iii) (except for the repurchase by the Company of the $35.0 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
FOR
PRO FORMA PENDING
FOR ACQUISITIONS,
COMPANY COMPANY
DEBT DEBT
PRO FORMA OFFERING OFFERING
FOR AND AND
ACTUAL OFFERING OFFERING OFFERING
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Total long-term debt (including current
installments):
Credit Agreement, net (1)........................ $ 35,771,044 $ 27,771,044 -- --
New Credit Agreement (2)......................... -- -- -- --
% Senior Notes due 2006........................ $ 75,000,000 $ 110,000,000
Notes payable (including obligations under
capital leases)............................... 13,374,758 13,374,758 2,302,337 2,863,904
----------- ----------- ------------ ------------
Total long-term debt (including current
installments)............................... 49,145,802 41,145,802 77,302,337 112,863,904
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 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)........................................... 76,397 143,897 143,897 143,897
Additional paid-in capital....................... 40,541,544 62,979,044 62,979,044 62,979,044
Accumulated deficit (5).......................... (28,973,186) (28,973,186) (39,208,467) (39,208,467)
----------- ----------- ------------ ------------
Total non-mandatorily redeemable preferred
stock, common stock and other shareholders'
equity...................................... 11,644,755 34,149,755 23,914,474 23,914,474
----------- ----------- ------------ ------------
Total capitalization............................... $ 67,329,610 $ 81,834,610 $ 107,755,864 $ 143,317,431
=========== =========== ============ ============
</TABLE>
19
<PAGE> 21
- ---------------
(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, which amount increased to $43,000,000 as of November 30, 1996.
(2) The Company expects to enter into the New Credit Agreement following the
consummation of the Company Debt Offering and the Offering.
(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
PRICE RANGE OF COMMON STOCK
Effective November 14, 1996, the Common Stock was listed on the American Stock
Exchange under the symbol "PHN." The Common Stock was formerly quoted on the
Nasdaq SmallCap Market under the symbol "PNTL." The following table sets forth
on a per share basis, for the periods indicated, the high and low sales prices
of the Common Stock as reported by Nasdaq or the American Stock Exchange, as
applicable.
<TABLE>
<CAPTION>
------------
PRICE RANGE
HIGH LOW
---- ---
<S> <C> <C>
1996:
First Quarter $ 7 7/8 $ 5
Second Quarter 6 1/2 2 3/4
Third Quarter 5 2
Fourth Quarter (through December 11, 1996) 5 2 1/4
1995:
First Quarter $ 7 1/8 $ 4 7/8
Second Quarter 8 1/4 4 7/8
Third Quarter 8 1/4 5 /16
Fourth Quarter 8 5/8 5 1/4
1994:
First Quarter $20 1/4 $14 1/4
Second Quarter 15 3/4 8 5/8
Third Quarter 9 3/8 6
Fourth Quarter 11 1/4 6 3/4
</TABLE>
On December 11, 1996, the closing price on the American Stock Exchange was $4.00
per share.
As of November 30, 1996, there were approximately 313 shareholders of record of
the Company's Common Stock. The number of record holders does not take into
account shares held in nominee or "street" name for the account of beneficial
owners.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock. The
Company currently intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. The payment of dividends by the Company is restricted by the
Credit Agreement and is expected to be restricted by the New Credit Agreement,
and the Company cannot pay any dividends on its Common Stock unless dividends
are paid to the holders of the Series A Preferred and Series B Preferred in an
amount equal to that which such holders would have been entitled to receive if
such holders had converted their shares of Series A Preferred or Series B
Preferred, as applicable, into Common Stock prior to the record date used by the
Board of Directors for determining the holders of Common Stock entitled to
receive such dividends. Any future declaration of dividends will be subject to
the discretion of the Board of Directors of the Company. The timing, amount and
form of dividends (other than with respect to the holders of the 14% Preferred
which are only entitled to receive dividends payable in additional shares of the
14% Preferred), if any, will depend, among other things, on the Company's
financial condition, capital requirements, cash flow, profitability, plans for
expansion, business outlook and other factors deemed relevant by the Board of
Directors of the Company.
21
<PAGE> 23
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 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 and the Offering as if such transactions had
been consummated at the beginning of the respective period, (b) the 1995
Acquisitions, the 1996 Acquisitions, the Offering and the Company Debt Offering
as if such transactions had been consummated at the beginning of the respective
period and assuming $35 million is held in escrow for five months and is then
utilized to purchase Notes from the bondholders and (c) the Acquisitions, the
Company Debt Offering and the 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 Offering as if such transaction had been consummated
on September 30, 1996, (b) the Offering and the Company Debt Offering as if such
transactions had been consummated on September 30, 1996 and assuming $35 million
is held in escrow for five months and is then utilized to purchase Notes from
the bondholders and (c) the Pending Acquisitions, the Company Debt Offering and
the 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.
22
<PAGE> 24
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1995
--------------------------------- ---------------------------------------------
PRO FORMA FOR
1995 AND 1996
PRO FORMA FOR ACQUISITIONS,
PRO FORMA FOR 1995 AND 1996 PENDING
1995 AND 1996 ACQUISITIONS, ACQUISITIONS,
ACQUISITIONS OFFERING AND OFFERING AND
AND COMPANY DEBT COMPANY DEBT
1993 1994 1995 OFFERING (1) OFFERING (2) OFFERING (3)
--------- --------- --------- ------------- ------------- -------------
Dollars in thousands, except per share data (unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues $11,070 $15,866 $18,718 $59,515 $ 59,515 $ 91,401
Costs and expenses 11,683 17,180 24,007 68,734 68,734 101,106
Loss from operations (613) (1,314) (5,289) (9,219) (9,219) (9,704)
Interest expense 175 388 837 8,771 12,070 14,520
Loss before extraordinary
item (779) (1,695) (6,110) (18,055) (20,479) (24,505)
Net loss (779) (1,695) (6,110) -- -- --
Net loss applicable to
common shareholders (7) (986) (1,987) (6,419) (18,708) (21,132) (25,158)
Net loss per common share
(7) (0.96) (1.35) (3.29) (1.54) (1.74) (2.08)
Weighted average number
of common shares 1,031,384 1,470,188 1,950,561 12,113,084 12,113,084 12,113,084
FINANCIAL RATIOS AND OPERATING DATA:
EBITDA (8) $283 $922 $1,264 $10,380 $10,380 $21,243
EBITDA margin (9) 2.56% 5.81% 6.75% 17.44% 17.44% 23.24%
Ratio of EBITDA to
interest expense 1.62 2.38 1.51 1.18 .86 1.46
Number of public pay
telephones
in service 2,350 4,891 9,458 24,074 24,074 37,763
<CAPTION>
-------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 1996
------------------------------ ---------------------------------------
PRO FORMA
FOR 1996
PRO FORMA ACQUISITIONS,
PRO FORMA FOR 1996 PENDING
FOR 1996 ACQUISITIONS, ACQUISITIONS,
ACQUISITIONS, OFFERING AND OFFERING AND
AND COMPANY DEBT COMPANY DEBT
1995 1996 OFFERING (4) OFFERING (5) OFFERING (6)
-------- ------- ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenues $11,957 $28,315 $45,379 $45,379 $70,448
Costs and expenses 15,203 37,156 54,354 54,354 81,390
Loss from operations (3,246) (8,840) (8,975) (8,975) (10,942)
Interest expense 304 4,140 5,041 9,127 10,527
Loss before extraordinary
item (3,538) (12,980) (14,086) (17,297) (21,534)
Net loss (3,538) (13,247) -- -- --
Net loss applicable to
common shareholders (7) (3,770) (15,519) (14,356) (17,567) (21,803)
Net loss per common share
(7) (2.22) (3.60) (1.07) (1.31) (1.63)
Weighted average number
of common shares 1,695,280 4,305,130 13,376,413 13,376,413 13,376,413
FINANCIAL RATIOS AND OPERAT
EBITDA (8) $337 $5,554 $9,766 $9,766 $16,055
EBITDA margin (9) 2.82% 19.62% 21.52% 21.52% 22.79%
Ratio of EBITDA to
interest expense 1.11 1.34 1.94 1.07 1.53
Number of public pay
telephones
in service 8,344 24,732 24,732 24,732 38,421
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
AS OF SEPTEMBER 30, 1996
PRO FORMA FOR
PRO FORMA PENDING
FOR ACQUISITIONS,
COMPANY DEBT COMPANY DEBT
PRO FORMA FOR OFFERING AND OFFERING AND
ACTUAL OFFERING (10) OFFERING (11) OFFERING (12)
------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $74,940 $ 89,445 $ 115,367 $ 151,321
Long-term debt and obligations under capital leases (including current
installments) 49,146(13) 41,146 77,302 112,864
14% Mandatorily redeemable preferred stock 6,539 6,539 6,539 6,539
Non-mandatorily redeemable preferred stock, common stock and other
shareholders' equity 11,645 34,150 23,914 23,914
Working capital (deficit) (14) (11,319) 3,186 33,209 6,327
</TABLE>
23
<PAGE> 25
- ---------------
(1) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions 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.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, the Offering
and the Company Debt 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.
(3) Gives effect to the Acquisitions, the Offering and the Company Debt
Offering, as if such transactions had occurred on January 1, 1995. Such
unaudited pro forma financial data is not necessarily indicative of the
results of operations that might have occurred if the transactions had
taken place on such date or which might occur in any future period. Because
Cherokee's fiscal year ends on September 30, the historical and pro forma
information relating to Cherokee is for the nine months ended June 30,
1996.
(4) Gives effect to the 1996 Acquisitions 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.
(5) Gives effect to the 1996 Acquisitions, the Offering and the Company Debt
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.
(6) Gives effect to the 1996 Acquisitions, the Pending Acquisitions, the
Offering and the Company Debt Offering, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period. Because Cherokee's fiscal year ends on
September 30, the historical and pro forma information relating to Cherokee
is for the nine months ended June 30, 1996.
(7) 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.
(8) EBITDA represents earnings before interest income, interest expense, income
taxes, depreciation, amortization and other unusual charges and settlements
of employment contracts. EBITDA is not intended to represent an alternative
to operating income (as determined in accordance with generally accepted
accounting principles) as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating activities
(as determined in accordance with generally accepted accounting principles)
as a measure of liquidity. The Company believes that EBITDA is a meaningful
measure of performance because it is commonly used in the public pay
telephone industry to analyze comparable public pay telephone companies on
the basis of operating performance, leverage and liquidity.
(9) EBITDA margin is calculated by dividing (a) EBITDA by (b) total revenues.
EBITDA margin is a measure commonly used in the Company's industry as an
indicator of the efficiency of the Company's operations.
(10) Gives effect to the Offering as if such transaction had occurred on
September 30, 1996.
(11) Gives effect to the Company Debt Offering and the 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.
(12) Gives effect to the Pending Acquisitions, the Company Debt Offering and the
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.
(13) 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.
(14) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
24
<PAGE> 26
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; (iii) the funds
borrowed under the Credit Agreement; (iv) the sale by the Company of $25 million
of Common Stock pursuant to the Offering and the application of the estimated
net proceeds therefrom as set forth under "Prospectus Summary -- The Offering";
and (v) the sale by the Company of $110 million of Notes pursuant to the Company
Debt Offering and the application of the estimated net proceeds therefrom as set
forth under "Prospectus Summary -- The Company Debt Offering." 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 Offering; and (iii) the sale by the Company of $110 million of
Notes pursuant to the Company Debt Offering and the application of the estimated
net proceeds therefrom as set forth under "Prospectus Summary -- The Company
Debt Offering." 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.
25
<PAGE> 27
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
WORLD, PRO FORMA
PUBLIC ADJUSTMENTS
TELEPHONE, FOR 1995
PHONETEL IPP AND AND 1996
TECHNOLOGIES PARAMOUNT(A) AMTEL POA ACQUISITIONS
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $12,130,189 $12,474,844 $ 9,689,179 $ 3,747,247 $ (295,000)
Non-coin 3,776,501 5,771,598 5,459,411 4,418,667 (964,000)
Other 2,811,293 147,259 1,910,550 49,221 (1,612,000)
----------- ----------- ------------ ----------- -----------
18,717,983 18,393,701 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) 519,313 (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 21,320 -- 415 --
Reorganization expenses -- -- (539,942) -- 539,942(j)
Other -- (311,932) (429,967) (68,517) 429,967(j)
----------- ----------- ------------ ----------- -----------
Total other income (expense) (820,799) (1,399,714) (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 requirements (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
=========== =========== ============ =========== ===========
Income (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 1996
ADJUSTMENTS ACQUISITIONS
FOR OFFERING AND OFFERING
------------ -------------
<S> <C> <C>
Revenues
Coin calls -- $ 37,746,459
Non-coin -- 18,462,177
Other -- 3,306,323
-------- ------------
-- 59,514,959
-------- ------------
Operating expenses:
Line and transmission charges -- 20,619,176
Location commissions -- 9,861,680
Other operating expenses -- 7,138,740
Depreciation and amortization -- 17,810,801
Selling, general and administrative -- 11,134,517
Other unusual charges and contractual
settlements -- 2,169,503
---------- ------------
-- 68,734,417
---------- ------------
Income (loss) from operations -- (9,219,458)
---------- ------------
Other income (expense)
Interest expense -- related parties $1,060,000 (l) (5,949,000)
Interest expense -- others -- (2,821,656)
Interest income -- 37,847
Reorganization expenses -- --
Other -- (380,449)
---------- ------------
Total other income (expense) 1,060,000 (9,113,258)
---------- ------------
Income (loss) before income taxes and
extraordinary item 1,060,000 (18,332,716)
Income taxes (benefit) -- (277,720)
---------- ------------
Income (loss) before extraordinary item $1,060,000 $(18,054,996)
========== ============
Earnings per share calculation:
Preferred dividend requirements -- (653,235)
-------- ---------
Income (loss) before extraordinary item
applicable to common shareholders $1,060,000 $(18,708,231)(n)
========== ============
Income (loss) per common share before
extraordinary item $ (1.54)(n)
============
Weighted average number of shares 6,750,000 (m) 12,113,084
========== ============
</TABLE>
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations
are an integral part of these financial statements
26
<PAGE> 28
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PRO FORMA FOR
1995 AND 1996
PRO FORMA FOR ACQUISITIONS,
PRO FORMA 1995 AND 1996 PENDING
ADJUSTMENTS ACQUISITIONS, PRO FORMA PRO FORMA ACQUISITIONS,
FOR COMPANY OFFERING AND ADJUSTMENTS FOR ADJUSTMENTS FOR OFFERING AND
DEBT COMPANY DEBT TEXAS PENDING COMPANY COMPANY DEBT
OFFERING OFFERING CHEROKEE COINPHONE ACQUISITIONS DEBT OFFERING OFFERING
- ----------- ------------- ----------- ---------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
-- $ 37,746,459 $14,036,665 $ 846,210 -- -- $ 52,629,334
-- 18,462,177 17,049,394 553,337 $(1,105,000) (q) -- 34,959,908
-- 3,306,323 505,581 -- -- -- 3,811,904
---------- ------------- ----------- ----------- ----------- ------------ ------------
-- 59,514,959 31,591,640 1,399,547 (1,105,000) -- 91,401,146
---------- ------------- ----------- ----------- ----------- ------------ ------------
20,619,176 9,673,772 513,036 -- -- 30,805,984
9,861,680 4,909,445 135,746 -- -- 14,906,871
7,138,740 3,121,831 280,706 (1,233,000)(s) -- 9,308,277
17,810,801 4,298,090 151,926 5,772,000(t) -- 28,032,817
11,134,517 5,520,405 357,197 (1,130,000)(u) -- 15,882,119
-- 2,169,503 -- -- -- -- 2,169,503
---------- ------------- ----------- ----------- ----------- ------------ ------------
-- 68,734,417 27,523,543 1,438,611 3,409,000 -- 101,105,571
---------- ------------- ----------- ----------- ----------- ------------ ------------
-- (9,219,458) 4,068,097 (39,064) (4,514,000) -- (9,704,425)
---------- ------------- ----------- ----------- ----------- ------------ ------------
5,949,000 (o) -- -- -- -- -- --
(9,248,000)(p) (12,069,656) (1,631,416) (57,561) 1,689,000(v) $(2,450,000) (14,519,633)
875,000 (q) 912,847 57,278 21,563 (21,563)(w) (875,000) 95,125
-- -- -- -- -- -- --
-- (380,449) 1,125,630 281,501 (281,501)(x) -- 745,181
---------- ------------- ----------- ----------- ----------- ------------ ------------
(2,424,000) (11,537,258) (448,508) 245,503 1,385,936 (3,325,000) (13,679,327)
---------- ------------- ----------- ----------- ----------- ------------ ------------
(2,424,000) (20,756,716) 3,619,589 206,439 (3,128,064) (3,325,000) (23,383,752)
-- (277,720) 1,399,140 -- -- -- 1,121,420
---------- ------------- ----------- ----------- ----------- ------------ ------------
$(2,424,000) $ (20,478,996) $ 2,220,449 $ 206,439 $(3,128,064) $(3,325,000) $(24,505,172)
========== ============= =========== =========== =========== ============ ============
-- (653,235) -- -- -- -- (653,235)
---------- ------------- ----------- ----------- ----------- ------------ ------------
$(2,424,000) $ (21,132,231)(r) $ 2,220,449 $ 206,439 $(3,128,064) $(3,325,000) $(25,158,407)
========== ============= =========== =========== =========== ============ ===========
$ (1.74)(r) $(2.08)
============= ============
12,113,084 12,113,084
============= ============
</TABLE>
27
<PAGE> 29
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, Paramount, IPP SC and
IPP TN for the period from January 1, 1995 through the date indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
PUBLIC
WORLD TELEPHONE PARAMOUNT IPP SC IPP TN
JANUARY 1, JANUARY 1, JANUARY 1, JANUARY 1, JANUARY 1,
1995 - 1995 - 1995 - 1995 - 1995 -
SEPTEMBER 21, OCTOBER 14, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1995 1995 COMBINED
--------------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Coin calls $ 2,791,016 $ 1,376,867 $ 3,751,744 $ 3,360,596 $ 1,194,621 $ 12,474,844
Non-coin 3,467,687 380,187 1,923,724 -- -- 5,771,598
Other 58,345 88,914 -- -- -- 147,259
---------- ---------- ----------- ----------- ------------- -------------
6,317,048 1,845,968 5,675,468 3,360,596 1,194,621 18,393,701
---------- ---------- ----------- ----------- ------------- -------------
Operating expenses:
Line and transmission
charges 2,706,199 535,771 1,543,956 983,204 608,061 6,377,191
Location commissions 852,944 196,243 696,443 615,527 -- 2,361,157
Other operating
expenses 1,026,000 112,071 -- 709,281 -- 1,847,352
Depreciation and
amortization 855,059 268,262 393,204 451,929 91,174 2,059,628
Selling, general and
administrative 1,276,056 594,588 2,407,479 479,083 471,854 5,229,060
---------- ---------- ----------- ----------- ------------- -------------
6,716,258 1,706,935 5,041,082 3,239,024 1,171,089 17,874,388
---------- ---------- ----------- ----------- ------------- -------------
Income (loss) from
operations (399,210) 139,033 634,386 121,572 23,532 519,313
---------- ---------- ----------- ----------- ------------- -------------
Other income (expense)
Interest expense (590,980) (304,664) (64,210) (149,248) -- (1,109,102)
Interest income 834 3,371 14,800 733 1,582 21,320
Other -- (226,701) (85,231) -- -- (311,932)
---------- ---------- ----------- ----------- ------------- -------------
(590,146) (527,994) (134,641) (148,515) 1,582 (1,399,714)
---------- ---------- ----------- ----------- ------------- -------------
Income (loss) before
income taxes (989,356) (388,961) 499,745 (26,943) 25,114 (880,401)
Income taxes -- -- -- 35,800 2,300 38,100
---------- ---------- ----------- ----------- ------------- -------------
Net income (loss) $ (989,356) $ (388,961) $ 499,745 $ (62,743) $ 22,814 $ (918,501)
========== ========== =========== =========== ============= =============
</TABLE>
(b) Represents the estimated reduction in revenues for assets not acquired.
<TABLE>
<CAPTION>
---------
<S> <C>
Amtel $2,859,000
POA 12,000
----------
$2,871,000
==========
</TABLE>
(c) Represents estimated reduction in line and transmission charges to reflect
lower volumes at Amtel due to assets not acquired and to better aggregate
rates due to overall increase in traffic in the Amtel regions.
(d) Represents estimated lower location commissions due to assets not acquired.
<TABLE>
<CAPTION>
---------
<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>
<CAPTION>
---------
<S> <C>
World, Public Telephone, IPP and Paramount $ 800,000
Amtel 2,132,000
POA 95,000
----------
$3,027,000
==========
</TABLE>
28
<PAGE> 30
(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 EXPENSES
----------- -------- ----------
<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 on $8.0 million repaid under the
Credit Agreement.
(m) Represents 6,250,000 shares of Common Stock which may be sold pursuant to
the Offering, and the exercise of warrants to purchase, in the aggregate,
25,000 shares of Series A Preferred and the immediate conversion of the
Series A Preferred into 500,000 shares of Common Stock.
(n) Loss per share excludes an increase of the loss to common shareholders of
(i) $2,002,386 which was realized on redemption of the 10% Preferred, the
8% Preferred, and the 7% Preferred; and (ii) an extraordinary loss of
$267,281 realized on the restructuring of the Company's debt on March 15,
1996.
(o) Represents elimination of interest expense incurred under the Credit
Agreement.
(p) Represents additional interest expense.
<TABLE>
<CAPTION>
------------------------------------------------------
AMOUNT INTEREST MONTHS INTEREST
OUTSTANDING RATE OUTSTANDING EXPENSE
------------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt Offering (during the five months
funds are held in escrow) $110,000,000 12% 5 $ 5,500,000
Debt pursuant to the Company Debt Offering assuming escrow amount 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>
(q) 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%.
(r) Loss per share excludes an increase of the loss to common shareholders of an
estimated extraordinary loss of $9,805,281 to be realized on the early
retirement of the borrowings under the Credit Agreement.
29
<PAGE> 31
(s) Represents the estimated reduction in other operating expenses primarily to
eliminate redundant operations and operations personnel and the
reclassification of chargebacks to non-coin revenue for Cherokee to conform
to Phonetel's presentation.
<TABLE>
<CAPTION>
---------
<S> <C>
Cherokee $ 40,000
Texas Coinphone 88,000
--------
128,000
Reclassification of chargebacks 1,105,000
--------
$1,233,000
========
</TABLE>
(t) 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>
(u) 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>
(v) 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>
(w) Represents reduction to reflect elimination of Texas Coinphone interest
income.
(x) Represents elimination of Texas Coinphone other income which relates to
assets not acquired.
(y) 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).
(z) Represents elimination of interest income on escrow balance assuming
consummation of the Pending Acquisitions.
30
<PAGE> 32
(This page intentionally left blank)
31
<PAGE> 33
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
PHONETEL IPP AND FOR 1996
TECHNOLOGIES PARAMOUNT(A) AMTEL(B) POA(C) ACQUISITIONS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $16,988,697 $1,883,110 $ 6,653,874 $ 1,769,257 --
Non-coin 9,308,538 590,457 3,464,990 1,795,827 --
Other 2,018,191 15,113 87,968 831,179 $ (28,000)(d)
----------- --------- --------- -------- ----------
28,315,426 2,488,680 10,206,832 4,396,263 (28,000)
----------- --------- --------- -------- ----------
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)
Interest expense -- others (551,243) (30,881) (8,508) (388,768) (453,000)(i)
Interest income -- -- 2,248 4,111 --
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
----------- --------- --------- -------- ----------
Income (loss) before income taxes
and extraordinary item (12,980,078) 450,438 (2,730,612) (459,213) 838,458
Income taxes -- -- 5,667 -- (5,667)(k)
----------- --------- --------- -------- ----------
Income (loss) before extraordinary
item $(12,980,078) $ 450,438 $ (2,736,279) $ (459,213) $ 844,125
=========== ========= ========= ======== ==========
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
=========== ========= ========= ======== ==========
Loss per common share before
extraordinary item $ (3.08)
===========
Weighted average number of shares 4,305,130 154,330 2,037,324 129,629
========== ========= ========= ========
<CAPTION>
PRO FORMA PRO FORMA FOR 1996
ADJUSTMENTS FOR ACQUISITIONS AND
OFFERING OFFERING
--------------- -------------------
<S> <C> <C>
Revenues
Coin calls -- $ 27,294,938
Non-coin -- 15,159,812
Other -- 2,924,451
---------- ----------
-- 45,379,201
---------- ----------
Operating expenses:
Line and transmission charges -- 11,641,668
Location commissions -- 7,309,022
Other operating expenses -- 9,905,789
Depreciation and amortization -- 13,299,575
Selling, general and administrative -- 6,680,266
Other unusual charges and
contractual settlements -- 5,517,753
---------- ----------
-- 54,354,073
---------- ----------
Income (loss) from operations -- (8,974,872)
---------- ----------
Other income (expense):
Interest expense -- related parties $ 795,000(l) (3,608,420)
Interest expense -- others -- (1,432,400)
Interest income -- 6,359
Reorganization expenses -- --
Other -- (76,674)
---------- ----------
Total other income (expense) 795,000 (5,111,135)
---------- ----------
Income (loss) before income taxes
and extraordinary item 795,000 (14,086,007)
Income taxes -- --
---------- ----------
Income (loss) before extraordinary
item $ 795,000 $(14,086,007)
========== ==========
Earnings per share calculation:
Preferred divided requirement -- (269,565)
---------- ----------
Income (loss) before extraordinary
item applicable to
common shareholders $ 795,000 $(14,355,572)(n)
========== ==========
Loss per common share before
extraordinary item $ (1.07)(n)
==========
Weighted average number of shares 6,750,000(m) 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.
32
<PAGE> 34
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRO FORMA
FOR 1996
PRO FORMA ACQUISITIONS,
PRO FORMA FOR 1996 PENDING
ADJUSTMENTS ACQUISITIONS, PRO FORMA PRO FORMA ACQUISITIONS,
FOR OFFERING AND ADJUSTMENTS ADJUSTMENTS FOR OFFERING AND
COMPANY COMPANY TEXAS FOR PENDING COMPANY DEBT COMPANY
DEBT OFFERING DEBT OFFERING CHEROKEE COINPHONE ACQUISITIONS OFFERING DEBT OFFERING
- ------------- --------------- ----------- ---------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
-- $ 27,294,938 $12,571,961 $ 910,263 -- -- $ 40,777,162
-- 15,159,812 11,061,973 403,573 $ (736,000)(s) -- 25,889,358
-- 2,924,451 817,273 39,485 -- -- 3,781,209
- ----------- ------------ --------- --------- ---------- ----------- ----------
-- 45,379,201 24,451,207 1,353,321 (736,000) -- 70,447,729
- ----------- ------------ --------- --------- ---------- ----------- ----------
-- 11,641,668 6,451,165 459,477 -- -- 18,552,310
-- 7,309,022 3,885,956 153,801 -- -- 11,348,779
-- 9,905,789 4,107,855 85,843 (878,000)(s) -- 13,221,487
-- 13,299,575 3,831,645 56,398 4,386,000 (t) -- 21,573,618
-- 6,680,266 4,909,963 432,635 (847,000)(u) -- 11,175,864
-- 5,517,753 -- -- -- -- 5,517,753
- ----------- ------------ --------- --------- ---------- ----------- ----------
-- 54,354,073 23,186,584 1,188,154 2,661,000 -- 81,389,811
- ----------- ----------- --------- --------- ---------- ----------- ----------
-- (8,974,872) 1,264,623 165,167 (3,397,000) -- (10,942,082)
- ----------- ------------ --------- --------- ---------- ----------- ----------
$ 3,580,000(o) (28,420) -- -- -- -- (28,420)
(7,666,000)(p) (9,098,400) (1,358,917) (51,325) 1,410,242 (v) $ (1,400,000)(x) (10,498,400)
875,000(q) 881,359 3,645 -- -- (875,000)(y) 10,004
-- -- -- -- -- -- --
-- (76,674) (17,365) 123,236 (123,236)(w) -- (94,039)
- ----------- ------------ --------- --------- ---------- ----------- ----------
(3,211,000) (8,322,135) (1,372,637) 71,911 1,287,006 (2,275,000) (10,610,855)
- ----------- ------------ --------- --------- ---------- ----------- ----------
(3,211,000) (17,297,007) (108,014) 237,078 (2,109,994) (2,275,000) (21,552,937)
-- -- (19,188) -- -- -- (19,188)
- ----------- ------------ --------- --------- ---------- ----------- ----------
$(3,211,000) $(17,297,007) $ (88,826) $ 237,078 $(2,109,994) $ (2,275,000) $(21,533,749)
=========== ============ ========= ========= ========== =========== ==========
-- (269,565) -- -- -- -- (269,565)
- ----------- ------------ --------- --------- ---------- ----------- ----------
$(3,211,000) $(17,566,572)(r) $ (88,826) $ 237,078 $(2,109,994) $ (2,275,000) $(21,803,314)
=========== ============ ========= ========= ========== =========== ==========
$ (1.31)(r) $ (1.63)
============ ==========
13,376,413 13,376,413
============ ==========
</TABLE>
33
<PAGE> 35
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 SC and IPP TN and Paramount for the period
from January 1, 1996 through March 14, 1996.
<TABLE>
<CAPTION>
-----------------------------------------------
IPP SC IPP TN PARAMOUNT COMBINED
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Coin calls $648,143 $193,203 $1,041,764 $ 1,883,110
Non-coin -- -- 590,457 590,457
Other 1,199 13,914 -- 15,113
-------- -------- ---------- ----------
649,342 207,117 1,632,221 2,488,680
-------- -------- ---------- ----------
Operating expenses:
Line and transmission charges 234,659 74,923 275,881 585,463
Location commissions 115,660 28,752 231,857 376,269
Other operating expenses 68,844 21,630 266,342 356,816
Depreciation and amortization 82,614 19,399 81,918 183,931
Selling, general and administrative 195,643 100,538 196,063 492,244
-------- -------- ---------- ----------
697,420 245,242 1,052,061 1,994,723
-------- -------- ---------- ----------
Income (loss) from operations (48,078) (38,125) 580,160 493,957
-------- -------- ---------- ----------
Other income (expense):
Interest expense (18,088) (1,423) (11,370) (30,881)
Other -- -- (12,638) (12,638)
-------- -------- ---------- ----------
Total other income (expense) (18,088) (1,423) (24,008) (43,519)
-------- -------- ---------- ----------
Income (loss) before income taxes (66,166) (39,548) 556,152 450,438
Income taxes -- -- -- --
-------- -------- ---------- ----------
Net income (loss) $(66,166) $(39,548) $ 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> <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
---------- -------- ----------
(MONTHS)
<S> <C> <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>
(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> <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>
---------------------------------------------------
AMOUNT INTEREST PRO FORMA
BORROWED RATE EXPENSE
---------- -------- ---------
<S> <C> <C> <C>
$8,776,546 13.25% $815,000
========== ===== ========
</TABLE>
34
<PAGE> 36
(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 on $8,000,000 repaid under the
Credit Agreement.
(m) Represents 6,250,000 shares of Common Stock (excluding the Underwriters'
over-allotment) sold pursuant to the Offering, and, the exercise of warrants
to purchase, in the aggregate, 25,000 shares of Series A Preferred by the
Selling Shareholders and the immediate conversion by the Selling
Shareholders of the shares of Series A Preferred into 500,000 shares of
Common Stock.
(n) Loss per share excludes an increase of the loss to common shareholders of
(i) $2,002,386 which was realized on redemption of the 10% Preferred, the
8% Preferred, and the 7% Preferred; and (ii) an extraordinary loss of
$267,281 realized on the restructuring of the Company's debt on March 15,
1996.
(o) Represents interest expense incurred under the Credit Agreement.
(p) Represents increase in interest expense.
<TABLE>
<CAPTION>
-------------------------------------------------
AMOUNT INTEREST MONTHS INTEREST
OUTSTANDING RATE OUTSTANDING EXPENSE
------------ -------- ----------- ----------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt Offering (during the 5 months
funds are held in escrow) $110,000,000 12% 5 $5,500,000
Debt pursuant to the Company Debt Offering assuming escrow amount
is 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>
(q) 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%.
(r) Loss per share excludes an increase of the loss to common shareholders of
an estimated extraordinary loss of $9,805,000 to be realized on the early
retirement of the borrowings under the Credit Agreement.
(s) Represents the estimated reduction in other operating expenses to eliminate
redundant operations and duplicate operational personnel and the
reclassification of chargebacks to non-coin revenue for Cherokee to
conform to Phonetel's presentations.
<TABLE>
<CAPTION>
-------
<S> <C>
Cherokee $ 76,000
Texas Coinphone 66,000
--------
142,000
Reclassification of chargebacks 736,000
--------
$878,000
========
</TABLE>
(t) 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> <C>
Cherokee $3,932,000 60 60-82
Texas Coinphone 454,000 60 72
----------
$4,386,000
==========
</TABLE>
(u) Represents estimated reductions in selling, general and administrative
expenses to reflect the elimination of certain offices, executives and
administrative personnel.
<TABLE>
<CAPTION>
-------
<S> <C> <C>
Cherokee $750,000
Texas Coinphone 97,000
--------
$847,000
========
</TABLE>
(v) Represents reduction in interest expense to reflect elimination of separate
company borrowings.
<TABLE>
<CAPTION>
----------
<S> <C> <C>
Cherokee $1,358,917
Texas Coinphone 51,325
----------
$1,410,242
==========
</TABLE>
(w) Represents elimination of Texas Coinphone other income which relates to
assets not acquired.
(x) 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).
(y) Represents elimination of interest income on escrow balance assuming
consummation of the Pending Acquisitions.
35
<PAGE> 37
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS FOR OFFERING
PRO FORMA FOR AND
PHONETEL ADJUSTMENTS FOR PRO FORMA FOR COMPANY DEBT COMPANY DEBT TEXAS
TECHNOLOGIES OFFERING OFFERING OFFERING OFFERING CHEROKEE COINPHONE
------------ --------------- ------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 655,734 $14,505,000(a) $15,160,734 $24,647,579 (c) $39,808,313 $ 364,691 $ 80,895
Accounts receivable,
net 2,423,060 -- 2,423,060 -- 2,423,060 3,712,950 55,140
Other current assets 247,426 -- 247,426 -- 247,426 210,439 --
----------- ------------- ------------- ------------ ------------ ----------- -----------
Total current assets 3,326,220 14,505,000 17,831,220 24,647,579 42,478,799 4,288,080 136,035
Property and equipment,
net 31,682,061 -- 31,682,061 -- 31,682,061 16,354,960 1,143,869
Intangible assets, net 39,226,619 -- 39,226,619 1,273,675 (d) 40,500,294 4,048,701 --
Other assets 705,473 -- 705,473 -- 705,473 665,044 35,420
----------- ------------- ------------- ------------ ------------ ----------- -----------
$74,940,373 $14,505,000 $89,445,373 $25,921,254 $115,366,627 $25,356,785 $ 1,315,324
=========== ============= ============= ============ ============ =========== ===========
Liabilities and Equity
Current liabilities:
Current long-term debt
Payable to related
parties $ 5,234,953 -- $ 5,234,953 $(4,717,707)(e) $ 517,246 -- --
Payable to others 995,673 -- 995,673 -- 995,673 $ 2,982,325 $ 183,300
Current portion capital
leases 803,336 -- 803,336 (656,947)(f) 146,389 977,433 --
Accounts payable 2,969,681 -- 2,969,681 -- 2,969,681 754,048 39,472
Accrued expenses 3,524,690 -- 3,524,690 -- 3,524,690 2,979,962 21,590
Deferred revenues 600,000 -- 600,000 -- 600,000 -- --
Other unusual items
and contractual
settlements 516,392 -- 516,392 -- 516,392 -- --
----------- ------------- ------------- ------------ ------------ ----------- -----------
Total current
liabilities 14,644,725 -- 14,644,725 (5,374,654) 9,270,071 7,693,768 244,362
Long-term debt:
Payable to related
parties 31,053,337 $(8,000,000)(a) 23,053,337 (23,053,337)(e) -- -- --
Payable to others 3,832,781 -- 3,832,781 71,677,579 (g) 75,510,360 10,636,237 626,910
Capital leases 7,225,722 -- 7,225,722 (7,093,053)(f) 132,669 -- 40,578
Deferred taxes -- -- -- -- -- 342,359 --
14% preferred mandatorily
redeemable at $6,978,963 6,539,053 -- 6,539,053 -- 6,539,053 -- --
Other shareholders'
equity:
Preferred stock -- -- -- -- -- 2,400,000 --
Common stock 76,397 67,500(b) 143,897 -- 143,897 351,903 166,395
Additional paid in
capital 40,541,544 22,437,500(b) 62,979,044 -- 62,979,044 1,097,630 --
Retained earnings
(accumulated deficit) (28,973,186) -- (28,973,186) (10,235,281)(h) (39,208,467) 2,834,888 237,079
----------- ------------- ------------- ------------ ------------ ----------- -----------
Total other equity 11,644,755 22,505,000 34,149,755 (10,235,281) 23,914,474 6,684,421 403,474
----------- ------------- ------------- ------------ ------------ ----------- -----------
$74,940,373 $14,505,000 $89,445,373 $25,921,254 $115,366,627 $25,356,785 $ 1,315,324
========== ============= ============ =========== ============ =========== ===========
<CAPTION>
PRO FORMA
PRO FORMA FOR PENDING
PRO FORMA ADJUSTMENTS ACQUISITIONS,
ADJUSTMENTS FOR OFFERING AND
FOR PENDING COMPANY DEBT COMPANY DEBT
ACQUISITIONS OFFERING OFFERING
------------ ------------ -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ (65,488,227)(i) $35,000,000 (p) 9,765,672
Accounts receivable,
net (3,768,090)(j) -- 2,423,060
Other current assets 3,000,000(i) -- 3,457,865
------------- ------------ ------------
Total current assets (66,256,317) 35,000,000 15,646,597
Property and equipment,
net 2,806,003(k) -- 51,986,893
Intangible assets, net 35,101,273(k) 79,650,268
Other assets 2,630,858(j) -- 4,036,795
------------- ------------ ------------
$ (25,718,183) $35,000,000 $151,320,553
============= ============ ============
Liabilities and Equity
Current liabilities:
Current long-term debt
Payable to related
parties -- -- $ 517,246
Payable to others $ (3,165,625)(l) -- 995,673
Current portion capital
leases (977,433)(m) -- 146,389
Accounts payable (793,520)(n) -- 2,969,681
Accrued expenses (2,951,552)(u) -- 3,574,690
Deferred revenues -- -- 600,000
Other unusual items
and contractual
settlements -- -- 516,392
------------- ------------ ------------
Total current
liabilities (7,888,130) -- 9,320,071
Long-term debt:
Payable to related
parties -- -- --
Payable to others (10,701,580)(l) $35,000,000 (p) 111,071,927
Capital leases (40,578)(m) -- 132,669
Deferred taxes -- -- 342,359
14% preferred mandatorily
redeemable at $6,978,963 -- -- 6,539,053
Other shareholders'
equity:
Preferred stock (2,400,000)(o) -- --
Common stock (518,298)(o) -- 143,897
Additional paid in
capital (1,097,630)(o) -- 62,979,044
Retained earnings
(accumulated deficit) (3,071,967)(o) -- (39,208,467)
------------- ------------ ------------
Total other equity (7,087,895) -- 23,914,474
------------- ------------ ------------
$ (25,718,183) $35,000,000 $151,320,553
============ ============ ============
</TABLE>
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed Balance
Sheet are an integral part of these financial statements.
36
<PAGE> 38
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
(a) Represents adjustments to cash. ------------
Offering proceeds, net of estimated expenses $ 22,500,000
Proceeds from exercise of Series A Preferred warrants 5,000
Repayment of borrowings under Credit Agreement (8,000,000)
-------------
$ 14,505,000
============
(b) Represents adjustments to other equity.
------------
Common Stock
Issuance of 6,250,000 shares pursuant to the Offering $ 62,500
Issuance of 500,000 shares pursuant to the exercise of
Series A Preferred warrants and the assumed immediate exercise thereof into 500,000 shares
of Common Stock 5,000
-------------
$ 67,500
============
Additional paid in capital
Proceeds from the sale of 6,250,000 shares of Common Stock at an offering price of $4.00 per
share, net of estimated transaction fees of $2,500,000 $ 22,437,500
============
(c) Represents adjustments to cash.
------------
Company Debt Offering proceeds, net of expenses $ 104,150,000
Repayment of borrowings under Credit Agreement (33,000,000)
Fees relating to early retirement of borrowings under the Credit Agreement (430,000)
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)
-------------
$ 24,647,579
============
(d) Represents adjustments to the intangible assets.
------------
Fees and expenses relating to the Company Debt Offering $ 5,850,000
Write-off unamortized fees pertaining to the
Credit Agreement (4,576,325)
-------------
$ 1,273,675
============
(e) Represents adjustments to current and long-term payable to related parties.
------------
Repay current portion of borrowings under Credit Agreement $ (4,717,707)
============
Repay long-term portion of borrowings under Credit Agreement $ (23,053,337)
============
(f) Represents adjustments to current and long-term obligations under capital leases.
------------
Repay obligations under capital leases current portion $ (656,947)
============
Repay obligations under capital leases long-term obligations $ (7,093,053)
============
(g) Represents adjustments to long-term debt payable to others.
------------
Repayment of POA Sellers' Notes $ (3,322,421)
Gross proceeds from the Company Debt Offering 110,000,000
Funds placed in escrow for Cherokee Acquisition (35,000,000)
-------------
$ 71,677,579
============
(h) Represents adjustments to other shareholders' equity.
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)
Fees relating to early retirement of borrowings under the Credit Agreement (430,000)
------------
$(10,235,281)
===========
(i) Represents adjustments to cash. -----------
Purchase of Cherokee $(55,725,000)
Less: Deferred taxes assumed 342,359
Less: Deposit of funds to escrow of up to $3,000,000 (current assets) (3,000,000)
Less: Deposit of funds to escrow of up to $3,000,000 (other assets) (3,000,000)
Cash not acquired in Cherokee Acquisition (364,691)
Purchase of Texas Coinphone (3,660,000)
Cash not acquired in Texas Coinphone Acquisition (80,895)
------------
$(65,488,227)
===========
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C> <C>
(j) Represents adjustments to accounts receivable, net, other current assets and other assets to
eliminate assets not acquired and reflect escrowed portion of purchase price: -----------
Accounts receivable, net
Cherokee $ (3,712,950)
Texas Coinphone (55,410)
------------
$ (3,768,090)
===========
Other current assets
Cherokee $ 3,000,000
------------
$ 3,000,000
===========
Other assets
Cherokee $ (336,159)
Texas Coinphone (32,983)
Funds held pursuant to potential rate cap arrangements 3,000,000
------------
$ 2,630,858
===========
</TABLE>
<TABLE>
<S> <C> <C>
(k) Represents adjustments to property and equipment, net and intangible assets, net to reflect
purchase price allocations:
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>
<TABLE>
<S> <C> <C>
(l) Represents adjustments to current long-term debt and long-term debt to others. -----------
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)
===========
(m) Represents adjustments to current and long-term capital leases.
-----------
Current portion of capital leases of Cherokee not acquired $ (977,433)
===========
Long-term capital leases of Texas Coinphone not acquired $ (40,578)
===========
(n) Adjustments to accounts payable and accrued expenses.
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)
===========
(o) Adjustments to the other shareholders' equity.
-----------
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)
===========
(p) The adjustments to cash and long-term debt payable to others represents the
release of funds held in escrow for Notes, upon completion of the Cherokee
-----------
Acquisition (see (e) above) $ 35,000,000
===========
</TABLE>
38
<PAGE> 40
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. A number of
parties have filed petitions for judicial review of these regulations in federal
courts of appeals. To date, the regulations remain in effect. 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."
39
<PAGE> 41
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>
---------------------------------------------
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 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 16,388, or
196.4%, from 8,344 at September 30, 1995 to approximately 24,732 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.
40
<PAGE> 42
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 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
41
<PAGE> 43
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%.
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 ended 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 4,567 public pay telephones, or 93.4%, 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
42
<PAGE> 44
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.
Depreciation and amortization increased $2,146,780, or 96.0%, from $2,236,269
for the year ended December 31, 1994 to $4,383,049 for the year ended December
31, 1995. Depreciation and amortization represented 14.1% of total revenues for
the year ended December 31, 1994 and 23.4% of total revenues for the year ended
December 31, 1995. The increase was primarily due to the 1995 Acquisitions and
the resultant expansion of its public pay telephone base which included
purchases of additional computer equipment, service vehicles and software to
accommodate the Company's growth.
SG&A expenses increased $368,967, or 13.0%, from $2,831,775 for the year ended
December 31, 1994 to $3,200,742 for the year ended December 31, 1995. The
increase was due to increases in advertising, travel and entertainment, wages
and payroll related expenses and general office expenses as a result of hiring
additional personnel to conduct the Company's expanded selling and marketing
program and customer services. SG&A expenses represented 17.9% of total revenues
for the year ended December 31, 1994 and 17.1% of total revenues for the year
ended December 31, 1995. The Company expects that SG&A expenses will continue to
decrease as a percentage of total revenues as total revenues increase.
Other unusual charges and contractual settlements consist primarily of costs
associated with the settlement of contractual obligations to certain former
officers of the Company and related legal fees, the write-off of selected assets
in connection with the outsourcing of the operator service center and consulting
and legal fees incurred for changes to the operations of the Company.
Settlements of employment contracts and other unusual charges were $2,169,503,
and represented 11.6% of total revenues, for the year ended December 31, 1995.
There were no contractual settlements and other unusual charges for 1994.
Other income (expense). Other income (expense) increased $440,005, or 115.5%,
from $380,794 for the year ended December 31, 1994 to $820,799 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 2,541 from 2,350 at December
31, 1993 to 4,891 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").
43
<PAGE> 45
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 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, expansion of the
public pay telephone base, and 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 $214,937, or 129.6%,
from $165,857 for the year ended December 31, 1993 to $380,794 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 its telephone
base.
EBITDA. EBITDA increased $638,918, or 225.7%, from $283,023 for the year ended
December 31, 1993 to $921,941 for the year ended December 31, 1994. For the
reasons discussed above, EBITDA represented 2.6% of total revenues for the year
ended December 31, 1993 and 5.8% of total revenues for the year ended December
31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating activities during the
fiscal years ended December 31, 1993, 1994 and 1995 and the 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 public 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 ING and Cerberus, 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, to pay related transaction
fees, to fund the Amtel acquisition deposit of $1,300,000 and for 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. The remainder of the proceeds were used for working capital and
payment of certain related acquisition expenses. On November 22, 1996, the
Lenders amended the Credit Agreement to permit the incurrence of additional
borrowings of up to $2.0 million to fund the deposits required in connection
with
44
<PAGE> 46
the Pending Acquisitions and for working capital purposes, thereby increasing
the maximum borrowings available under the Credit Agreement to $43,000,000. As
of November 30, 1996, borrowings of $43,000,000 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 and the Company was in compliance
with such covenants as of September 30, 1996. The Company intends to use a
portion of the net proceeds from the Company Debt Offering and the Offering to
repay the indebtedness under the Credit Agreement. Concurrently with such
repayment, the Company will terminate the Credit Agreement. Following
consummation of the Offering and the Concurrent Offering, the Company expects to
enter into the New Credit Agreement, which would provide for a senior credit
facility of $25 to $50 million. See "Description of Certain Indebtedness" for
descriptions of the terms of the Credit Agreement, the New Credit Agreement and
the Indenture.
Of the term loans outstanding under the Credit Agreement, $29,000,000 can be
converted into Series B Preferred at the ratio of 833 shares for each $100,000
in outstanding debt and accrued interest. Additionally, in connection with the
execution of the original Credit Agreement on March 15, 1996, ING and Cerberus
each received 102,412 warrants (204,824 warrants in total and referred to herein
as the "Lenders' Warrants"), which would collectively allow them to purchase up
to 204,824 shares of Series A Preferred at an exercise price of $0.20 per share.
Each share of Series A Preferred 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-Schules 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, $6,475,011 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 Company Debt Offering and the 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 $882,647, a decrease of $7,713,766 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, the Representative of the Underwriters in the Offering and
one of the underwriters in the Company Debt Offering, at values ranging from
$4.20 to $6.01 per share. See "Certain Transactions." Additionally, certain
warrants and options to purchase 660,506 shares of the Company's Common Stock at
prices ranging from $5.70 to $6.00 were granted in 1995.
45
<PAGE> 47
On September 12, 1995, the Company borrowed $1,200,000 (which was recorded net
of the value of warrants issued of $349,000) from third party investors pursuant
to a 19 month credit agreement, bearing interest at 12.5%. The proceeds were
used for operating expenses and to make certain employee 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 Company Debt Offering, will be
sufficient to meet the Company's cash requirements for working capital, capital
expenditures and debt service over the next twelve months.
46
<PAGE> 48
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. As of
September 30, 1996, the average remaining life of the Company's contracts with
its location providers was 40.1 months (excluding the contracts acquired in
connection with the acquisition of POA).
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%.
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 with the closing of certain offices, 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,
47
<PAGE> 49
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 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 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
48
<PAGE> 50
(ii) respond quickly to equipment malfunctions. The Company's standard of
performance is to repair malfunctions within 24 hours of their occurrence.
Achieve market recognition. With the greater financial resources available to
the Company following the Company Debt Offering and the 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 Telecommunication 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-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
Telecommunica-
49
<PAGE> 51
tion Act and the FCC's implementing regulations (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 the Company Debt Offering and the 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.
50
<PAGE> 52
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
EXPECTED TO BE PRIMARY
COMPANY TO BE ACQUIRED ACQUISITION ACQUIRED AREAS SERVED
- --------------------------------- ------------------- ------------ -------------------------
<S> <C> <C> <C>
Cherokee Communications, Inc. (1) January 1997 13,350 Texas; New Mexico; Utah;
Montana; Colorado
Texas Coinphone (2) January 1997 1,200 Texas
------
Total 14,550
======
<CAPTION>
NUMBER OF
INSTALLED
PUBLIC
PAY
DATE OF TELEPHONES PRIMARY
COMPANY ACQUIRED 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. 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 $0.5 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 $0.3 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.
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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 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 public 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 regulations 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. A number of
parties have filed petitions for judicial review of these regulations in federal
courts of appeals. To date, the regulations remain in effect. There can be no
assurance that the rules, regulations and policies adopted by
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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.
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.
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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 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
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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 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 threephase 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
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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).
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
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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. A number of parties
have filed petitions for judicial review of these regulations in federal courts
of appeals. To date, the regulations remain in effect. The final rules adopted
by the FCC and Section 276 have not yet been interpreted by the courts, and
there can be no assurance regarding the effect that the rules and policies
ultimately adopted thereunder will have on the Company.
SERVICEMARK
The Company uses the servicemark "PhoneTel" on its 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.
57
<PAGE> 59
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.
58
<PAGE> 60
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.
59
<PAGE> 61
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 had held any meetings in 1995, both
committees are scheduled to meet in the fourth quarter of 1996. The Audit
Committee is expected to meet on a quarterly basis in 1997.
The Compensation Committee has the authority to make 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 any compensation. The Company does, however, reimburse such
officers for their business expenses.
The following table sets forth a summary of all compensation of the Company's
Chief Executive Officer and all other executive officers whose total
compensation exceeded $100,000 per year for any year in the three year period
ended December 31, 1995 (the "named executive officers").
60
<PAGE> 62
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ ---------------------- ---------------------
OTHER LONG-
ANNUAL RESTRICTED TERM ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ INCENTIVE COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
- ---------------------------------------- ---- -------- ------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter G. Graf 1995 -- -- $ 5,000(1) -- 47,583 -- --
Chairman, Chief 1994 -- -- -- -- 24,705 -- --
Executive Officer
and Director
Jerry H. Burger 1995 $ 74,293 $13,600 $13,600(2) -- 62,500 -- $212,000 (3)
Former Chief 1994 $ 40,000 -- -- -- -- -- --
Executive Officer 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 1993 $ 83,269 $25,000 $ 3,698(4) -- 10,000(8) -- --
Officer 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 $10 million.
61
<PAGE> 63
The following table sets forth certain information concerning individual grants
of stock options made during the year ended December 31, 1995 to each of the
named executive officers.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS/
OPTIONS/ SARS EXERCISE
SARS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE
NAME AND PRINCIPAL POSITION (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ------------------------------------------ ---------- ------------ -------- -------------------
<S> <C> <C> <C> <C>
Peter G. Graf 41,833 6.3% $ 5.70 December 31, 1997
Chairman, Chief 5,750 0.9% $ 6.00 August 15, 2000
Executive 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 $3.72 per share.
(3) Excludes 25,537 additional options issued pursuant to anti-dilution
provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-dilution
provisions.
The following table sets forth certain information about unexercised stock
options held by the named executive officers at December 31, 1995. No stock
options were exercised by such persons during 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
-------------------------------------------------------
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
SHARES (#) ($)
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME AND 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>
62
<PAGE> 64
PRINCIPAL AND SELLING SHAREHOLDERS
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, all directors and officers as a group and
the Selling Shareholders as of November 30, 1996 and as adjusted to reflect the
sale of the shares in the 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>
---------------------------------------------------------
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
SHARE TO SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
- ------------------------------------------------------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Peter G. Graf (1)(16) 1,029,376 12.89% -- 1,029,376 6.99%
Chairman, Chief Executive Officer
and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Nickey B. Maxey (2)(16) 406,184 5.30% -- 406,184 2.82%
Chief Operating Officer and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
George H. Henry (3) 360,376 4.70% -- 360,376 2.50%
Director
6860 Sunrise Court
Coral Gables, FL 33133
Stuart Hollander (4) 323,559 4.24% -- 323,559 2.25%
Director
32 Lake Forest
St. Louis, MO 63124
Steven Richman (5)(16) 258,535 3.31% -- 258,535 1.78%
Director
9 Beech Lane
Kings Point, NY 11024
Aron Katzman (6)(16) 244,664 3.14% -- 244,664 1.68%
Director
10 Layton Terrace
St. Louis, MO 63124
Joseph Abrams (7)(16) 195,536 2.50% -- 195,536 1.34%
Director
85 Old Farm Road
Bedminister, NJ 07921
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
---------------------------------------------------------
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING
SHARE TO SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
- ------------------------------------------------------ --------- ------ ---- --------- ----
<S> <C> <C> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
Jerry H. Burger (8) 251,514 3.20% -- 251,514 1.72%
Former Chief Executive Officer
27040 Cedar Road
Beachwood, OH 44122
Bernard Mandel (9) 105,609 1.37% -- 105,609 .73%
Former President,
Chief Operating Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos (10) 105,747 1.37% -- 105,747 .73%
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% -- 2,961,473 19.35%
SELLING SHAREHOLDERS
ING (U.S.) Investment Corporation (12)(18) 4,464,907 36.89% 250,000 4,214,907 24.0%
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P. (13)(18) 4,464,907 36.89% 250,000 4,214,907 24.0%
950 Third Avenue, 20th floor
New York, NY 10022
OTHER 5% BENEFICIAL OWNERS
ACI -- HDT Supply Company, et al.,
as Debtors-in-Possession (14) 2,162,163 28.3% -- 2,162,163 15.3%
5452 Oberlin Drive, Suite B
San Diego, CA 92121
J&C Resources (15) 486,860 6.25% -- 486,860 3.35%
216 Daniel Webster Highway
S. Nashua, NH 03060
Southcoast Capital Corporation (16)(17) 475,108 5.90% -- 475,108 3.21%
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.
64
<PAGE> 66
(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 222,014 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 occur subsequent to November 30, 1996, such as the Offering.
(9) Includes options to purchase 102,326 shares of Common Stock through August
1, 2000 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 occur subsequent to
November 30, 1996, such as the Offering.
(10) Includes options to purchase 93,748 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 occur subsequent to November 30, 1996, such as the Offering.
(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 (U.S.) Investment Corporation is a wholly-owned subsidiary of
ING. In December 1996, ING transferred the Lenders' Warrants to ING (U.S.)
Investment Corporation. All references to "ING" as holder of the Lenders'
Warrants or as a holder of shares of Common Stock refer to ING (U.S.)
Investment Corporation. ING may exercise a portion of its Lender Warrants
in order to sell Shares of Common Stock in the Offering. Assuming ING sells
250,000 shares of Common Stock in the Offering and all of the indebtedness
under the Credit Agreement is repaid with a portion of the net proceeds of
the Company Debt Offering, ING will beneficially own 1,798,240 shares of
Common Stock, which would represent 23.68% of the Common Stock outstanding
after consummation of the Offering. See note (18) below. An affiliate of
ING is expected to be one of the underwriters in the Company Debt Offering.
(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 Lender Warrants in order to
sell shares of Common Stock in the Offering. Assuming Cerberus sells
250,000 shares of Common Stock in the Offering and all of the indebtedness
under the Credit Agreement is repaid with a portion of the net proceeds of
the Company Debt Offering, Cerberus will beneficially own 1,798,240 shares
of Common Stock, which would represent 23.68% of the Common Stock
outstanding after consummation of the Offering. See note (18) below.
(14) Represents the shares of Common Stock given by the Company to ACI-HDT
Supply Company and its affiliates (collectively referred to herein as
Amtel) as consideration in the Amtel acquisition. Each of the Amtel
entities is a Debtor-In-Possession in separate Chapter 11 reorganization
proceedings pending before the Untied States Bankruptcy Court for the
Southern District of California (the "Bankruptcy Court") identified as Case
Nos. 95-08253-All. Pursuant to the Asset Purchase Agreement dated as of
June 26, 1996, as amended, between the Company and Amtel, Amtel has agreed
to distribute the shares of Common Stock to its creditors pursuant to the
terms of the final plan of reorganization, which was confirmed by order of
the Bankruptcy Court on November 13, 1996.
(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
Offering. Notwithstanding the lock-up agreement entered into with the
underwriters in the Offering, Cerberus or ING will be permitted to sell
after 45 days following the effective date of the registration statement
relating to the 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 Offering. See "Underwriting."
65
<PAGE> 67
CERTAIN TRANSACTIONS
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of Common
Stock expiring March 13, 2001 were issued in conjunction with the acquisitions
of IPP and Paramount, redemption of the 10% Preferred, 8% Preferred, and 7%
Preferred, and conversion of certain debt of the Company into the 14% Preferred.
See "Description of Capital Stock -- Preferred Stock -- 14% Preferred" for a
description of the terms of the 14% Preferred. Concurrently with their exchange
of debt and preferred stock for the 14% Preferred, the following directors,
executive officers and security holders of 5% or more of the Common Stock
received the amount of 14% Preferred and Nominal Value Warrants shown below. The
Company may use a portion of the net proceeds of the Company Debt Offering and
the Offering to redeem all of the 14% Preferred other than the shares of 14%
Preferred beneficially owned by Peter G. Graf.
<TABLE>
<CAPTION>
---------------------------------
VALUE OF
DEBT/PREFERRED
SURRENDERED
AND STATED
VALUE OF 14% NUMBER OF
PREFERRED NOMINAL VALUE
NAME OF BENEFICIAL OWNER ISSUED WARRANTS ISSUED
- --------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
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 1996, a predecessor of Southcoast Capital Corporation ("Southcoast"),
which is a 5% or more stockholder and one of the underwriters in the Company
Debt Offering and the Offering, 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 the 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 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 Company Debt 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.
66
<PAGE> 68
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 November 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"), which are then convertible into 1,163,161 shares of Common Stock,
(iii) Lenders' Warrants to purchase 204,824 shares of Series A Preferred, which
are 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) 805,357 additional warrants which are exercisable into the
same number of shares of Common Stock and (vi) 675,321 stock options for Common
Stock, all of which are immediately exercisable. In addition, at November 30,
1996, $29,000,000 of indebtedness outstanding under the Credit Agreement was
convertible at the Lenders' option into approximately 241,667 shares of Series B
Preferred, which are then immediately convertible into 4,833,333 shares of
Common Stock. Upon completion of the Company Debt Offering and the 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) 805,351 additional
warrants and (vi) 675,321 stock options for Common Stock. After the Company Debt
Offering and the Offering and the application of the net proceeds therefrom,
there would be no debt outstanding under the Credit Agreement that is
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:
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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 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 Company Debt Offering and the Offering. See "Prospectus Summary -- The
Company Debt Offering."
The Series B Preferred shares are pari passu with the Common Stock with respect
to the payment of dividends. If a dividend or other distribution is declared by
the Board of Directors to be paid to holders of the Common Stock, then
simultaneously with the payment of such dividend or making of such distribution,
and as a condition precedent to its right to do so, the Board of Directors will
pay or distribute to the holders of the Series B Preferred the same dividends or
distributions as such holders would have been entitled to receive if such
holders had converted their shares of Series B Preferred into Common Stock prior
to the record date used by the Board of Directors for determining the holders of
Common Stock entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series B Preferred is pari passu
with the Series A Preferred and senior to the Common Stock and any other series
of Preferred Stock. Accordingly, upon the liquidation, dissolution or winding up
of the Company, holders of the Series B Preferred will be entitled to receive,
on a ratable and pari passu basis with the holders of the Series A Preferred,
out of the assets of the Company legally available for distribution to its
stockholders before making any payment to holders of Common Stock or any other
series of 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 November 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
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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 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 Company Debt Offering and
the Offering to redeem shares of 14% Preferred having a liquidation preference
of approximately $5.5 million. See "Prospectus Summary -- The Company Debt
Offering."
Except as provided by law, the holders of the 14% Preferred have no voting
rights.
From time to time, the Board of Directors has designated other series of
Preferred Stock, none of which are currently outstanding.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of November 30, 1996, the Company has reserved 12,724,117 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 805,351 warrants at prices ranging from $5.70 to $15.75 per share;
(v) exercise of 675,321 stock options at prices ranging from $2.62 to $19.50 per
share; (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; and (vii)
conversion of certain capital lease obligations into 166,667 shares of Common
Stock.
REGISTRATION RIGHTS
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 14,000,000 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 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 of which this Prospectus forms a part
(including the Selling Shareholders). However, in order to satisfy its
obligations under the registration rights agreements, the Company has filed 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, the Selling Shareholders and certain other holders of
Registrable Securities have agreed not to transfer, sell or otherwise dispose of
such shares, without the consent of Southcoast, for the periods described under
the caption "Shares Eligible for Future Sale."
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding 14,389,709
shares of Common Stock. The 6,750,000 shares of Common Stock sold in this
Offering, all of the 14,783,750 shares of Common Stock to be registered pursuant
to the Shelf Registration Statement, when issued, and the 1,222,226 shares of
Common Stock currently outstanding which were either registered or "restricted
securities" (as discussed below) and sold pursuant to the exemption from
registration provided by Rule 144 under the Securities Act, will be freely
tradeable without restrictions or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which will be subject to
the resale limitations of Rule 144 under the Securities Act. As defined in Rule
144, an affiliate of an issuer is a person who directly or indirectly, through
one or more intermediaries, controls, is controlled by or is under common
control with, such issuer, and generally includes members of the Board of
Directors and senior management.
As of November 30, 1996 and prior to the effectiveness of the Shelf Registration
Statement, 6,417,483 shares (the "Restricted Shares") were deemed "restricted
securities" under Rule 144 in that they were originally issued and sold by the
Company in private transactions in reliance upon exemptions under the Securities
Act. The Restricted Shares may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act.
In general, Rule 144 as currently in effect allows a shareholder who has
beneficially owned Restricted Shares for at least two years (including persons
who may be deemed "affiliates" of the Company under Rule 144) to sell a number
of shares within any three-month period that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock (approximately 143,897 shares
after giving effect to this Offering) or (ii) the average weekly trading volume
in the Common Stock during the four calendar weeks immediately preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner and notice of sale and the availability of public information about the
Company. A shareholder (or shareholder whose shares are aggregated) who is not
an "affiliate" of the Company at any time during the 90 days immediately
preceding a sale, and who has beneficially owned his shares for at least three
years (as computed under Rule 144), is entitled to sell such shares under Rule
144 without regard to the volume and manner of sale limitations described above.
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 date of this Prospectus without the prior
written consent of Southcoast Capital Corporation.
As of November 30, 1996, options and warrants to purchase 2,464,477 shares of
Common Stock were issued and outstanding, all of which were immediately
exercisable on such date. In addition, at November 30, 1996, an aggregate of
10,259,641 shares of Common Stock have been reserved for issuance pursuant to
the conversion of shares of the Company's Series A Preferred, Series B Preferred
and 14% Preferred and the conversion of certain capital lease obligations.
Holders of the Company's options, warrants and convertible preferred stock and
certain holders of the Company's Common Stock have entered into registration
rights agreements with the Company and have demand and piggyback registration
rights necessary under certain circumstances. The Company has obtained waivers
of such registration rights in connection with the Offering from the holders of
approximately 92% of the Registrable Securities that had piggyback registration
rights as a result of the filing of the Registration Statement of which this
Prospectus forms a part. However, in order to satisfy its obligations under such
registration rights agreements, the Company has filed a Shelf Registration
Statement to register under the Securities Act 14,783,750 shares of Common Stock
including the shares issuable upon the exercise or conversion of such options,
warrants and convertible preferred stock. The Company expects that the Shelf
Registration Statement will be declared effective concurrently with the
Registration Statement of which this Prospectus forms a part. Upon effectiveness
of the Shelf Registration Statement, all of such shares of Common Stock, when
issued, will be eligible for sale without restriction under the Securities Act.
However, each of the Selling Shareholders (who hold approximately 69% of the
Registrable Securities) and other shareholders of the Company who hold
approximately 25% of the Registrable Securities have entered into lock-up
agreements with the representative of the Underwriters. See "Underwriting."
No prediction can be made of the effect, if any, that sales of shares under Rule
144 or the availability of shares for sale will have on the market price of the
Common Stock prevailing from time to time after the Offering. The Company is
unable to estimate the number of shares that may be sold in the public market
under Rule 144, because such amount will depend on the trading volume in, and
market price for, the Common Stock and other factors. Nevertheless, sales of
substantial amounts of shares in the public market, or the perception that such
sales could occur, could adversely affect the market price of the Common Stock.
See "Underwriting."
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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 $6,750,000 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 November 30, 1996, approximately $43.0 million of indebtedness (excluding
accrued interest) was outstanding under the Credit Agreement. Simultaneously
with the closing of the Company Debt Offering, the Company will retire all of
the outstanding indebtedness under the Credit Agreement and terminate the Credit
Agreement. Following consummation of the Company Debt Offering, the Company
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 following the consummation of the Company Debt Offering and the
Offering. 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 also include restrictions on the activities of the Subsidiary Guarantors.
The New Credit Agreement is also expected to contain provisions requiring the
Company to maintain certain financial ratios.
THE NOTES
The Notes that are being offered in the Company Debt Offering will be issued
under an Indenture (the "Indenture") by and among the Company, each subsidiary
of the Company (the "Subsidiary Guarantors") and Marine Midland Bank, as trustee
(the "Trustee"). The following summary of the terms of the Notes and the
Indenture does not purport to be complete, and is subject to the detailed
provisions of, and is qualified in its entirety by reference to, the Notes and
the Indenture. A copy of the form of the Indenture, which includes the form of
Note, has been filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
The Notes will be general unsecured obligations of the Company limited in
aggregate principal amount to $110.0 million 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 , 1997. The Notes will rank senior in right of payment to
all indebtedness of the Company that is expressly subordinated and will be pari
passu in right of payment with all other
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existing and future senior indebtedness of the Company. The Notes will be
guaranteed jointly and severally and fully and unconditionally on a senior
unsecured basis by the Subsidiary Guarantors, including any and all future
subsidiaries of 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 in
the Indenture, plus accrued and unpaid interest to the date of redemption. In
addition, at any time or from time to time prior to , 1999, the
Company may redeem up to % of the aggregate principal amount of the Notes
originally issued with the net cash proceeds to the Company of one or more
public equity offerings or equity private placements (other than the Company
Equity Offering) at a redemption price equal to % of the principal amount
thereof, plus accrued and unpaid interest to the date of redemption, provided
that at least $75.0 million principal amount of the Notes remains outstanding
immediately after any such redemption.
If the Cherokee Acquisition is not consummated prior to , 1997, the
Company will be required to offer to purchase (the "Special Offer") $35.0
million principal amount of the Notes at a price equal to 101% of the principal
amount of the Notes plus accrued and unpaid interest to the date of purchase. If
the Cherokee Acquisition shall not have been consummated on or prior to the date
of issue of the Notes, on such 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 at the Special Offer Price in accordance with the Indenture. All
amounts so deposited with the Trustee will be pledged to and held by the Trustee
pursuant to the Indenture as security for the Notes.
The Indenture will impose certain limitations on the ability of the Company and
the Subsidiary Guarantors to, among other things, incur additional indebtedness,
pay dividends or make certain other restricted payments, consummate certain
asset sales, enter into certain transactions with interested persons, incur
liens, impose restrictions on the ability of a Subsidiary Guarantor to pay
dividends or make certain payments to the Company, conduct business other than
the pay telephone and ancillary businesses, merge or consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company.
The Indenture will contain customary events of default, including, without
limitation, the following: (i) the failure to pay principal or interest when due
on the Notes; (ii) certain defaults under agreements relating to other
indebtedness; (iii) the breach of any covenant in the Indenture; (iv) the levy
of certain judgments; and (v) certain bankruptcy, reorganization and insolvency
events. The occurrence of an event of default under the Indenture will permit
the holders of the Notes to accelerate the Notes and to pursue other remedies.
In addition, upon a "change of control" (as defined in the Indenture), the
Company will have the obligation to offer to repurchase all outstanding Notes
from the holders thereof at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase.
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UNDERWRITING
The Underwriters named below, for whom Southcoast Capital Corporation is acting
as the representative (the "Representative"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement (the "Underwriting
Agreement"), to purchase 6,250,000 shares of Common Stock from the Company and
500,000 shares of Common Stock from the Selling Shareholders. The number of
shares of Common Stock that each Underwriter has agreed to purchase is set forth
opposite their names below. The nature of the obligations of the Underwriters is
such that, if any of such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------------------------------------------- ---------
<S> <C>
Southcoast Capital Corporation................................................................
---------
Total............................................................................... 6,750,000
=========
</TABLE>
The Underwriters propose initially to offer the shares of Common Stock offered
hereby to the public at the price to public set forth on the cover page of this
Prospectus. The Underwriters may allow a concession to selected dealers who are
members of the National Association of Securities Dealers, Inc. ("NASD") not in
excess of $ per share, and the Underwriters may allow, and such dealers
may reallow, to members of the NASD a concession not in excess of $ per
share. After this Offering, the price to public, the concession and the
reallowance may be changed by the Underwriters.
The Company has granted an option to the Underwriters, exercisable within 45
days after the date of this Prospectus, to purchase up to an aggregate of
937,500 additional shares of Common Stock at the price to public, less
underwriting discount, set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only for the purpose of covering any
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase that
number of additional shares of Common Stock which is proportionate to such
Underwriter's initial commitment.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act.
The Underwriting Agreement provides for payment by the Company to the
Representative of a non-accountable expense allowance of $100,000 for due
diligence and other out-of pocket expenses.
The Company and its executive officers and directors have agreed that for a
period of 180 days after the date of this Prospectus, they will not offer, sell
or otherwise dispose any Shares of Common Stock beneficially owned or controlled
by them (including subsequently acquired shares) 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. Notwithstanding
the filing of the Shelf Registration Statement, ING and Cerberus (who hold
approximately 69% of the shares of Registrable Securities) have agreed not to
transfer, sell or otherwise dispose of any other shares of Common Stock (other
than the 250,000 shares which may be sold by each of them as part of the
Offering or otherwise following 45 days after the Effective Date) 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
Offering without the consent of Southcoast.
Southcoast will also receive customary fees for acting as an underwriter in
connection with the Company Debt 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."
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LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed upon
for the Company by Tammy L. Martin, Esq., General Counsel of the Company, and
certain other legal matters relating to the Offering will be passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Wolin, Fuller, Ridley
& Miller LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1994 and
1995 and for the three years ended December 31, 1995 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Paramount Communications 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 in this Prospectus have
been so included in reliance on the report of KPMG Peat Marwick LLP, independent
accountants given on the authority of said firm as experts in auditing and
accounting.
The financial statements of International Pay Phones, Inc. (South Carolina) as
of December 31, 1994 and 1995 and for each of the two years ended December 31,
1994 and 1995 included in this Prospectus have been so included in reliance on
the report of Miller Sherrill Blake, CPA, PA, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
The financial statements of International Pay Phones, Inc. (Tennessee) as of
December 31, 1994 and 1995 and for each of the two years ended December 31, 1994
and 1995 included in this Prospectus have been so included in reliance on the
report of Ernest M. Sewell, CPA, independent accountant, given on the authority
of said person as an expert in auditing and accounting.
The financial statements of Payphones of America, Inc. as of December 31, 1994
and 1995 and for each of the two years ended December 31, 1994 and 1995 included
in this Prospectus have been so included in reliance on the report of Kerber,
Eck & Braeckel LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The consolidated financial statements of Amtel 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.
74
<PAGE> 76
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> 77
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or any other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the Offering covered by this Prospectus. If given
or made, such information or representations must not be relied upon as having
been authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Common
Stock in any jurisdiction where or to any person to whom it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implications that
there has not been any change in the facts set forth in this Prospectus or in
the affairs of the Company since the date hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Prospectus Summary.................... 4
Risk Factors.......................... 11
The Pending Acquisitions.............. 17
Use of Proceeds....................... 18
Capitalization........................ 19
Price Range of Common Stock........... 21
Dividend Policy....................... 21
Selected Financial Data............... 22
Pro Forma Financial Data.............. 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 39
Business.............................. 47
Management............................ 59
Principal and Selling Shareholders.... 63
Certain Transactions.................. 66
Description of Capital Stock.......... 67
Shares Eligible for Future Sale....... 70
Description of Certain Indebtedness... 71
Underwriting.......................... 73
Legal Matters......................... 74
Experts............................... 74
Glossary.............................. A-1
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
6,750,000 SHARES
PHONETEL LOGO
PHONETEL
TECHNOLOGIES, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
SOUTHCOAST CAPITAL
C o r p o r a t i o n
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78
PHONETEL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PHONETEL TECHNOLOGIES, INC.
Audited Financial Statements:
Report of Independent Accountants............................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995....... F-4
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995.................................................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1993, 1994 and 1995............................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995.................................................................. F-8
Notes to Consolidated Financial Statements...................................... F-10
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 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> 79
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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> 80
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
7. LONG-TERM DEBT (CONTINUED)
Notes payable due on demand to five former World
stockholders repaid on March 15, 1996.................... -- 625,000
Notes payable to former stockholders of Public due on April
16, 1996 with interest at 9%. On March 15, 1996 $211,285
was repaid............................................... -- 293,226
Non-compete notes payable to two former officers of Public
repaid on March 15, 1996................................. -- 203,480
Two notes payable to a service provider repaid on March 15,
1996..................................................... $ 1,852,628 1,401,872
Term notes payable to a vendor in monthly installments
ranging from $31,107 to $47,330 including interest at
rates varying from 10% to 13.75%. The vendor has a
security interest in the underlying phones. On March 15,
1996, the Company repaid $225,000, refinanced the
remaining balance owed at 15% interest and the vendor
released its security interest in the goods sold......... 694,611 1,066,428
Promissory notes payable to Alpha repaid on March 15,
1996..................................................... 751,848 500,756
Promissory notes payable to a group of five investors
repaid in 1995........................................... 300,000 --
Promissory note payable to a vendor in monthly installments
of $318 through $535 at an interest rate of 8.75%........ -- 120,617
Promissory note payable in monthly installments of $12,500
through January 1996 at an interest rate of 8%........... 147,721 124,614
Notes payable to directors and shareholders at an imputed
interest rate of prime plus 5%, repaid on March 15,
1996..................................................... -- 1,732,500
Notes payable to two investors repaid on March 15, 1996.... -- 200,000
Note payable to a vendor repaid on March 15, 1996.......... -- 201,101
Note payable to a consultant. On March 15, 1996, the
consultant accepted 12,500 shares of the Company's Common
Stock and $50,000 in full settlement of the debt......... -- 125,000
Non-compete obligation to a former owner of World payable
in bi-weekly installments of $6,000 at an imputed
interest at 9%........................................... -- 288,844
Various notes payable to vendors in monthly installments
ranging from $283 to $3,538 with interest rates ranging
from 6.9% to 10.4%....................................... 131,848 199,370
----------- -----------
3,878,656 10,328,913
Less current maturities.................................... (1,814,760) (1,010,412)
----------- -----------
$ 2,063,896 $ 9,318,501
=========== ===========
</TABLE>
F-15
<PAGE> 93
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> 94
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. LEASES (CONTINUED)
On March 15, 1996, the Company repaid $3,243,965 of the outstanding
obligations under capital leases. The following are maturities of long-term debt
(which replaced obligations under capital leases) based on the terms of the ING
credit facility (See Note 15):
<TABLE>
<S> <C>
1996................................................ $ 288,972
1997................................................ 112,545
1998................................................ 357,371
1999................................................ 2,774,049
2000................................................ --
----------
$3,532,937
==========
</TABLE>
9. INCOME TAXES
No provisions for income tax were required and no income taxes were paid for the
years ended December 31, 1993, 1994 or 1995 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) at December 31
were as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Federal net operating loss carryforward................... $ 1,863,867 $ 5,342,374
Depreciation and amortization............................. 273,287 1,017,406
Bad debts................................................. 17,160 13,600
Other..................................................... 5,538 --
----------- -----------
Gross deferred tax assets................................. 2,159,852 6,373,380
Accruals.................................................. (117,000) --
Deferred sales commissions................................ (130,217) (125,066)
Valuation allowance on deferred tax assets................ (1,912,635) (6,248,314)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
A valuation allowance has been provided against the net deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets will be ultimately realized. The net
operating loss carryforwards, if not utilized, will expire between the years
2002-2010. Internal Revenue Code Section 382 provides for the limitation on the
use of net operating loss carryforwards in years subsequent to significant
changes in ownership. As a result of the Company's Initial Public Offering in
1988 and certain other transactions, including acquisitions, changes in
ownership have occurred resulting in significant limitations on the use of net
operating loss carryforwards. The extent of limitations as a result of
significant changes in ownership has not been determined by the Company.
10. SHAREHOLDERS' EQUITY
As of December 31, shareholders' equity consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized;
530,534 shares issued and outstanding at December 31,
1995)................................................. -- $ 5,305,340
</TABLE>
F-17
<PAGE> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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.
CREDIT FACILITY AMENDMENT
On November 22, 1996, the Lenders amended the Credit Facility increasing
the maximum borrowings available under the Credit Facility to $43,000,000. The
Company then borrowed an additional $2,000,000 and used the proceeds to fund the
Cherokee and Texas Coinphone acquisition deposits and for working capital. There
are no additional amounts available under the Credit Facility. The Company
intends to repay the Credit Facility with the proceeds from an equity and debt
public offering.
F-25
<PAGE> 103
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...................... $ 1,010,412 995,673
Current portion of obligations under capital leases.............. 288,972 803,336
Accounts payable................................................. 2,772,306 2,969,681
Accrued expenses................................................. 1,610,100 3,524,690
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> 104
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.......... (304,105) (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> 105
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> 106
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)
NINE MONTHS ENDED
YEAR ENDED DECEMBER SEPTEMBER 30,
31, 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> 107
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> 108
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> 109
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> 110
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 THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 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 an Agreement and Plan of Merger dated as of
November 21, 1996 (the "Cherokee Merger Agreement") 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 payable in two
installments due January 1998 and 1999, if the FCC fails to implement certain
rate caps, rate guidelines or third party preferences during the first and
second years after closing, 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, Utah, Montana, and
Colorado.
The Company has entered into a letter of intent dated October 9, 1996, as
amended on November 25, 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 Pending Acquisitions with the proceeds from
a contemplated debt offering expected to be completed in the fourth quarter of
1996.
F-33
<PAGE> 111
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> 112
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 and the Company was in
compliance with such covenants as of September 30, 1996.
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> 113
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
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)...................................... -- $ 6,539,053
</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
stated value -- 550,000 shares authorized; 530,534
shares issued and outstanding at December 31, 1995,
redeemed on June 28, 1996).............................. $ 5,305,340 --
Series A Special Convertible Preferred Stock ($0.20 par
value, $0.20 stated value -- 250,000 shares authorized;
no shares issued)....................................... -- --
Series B Special Convertible Preferred Stock ($0.20 par
value, $120 stated value -- 250,000 shares authorized;
no shares issued)....................................... -- --
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996)............................................... 1 --
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996)............................................... 981,084 --
7% Cumulative Convertible Redeemable Preferred Stock ($100
stated value -- 2,500 shares authorized, issued and
outstanding at December 31, 1995, redeemed on March 15,
1996)................................................... 200,000 --
</TABLE>
F-36
<PAGE> 114
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 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.
F-37
<PAGE> 115
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
8. SUBSEQUENT EVENTS
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.
CREDIT FACILITY AMENDMENT
On November , 1996, the Lenders amended the Credit Facility increasing
the maximum borrowings available under the Credit Facility to $43,000,000. The
Company then borrowed an additional $2,000,000 and used the proceeds to fund the
Cherokee and Texas Coinphone acquisition deposits and for working capital. There
are no additional amounts available under the Credit Facility. The Company
intends to repay the Credit Facility with the proceeds from an equity and debt
public offering.
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 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.
F-38
<PAGE> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheet of Paramount Communications
Systems, Inc. as of December 31, 1994, and the related statement of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-47
<PAGE> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
May 21, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones, Inc.
(a South Carolina corporation) as of December 31, 1995, and the related
statement of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Pay Phones, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ Miller Sherrill Blake CPA
Lincolnton, North Carolina
F-55
<PAGE> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
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> 162
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> 163
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> 164
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> 165
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are attributable to the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation................................ $(472,000) $(365,000)
Accumulated amortization................................ 262,000 81,000
Tax benefit of net operating loss carryforward.......... 460,000 --
--------- ---------
250,000 (284,000)
Less valuation allowance..................................... (250,000) --
--------- ---------
Net deferred tax asset (liability).................... $ -- $(284,000)
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards for Federal income tax
purposes which are available to offset future Federal taxable income. These
carryforwards expire as follows:
<TABLE>
<S> <C>
2008..................................................... $ 9,194
2009..................................................... 332,849
2010..................................................... 836,510
----------
$1,178,553
=========
</TABLE>
NOTE F -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended December 31:
<TABLE>
<S> <C>
1996...................................................... $ 95,091
1997...................................................... 93,246
1998...................................................... 60,550
1999...................................................... 59,000
2000...................................................... 64,400
2001 and thereafter....................................... 310,500
--------
Total minimum lease payments.............................. $682,787
========
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1995
and 1994, was $71,512 and $31,389, respectively.
NOTE G -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
- ------- --------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
F-88
<PAGE> 166
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> 167
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> 168
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> 169
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> 170
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> 171
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> 172
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> 173
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> 174
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> 175
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> 176
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE F -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
- ------- ---------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE G -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the shortterm
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at June 30, 1996, based on market
rates and conditions.
F-99
<PAGE> 177
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined balance sheets of Amtel
Communications, Inc., and Combined Companies (Note B) as of June 30, 1996 and
December 31, 1995, and the related combined statements of operations,
stockholder's deficit, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amtel Communications, Inc., and
combined Companies (Note B) as of June 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, on August
3, 1995, the Company filed voluntary petitions for relief under Chapter 11 of
Title II of the United States Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-100
<PAGE> 178
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> 179
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> 180
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> 181
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> 182
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> 183
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> 184
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> 185
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> 186
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined statement of revenues and direct
operating expenses of Amtel Communications, Inc., and combined Companies (Note
B) for the three months ended December 31, 1994. This combined statement of
revenues and direct operating expenses is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and direct operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the revenues and direct
operating expenses for the three months ended December 31, 1994, pursuant to the
Securities and Exchange Commission's communication dated July 25, 1996 described
in Note C, and is not intended to be a complete presentation of the Company's
operations.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenue and direct operating expenses of Amtel Communications, Inc., and
combined Companies (Note B) for the three months ended December 31, 1994 in
conformity with generally accepted accounting principles.
The accompanying combined statement of revenues and direct operating
expenses has been prepared assuming that the Company will continue as a going
concern. As described in Note A, on August 3, 1995, the Company filed voluntary
petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The combined statement of revenues and
direct operating expenses does not include any adjustment that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-109
<PAGE> 187
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> 188
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> 189
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> 190
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> 191
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> 192
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> 193
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> 194
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> 195
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> 196
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> 197
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> 198
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> 199
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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Articles of Incorporation of the Company provides for
indemnification, to the fullest extent permitted or required under law, of any
director or officer of the Company or any person serving at the request of the
Company as a director, trustee or officer of another entity, in 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
shares 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.
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 $ 9,470
NASD Filing Fee 3,625
American Stock Exchange listing fees 50,000
Printing and Engraving Expenses 150,000
Accounting Fees and Expenses 120,000
Legal Fees and Expenses 350,000
--------
Transfer Agent's and Registrar's Fees and Expenses 15,000
Miscellaneous 51,905
--------
Total $750,000
========
</TABLE>
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.
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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 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 totalling $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 to 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 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 totaling $33,625. All of the aforementioned shares were
issued pursuant to the exemption from registration provided under Section 4(2)
of the Act.
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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 to 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 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
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<PAGE> 211
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
- ----------- ---------------------------------------------------------------------------------------------
<S> <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)*
4.1 Specimen of Common Stock Certificate. (3)*
4.2 Form of 14% Convertible Preferred Stock. (13)*
4.3 Form of Indenture relating to the Notes offered in the Company Debt Offering (including the
form of Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the shares of Common Stock registered
hereby.
10.1 Stock Option Agreement between William Tymoszczuk and PhoneTel Technologies, Inc., dated
March 1, 1987. (3)*
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)*
10.3 Amended and Restated Stock Option Agreement between PhoneTel Technologies, Inc. and Jerry H.
Burger dated July 1, 1993. (8)*
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel Technologies, Inc. and Bernard
Mandel. (8)*
10.5 Form of Stock Option Agreement between PhoneTel 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)*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
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)*
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>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <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. 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)*
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
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)*
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)*
10.75 Seventh Amendment to Credit Agreement dated as of November 22, 1996.
10.76 Agreement and Plan of Merger dated as of November 21, 1996 among PhoneTel Technologies, Inc.,
PhoneTel CCI, Inc., Cherokee Communications, Inc. and all of the shareholders of Cherokee
Communications, Inc.
</TABLE>
II-7
<PAGE> 215
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------
<S> <C>
10.77 Escrow Agreement dated as of November 21, 1996 among Comerica Bank-Texas, as escrow agent,
Cherokee Communications, Inc., Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized
agents for all of the shareholders of Cherokee Communications, Inc., PhoneTel Technologies,
Inc. and Bill H. Bailey, Jr., Jerry T. Beddow and Edward L. Marshall, individually.
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)*
23.1 Consent of Price Waterhouse LLP regarding PhoneTel Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Ernest M. Sewell, CPA
23.6 Consent of Miller Sherrill Blake, CPA, PA
23.7 Consent of Kerber, Eck & Braeckel, LLP
23.8 Consent of Deloitte & Touche LLP
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature pages to the Registration Statement).*
</TABLE>
- ---------------
* Previously filed.
<TABLE>
<S> <C>
(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>
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 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
II-8
<PAGE> 216
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-9
<PAGE> 217
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. 2
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
December 11, 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. 2 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, December 11, 1996
- ---------------------------------------- Chief Executive Officer,
Peter G. Graf and Director
* Chief Operating Officer and December 11, 1996
- ---------------------------------------- Director
Nickey B. Maxey
* Director December 11, 1996
- ----------------------------------------
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer and Treasurer December 11, 1996
- ---------------------------------------- (Principal Financial and Accounting
Richard Kebert Officer)
* Director December 11, 1996
- ----------------------------------------
Joseph Abrams
* Director December 11, 1996
- ----------------------------------------
George Henry
* Director December 11, 1996
- ----------------------------------------
Aron Katzman
* Director December 11, 1996
- ----------------------------------------
Steven Richman
</TABLE>
- ---------------
* Tammy L. Martin, by signing her name hereto, does hereby execute this
Amendment No. 2 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 of the original
Registration Statement.
By: /s/ Tammy L. Martin
-------------------------------
Tammy L. Martin
Attorney-in-Fact
II-10
<PAGE> 218
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)*
4.1 Specimen of Common Stock Certificate. (3)*
4.2 Form of 14% Convertible Preferred Stock. (13)*
4.3 Form of Indenture relating to the Notes offered in the Company Debt Offering
(including the form of Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the shares of Common Stock
registered hereby.
10.1 Stock Option Agreement between William Tymoszczuk and PhoneTel Technologies, Inc.,
dated March 1, 1987. (3)*
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)*
10.3 Amended and Restated Stock Option Agreement between PhoneTel Technologies, Inc. and
Jerry H. Burger dated July 1, 1993. (8)*
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel Technologies, Inc. and
Bernard Mandel. (8)*
10.5 Form of Stock Option Agreement between PhoneTel 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)*
</TABLE>
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
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)*
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)*
</TABLE>
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
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. 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)*
</TABLE>
<PAGE> 221
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------- ---------
<S> <C> <C>
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)*
10.75 Seventh Amendment to Credit Agreement dated as of November 22, 1996.
10.76 Agreement and Plan of Merger dated as of November 21, 1996 among PhoneTel
Technologies, Inc., PhoneTel CCI, Inc., Cherokee Communications, Inc. and all of
the shareholders of Cherokee Communications, Inc.
10.77 Escrow Agreement dated as of November 21, 1996 among Comerica Bank-Texas, as escrow
agent, Cherokee Communications, Inc., Bill H. Bailey, Jr. and J. Bruce Duty, as
duly authorized agents for all of the shareholders of Cherokee Communications,
Inc., PhoneTel Technologies, Inc. and Bill H. Bailey, Jr., Jerry T. Beddow and
Edward L. Marshall, individually.
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)*
23.1 Consent of Price Waterhouse LLP regarding PhoneTel Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Ernest M. Sewell, CPA
23.6 Consent of Miller Sherrill Blake, CPA, PA
23.7 Consent of Kerber, Eck & Braeckel, LLP
23.8 Consent of Deloitte & Touche LLP
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature pages to the Registration Statement).*
</TABLE>
<PAGE> 222
- ---------------
* Previously filed.
<TABLE>
<S> <C>
(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> 223
REGISTRATION STATEMENT NO. 333-13767
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PHONETEL TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 1.1
PHONETEL TECHNOLOGIES, INC.
COMMON STOCK
------------------------
UNDERWRITING AGREEMENT
December 12, 1996
<PAGE> 2
PHONETEL TECHNOLOGIES, INC.
COMMON STOCK
------------------------
UNDERWRITING AGREEMENT
------------------------
December 12, 1996
Southcoast Capital Corporation,
As the Representative of the Several
Underwriters named in Schedule I hereto
c/o Southcoast Capital Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
PhoneTel Technologies, Inc., an Ohio corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") for whom Southcoast
Capital Corporation is acting as representative (the "Representative"),
6,250,000 shares and, at the election of the Underwriters pursuant to the option
granted by the Company to cover over-allotments described in Section 2 hereof,
up to 937,500 additional shares of Common Stock, par value $0.01 per share
("Common Stock"), of the Company, and the stockholders of the Company named in
Schedule II hereto (the "Selling Stockholders") propose, subject to the terms
and conditions stated herein, to sell to the Underwriters an aggregate of
shares of Common Stock. The aggregate of 6,750,000 shares of Common Stock
to be sold by the Company and the Selling Stockholders is herein called the
"Firm Shares," and the up to 937,500 additional shares of Common Stock to be
sold by the Company is herein called the "Optional Shares." The Firm Shares and
the Optional Shares which the Underwriters elect to purchase pursuant to Section
2 hereof are herein collectively called the "Shares."
The Company is a party to that certain Agreement and Plan of Merger, dated
as of November 21, 1996, with Cherokee Communications, Inc. ("Cherokee"),
PhoneTel CCI, Inc. and all of the shareholders of Cherokee (the "Cherokee
Agreement"). The issuance and sale of the Shares is not conditioned upon the
completion of the Cherokee Acquisitions. By separate prospectus, the Company is
also offering $110,000,000 million of % Senior Notes due 2006 (the "Company
Debt Offering"). References to "the transactions contemplated by this Agreement"
exclude the Pending Acquisitions and the Company Debt Offering.
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters and each Selling Stockholder that:
(i) A registration statement on Form SB-2 (File No. 333-13767) in
respect of the Firm Shares and Optional Shares has been filed with the
Securities and Exchange Commission (the "Commission"); each of such
registration statement, as amended, and any post-effective amendment
thereto, each in the form heretofore delivered to the Representative and
each Selling Stockholder, has been declared effective by the Commission in
such form; no other document with respect to such registration statement
has heretofore been filed with the Commission; and no stop order suspending
the effectiveness of such registration statement has been issued and no
proceeding for that purpose has been initiated or, to the knowledge of the
Company, threatened by the Commission (any preliminary prospectus included
in such registration statement or any pre-effective amendment thereto or
filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Securities Act of 1933, as amended
(the "Act"), being hereinafter called a "Preliminary Prospectus"; the
various parts of such registration statement, including all financial
statements and exhibits thereto and, if applicable, including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Act in accordance with Section
5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of
the registration statement at the time it was declared effective, each as
amended at the time such part of the registration statement became
effective, being hereinafter called the "Registration Statement"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under the
Act or, if no such filing is required to be made, in the form included in
the Registration Statement at the time of effectiveness, being hereinafter
called the "Prospectus");
<PAGE> 3
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, complied, when so filed, in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, 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 to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by (1) an Underwriter
through the Representative expressly for use therein or (2) a Selling
Stockholder expressly for use in the preparation of the information
required to be presented therein pursuant to Form SB-2;
(iii) The financial statements, and the related notes thereto, included
in the Registration Statement and the Prospectus present fairly the
consolidated financial position of (1) the Company and its Subsidiaries (as
defined herein), (2) each of the Acquired Companies (as defined below) for
whom financial statements are included, and (3) to the Company's knowledge
after due inquiry, 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 (A) Paramount Communications Systems, Inc.
("Paramount"), (B) International Pay Phones, Inc. (South Carolina)
("IPP-SC"), (C) International Payphones, Inc. (Tennessee) ("IPP-TN"), (D)
Payphones of America, Inc. ("POA"), and (E) Amtel Communications, Inc. and
Combined Companies (Debtor-in-Possession) ("Amtel"). 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;
(iv) The pro forma financial statements (including the footnotes
thereto) and the other pro forma financial information included in the
Prospectus and Registration Statement (1) comply as to form in all material
respects with the applicable requirements of Item 310 of Regulation S-B
under the Act; (2) 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 (3)
have been computed on the bases described therein; the assumptions used in
the preparation of the pro forma 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;
(v) The Registration Statement complies, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will comply, in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder 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 applicable date of the
Prospectus and any amendment or supplement thereto, contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the case
of the Prospectus and any amendment or supplement thereto, in the light of
the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by (1) an Underwriter
through the Representative expressly for use therein, or (2) a Selling
Stockholder for use in the preparation of the information to be presented
therein pursuant to Form SB-2;
(vi) Neither the Company nor any Subsidiary (as defined herein) of the
Company 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 Shares or
(ii) since the filing of the Registration Statement (1) sold, bid for,
purchased or paid anyone any compensation for soliciting purchases of the
Shares or (2) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, except
as contemplated by this Agreement or the Underwriting Agreement with
respect to the Company Debt Offering.
(vii) All offers and sales of securities of the Company prior to the
date hereof were at all relevant times duly registered under the Act or
exempt from the registration requirements of the 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;
(viii) Neither the Company nor any of its subsidiaries listed on
Schedule III ("Subsidiary" or "Subsidiaries") has sustained since the date
of the latest audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, that is material to the
general affairs, management, financial position, stockholders'
2
<PAGE> 4
equity or results of operations of the Company and, since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, there has not been any change in the capital stock,
warrants or options (other than issuances of stock upon the exercise of
stock options or warrants which were outstanding on the date of the latest
balance sheet included in the Prospectus which in the aggregate are less
than 2% of the outstanding Common Stock), short-term debt or long-term debt
of the Company or any Subsidiary or any material adverse change, or any
development reasonably likely to become a material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and
Subsidiaries taken as a whole, otherwise than as set forth or contemplated
in the Prospectus;
(ix) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as disclosed therein,
(1) there have been no transactions entered into by the Company or by any
of the Subsidiaries, other than in the ordinary course of business, which
are material to the Company and the Subsidiaries, taken as a whole; and (2)
there has been no dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock;
(x) The Company, its Subsidiaries and, to the best of the Company's
knowledge after due inquiry, Cherokee [and Texas Coinphone] each have good
and marketable title in fee simple or, in jurisdictions outside of the
United States, the substantive equivalent thereto, to all items of real
property and good and marketable title to all assets owned by them that is
material to the business of the Company and the Subsidiaries, taken as a
whole, as currently conducted or 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 and do not
interfere with the use made and proposed to be made of such property by the
Company, its Subsidiaries, Cherokee and Texas Coinphone after their
acquisition; and any real property and buildings held under lease by the
Company, its Subsidiaries and, to the best of the Company's knowledge after
due inquiry, Cherokee [and Texas Coinphone] that are material to the
business of the Company and its Subsidiaries, 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, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere materially with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries;
(xi) The Company and each of its Subsidiaries have been duly
incorporated and are validly existing as a corporation in good standing
under the respective states of their incorporation, with power and
authority (corporate and other) to own, lease or operate their respective
properties and conduct their respective businesses as described in the
Prospectus, and they have been duly qualified as a foreign corporation for
the transaction of business and are in good standing under the laws of each
other jurisdiction in which they own or lease properties or conduct any
business, so as to require such qualification, except where the failure to
be so qualified or be in good standing would not have a Material Adverse
Effect (as defined herein);
(xii) The Company has an authorized capitalization as set forth in the
Prospectus under the column entitled "Actual" under the heading entitled
"Capitalization," and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description thereof contained in the
Prospectus under the heading "Description of Capital Stock;" except as
described in the Prospectus, there are no outstanding rights (including,
without limitation, preemptive rights), warrants or options to acquire, or
instruments exercisable or convertible into or exchangeable for, any shares
of capital stock or other equity interest in the Company, or any contract,
commitment, agreement, understanding or arrangement of any kind relating to
the issuance of any capital stock of the Company, any such convertible or
exchangeable securities or any such rights, warrants or options; and all of
the outstanding shares of capital stock of each Subsidiary of the Company
have been duly and validly authorized and issued, and are fully paid and
non-assessable and (except for directors' qualifying shares) are
beneficially owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or adverse claims, except for such liens,
encumbrances, equities or adverse claims created pursuant to the Credit
Agreement (as defined in the Prospectus) and related loan documents;
(xiii) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and nonassessable and will conform
to the description of the Common Stock contained in the Prospectus;
(xiv) The issue and sale of the Firm Shares and Optional Shares by the
Company and the compliance by the Company with all of the provisions of
this Agreement and the consummation of the transactions herein and therein
contemplated (A) will not result in any violation of the provisions of the
Articles of Incorporation or the By-laws of the Company or any
shareholders' agreements, (B) except as would not have a Material Adverse
Effect (as defined herein), will not conflict with nor result in a breach
or violation of any of the terms or provisions of, nor constitute a default
under, any shareholder agreement, indenture, mortgage, deed of trust, loan
agreement, sale/leaseback agreement or other agreement or instrument to
3
<PAGE> 5
which the Company or any Subsidiary is a party or by which the Company or
any Subsidiary is bound or to which any of the property or assets of the
Company or any Subsidiary is subject, or (C) except as would not have a
Material Adverse Effect and, with respect to the issuance and sale of the
Firm Shares and Optional Shares by the Company, assuming compliance with
the Act and all applicable state securities or "Blue Sky" laws, any statute
or any order, rule, or regulation of any court or government agency or body
having jurisdiction over the Company or any Subsidiary or any of their
properties, including, but not limited to, the Federal Communications
Commission ("FCC") and comparable or additional state regulatory agencies
or bodies with jurisdiction over telecommunications matters or permits or
authorizations in the states in which the Company and any of its
Subsidiaries operates or provides telecommunications services (the "State
Regulatory Agencies"); and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body, including, but not limited to, the FCC or any State
Regulatory Agency, is required for the issue and sale of the Shares being
sold by the Company or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of
the Shares and such consents, approvals, authorizations, registrations, or
qualifications as may be required under state securities or Blue Sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters or by the rules and regulations of the National Association of
Securities Dealers, Inc. or which may have become applicable to the Company
as a result of the Underwriters' involvement in this Agreement;
(xv) Other than as set forth or contemplated in the Prospectus, there
are no legal or governmental proceedings pending or, to the Company's best
knowledge, threatened, including, but not limited to, any litigation,
inquiry, or investigation to which the Company or its Subsidiaries or, to
the best of the Company's knowledge after due inquiry, Cherokee [or Texas
Coinphone] is a party or of which any property, certification, consent,
approval, license, Permit or Authorization (as defined in this Agreement)
of the Company, its Subsidiaries, Cherokee [or Texas Coinphone] is the
subject which are required to be described in the Registration Statement or
Prospectus, or which, if determined adversely to the Company or its
Subsidiaries, would individually or in the aggregate have a material
adverse effect on the consolidated financial position, shareholders' equity
or results of operations of the Company and its Subsidiaries taken as a
whole (a "Material Adverse Effect");
(xvi) 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
Subsidiaries and Paramount, as required by the 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 public accountants
with respect to Paramount, as required by the 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 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 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 accounts with respect to POA, as required by
the 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 Act; and, to the knowledge of the Company after due inquiry,
Deloitte & Touche LLP, whose report on the audited financial statements of
Cherokee as of September 30, 1994 and 1995 and for the three years ended
September 30, 1995, is included in the Registration Statement and
Prospectus, are independent accountants with respect to Cherokee, as
required by the Act;
(xvii) The Company makes and keeps accurate books and records reflecting
its assets and maintains internal accounting controls which provide
reasonable assurance that (1) transactions are executed in accordance with
management's authorization, (2) 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, (3) access to the assets of
the Company is permitted only in accordance with management's
authorization, and (4) the recorded accountability for assets of the
Company is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
(xviii) To the best of the Company's knowledge after due inquiry,
Cherokee has duly authorized, executed and delivered the Cherokee Agreement
and such agreement is a legal, valid and binding agreement of Cherokee; [to
the best of the Company's knowledge after due inquiry, Texas Coinphone has
duly executed and delivered the Texas Coinphone Agreement and such
agreement is a legal, valid and binding agreement of Texas Coinphone;]
4
<PAGE> 6
(xix) Each of the Company, its Subsidiaries, and, to the best of the
Company's knowledge after due inquiry, Cherokee [and Texas Coinphone] have
obtained all certificates, consents, exemptions, orders, permits, licenses,
authorizations or other approvals (each, an "Authorization") of and from,
and have made all declarations and filings with, all federal, state, local
and other governmental authorities, all self-regulatory organizations and
all courts and other tribunals, including, but not limited to, the FCC and
the State Regulatory Agencies, necessary or required to own, lease, license
and use their properties and assets and to conduct their businesses as
currently conducted in the manner described in the Prospectus, and all such
Authorizations are in full force and effect, except in each case as
otherwise disclosed in the Registration Statement or where the failure to
obtain such Authorizations or to make all declarations and filings would
not, individually or in the aggregate, have a Material Adverse Effect or,
with respect to the operations of Cherokee [and Texas Coinphone], where
such Authorizations are not required to be obtained prior to the closing of
the acquisition by the Company of Cherokee [or Texas Coinphone, as the case
may be], and none of the Company, its Subsidiaries, and, to the best of the
Company's knowledge after due inquiry, Cherokee [or Texas Coinphone] has
received any notice relating to revocation or modification of any such
Authorization, except where such revocation or modification would not,
individually or in the aggregate, have a Material Adverse Effect;
(xx) No person has the right to require the Company to register any
securities for offering and sale under the Act by reason of the filing of
the Registration Statement with the Commission or the issue and sale of the
Shares, except as disclosed in the Registration Statement and Prospectus,
by reason of the filing of the Registration Statement;
(xxi) Neither the Company nor any of its Subsidiaries is (1) in
violation of its Articles of Incorporation (or other applicable charter
document) or By-laws, (2) 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 of 1934, as amended (the "Communications Act"), the
Telecommunications Act of 1996 (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.
(xxii) There are no employment or labor disputes or negotiations with
employees of the Company which could have, individually or in the
aggregate, a Material Adverse Effect;
(xxiii) The Company is in compliance with, and not subject to any
liability under, all applicable federal, state, local and foreign laws, 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;
(xxiv) This Agreement has been duly authorized, executed and delivered
by the Company;
(xxv) 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;
(xxvi) The Common Stock is listed on the American Stock Exchange;
(xxvii) The Company 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 to the best knowledge of the Company after due inquiry,
the Company has not received any notice of infringement of or conflict with
asserted rights of others with respect to any Intellectual Property;
(xxviii) The Company has no 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 ever has made a contribution and in which any employee
of the Company has ever been a participant. The Company does not
participate in or make contributions to any pension, profit sharing or
other plan which is subject to ERISA;
(xxix) The Company has filed all necessary federal, state, local and
foreign income and franchise tax returns, and has paid all taxes shown as
due thereon, except where the failure to file such returns or pay such
taxes would not have a Material
5
<PAGE> 7
Adverse Effect; there is no tax deficiency that has been asserted against
the Company that would have a Material Adverse Effect; and
(xxx) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" or a company
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940.
(b) Each of the Selling Stockholders severally and not jointly represents
and warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and
for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has
the power and authority to enter into this Agreement and to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement and the consummation of the transactions
herein contemplated will not conflict with in any material respect or
result in a material breach or violation of any of the terms or provisions
of, or constitute a default under, any statute, indenture, mortgage, deed
of trust, loan agreement or other material agreement or instrument to which
such Selling Stockholder is a party or by which such Selling Stockholder is
bound or to which any of the property or assets of such Selling Stockholder
is subject, nor will such action result in any material violation of the
provisions of the Articles of Incorporation or By-laws of such Selling
Stockholder if such Selling Stockholder is a corporation, or the
partnership agreement of such Selling Stockholder if such Selling
Stockholder is a partnership, or any statute applicable to such Selling
Stockholder or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over such Selling Stockholder or the
property of such Selling Stockholder; provided, however, that such Selling
Stockholder makes no representation or warranty regarding compliance by the
Company and the Underwriters with the requirements of the Act, the Exchange
Act, the rules and regulations of the Commission and applicable state
securities or Blue Sky laws with respect to the transactions contemplated
hereby;
(iii) Such Selling Stockholder has and, immediately prior to the First
Time of Delivery (as defined in Section 4 hereof) will have, good and
marketable title to the Shares to be sold at the First Time of Delivery by
such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities and adverse claims and, upon delivery of such Shares
and payment therefor pursuant hereto, the Underwriters will acquire such
Shares, free and clear of all liens, encumbrances, equities or adverse
claims (other than those created by the Underwriters);
(iv) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Shares; and
(v) Statements made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company by such Selling Stockholder expressly for use therein did not, at
the time such document became effective or was filed with the Commission,
as the case may be, 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, in light of the circumstances in which they
were made, not misleading.
In order to document the Underwriters' compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982
with respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to the Representative prior to or at the First
Time of Delivery (as hereinafter defined) a properly completed and executed
United States Treasury Department Form W-9 (or Form W-8 if applicable, or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) ING (U.S.) Investment Corporation ("ING") and Cerberus Partners, L.P.
("Cerberus") agree, severally and not jointly, not to, directly or indirectly,
offer, sell, contract to sell or otherwise transfer or dispose of any shares of
Common Stock (other than the number of shares of Common Stock equal to the
difference between 250,000 and the number of shares of Common Stock such Selling
Stockholder sells to the Underwriters pursuant to this Agreement, which may be
sold by each such Selling Stockholder 45 days after the effective date of the
Registration Statement) or securities exercisable, convertible or exchangeable
into Common Stock, without the consent of the Representative, 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 of the Registration Statement (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) above) may be transferred, sold or otherwise
6
<PAGE> 8
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.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $ , the number of Firm Shares (to be
adjusted by the Representative so as to eliminate fractional shares) determined
by multiplying the aggregate number of Firm Shares to be sold by the Company and
each of the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all the Underwriters from
the Company and all the Selling Stockholders hereunder and (b) in the event and
to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by the
Representative so as to eliminate fractional shares) determined by multiplying
such number of Optional Shares by a fraction, the numerator of which is the
maximum number of Optional Shares which such Underwriter is entitled to purchase
as set forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the maximum number of the Optional Shares which all of
the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election the Optional Shares, at the purchase price per share set forth in
the paragraph above, for the sole purpose of covering overallotments in the sale
of the Firm Shares. Any such election to purchase Optional Shares may be
exercised only by written notice from the Representative to the Company, given
within a period of forty-five (45) calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
the Representative but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless the Representative and the Company
otherwise agree in writing, earlier than two or later than ten business days
after the date of such notice.
3. Upon the authorization by the Representative of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale upon
the terms and conditions set forth in the Prospectus.
4. Certificates in definitive form for the Shares to be purchased by each
Underwriter hereunder, and in such denominations and registered in such names as
the Representative may request upon at least 48 hours' prior notice to the
Company and the Selling Stockholders, shall be delivered by wire transfer or by
or on behalf of the Company and the Selling Stockholders to the Representative
for the account of such Underwriter against payment by such Underwriter or on
its behalf of the purchase price therefor by certified or official bank checks,
payable separately to the order of the Company and each Selling Stockholder in
same day funds, or by payment in such other manner as shall be agreed to in
writing by the Company, the Selling Stockholders and the Representative, all at
the offices of the Representative in New York, New York, or at such other place
located in New York as the Representative, the Selling Stockholders and the
Company may agree. The time and date of such delivery and payment shall be, with
respect to the Firm Shares, 9:00 a.m., New York time, on December , 1996, or
at such other time and date as the Representative and the Company and the
Selling Stockholders may agree upon in writing, and, with respect to the
Optional Shares, 9:00 a.m., New York time, on the date specified by the
Representative in the written notice given by the Representative of the
Underwriters' election to purchase such Optional Shares, or at such other time
and date as the Representative and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery," such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery," and each
such time and date for delivery is herein called a "Time of Delivery."
5. The Company agrees with each of the Underwriters and each Selling
Stockholder:
(a) To prepare the Prospectus in a form approved by the Representative
and, if required, to file such Prospectus pursuant to Rule 424(b) under the
Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Act; to make no further amendment or any supplement to the Registration
Statement or Prospectus which shall be disapproved by the Representative or
any Selling Stockholder promptly after reasonable notice thereof; to advise
the Representative and each Selling Stockholder, promptly after it receives
notice thereof, of the time when the Registration Statement, or any
amendment thereto, has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish the
Representative and each Selling Stockholder with copies thereof; to advise
the Representative and each Selling Stockholder, promptly after it receives
notice thereof, of the issuance by the
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Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction, of
the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) Promptly from time to time to take such action as the Representative
may reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as the Representative may request
and to comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Shares, provided that in connection
therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) To furnish the Underwriters and the Selling Stockholders with copies
of the Prospectus in such quantities as the Representative or they may from
time to time reasonably request, and, if the delivery of a prospectus is
required at any time prior to the expiration of nine months after the time
of the issue of the Prospectus in connection with the offering or sale of
the Shares and if at such time any event shall have occurred as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary during
such same period to amend or supplement the Prospectus in order to comply
with the Act, to notify the Representative and the Selling Stockholders and
upon the Representative's request to prepare and furnish without charge to
each Underwriter, to any dealer in securities and to the Selling
Stockholders as many copies as the Representative or they may from time to
time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a prospectus
in connection with sales of any of the Shares at any time nine months or
more after the time of issue of the Prospectus, upon the Representative's
request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as the Representative may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act;
(d) To make generally available to its security holders as soon as
practicable, but in any event not later than 18 months after the effective
date of the Registration Statement (as defined in Rule 158(c)), an earnings
statement of the Company and its Subsidiaries (which need not be audited)
complying with Section 11(a) of the Act and the rules and regulations
thereunder (including at the option of the Company Rule 158);
(e) (i) During the period beginning from the date hereof and continuing
to and including the date one hundred eighty (180) days after the effective
date of the Prospectus, not to offer, sell, contract to sell or otherwise
dispose of Common Stock or other securities which are substantially similar
to the Common Stock or which are exercisable, convertible or exchangeable
into Common Stock or other securities which are substantially similar to
the Common Stock, without the Representative's prior written consent (other
than pursuant to stock option or purchase plans existing, or on the
exercise, conversion or exchange of convertible, exercisable or
exchangeable securities outstanding, on the date of this Agreement or as
consideration to be used in connection with any acquisitions); and (ii)
that it will use its best efforts to cause each holder of Common Stock who
had registration rights as a result of the filing of the Registration
Statement that waived such rights and entered into a lock-up agreement to
comply therewith, will not grant any waivers or consents to non-compliance
therewith and will otherwise enforce its rights under each such agreement,
in each case unless and to the extent that it shall have obtained the
Representative's prior written consent;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flow of the Company and
its consolidated subsidiaries certified by independent public accountants)
and such other reports and definitive proxy materials required to be
furnished to its stockholders pursuant to the Exchange Act;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to the Representative copies of all
reports or other communications (financial or other) furnished to
shareholders, and deliver to the Representative (i) as soon as they are
available, copies of any reports and financial statements furnished to or
filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the Company
as the Representative may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its Subsidiaries are consolidated in reports
furnished to its stockholders generally or to the Commission); and
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<PAGE> 10
(h) To have the Shares listed on the American Stock Exchange.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that, except as provided
below, the Company will pay or cause to be paid all costs and expenses incident
to the performance of the Company's and the Selling Stockholders' obligations
hereunder including: (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection with the registration of the Shares under
the Act and all other expenses in connection with the preparation, printing and
filing of the Registration Statement, any Preliminary Prospectus and the
Prospectus and amendments and supplements thereto and the mailing and delivering
of copies thereof to the Underwriters and dealers; (ii) the cost of printing or
producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum and any other documents in connection with the offering, purchase,
sale and delivery of the Shares; (iii) all expenses in connection with the
qualification of the Shares for offering and sale under state securities laws as
provided in Section 5(b) hereof, including the fees and disbursements of counsel
for the Underwriters in connection with such qualification and in connection
with the Blue Sky survey; (iv) the filing fees and the fees and disbursements of
counsel for the Underwriters incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (v) the cost of preparing stock certificates; (vi) the cost and charges
of any transfer agent or registrar; (vii) the fees and expenses of one counsel
for the Selling Stockholders (determined in accordance with Section 4(b) of the
Registration Rights Agreement dated as of March 15, 1996, between the Company
and the Selling Stockholders); (viii) the $100,000 non-accountable expense
allowance for due diligence and other out-of-pocket expenses payable to the
Representative; (ix) all expenses incurred with regard to informational
meetings; and (x) all expenses and taxes incident to the sale and delivery of
the Shares to be sold by each Selling Stockholder to the Underwriters hereunder
(other than legal fees and disbursements); provided, however, that,
notwithstanding the foregoing, all underwriters' discounts and commissions in
respect of the sale of the Shares by any Selling Stockholder shall be paid by
such Selling Stockholder. In connection with clause (x) of the preceding
sentence, the Company agrees to reimburse the Representative for associated
carrying costs if such tax payment is not rebated on the day of payment and for
any portion of such tax payment not rebated. It is understood, however, that the
Company shall bear, and the Selling Stockholders shall not be required to pay or
reimburse the Company for, the cost of any other matters not directly relating
to the sale and purchase of the Shares pursuant to this Agreement and that,
except as provided in this Section, Section 8 and Section 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct in all material respects, the condition that the
Company and the Selling Stockholders shall have performed in all material
respects all of its and their obligations hereunder theretofore to be performed,
and the following additional conditions:
(a) The Prospectus, if required, shall have been filed with the
Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing by the rules and regulations under the Act and
in accordance with Section 5(a) hereof; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information
on the part of the Commission shall have been complied with to the
Representative's reasonable satisfaction;
(b) Wolin, Fuller, Ridley & Miller LLP, counsel for the Underwriters,
shall have furnished to the Representative such opinion or opinions, dated
such Time of Delivery, with respect to the incorporation of the Company,
this Agreement, the validity of the Shares being delivered at such Time of
Delivery, the Registration Statement, the Prospectus, and other related
matters as the Representative may reasonably request, and such counsel
shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Tammy L. Martin, Esq. shall have furnished to the Representative a
written opinion, dated such Time of Delivery, in form and substance
satisfactory to the Representative, 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 its properties and
conduct its business as described in the Prospectus;
(ii) The Shares to be issued and delivered by the Company have been
duly authorized and, when certificates therefor have been duly executed
and the Shares delivered by the Company pursuant to this Agreement
against payment therefor, will be validly issued, fully paid and
non-assessable;
(iii) The execution and delivery by the Company and the performance by
the Company of its obligations under this Agreement and the consummation
by the Company of the transactions contemplated herein (1) have been
duly
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<PAGE> 11
authorized by all necessary corporate action on the part of the Company,
(2) do not and will not result in any violation of the Articles of
Incorporation (or other applicable charter document) or the Bylaws of
the Company, (3) 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
under (A) any contract, indenture, mortgage, deed of trust, loan
agreement, note, lease, partnership agreement or other agreement or
instrument to which the Company is a party or by which it may be bound
or to which any of its properties or assets may be subject, (B) any
applicable law or statute or governmental rule or regulation (other than
the Act or 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 of its properties or assets;
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus, and the Shares being
delivered at such Time of Delivery conform in all material respects to
the description of the Common Stock contained in the Prospectus under
the caption "Description of the Capital Stock," and all the outstanding
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable;
(v) The Company has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
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;
(vi) All of the issued shares of capital stock of each Subsidiary have
been duly and validly authorized and issued, are fully paid and
non-assessable, and to such counsel's knowledge such shares (except for
directors' qualifying shares and except as otherwise set forth in the
Prospectus) are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equities or adverse claims, except for
such liens, encumbrances, equities or adverse claims created pursuant to
the Credit Agreement and related loan documents;
(vii) To the best of such counsel's knowledge (after inquiry of the
Chief Executive Officer and Chief Financial Officer of the Company and
of counsel retained by the Company) and other than as set forth in the
Registration Statement or Prospectus, there are no legal or governmental
proceedings pending or threatened, including, but not limited to, any
litigation, inquiry or investigation to which the Company, any
Subsidiary, Cherokee or Texas Coinphone is a party or of which any
property, certification, consent, approval, license, Permit or Authority
of the Company, any Subsidiary, Cherokee or Texas Coinphone is the
subject which are required to be described in the Registration Statement
or Prospectus, or which, if determined adversely to the Company, any
Subsidiary, Cherokee or Texas Coinphone, would individually or in the
aggregate 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.
(viii) This Agreement has been duly authorized, executed and delivered
by the Company.
(ix) To such counsel's knowledge after due inquiry, the Company has
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, any State Regulatory
Agencies) in the State of Ohio, all self-regulatory organizations, and
all courts and other tribunals necessary to own, lease, license, use and
operate its properties and assets and to conduct its businesses in the
manner described in the Registration Statement and Prospectus, except,
in each case, as otherwise disclosed in the Prospectus or where the
failure to obtain consents, approvals, orders, certificates, licenses,
permits, franchises and other authorizations or to make declarations and
filings would not, individually or in the aggregate, have a Material
Adverse Effect; the execution and delivery by the Company of, and the
performance by the Company of, its obligations under this Agreement and
the Acquisition Agreements and the consummation by the Company of the
transactions herein and therein contemplated will not violate any such
approval, certification, license or permit, except, in all cases, as
should not have a Material Adverse Effect; and
(x) No authorization, approval, consent, order, registration,
qualification or license of, or filing with, any government,
governmental instrumentality, agency, body or court is required under
the laws of the State of Ohio in connection with the authorization,
issuance and sale and delivery of the Shares by the Company.
(d) Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company,
shall have furnished to the Representative their written opinion, dated
such Time of Delivery, in form and substance satisfactory to the
Representative, to the effect that:
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(i) To the best of such counsel's knowledge (which knowledge may be
based solely on such counsel's discussions with officers of the Company,
the Subsidiaries, and Cherokee responsible for the matters discussed
below and such counsel's review of documents furnished to them by the
Company without any search of the public docket records of any court,
governmental agency or body or administrative agency) and other than as
set forth in the Registration Statement or Prospectus, there are no
legal, regulatory or governmental proceedings pending or threatened to
which the Company, any Subsidiary or Cherokee is or may be a party or to
which any property of the Company or any Subsidiary or Cherokee is or
may be the subject which are required to be described in the
Registration Statement or Prospectus, or which, if determined adversely
to the Company or any Subsidiary, could individually or in the aggregate
be reasonably 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;
(ii) The issue and sale to the Representative of the Shares being
delivered at such Time of Delivery by the Company in accordance with and
upon the terms and conditions set forth herein and the compliance by the
Company with all of the provisions of this Agreement, and the
consummation of the transactions herein contemplated, will not conflict
with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any document listed as an
exhibit to the Registration Statement, nor will such action result in
any violation of the provisions of the Articles of Incorporation or
By-laws;
(iii) To such counsel's knowledge after due inquiry, the Company and
each Subsidiary 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, the FCC and
the State Regulatory Agencies 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, except where the failure to obtain consents,
approvals, orders, certificates, licenses, permits, franchises and other
authorizations or to make declarations and filings would not,
individually or in the aggregate, have a Material Adverse Effect;
(iv) No consent, approval, authorization, order, registration,
qualification or license of or filing with any government or
governmental instrumentality, agency, body, or court is required under
the laws of the State of New York or the laws of the United States of
America for the issue and sale of the Shares by the Company or the
performance by the Company of all of its obligations under this
Agreement or the consummation by the Company of the transactions
contemplated by this Agreement, except such as have been obtained. Such
counsel need not express any opinion in this paragraph (iv), however, as
to (1) the securities laws of any jurisdiction, the rules and
regulations of the National Association of Securities Dealers, Inc., and
(2) laws other than those that, in such counsel's experience, are
normally applicable to transactions of the type provided for by this
Agreement.
(v) The Registration Statement has been declared effective under the
Act, and no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto has been issued. The
Registration Statement and the Prospectus as of its date and any further
amendments and supplements thereto made by the Company prior to such
Time of Delivery as of their respective dates (other than the financial
statements and other financial or statistical information included
therein or omitted therefrom, as to which such counsel need express no
opinion) appeared on their face to be appropriately responsive in all
material respects with the requirements of the Act and the rules and
regulations thereunder, except that such counsel is not required to
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the
Prospectus (other than to the extent specified in Section 7(d)( )
hereof); the Company satisfies all of the requirements to file a
Registration Statement on Form SB-2;
(vi) The Company is not and, after giving effect to the offering and
sale of the Shares by the Company and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(vii) The Company is not a "public utility" or a "holding company"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended;
(viii) Section 310 of the Communications Act does not apply to the
Company or the Subsidiaries; and
(ix) The statements in the Registration Statement and Prospectus under
the headings "Prospectus Summary -- Recent Developments -- Recent
Regulatory Developments," "Risk Factors -- Government Regulation," the
third and fifth paragraphs of "Business -- Industry Overview," and
"Business -- Government Regulations," insofar as such statements
constitute a summary of statutes, regulations, rules, legal matters,
documents or proceedings referred to therein,
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fairly present the information required to be set forth therein with
respect to such statutes, regulations, rules, legal matters, documents
or proceedings.
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,
representatives of the independent auditors of the Company, representatives
of the independent auditors for each of the Company, the Acquired Companies
and Cherokee and representatives of the Underwriters, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed, and although such counsel 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 7(d)(iii), no facts have come to such counsel's attention which
lead such counsel 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
or make the statements therein not misleading, or that the Prospectus as of
its date and as of such Time of Delivery, 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 or the exhibits to the Registration Statement).
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the State
of New York and the federal laws of the United States.
(e) The Underwriters shall have also received on the Closing Date signed
opinions, in form and substance satisfactory to counsel to the
Underwriters, dated the Closing Date and addressed to the Underwriters,
from local counsel in each of Florida, Missouri, California and Texas with
respect to the operations of the Company and the Subsidiaries in such
state.
(f) King & Spalding and Lowenstein, Sandler, Kohl, Fisher & Boylan,
counsel for ING and Cerberus, respectively, shall have furnished to the
Representative their written opinions, dated the First Time of Delivery, in
form and substance satisfactory to the Representative, to the effect that:
(i) This Agreement has been duly authorized, executed and delivered by
or on behalf of each such Selling Stockholder; and the sale of the
Shares to be sold by each such Selling Stockholder hereunder and the
compliance by each such Selling Stockholder with all of the provisions
of this Agreement and the consummation of the transactions herein and
therein contemplated will not (a) conflict with the federal laws of the
United States by which such Selling Stockholder is bound, or (b) result
in a material breach or violation of any order, rule or regulation known
to such counsel of any court or governmental agency or body which, to
such counsel's knowledge, has jurisdiction over such Selling Stockholder
or the Common Stock of such Selling Stockholder;
(ii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder, except such as
have been obtained under the Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of such Shares by the Underwriters; and
(iii) The Underwriters shall acquire the Shares, free of all adverse
claims, assuming they purchased such Shares in good faith and without
notice of any such adverse claim, within the meaning of the Uniform
Commercial Code.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the State
of New York (excluding conflict of law rules) and the federal laws of the
United States. Such counsel may rely as to factual matters (1) upon
certificates of the Selling Stockholders and (2) the representations of the
Selling Stockholders contained in this Agreement.
(g) At 9:00 a.m., New York time, on the effective date of the
Registration Statement and the effective date of the most recently filed
post-effective amendment to the Registration Statement and also at each
Time of Delivery, Price Waterhouse LLP and all accountants named in Section
1(xiii) shall have furnished to the Representative a letter or letters,
dated the respective date of delivery thereof, in form and substance
satisfactory to the Representative;
(h) (i) Neither the Company nor any Subsidiary shall have sustained
since the date of the latest audited financial statements included in the
Prospectus any loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus, and (ii) since the
respective dates as of which information is given in the Prospectus there
shall not have been any change in the capital stock (other than issuances
of stock upon the exercise of stock
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options or warrants which were outstanding on the date of the latest
balance sheet included in the Prospectus), short-term or long-term debt of
the Company or any Subsidiary or any material adverse change, or any
development reasonably likely to become a material adverse change, in or
affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Company and its
Subsidiaries taken as a whole otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is in the Representative's judgment so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(i) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange or the American Stock Exchange;
(ii) a general moratorium on commercial banking activities in New York
declared by either federal or New York authorities; or (iii) the outbreak
or escalation of hostilities involving the United States or the declaration
by the United States of a national emergency or war, if the effect of any
such event specified in this clause (iii) in the Representative's judgment
makes it impracticable or inadvisable to proceed with the public offering
or delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated by the Prospectus;
(j) The Shares to be sold by the Company and the Selling Stockholders at
such Time of Delivery shall have been listed, subject to notice of
issuance, on the American Stock Exchange;
(k) The Company and the Selling Stockholders shall have furnished or
caused to be furnished to the Representative at such Time of Delivery
certificates of officers of the Company and of the Selling Stockholders,
respectively, satisfactory to the Representative as to the accuracy of the
representations and warranties of the Company and the Selling Stockholders,
respectively, herein at and as of such Time of Delivery, as to the
performance by the Company and the Selling Stockholders of all of their
respective obligations hereunder to be performed at or prior to such Time
of Delivery, and as to such other matters as the Representative may
reasonably request and the Company shall have furnished or caused to be
furnished certificates as to the matters set forth in this Section and as
to such other matters as the Representative may reasonably request; and,
with respect to the Company, to the 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,
and that such officer(s) is knowledgeable with respect to regulatory
compliance matters affecting the operations of the Company, and the
approvals, certificates, licenses and permits obtained by the Company and
listed on a schedule attached to such certificate constitute all such
approvals, certificates, licenses and permits required by the FCC or State
Regulatory Agencies, except such as the failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect;
(l) On or prior to the First Time of Delivery, each of the Selling
Stockholders shall have entered into a Lock-up Agreement with the
Representative of the Underwriters containing the terms and provisions set
forth in Section 1(c); and
(m) On or prior to the First Time of Delivery, each executive officer
and director of the Company listed under the caption "Management" in the
Prospectus shall have entered into a lock-up agreement with the
Representative that, during the period beginning from the date hereof and
continuing to and including the date one hundred eighty (180) days after
the date of the Prospectus, he or she will not offer, sell, contract to
sell or otherwise dispose of any Common Stock or securities exercisable,
convertible or exchangeable into Common Stock other than pursuant to bona
fide gifts to persons who agree in writing with the Representative to be
bound by the terms of such agreement.
8. (a) The Company will indemnify and hold harmless each Underwriter and
each Selling Stockholder against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or Selling Stockholder may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus (subject to Section 8(d) hereof), the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter and each Selling
Stockholder for any legal or other expenses reasonably incurred by such
Underwriter or Selling Stockholder, as the case may be, in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by (i) any
Underwriter through the Representative or (ii) either Selling Stockholder, in
each case, expressly for use therein.
(b) Each of the Selling Stockholders, severally and not jointly, will
indemnify and hold harmless the Company and each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which the Company and such
Underwriter may
13
<PAGE> 15
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each Underwriter for any legal or other
expenses reasonably incurred by the Company and such Underwriter in connection
with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that (i) the Selling Stockholders shall only be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished by the
Selling Stockholder to the Company or any Underwriter expressly for use therein
and (ii) in no event shall the liability of any Selling Stockholder under this
subsection (b) exceed the total net proceeds from the sale of Shares by such
Selling Stockholder hereunder.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any such amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by such
Underwriter through the Representative expressly for use therein; and will
reimburse the Company and each Selling Stockholder for any legal or other
expenses reasonably incurred by the Company or such Selling Stockholder in
connection with investigating or defending any such action or claim as such
expenses are incurred. For purposes of this Section 8, and Sections 1(a)(ii) and
1(a)(v) hereof, the only written information furnished by the Underwriters to
the Company expressly for use in the Prospectus and the Registration Statement
is the information in (i) the last paragraph on the cover page of the
Prospectus, (ii) the paragraph regarding stabilization in the first paragraph on
the inside cover page of the Prospectus, and (iii) in the section entitled
"Underwriting" in the Prospectus, the paragraph preceding the table and the
first and sixth paragraphs following the table.
(d) With respect to any untrue statement or omission of a material fact or
alleged untrue statement or omission of a material fact made in any Preliminary
Prospectus, the indemnity contained in this Section 8 shall not inure to the
benefit of the indemnified party, if such untrue statement or omission of a
material fact or alleged untrue statement or omission of a material fact in the
Preliminary Prospectus was corrected in the Prospectus.
(e) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation.
(f) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (e) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions
14
<PAGE> 16
in respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering of the Shares purchased
under this Agreement (before deducting expenses) received by the Company and the
Selling Stockholders, respectively, bear to the total underwriting discounts and
commissions received by the Underwriters with respect to the Shares purchased
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault 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 Company or the Selling Stockholders on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, each of the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (f) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purposes) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (f). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (f) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission and (ii) no Selling Stockholder shall
be required to contribute any amount in excess of the net proceeds received by
such Selling Stockholder from the sale of Shares by such Selling Stockholder
hereunder. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (f) to contribute are several in proportion to
their respective underwriting obligations and not joint. The Selling
Stockholders' obligations in this subsection (f) to contribute are several in
proportion to the Shares sold by each and not joint.
(g) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at the Time of Delivery, the
Representative may in its discretion arrange for the Representative or another
party or other parties to purchase such Shares on the terms contained herein.
If, within 36 hours after such default by any Underwriter, the Representative
does not arrange for the purchase of such Shares, then the Company and the
Selling Stockholders shall be entitled to a further period of 36 hours within
which to procure another party or other parties satisfactory to the
Representative to purchase such Shares on such terms. In the event that, within
the respective prescribed periods, the Representative notifies the Company and
the Selling Stockholders that the Representative has so arranged for the
purchase of such Shares, or the Company and the Selling Stockholders notify the
Representative that they have so arranged for the purchase of such Shares, the
Representative or the Company and the Selling Stockholders shall have the right
to postpone such Time of Delivery for a period of not more than seven days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in the Representative's opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representative and the
Company and the Selling Stockholders as provided in subsection (a) above, the
aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company and the Selling Stockholders shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by the Representative and the
Company and the Selling Stockholders as provided in subsection (a) above, the
aggregate number of Shares
15
<PAGE> 17
which remains unpurchased exceeds one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, or if the Company and the
Selling Stockholders shall not exercise the right described in subsection (b)
above to require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the
Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any nondefaulting Underwriter or the Company or the
Selling Stockholders, except for the expenses to be borne by the Company and the
Selling Stockholders and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders or any officer
or director or controlling person of the Company, or controlling person of any
Selling Stockholder, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall be under any liability to
any Underwriter except as provided in Section 6 and Section 8 hereof; but, if
for any other reason any Shares are not delivered by on behalf of the Company
and the Selling Stockholders as provided herein, the Company will reimburse the
Underwriters through the Representative for all out-of-pocket expenses approved
in writing by the Representative, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company and the
Selling Stockholders shall then be under no further liability to any Underwriter
in respect of the Shares not so delivered except as provided in Section 6 and
Section 8 hereof. Notwithstanding any other provision of this Agreement, if this
Agreement is terminated for any reason, the Company shall have no obligation to
pay a non-accountable expense allowance to the Representative.
12. In all dealings hereunder, the Representative shall act on behalf of
each of the Underwriters, and the parties hereto shall be entitled to act and
rely upon any statement, request, notice or agreement on behalf of any
Underwriter made or given by the Representative.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to the Representative in care of Southcoast Capital
Corporation at 277 Park Avenue, New York, New York 10172, Attention: Corporate
Syndicate Department; if to any Selling Stockholder shall be delivered or sent
by mail, telex or facsimile transmission to counsel for such Selling Stockholder
at its address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(e) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by the Representative on request. Any such
statements, requests, notices or agreements shall take effect upon receipt
thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Section 8 and Section 10 hereof, the officers and directors
of the Company and each person who controls the Company, any Selling Stockholder
(or the officers, directors and partners thereof) or any Underwriter, and their
respective heirs, executors, administrators, successors and assigns, and no
other person shall acquire or have any right by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, DC is open for business.
15. 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.
16. The Company and the Underwriter agree that it is the intent of the
parties to this Agreement that the Underwriter be entitled to rely on the
representations and warranties of the Company contained in the Underwriting
Agreement relating to the Company Debt Offering and the representations and
warranties of Cherokee as set forth in the Cherokee Agreement, on the same terms
and conditions as the Company.
16
<PAGE> 18
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with the Representative's understanding,
please sign and return to us seven counterparts hereof, and upon the acceptance
hereof by the Representative, on behalf of each of the Underwriters, this letter
and such acceptance hereof shall constitute a binding agreement among each of
the Underwriters, the Company and each of the Selling Stockholders. It is
understood that the Representative's acceptance of this letter on behalf of each
of the Underwriters is pursuant to the authority set forth in a form of
Agreement among Underwriters, the form of which shall be submitted to the
Company and the Selling Stockholders for examination, upon request, but without
warranty on the Representative's part as to the authority of the signers
thereof.
Very truly yours,
PhoneTel Technologies, Inc.
By:
----------------------------------------
Name: Peter G. Graf
Title: Chief Executive Officer
SELLING STOCKHOLDERS:
ING (U.S.) Investment Corporation
By:
----------------------------------------
Name:
Title:
Cerberus Partners, L.P.
By:
----------------------------------------
Name:
Title:
Accepted as of the date hereof:
SOUTHCOAST CAPITAL CORPORATION
By:
------------------------------------------------------------
On behalf of each of the Underwriters
17
<PAGE> 19
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF PURCHASED IF
FIRM MAXIMUM
SHARES TO BE OPTION
UNDERWRITER PURCHASED EXERCISED
- -------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Southcoast Capital Corporation.................................................. 000,000 000,000
................................................................................
--------- -------
Total................................................................. 6,750,000 937,500
========= =======
</TABLE>
<PAGE> 20
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
OPTIONAL
TOTAL SHARES TO BE
NUMBER OF SOLD IF
FIRM MAXIMUM
SHARES TO BE OPTION
UNDERWRITER SOLD EXERCISED
- -------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
The Company
The Selling Stockholders:....................................................... 6,250,000 937,500
ING (U.S.) Investment Corporation(1).......................................... ,000 --
Cerberus Partners, L.P.(2).................................................... ,000 --
--------- -------
Total:................................................................ 6,750,000 937,500
========= =======
</TABLE>
- ---------------
(1) 135 East 57th Street, New York, New York 10022
(2) 950 Third Avenue, 20th Floor, New York, New York 10022
<PAGE> 21
SCHEDULE III
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
PhoneTel CCI, Inc.......................................................................... Texas
</TABLE>
<PAGE> 1
EXHIBIT 4.3
PHONETEL TECHNOLOGIES, INC.,
As Issuer,
THE SUBSIDIARY GUARANTORS
named on Schedule I hereto
AND
MARINE MIDLAND BANK,
As Trustee
INDENTURE
Dated as of December , 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
(c)........................................................ 2.13
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
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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
SECTION 4.21. Limitation on Liens................................. 49
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
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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
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THIS INDENTURE, dated as of December , 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 and each of the Company's
Subsidiaries which becomes a guarantor of the Notes in compliance with Section
4.15 and executes 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)
Marine Midland Bank, 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 of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or shall be merged with or into the
Company or any Subsidiary of the Company, (b) the acquisition by the Company or
any Subsidiary of the Company 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 the Company of any public pay
telephones from any Person other than the manufacturer (or an Affiliate thereof
or special purpose finance
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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 of its
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 by the Company and its Subsidiaries 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, except with respect to clause (c) of the definition of a Change of Control,
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.
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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 Ratings Service 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,
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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 of Directors 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 Agreement and Plan of Merger dated as of November 21, 1996, among the
Company, Cherokee, PhoneTel CCI, Inc. and all of the shareholders of 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 December , 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 Net Income, (ii)
Consolidated Interest Expense, (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
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Subsidiaries in conformity with GAAP; provided that, if any Subsidiary of the
Company is not a Wholly-Owned Subsidiary of the Company, 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 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 of the Company or has been merged with or
into the Company or any Subsidiary of the Company during such Reference Period
or subsequent to such period and prior to the Transaction Date and that would
have
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constituted Asset Sales or Asset Acquisitions had such transactions occurred
when such person was a Subsidiary of the Company 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 of the Company), 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 of the Company to the extent
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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.
"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, dated as of
March 15, 1996, as amended, among the Company, as borrower, and the lenders
named therein and Internationale Nederlanden (U.S.) Capital Corporation and
Cerberus Partners, L.P., as Agents, 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.
"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
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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 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.
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"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 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.
"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
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 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.
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"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 or Affiliate of the Company or a Subsidiary of the
Company 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 (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.
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"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,
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.
"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.
<PAGE> 19
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"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 and otherwise complying with the applicable
requirements of Sections 11.04 and 11.05.
"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)
and complying with the applicable requirements of Sections 11.04 and 11.05.
"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 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 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 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 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.
<PAGE> 20
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"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 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 $2.5
million 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 Section 4.07(b)(i); (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(a); 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
<PAGE> 21
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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.
"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 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 December , 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
<PAGE> 22
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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 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 Marine Midland Bank until a successor replaces
it in accordance with the applicable provisions of this Indenture and thereafter
means such successor.
"Trust Officer" means any officer of the Trustee assigned by
the Trustee to administer the Indenture, or in the case of a successor trustee,
an officer assigned to the department, division or group performing the
corporation trust work of such successor and assigned to administer this
Indenture.
"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.
<PAGE> 23
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"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 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
<PAGE> 24
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"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
"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.
<PAGE> 25
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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.
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 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, one of whom must be the Secretary
or an assistant secretary, 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
<PAGE> 26
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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 and Section 11.04 and 11.05. 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 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
<PAGE> 27
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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. 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.
<PAGE> 28
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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 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.
<PAGE> 29
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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 in the form of an Officers' Certificate,
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 their 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 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
<PAGE> 30
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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 in the form of an Officers' Certificate, 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 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
<PAGE> 31
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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.
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
<PAGE> 32
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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 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.
<PAGE> 33
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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.
Year Percentage
---- ----------
2001........................................ %
2002........................................ %
2003........................................ %
2004 and thereafter......................... 100%
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 cash
proceeds of one or more 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
<PAGE> 34
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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 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 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
<PAGE> 35
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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.
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
<PAGE> 36
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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 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.
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
and in this Indenture. 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 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.
<PAGE> 37
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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 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,
<PAGE> 38
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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. The Officers' Certificate shall also notify the Trustee should the
Company elect to change the manner in which it fixes its fiscal year end. 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 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.
<PAGE> 39
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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 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 of its Subsidiaries 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);
<PAGE> 40
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(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;
(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
<PAGE> 41
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required to preserve any such right, license or franchise, or the corporate,
partnership or other existence of any of its Subsidiaries, 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, 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.
(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 other 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;
<PAGE> 42
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(iii) Indebtedness owed by any Subsidiary of the Company 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 of
the Company 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 of the Company or (b) the sale, lease, transfer or
other disposition of shares of Capital Stock (including by
consolidation or merger) of any such Subsidiary of the Company 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
(vi) Indebtedness of the Company or a Subsidiary of the
Company 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
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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.
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 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
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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.
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, 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
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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 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) 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,
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.
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The Company will also provide the Trustee a copy of the
notice sent to holders pursuant to Section 4.11(b) and 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, together with an Officers'
Certificate stating the Notes or portions thereof being purchased by the
Company. If less than all Notes tendered pursuant to the Change of Control 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 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
Company shall execute and issue 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 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 aggregate principal amount of Notes at a
price equal to 101% of such principal
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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 (such 60th day
being referred to as the "Final Special Offer Purchase Date") from the date such
notice is mailed, (ii) the amount of accrued and unpaid 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 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) 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, 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 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 if the Cherokee
Acquisition is not consummated prior to the Special Offer Notice Date that the
Special Offer will be 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).
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The Company will also provide the Trustee with a copy of the
notice sent to holders pursuant to Section 4.12(b) and 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, together with an Officers' Certificate stating the Notes or portions
thereof being purchased by the Company, and the Trustee will apply the Trust
Funds to the purchase of such Notes. 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 Company shall
execute and issue 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 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.
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
<PAGE> 49
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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 this 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 remaining amount for general corporate purposes and such
amount shall no longer constitute "Excess Proceeds."
(d) 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 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
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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 on
and 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, 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 a copy of the
notice sent to holders pursuant to Section 4.13(d) and any additional
information that the Trustee reasonably requests in connection with any Asset
Sale Offer.
(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, together with an Officers'
Certificate stating the Notes or portions thereof being purchased by the
Company. 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
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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
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
Company shall execute and issue 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
Preferred Stock to any person other than to the Company or a Subsidiary
Guarantor.
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.
<PAGE> 52
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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 (i) 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, (ii) making an Asset Sale that complies with Section 4.13 or
(iii) entering into a transaction permitted by Section 5.01.
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 ___________, 1997 (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 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
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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. The Trustee shall have no
obligation to file any financing statement or otherwise take any action to
maintain or perfect any such security interest.
(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).
(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
<PAGE> 54
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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 in accordance with Section 4.12(d) 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 on the Special
Offer Purchase Date after application of the Trust Funds as specified in Section
4.18(f) 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 of the Company 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
agreements or compensation or employee benefit arrangements with (including,
without limitation, any stock options granted to) any officer, director or
employee of
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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 of the
Company 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.
SECTION 4.21. Limitation on Liens.
The Company will not, and will not permit any Subsidiary of the
Company 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 of the Company, 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.
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
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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 the assets of the Company or a Subsidiary Guarantor (other
than a Disposition to a Subsidiary Guarantor), the Company shall deliver to the
Trustee an Officers' Certificate stating that such transaction complies with
Article V or Section 10.01(e), as the case may be, of this Indenture and an
Opinion of Counsel stating that such transaction and the supplemental indenture,
if required, comply with Article V or Section 10.01(e), as the case may be, 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).
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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 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
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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
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).
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(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.
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
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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 (i) 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 or (ii)
take any additional actions deemed proper by the Trustee that is not
inconsistent with such direction.
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.
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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 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:
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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.
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. The Trustee shall not be charged with knowledge of
any default or Event of Default unless either (1) A Trust Officer of the Trustee
shall have actual knowledge of such default or Event of Default or (2) written
notice of such default or Event of Default shall have been given to the Trustee
by any Holder or by the Company or any obligor on the Notes.
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(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 6.02, 6.04 or 6.05.
(d) Every provision of this Indenture that in any way relates to
the Trustee shall be subject to paragraphs (a), (b), (c) and (e) 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. Except as
specified in Section 4.18 with respect to the Trust Funds, 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, and shall be fully protected in acting or
refraining from acting, on any document it believes in good faith 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, but the Trustee, in
its discretion, may make such further inquiry or investigation into such facts
or matter as it may see fit, and, if the Trustee shall determine to
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make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney.
(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 its attorneys and 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.
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
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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, 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
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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, including, without limitation, the reasonable costs and expenses of
defending itself against any claim in liability in connection with the exercise
or performance of any of its rights, powers or 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
resignation or removal (other than as a result of negligence or willful
misconduct) of the Trustee, satisfaction and discharge of this Indenture or
termination 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 security to pay principal of, and premium, if
any, and interest on, particular Notes. Such Lien shall survive the resignation
or removal of the Trustee, the satisfaction and discharge of this Indenture or
the termination 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.
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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 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.
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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.
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
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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.
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
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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 Indebtedness of the Company or 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 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.
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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.
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
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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 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
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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
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
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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 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.
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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.
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
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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, legality 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
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.
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(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.
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
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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 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.
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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.
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)
<PAGE> 80
-73-
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:
Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration Department
Facsimile: (212) 658-6425
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 confirmation is received, 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
<PAGE> 81
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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.
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.
<PAGE> 82
-75-
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.
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.
<PAGE> 83
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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.
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. No Recourse Against Others.
No director, officer, employee, incorporator, or stockholder of the
Company shall have any liability for any obligations 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.
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.
PHONETEL CCI, INC.
For each of the above:
By: ________________________________
Name:
Title:
<PAGE> 86
MARINE MIDLAND BANK,
as Trustee
By: ________________________________
Name:
Title:
<PAGE> 87
Schedule I
Subsidiary Guarantors Existing on the Issue Date
Name of Subsidiary Jurisdiction of Incorporation
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
6. PhoneTel CCI, Inc. Texas
<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.
Dated: , 1996
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.
MARINE MIDLAND BANK, 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 and, in the case
of a Global Note, may pay principal, premium, if any, and interest by wire
transfer of immediately available funds to the account specified by the Holder
thereof.
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 and 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 that executes a
supplemental indenture in which such Subsidiary agrees to be
<PAGE> 91
-2-
bound by the terms of the Indenture as guarantors of the Company's obligations
under the Indenture and the Notes (each a "Subsidiary 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 $110,000,000 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 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 from time to time up to [ ]% of the
aggregate principal amount of the Notes originally issued with the net cash
proceeds of one or more 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, 10 Business Days
following 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 applicable 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 and 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 or any 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 or 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: Secretary.
<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.
PHONETEL CCI, 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:* _________________________
- --------
* 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
DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR DEPOSITARY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A
PERSON OTHER THAN THE DEPOSITARY 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
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) 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 5.1
December 12, 1996
PhoneTel Technologies, Inc.
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
Re: PhoneTel Technologies, Inc.
Registration Statement on Form SB-2
(No. 333-13767)
-----------------------------------
Ladies and Gentlemen:
I am Executive Vice President, Chief Administrative Officer, General
Counsel and Secretary of PhoneTel Technologies, Inc., an Ohio corporation (the
"Company"). I am providing the opinions set forth herein in connection with
the preparation of a registration statement on Form SB-2 (No. 333-13767), which
was filed by the Company with the Securities and Exchange Commission (the
"Commission") on October 9, 1996, Amendment No. 1 thereto, which was filed with
the Commission on November 18, 1996 and Amendment No. 2 thereto, which is
being filed with the Commission on the date hereof (such Registration
Statement, as so amended, being hereinafter referred to as the "Registration
Statement").
The Registration Statement relates to the registration by the Company
under the Securities Act of 1933, as amended (the "Act"), of Common Stock of
the Company, par value $.0l per share (the "Common Stock"), having an aggregate
maximum offering price of $31,250,000, and the sale of (i) 6,250,000 shares of
Common Stock by the Company (or such other number of shares of Common Stock
such that the aggregate gross proceeds to the Company equals $25.0 million)
(such shares being sold by the Company referred to herein as the "Primary Firm
Shares"); (ii) up to 937,500 shares of Common Stock (or, if the
<PAGE> 2
PhoneTel Technologies, Inc.
December 12, 1996
Page 2
number of Primary Firm Shares is different than 6,250,000, such number of
shares that is equal to 15% of the Primary Firm Shares being sold) subject to
an option given to the Underwriters (as defined below) by the Company solely to
cover over-allotments, if necessary (the "Primary Option Shares" and together
with the Primary Firm Shares, the "Primary Shares"); and (iii) up to 500,000
shares of Common Stock (the "Secondary Shares") by certain shareholders of the
Company (the "Selling Shareholders")(the Primary Shares and the Secondary
Shares, together with any additional shares to be sold by the Company as
Primary Shares or by the Selling Shareholders as Secondary Shares and
registered on a registration statement filed by the Company pursuant to Rule
462(b) under the Act, are collectively referred to herein as the "Shares"), to
the public through a syndicate of underwriters in a firm commitment public
offering pursuant to an Underwriting Agreement (the "Underwriting Agreement")
in the form filed herewith as Exhibit 1.1 to the Registration Statement, to be
entered into by and among the Company, the Selling Shareholders and Southcoast
Capital Corporation, acting on behalf of itself and the several Underwriters
named therein (the "Underwriters").
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-B under the Act.
In connection with this opinion, I have examined originals or copies,
certified or otherwise identified to my satisfaction, of (i) the Registration
Statement; (ii) the form of the Underwriting Agreement; (iii) the Company's
Articles of Incorporation, as in effect as of the respective issue dates of the
Secondary Shares and as of the date hereof; (iv) the Company's Amended and Re-
stated Code of Government Regulations, as in effect as of the respective issue
dates of the Secondary Shares and as of the date hereof; (v) the resolutions of
the Board of Directors of the Company relating to among other things, the
issuance of the Primary Shares and the Secondary Shares and the registration of
the Shares under the Act, and drafts of certain resolutions (the "Draft Resolu-
<PAGE> 3
PhoneTel Technologies, Inc.
December 12, 1996
Page 3
tions") of the Special Committee of the Board of Directors of the Company
(the "Special Committee"); (vi) the form of a specimen certificate
representing the Shares; and (vii) such other documents as I have deemed
necessary or appropriate as a basis for the opinions set forth below. I have
also examined originals or copies, certified or otherwise identified to my
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and records as I
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In my examination, I have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making my
examination of documents executed by parties other than the Company, I have
assumed that such parties had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and the execution and delivery
by such parties of such documents and the validity and binding effect thereof.
As to any facts material to the opinions expressed herein which I have not
independently established or verified, I have relied upon oral or written
statements and representations of officers and other representatives of the
Company and others.
I am admitted to practice law in the State of Ohio and I do not purport
to be an expert on any law other than the laws of the State of Ohio and the
laws of the United States of America. I do not express any opinion as to the
laws of any other jurisdiction.
Based upon and subject to the foregoing, I am of the opinion that:
<PAGE> 4
PhoneTel Technologies, Inc.
December 12, 1996
Page 4
1. When (i) the Registration Statement becomes effective, (ii) the
Draft Resolutions have been approved by the Special Committee which approves
the price at which the Primary Shares are sold to the Underwriters pursuant to
the Underwriting Agreement, (iii) the Underwriting Agreement has been duly
executed and delivered, and (iv) the certificates representing the Primary
Shares in the form of the specimen certificates examined by me have been
manually signed by an authorized officer of the transfer agent and registrar,
and delivered to and paid for by the Underwriters (at a price per share not
less than the per share par value of the Common Stock), as contemplated by the
Underwriting Agreement, the issuance and sale of the Primary Shares will have
been duly authorized by all requisite corporate action on the part of the
Company, and the Primary shares will be validly issued, fully paid and
nonassessable.
2. The Secondary Shares have been duly authorized and validly issued
and are fully paid and nonassessable.
I hereby consent to the use of my name in the Registration Statement
under the caption "Legal Matters" and to the filing of this opinion as an
Exhibit to the Registration Statement. I further consent to the incorpora-
tion of this opinion by reference as an exhibit to any registration statement
relating to the offering which is filed pursuant to Rule 462(b) of the Rules
and Regulations under the Act and to the use of my name under the caption
"Legal Matters" in the prospectus included in or incorporated by reference in
any such registration statement. In giving such consent, I do not admit that
I come
<PAGE> 5
PhoneTel Technologies, Inc.
December 12, 1996
Page 5
within the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Tammy L. Martin, Esquire
Tammy L. Martin, Esquire
Executive Vice President,
Chief Administrative Officer,
General Counsel and Secretary of
PhoneTel Technologies, Inc.
<PAGE> 1
EXHIBIT 10.75
SEVENTH AMENDMENT TO CREDIT AGREEMENT
-------------------------------------
This SEVENTH AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as
of November 22, 1996, among PHONETEL TECHNOLOGIES, INC., an Ohio corporation
(the "BORROWER"), ING (U.S.) CAPITAL CORPORATION (formerly known as
Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation
("ING") and CERBERUS PARTNERS, L.P., a Delaware limited partnership
("CERBERUS"), constituting all of the Lenders under the Credit Agreement
referenced below, and ING in its capacity as Agent for the Lenders.
W I T N E S S E T H:
--------------------
RECITALS:
A. The Borrower, the Lenders and the Agent have entered into a certain
Credit Agreement, dated as of March 15, 1996 (as amended to the date hereof, the
"CREDIT AGREEMENT"). Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Credit Agreement.
B. The Borrower has requested an amendment to the Credit Agreement to
increase the amount available under the Revolving B Loan Commitment and to
revise certain other provisions.
C. The Lenders are agreeable to amending the Credit Agreement on the
terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit
Agreement is hereby amended by inserting the following definitions in the
appropriate alphabetical order:
"CHEROKEE" means Cherokee Communications, Inc., a Texas
corporation.
"CHEROKEE ACQUISITION AGREEMENT" means that certain Agreement
and Plan of Merger, dated November 21, 1996, among the Borrower,
PhoneTel CCI, Inc., Cherokee Communications, Inc. and all of the
shareholders of Cherokee Communications, Inc., the form of which is
attached to the Seventh Amendment as EXHIBIT A.
<PAGE> 2
"CHEROKEE PURCHASE" means the purchase by the Borrower of all
of the capital stock of Cherokee pursuant to the terms and conditions
of the Cherokee Acquisition Agreement.
"PHONETEL CCI" means PhoneTel CCI, Inc., a Texas corporation,
and a wholly-owned subsidiary of Borrower.
"PUBLIC OFFERINGS" means, collectively, the offering by the
Borrower and certain holders of its securities of common stock, $.01
par value per share, of the Borrower pursuant to a Registration
Statement on Form SB-2 under the Securities Act of 1933, as amended,
which Registration Statement was initially filed with the Securities
and Exchange Commission ("SEC") on October 9, 1996, and the offering by
the Borrower of an aggregate principal amount of $110,000,000 of the
Borrower's Senior Notes due 2006 pursuant to a Registration Statement
on Form SB-2 under the Securities Act of 1933, as amended, which
Registration Statement was initially filed with the SEC on October 31,
1996.
"REFINANCING CREDIT FACILITY" means a credit facility in an
aggregate principal amount of not less than $25,000,000 that may be
provided by ING and other lenders in connection with the Public
Offerings, the proposed terms of which are set forth in that certain
proposal letter from ING to the Borrower, dated November 7, 1996.
"SEVENTH AMENDMENT" means the Seventh Amendment to Credit
Agreement, dated as of November 22, 1996, among the Borrower, ING,
Cerberus and the Agent.
"TEXAS COINPHONE" means Texas Coinphone, a Texas partnership.
"TEXAS COINPHONE PURCHASE" means the purchase by the Borrower
of substantially all of the assets of Texas Coinphone pursuant to the
terms and conditions of the Texas Coinphone Letter of Intent.
"TEXAS COINPHONE LETTER OF INTENT" means that certain Letter
of Intent, dated as of October 9, 1996, between the Borrower and Texas
Coinphone, the form of which is attached to the Seventh Amendment as
EXHIBIT B.
2
<PAGE> 3
SECTION 2. AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit
Agreement is hereby amended by deleting the definitions of "Revolving B Loan
Commitment Amount" and "Stated Maturity Date" in their entirety and inserting in
lieu thereof the following, respectively:
"REVOLVING B LOAN COMMITMENT AMOUNT" means $6,750,000 as such
amount may be reduced from time to time pursuant to SECTION 3.3.4.
"STATED MATURITY DATE" means:
(a) with respect to the Revolving A Loans, June 30, 1999;
(b) with respect to the Revolving B Loans, December 31, 1997;
and
(c) with respect to the Term Loan, June 30, 1999.
SECTION 3. AMENDMENT TO SECTION 1.1. Section 1.1 of the Credit
Agreement is hereby amended by deleting the definition of "Revolving B
Overadvance Amount" in its entirety and inserting in lieu thereof the following:
"REVOLVING B OVERADVANCE AMOUNT" means an amount equal to
$4,000,000."
SECTION 4. AMENDMENT TO SECTION 3.3.4(e). Section 3.3.4(e) of the
Credit Agreement is hereby amended by deleting said section in its entirety and
substituting in lieu thereof the following:
"(e) The Revolving B Loan Commitment (and the Revolving B
Commitment Amount) shall be permanently reduced on each Monthly Payment
Date set forth below by the amount set forth opposite such Monthly
Payment Date:
<TABLE>
<CAPTION>
Monthly Payment Date In: Amount
------------------------ ------
<S> <C>
April, 1997 $2,972,222
May, 1997 $ 222,222
June, 1997 $ 222,222
July, 1997 $2,222,222
August, 1997 $ 222,222
September, 1997 $ 222,222
October, 1997 $ 222,222
November, 1997 $ 222,222
December, 1997 $ 222,224."
</TABLE>
3
<PAGE> 4
SECTION 5. AMENDMENT TO SECTION 3.9(b). Section 3.9(b) of the Credit
Agreement is hereby amended by deleting said section in its entirety and
substituting in lieu thereof the following:
(b) Borrower shall use the proceeds of (i) Revolving A Loans
made after the Closing Date and prior to or on the Amtel Closing Date
only for the purpose of paying a portion of the cash consideration
required under the Amtel Purchase Agreement and for the payment of the
Amendment Fee payable pursuant to the Second Amendment, (ii) Revolving
A Loans made after the Amtel Closing Date to finance other acquisitions
(PROVIDED, HOWEVER, that this clause (ii) shall not be construed to
permit any acquisitions which are otherwise prohibited by the terms of
this Agreement or the other Loan Documents), (iii) Revolving B Loans
made on or after the effective date of the Third Amendment to finance
the funding of a $250,000 loan to be made by the Borrower to PhoneTel
III to be evidenced by the PhoneTel III Note; (iv) Revolving B Loans
made on the effective date of the Fourth Amendment to pay the Priority
Payables; (v) Revolving B Loans made on the effective date of the Fifth
Amendment for the purpose of paying a portion of the cash consideration
required under the Amtel Purchase Agreement; (vi) Revolving B Loans
made on the effective date of the Seventh Amendment for the purpose of
paying the amounts set forth on Exhibit F to the Seventh Amendment; and
(vii) the Revolving B Loans made after the effective date of the
Seventh Amendment to finance its continuing working capital needs;
PROVIDED, HOWEVER, that Revolving B Loans shall not be used to repay
any other outstanding Loan.
SECTION 6. AMENDMENT TO SECTION 6.2.10(b). Section 6.2.10(b) of the
Credit Agreement is hereby amended by inserting the following provision
immediately prior to the period appearing at the end of such section:
"; PROVIDED, FURTHER, HOWEVER, that Borrower may create PhoneTel CCI, a
wholly-owned subsidiary of Borrower, in order to acquire Cherokee."
SECTION 7. AMENDMENT TO SECTION 6.2.22. Section 6.2.22 of the Credit
Agreement is hereby amended by deleting said Section in its entirety and
substituting in lieu thereof the following:
"SECTION 6.2.22. ACQUISITION EXPENSES. The Borrower shall not,
and shall not permit any of its Subsidiaries to, incur or
4
<PAGE> 5
agree to incur or reimburse any Person for any expenses, or make any
payment or deposit, in respect of or related to the acquisition or
proposed acquisition of assets or stock of any Person or any
transaction prohibited under SECTION 6.2.10 or SECTION 6.2.11 (any such
acquisition or transaction, a "PROSPECTIVE ACQUISITION") other than (a)
any such expenses incurred or payments or deposits made prior to
September 13, 1996, (b) any such expenses incurred or payments or
deposits made pursuant to agreements relating to the POA Purchase, the
Amtel Purchase, the Cherokee Purchase, or the Texas Coinphone Purchase
and (c) any such expenses relating to the Public Offerings and the
Refinancing Credit Facility; PROVIDED, HOWEVER that the Borrower may
reimburse Peter G. Graf for his reasonable travel and entertainment
expenses incurred to explore Prospective Acquisitions. The Borrower
shall have given notice to all Persons entitled to be paid or
reimbursed in respect of such expenses (other than any such amounts
payable in connection with the POA Purchase or the Amtel Purchase) that
no amounts or expenses accruing after September 13, 1996 shall be
payable or reimbursable by the Borrower or any of its Subsidiaries."
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS. In order to
induce the Lenders and the Agent to enter into this Amendment and to consummate
the transactions contemplated herein, the Borrower hereby represents, warrants
and covenants to and with the Agent and each Lender that of the proceeds of the
Revolving B Loans to be made on or after the date hereof of not less than
$2,000,000 shall be used to pay the items shown on EXHIBIT F attached hereto,
and upon the request of the Lenders, the Borrower shall provide evidence,
reasonably satisfactory to the Lenders, that such proceeds were so used.
SECTION 9. EFFECTIVENESS. This Amendment shall become effective upon
(i) receipt by the Agent of a copy of this Amendment, duly executed by each of
the Borrower, the Lenders and the Agent, and duly acknowledged and consented to
by the Subsidiaries of the Borrower in the form attached to this Amendment; (ii)
receipt by the Lenders of a copy of the Supplement to Warrant Purchase
Agreement, in the form attached hereto as EXHIBIT C, duly executed by each of
the Borrower and the Lenders; (iv) receipt by each of ING and Cerberus of a duly
executed and delivered Revolving B Note in the amount of $3,375,000; (iv)
receipt by legal counsel to ING and Cerberus of payment for fees and expenses
incurred to date; and (v) receipt by the Lenders and the Agent of an opinion
letter, dated the date hereof, from Skadden, Arps, Slate, Meagher & Flom,
counsel to the Borrower and its Subsidiaries, and from Tammy L. Martin, General
Counsel to Borrower and its Subsidiaries, in the form of EXHIBIT D and EXHIBIT E
hereto, respectively.
5
<PAGE> 6
SECTION 10. CONTINUING EFFECTIVENESS OF CREDIT AGREEMENT. The Credit
Agreement and each of the other Loan Documents shall remain in full force and
effect in accordance with their respective terms, except as expressly amended or
modified by this Amendment.
SECTION 11. AMENDMENT FEE. The Borrower agrees to pay to the Agent for
the ratable account of each Lender, an amendment fee in an amount equal to
$80,000 (the "AMENDMENT FEE"). The Amendment Fee shall be payable by the
Borrower upon the execution of this Amendment, and the Borrower hereby
irrevocably authorizes the Agent to deduct from the proceeds of a Borrowing of
Revolving B Loans to be made on the date of this Agreement in the amount of
$2,000,000, the sum of $80,000 for the ratable account of each Lender as payment
in full of the Amendment Fee.
SECTION 12. COST AND EXPENSES. The Borrower agrees to pay all
reasonable out-of-pocket expenses of the Agent and each of the Lenders party to
this Amendment for the negotiation, preparation, execution and delivery of this
Amendment (including reasonable fees and expenses of counsel to the Agent and
such Lenders).
SECTION 13. HEADINGS. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or any provision hereof.
SECTION 14. COUNTERPARTS. This Amendment may be executed by the parties
hereto in several counterparts, each of which shall be executed by the Borrower,
the Lenders and the Agent and shall be deemed to be an original and all of which
shall constitute together but one and the same agreement.
SECTION 15. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO
BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF NEW YORK.
SECTION 16. SUCCESSORS AND ASSIGNS. This Amendment shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that the Borrower may not assign or
transfer its rights or obligations hereunder or under the Credit Agreement
except in accordance with the terms of the Credit Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter Graf
-------------------------------
Name: Peter Graf
Title: Chairman
[CORPORATE SEAL]
ING (U.S.) CAPITAL CORPORATION, in its
capacity as Agent and Lender
By: /s/ Steven G. Fleenor
-------------------------------
Name: Steven G. Fleenor
Title: Vice President
CERBERUS PARTNERS, L.P.
By: CERBERUS ASSOCIATES, L.P.,
its General Partner
By: /s/ Stephen Feinberg
---------------------------
Name: Stephen Feinberg
Title: General Partner
(SIGNATURE PAGE TO THE SEVENTH AMENDMENT TO CREDIT AGREEMENT)
<PAGE> 8
ACKNOWLEDGMENT AND CONSENT
The undersigned hereby acknowledge receipt of a copy of the foregoing
Amendment, consent to the terms and provisions set forth therein, and agree that
the Subsidiary Guaranty dated as of March 15, 1996 (the "SUBSIDIARY GUARANTY")
made by each of the undersigned, jointly and severally, in favor of
Internationale Nederlanden (U.S.) Capital Corporation ("ING") and such other
Lenders as are, or may from time to time become, parties to the Credit
Agreement, and ING as Agent for such Lenders, will continue in full force and
effect without diminution or impairment notwithstanding the execution and
delivery of the Amendment. The undersigned further acknowledge and agree that,
upon effectiveness of the Amendment and from and after the date thereof, each
reference to the Credit Agreement in the Subsidiary Guaranty and each other Loan
Document (as such term is defined in the Credit Agreement) to which any of the
undersigned is a party shall mean and be a reference to the Credit Agreement as
amended by this Amendment.
PUBLIC TELEPHONE CORPORATION
By: /s/ Tammy L. Martin
-------------------------------
Name: Tammy L. Martin
Title: Chief Administrative Officer
Corporate Secretary
[CORPORATE SEAL]
WORLD COMMUNICATIONS, INC.
By: /s/ Tammy L. Martin
-------------------------------
Name: Tammy L. Martin
Title: Chief Administrative Officer
Corporate Secretary
[CORPORATE SEAL]
(ACKNOWLEDGMENT AND CONSENT TO SEVENTH AMENDMENT)
<PAGE> 9
NORTHERN FLORIDA TELEPHONE CORPORATION
By: /s/ Tammy L. Martin
-------------------------------
Name: Tammy L. Martin
Title: Chief Administrative Officer
Corporate Secretary
[CORPORATE SEAL]
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
By: /s/ Tammy L. Martin
-------------------------------
Name: Tammy L. Martin
Title: Chief Administrative Officer
Corporate Secretary
[CORPORATE SEAL]
PAYPHONES OF AMERICA, INC.
By: /s/ Tammy L. Martin
-------------------------------
Name: Tammy L. Martin
Title: Chief Administrative Officer
Corporate Secretary
[CORPORATE SEAL]
(ACKNOWLEDGMENT AND CONSENT TO SEVENTH AMENDMENT)
<PAGE> 10
Exhibit A
AGREEMENT AND PLAN OF MERGER
among
PHONETEL TECHNOLOGIES, INC.,
PHONETEL CCI, INC.,
CHEROKEE COMMUNICATIONS, INC.
and
ALL OF THE SHAREHOLDERS OF
CHEROKEE COMMUNICATIONS, INC.
November 21, 1996
TABLE OF CONTENTS
Page
ARTICLE I
PURCHASE AND SALE OF THE SHARES; THE CLOSING................. 2
1.1 The Merger................................................... 2
1.2 Consideration for Conversion of Shares....................... 2
1.3 Closing Payment.............................................. 3
1.4 Consideration Adjustments.................................... 4
1.5 Adjustment Schedule.......................................... 6
1.6 Escrow....................................................... 8
1.7 Appointment of the Seller Representatives.................... 9
1.8 The Closing.................................................. 10
1.9 Deliveries by the Sellers. .................................. 11
1.10 Deliveries by the Buyer...................................... 14
1.11 Articles of Incorporation; By-Laws........................... 15
1.12 Directors and Officers of the Surviving
Corporation.................................................. 15
1.13 Rate Cap Consideration Adjustments........................... 16
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SELLER...... 17
2.1 Authorization; Binding Obligation............................ 17
2.2 Title to the Securities...................................... 18
<PAGE> 11
2.3 Consents and Approvals; No Violation......................... 19
2.4 Fees To Brokers or Other Parties. ........................... 20
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CCI AND THE SELLERS
(OTHER THAN BERTHEL FISHER)............... 20
3.1 Organization and Standing; Subsidiaries. .................... 21
3.2 Organizational Documents and Corporate
Records...................................................... 22
3.3 Authorization................................................ 23
3.4 CCI Capitalization........................................... 23
3.5 Consents and Approvals; No Violation......................... 25
3.6 Financial Statements......................................... 26
3.7 Absence of Undisclosed Liabilities........................... 27
3.8 Accounts Receivable.......................................... 28
3.9 Equipment.................................................... 29
3.10 Absence of Certain Changes or Events......................... 29
3.11 Properties and Assets........................................ 31
3.12 Contracts.................................................... 31
3.13 Compliance with Laws and Permits............................. 33
3.14 Litigation and Arbitration................................... 34
3.15 Employee Matters............................................. 35
3.16 Labor Relations.............................................. 35
3.17 Taxes........................................................ 36
3.18 Intellectual Property........................................ 38
3.19 Environmental Matters........................................ 38
3.20 Insurance.................................................... 41
3.21 Bank Accounts................................................ 42
3.22 Customers and Suppliers...................................... 42
3.23 Affiliate Transactions....................................... 43
3.24 Prior Acquisitions........................................... 43
3.25 Interests in Real Property................................... 43
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER....... 46
4.1 Organization and Standing.................................... 46
4.2 Authorization; Binding Obligation............................ 46
4.3 Consents and Approvals; No Violation......................... 47
4.4 Buyer Shares................................................. 48
4.5 SEC Documents................................................ 48
ARTICLE V
ADDITIONAL COVENANTS................... 49
5.1 Transfer and Other Taxes; Preparation
and Filing of Tax Returns; Payment of
Taxes; Tax Year.............................................. 49
5.2 Further Assurances; Cooperation.............................. 53
5.3 Notification of Certain Matters.............................. 54
5.4 Confidentiality and Exclusivity.............................. 54
5.5 Publicity.................................................... 55
<PAGE> 12
5.6 Expenses..................................................... 56
5.7 Due Diligence................................................ 57
5.8 Interim Conduct of Business.................................. 57
5.9 Excluded Assets.............................................. 60
5.10 1996 Audit................................................... 61
5.11 Permits...................................................... 61
5.13 Cooperation in Financings.................................... 62
5.14 Options...................................................... 63
5.15 Payment of Certain Liabilities............................... 63
ARTICLE VI
CONDITIONS.............................................. 63
6.1 Conditions Precedent to Obligations of
the Buyer.................................................... 63
6.2 Conditions Precedent to Obligations of
CCI and the Sellers.......................................... 65
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION................... 66
7.1 Survival of Representations and Warranties................... 66
7.2 Statements as Representations................................ 67
7.3 Indemnification by the Sellers............................... 67
7.4 Indemnification by the Buyer. ............................... 70
7.5 Limitations on Indemnification............................... 71
7.6 Indemnification Procedures................................... 73
7.7 Tax Indemnification.......................................... 76
ARTICLE VIII
MISCELLANEOUS...................................... 82
8.1 Consent to Service........................................... 82
8.2 Parties in Interest; No Third Party
Beneficiaries................................................ 83
8.3 Exhibits and Disclosure Schedule............................. 83
8.4 Entire Agreement. ........................................... 83
8.5 Waiver of Compliance......................................... 84
8.6 Validity..................................................... 84
8.7 Counterparts................................................. 84
8.8 Headings..................................................... 84
8.9 Governing Law; Arbitration................................... 85
8.10 Notices...................................................... 87
8.11 Termination or Abandonment................................... 89
8.12 Effect of Termination........................................ 89
ARTICLE IX
DEFINITIONS............................................. 90
9.1 Definitions.................................................. 90
<PAGE> 13
Exhibit A - Shareholders of CCI
Exhibit B - Escrow Agreement
Exhibit C - Bailey Employment Agreement
Exhibit D - Marshall Employment Agreement
Exhibit E - Beddow Employment Agreement
Exhibit F - Certificate of Non-Foreign Status
Exhibit G - Financial Statements
Exhibit H - Excluded Assets
Exhibit I - Permits Required
Exhibit J - Consents Required
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of November
21, 1996, among PhoneTel Technologies, Inc., an Ohio corporation (the "Buyer"),
Phonetel CCI, Inc., a Texas corporation and a wholly owned subsidiary of Buyer
("Merger Sub"), Cherokee Communications, Inc., a Texas corporation ("CCI"), and
all of the shareholders of CCI and the holders of options, warrants and
convertible preferred stock of CCI (collectively, the "Sellers"), whose names,
addresses and holdings in CCI are set forth on Exhibit A hereto. WHEREAS, CCI is
engaged in the business of owning and operating microprocessor-based pay
telephones and related activities; and WHEREAS, the Boards of Directors of the
Buyer, Merger Sub and CCI have each approved, and deem it advisable and in the
best interests of their respective shareholders to consummate, the merger of
Merger Sub with and into CCI, with CCI as the Surviving Corporation, upon the
terms and subject to the conditions set forth herein; NOW, THEREFORE, in
consideration of the mutual agreements, covenants, representations and
warranties set forth herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE SHARES; THE CLOSING
1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement and in accordance with Article 5.06 of the Texas Business
Corporation Act, at the Effective Time, Merger Sub shall be merged with and into
CCI (the "Merger") and the separate corporate existence of Merger Sub shall
cease. After the Merger, CCI shall continue as the surviving corporation
(sometimes hereinafter referred to as the "Surviving Corporation"). The Merger
shall have the effect as provided in the applicable provisions of the Texas
Business Corporation Act and this Agreement. Without limiting the generality of
the foregoing, upon the Merger, all the rights, privileges, immunities, powers
and franchises of CCI and Merger Sub shall vest in the Surviving Corporation
and, except as otherwise provided for in this Agreement, all obligations,
duties, debts and liabilities of CCI and Merger Sub shall be the obligations,
duties, debts and liabilities of the Surviving Corporation.
1.2 Consideration for Conversion of Shares. At the Effective
Time:
(a) Each share of common stock, no par value per share, of CCI
(the "Shares") and each Convertible (collectively, the "Securities"),
outstanding immediately prior to the Effective Time shall be converted into
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the right to receive a portion of the Consideration set forth in Exhibit A
hereto. The "Consideration" shall equal the sum of $54,000,000, subject to
adjustment as set forth in Sections 1.4 and 1.13 hereof.
(b) Each share of common stock of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into one share
of common stock, no par value per share, of the Surviving Corporation and
shall constitute the only outstanding shares of capital stock of the
Surviving Corporation.
1.3 Closing Payment.
(a) Not later than three business days prior to the Closing,
Seller Representatives shall deliver to the Buyer a good faith estimate of
the adjustments to the Consideration required by Section 1.4 hereof, as of
the Closing Date, including all the detail required by Section 1.4 hereof.
(b) At the Closing, the Buyer shall pay to Seller
Representatives by wire transfer or certified check (for distribution Pro
Rata to the Sellers, adjusted as agreed among the Sellers) an amount equal
to the Consideration which would be payable if adjusted pursuant to Section
1.4 (using the good faith estimates delivered pursuant to paragraph (a)
above); provided that such amount shall be reduced by the Escrow Amount.
1.4 Consideration Adjustments.
(a) 1996 EBITDA. The Consideration shall be reduced by the
same percentage, if any, that EBITDA for the year ended September 30, 1996
(as determined from the 1996 Audit) is less than $7,900,000.
(b) First Quarter EBITDA. The Consideration (as adjusted
pursuant to Section 1.4(a)) shall be further reduced by the same percentage
(but not greater than 6.5%), if any, that EBITDA for the three months
ending December 31, 1996 is less than EBITDA for the three months ended
December 31, 1995.
(c) Average Term. If at the Closing Date the Average Term is
less than 46 months, then the Consideration (as adjusted pursuant to
Sections 1.4(a) and (b)) shall be further adjusted by multiplying it by a
fraction, the numerator of which is the Average Term and the denominator of
which is 46.
(d) Installed Phones. If the number of Installed Phones as
of the Closing Date is less than 14,000, the Consideration (as adjusted
pursuant to Sections 1.4(a), (b) and (c)) shall be decreased by the amount
of $3,950 multiplied by the difference between (i) 14,000 and (ii) the
number of Installed Phones as of the Closing Date, provided that, for
purposes of this Section 1.4(d), the number of Installed Phones shall
include up to 650 Contract Phones.
(e) Liabilities/Current Assets.
(i) The Consideration (as adjusted pursuant to
Sections 1.4(a), (b), (c) and (d)) shall be decreased by an amount
equal to the excess, if any, of (A) the sum of all Liabilities as
of the Effective Time over (B) the sum of all Current Assets as of
the Effective Time; or
(ii) the Consideration (as adjusted pursuant to
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Sections 1.4(a), (b), (c) and (d)) shall be increased by an amount
equal to the excess, if any, of (A) the sum of all Current Assets
as of the Effective Time over (B) the sum of all Liabilities as of
the Effective Time.
1.5 Adjustment Schedule.
(a) As soon as practicable after the Closing Date (but in
any event not more than 150 days after the Closing Date), the Buyer shall
cause to be prepared and delivered to Seller Representatives and the Escrow
Agent a schedule (the "Adjustment Schedule") which shows, as of the
Effective Time, the calculation of the Consideration as provided in Section
1.2(a) and as adjusted pursuant to Section 1.4.
(b) Upon receipt of the Adjustment Schedule, Seller
Representatives shall have the right during the succeeding 30-day period to
examine the Adjustment Schedule and all records used to prepare such
Adjustment Schedule. Seller Representatives shall notify the Buyer in
writing, on or before the last day of the 30-day period, of any good faith
objections to the Adjustment Schedule, setting forth a reasonably specific
description of such objections and the dollar amount of each objection.
(c) If Seller Representatives in good faith object to the
Adjustment Schedule, Seller Representatives and the Buyer shall attempt to
resolve any such objections within 30 days of the Buyer's receipt of such
objections. If the Buyer and Seller Representatives are unable to resolve
the matter within such 30-day period, they shall jointly appoint a mutually
acceptable firm of independent certified public accountants (or, if they
cannot agree on a mutually acceptable firm, they shall cause their
respective accounting firms to select such firm) within five days after the
end of such 30-day period. The fees of such independent certified public
accountants shall be divided equally between the Buyer and Seller
Representatives (on behalf of all Sellers). Such firm's resolution of the
dispute shall be conclusive and binding upon the Sellers and the Buyer.
(d) The Adjustment Schedule shall be deemed complete upon
the earlier of (i) the 31st day after the Buyer's delivery of the
Adjustment Schedule to Seller Representatives, unless prior to such day
Seller Representatives shall have notified the Buyer of an objection in
accordance with Section 1.5(b), and (ii) the resolution of all objections,
pursuant to Section 1.5(c). Within five business days following completion
of the Adjustment Schedule as aforesaid, either
(A) the Buyer shall pay Seller Representatives, on behalf of
the Sellers, the amount, if any, by which the Consideration
(as adjusted) exceeds the amount paid pursuant to Section
1.3(b); or (B) Seller Representatives, on behalf of the
Sellers, shall pay to the Buyer the amount, if any, by which
the amount paid pursuant to Section 1.3(b) exceeds the
Consideration (as adjusted).
All payments pursuant to this Section 1.5(d) shall be made by wire transfer
or certified check.
1.6 Escrow.
(a) Simultaneously herewith, the Buyer, CCI, Seller
Representatives (on behalf of the Sellers) and Comerica Bank-Texas, as
escrow agent (the "Escrow Agent") are entering into an Escrow Agreement in
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the form attached hereto as Exhibit B, and the Buyer is depositing $520,000 (as
may be increased pursuant to Section 1.6(b) below, the "Escrow Amount") with the
Escrow Agent, to be held and disposed of by the Escrow Agent pursuant to the
Escrow Agreement. In the event the Closing does not occur due to a material
breach of this Agreement by the Buyer (including, without limitation, failure to
close by January 31, 1997 for any reason other than a material breach of this
Agreement by CCI or the Sellers), Seller Representatives (on behalf of all
Sellers, Pro Rata) shall be entitled to receive the entire Escrow Amount, as
liquidated damages, and the Sellers and CCI shall have no other rights or
remedies in respect of this Agreement.
(b) At the Closing, the Buyer shall deposit an additional
$6,480,000 with the Escrow Agent, which shall become part of the Escrow
Amount.
(c) Delivery of funds by the Escrow Agent to the applicable
parties shall be pursuant to the terms of the Escrow Agreement.
1.7 Appointment of the Seller Representatives.
(a) Each Seller hereby irrevocably appoints Bill H. Bailey, Jr.
and J. Bruce Duty ("Seller Representatives") as such Seller's attorneys-in-fact
and representatives, to do any and all things specifically provided for by this
Agreement and the other documents contemplated hereby. The Buyer shall be
entitled to rely, as being binding upon such Seller, upon any document or other
writing executed by Seller Representatives pursuant to the authority granted in
this Section 1.7(a), and the Buyer shall not be liable to any Seller for any
action taken or omitted to be taken by the Buyer in reliance thereon. All action
taken by Seller Representatives shall be valid and binding only if both Seller
Representatives have approved such action.
(b) In the event of the death or incapacity of either Seller
Representative or any other inability or refusal by either Seller Representative
to continue acting in such capacity, (i) in the case of Bill H. Bailey, Jr., a
majority in interest of the Management Sellers (determined Pro Rata), and (ii)
in the case of J. Bruce Duty, a majority in interest of the Sellers other than
the Management Sellers (determined Pro Rata), may, by document submitted to the
Buyer, select a substitute Seller Representative. Upon acceptance of such
appointment, the substitute Seller Representative shall have all the powers and
obligations of the Seller Representative who such substitute Seller
Representative is replacing.
1.8 The Closing. Upon the terms and subject to the conditions
contained in this Agreement, the Closing of the transactions contemplated hereby
(the "Closing") will take place at the offices of Gardere & Wynne, L.L.P., 3000
Thanksgiving Tower, Dallas, Texas (or such other place as the Buyer and Seller
Representatives may agree) on a date mutually agreeable to all parties, but no
earlier than January 2, 1997 and no later than January 31, 1997 without the
consent of the Buyer and Seller Representatives (the "Closing Date"),
simultaneously with the execution of the other agreements, documents,
instruments and writings to be executed and delivered pursuant hereto or in
connection herewith (collectively, the "Other Documents"). At the Closing, the
actions described in Sections 1.6(b), 1.8, 1.9 and 1.10 hereof shall be taken.
All such actions shall be deemed to have occurred simultaneously. On the Closing
Date, the Buyer and CCI will cause appropriate Articles of Merger (the "Articles
of Merger") to be executed and filed with the Secretary of State of Texas in
such form and
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executed as provided in Article 5.04 of the Texas Business Corporation Act. The
Merger shall become effective at the close of business on the date on which the
Articles of Merger have been duly filed with the Secretary of State of Texas or
such other time as is agreed upon by the parties and specified in the Articles
of Merger, and such time is hereinafter referred to as the "Effective Time".
1.9 Deliveries by the Sellers. At the Closing, the Sellers shall
deliver to the Buyer (unless previously delivered) the following:
(a) (i) stock certificates representing all the Shares and
Preferred Stock, and (ii) documentation reasonably satisfactory to the Buyer as
to (A) the cancellation of the Warrants and (B) the exercise of the Options, in
the case of the Shares and Preferred Stock accompanied by stock powers duly
endorsed in blank or accompanied by duly executed instruments of transfer, with
all necessary transfer tax and other revenue stamps affixed thereto;
(b) a receipt for the payment provided for by Section 1.3(b)
hereof;
(c) Certificates of Good Standing for CCI from the Texas
Secretary of State and from the Secretary of State of each state in which the
subsidiaries of CCI are organized and Certificates of Qualification to do
Business in each other state in which CCI is qualified to do business as a
foreign corporation;
(d) the resignations of such officers of CCI as the Buyer shall
request;
(e) the stock books, stock ledgers and minute books of CCI (all
other records of CCI being located on the premises of CCI);
(f) certified resolutions of the Board of Directors of CCI
approving this Agreement and the Other Documents and the transactions
contemplated hereby and thereby;
(g) certified resolutions of the shareholders of CCI approving
this Agreement and the transactions contemplated hereby;
(h) all consents, assignments or waivers required to be obtained
in connection with the Contracts, in order for the Buyer to assume the
operations and conduct the business of CCI without breaching the provisions of
any Contract;
(i) executed employment and non-competition agreements, in the
forms attached hereto as Exhibits C, D and E, between Buyer and Bill H. Bailey,
Jr., Edward L. Marshall and Jerry T. Beddow, respectively;
(j) a certificate from an officer of CCI certifying that all
representations and warranties contained in Article III are true and correct in
all material respects as of the Closing Date;
(k) a certificate from each Seller certifying that all
representations and warranties contained in Articles II and a certificate from
such Seller other than Berthel Fisher certifying that all representations and
warranties contained in Article III are true and correct in all material
respects as of the Closing Date, provided that each Seller other than the
Management Sellers and Berthel Fisher shall so
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certify as to Article III only to the best of their information and
knowledge;
(l) an executed amendment to the lease for the headquarters of
CCI extending the term for five years after the Closing Date, subject to the
option of the Buyer, exercisable on 90 days notice, to terminate the lease at
any time after the second anniversary of the Closing Date;
(m) a Certificate of Non-Foreign Status from each Seller in the
form attached as Exhibit F hereto. Notwithstanding anything to the contrary
herein, if any Seller fails to provide the Buyer with such Certificate, Buyer
shall be entitled to withhold the requisite amounts from the Consideration in
accordance with Section 1445 of the Code.
1.10 Deliveries by the Buyer. At the Closing, the Buyer shall
deliver to Seller Representatives (unless previously delivered) the following:
(a) the payment provided for in Section 1.3(b) hereof;
(b) a Certificate of Good Standing of the Buyer under the laws of
the State of Ohio;
(c) certified resolutions of the Boards of Directors of the Buyer
and Merger Sub approving this Agreement, the Other Documents and the
transactions contemplated hereby and thereby;
(d) the executed contracts attached as Exhibits C, D, and E,
respectively;
(e) a certificate from an officer of the Buyer certifying that
all representations and warranties contained in Article IV are true and correct
in all material respects as of the Closing Date; and
(f) an executed amendment to the lease for the headquarters of
CCI extending the term for five years after the Closing Date, subject to the
option of the Buyer, exercisable on 90 days notice, to terminate the lease at
any time after the end of the second anniversary of the Closing Date.
1.11 Articles of Incorporation; By-Laws. Pursuant to the Merger,
(A) the Articles of Incorporation of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by law and such Articles of
Incorporation and (B) the By-Laws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law, the Articles of Incorporation and such
By-Laws.
1.12 Directors and Officers of the Surviving Corporation.
(a) The directors of Merger Sub immediately prior to the
Effective Time shall, from and after the Effective Time, be the directors of the
Surviving Corporation until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
ByLaws.
(b) The officers of Merger Sub immediately prior to the
<PAGE> 19
Effective Time shall be the initial officers of the Surviving Corporation and
shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal.
1.13 Rate Cap Consideration Adjustments.
(a) First Rate Cap Year. (i) If there is no Rate Cap Effective
Date in the First Rate Cap Year, then the Buyer shall pay Seller Representatives
(on behalf of the Sellers Pro Rata), as additional Consideration, the sum of
$3,000,000.
(ii) If there is a Rate Cap Effective Date during the First Rate
Cap Year, the Buyer shall pay Seller Representatives (on behalf of the Sellers
Pro Rata), as additional Consideration, the sum of $3,000,000, reduced for each
day during the First Rate Cap Year which is a Rate Cap Effective Date by the
product of $111.07 and the number of percentage points (not exceeding 74) that
the Rate Cap is less than 89% above the AT&T Rate.
(b) Second Rate Cap Year. (i) If there is no Rate Cap Effective
Date during the Second Rate Cap Year, then the Buyer shall pay Seller
Representatives (on behalf of the Sellers Pro Rata), as additional Consideration
(in addition to the amount provided in Section 1.13(a)), the sum of $3,000,000.
(ii) If there is a Rate Cap Effective Date during the Second Rate
Cap Year, the Buyer shall pay Seller Representatives (on behalf of the Sellers
Pro Rata), as additional Consideration (in addition to the amount provided in
Section 1.13(a)), the sum of $3,000,000, reduced for each day during the Second
Rate Cap Year which is a Rate Cap Effective Date by the product of $111.07 and
the number of percentage points (not exceeding 74) that the Rate Cap is less
than 89% above the AT&T Rate.
(c) Manner of Payment. Not later than 10 days after the end of
each of the First Rate Cap Year and the Second Rate Cap Year, the Buyer shall
notify Seller Representatives of the amount payable in respect of this Section
1.13, and shall direct the Escrow Agent to pay such amount to Seller
Representatives, on behalf of the Sellers Pro Rata, in cash or by wire transfer
or certified check.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SELLER
Each Seller severally represents and warrants to the Buyer as
follows:
2.1 Authorization; Binding Obligation. This Agreement has been,
and each the Other Documents to which it is a party will be, duly and validly
executed and delivered by such Seller and, assuming due authorization, execution
and delivery by the other parties hereto or thereto, constitutes or, in the case
of the Other Documents, will constitute a legal, valid and binding obligation of
such Seller, enforceable against such Seller in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization, or other laws affecting creditors'
rights generally or by the availability of equitable remedies generally. Such
Seller has the legal capacity and all requisite power and authority, whether
corporate or otherwise, to execute and deliver this Agreement and
<PAGE> 20
the Other Documents to which it is (or is required to be) a party and to
consummate the transactions contemplated hereby and thereby and to perform such
Seller's obligations hereunder and thereunder. Such execution, delivery and
consummation has been duly and validly authorized by all necessary action on the
part of such Seller, and no other corporate proceedings on the part of such
Seller are necessary to authorize such execution, delivery and consummation.
Except as set forth in Section 1.7 hereof, no power of attorney has been granted
by such Seller with respect to any matter relating to CCI or the Shares.
2.2 Title to the Securities. Such Seller is the record and
beneficial owner of, and has good and marketable title to, the number of
Securities set forth next to such Seller's name on Exhibit A hereto, free and
clear of all Encumbrances except for Encumbrances to be satisfied prior to or
contemporaneously with Closing. Except as set forth in Schedule 2.2 of the
Disclosure Schedule, such Securities are not subject to any restrictions on
transferability other than those imposed by the Securities Act and applicable
state securities laws. Except as set forth in Schedule 2.2 of the Disclosure
Schedule, there are no (a) options, warrants, calls, commitments or rights of
any character to purchase or otherwise acquire Securities from such Seller
pursuant to which such Seller may be obligated to sell or transfer any
Securities or (b) agreements, arrangements, understandings or special rights
with respect to the voting of Shares.
2.3 Consents and Approvals; No Violation. Except as set forth in
Schedule 2.3 of the Disclosure Schedule, neither the execution and delivery of
this Agreement and the Other Documents by such Seller, nor the consummation of
the transactions contemplated hereby or thereby by such Seller, nor compliance
with any of the provisions hereof by such Seller, will (a) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
or any other action by, any Governmental Authority by such Seller, (b) violate
any Law of any Governmental Authority which may be applicable to such Seller, or
by which any of such Seller's businesses, properties or assets (including,
without limitation, such Seller's Securities) may be bound or affected or (c)
violate, breach, or conflict with, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or any obligation to pay or result in the
imposition of any Encumbrance upon such Seller's Securities) except to the
extent consent of same is obtained prior to Closing.
2.4 Fees To Brokers or Other Parties. The Buyer and the Sellers
shall each pay their own expenses in connection with this transaction. Neither
CCI nor any Seller has or will have any obligation to pay any broker's,
finder's, investment banker's, financial advisor's or similar fee to any party,
in connection with this Agreement or the Other Documents, or the transactions
contemplated hereby or thereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CCI AND THE SELLERS
(OTHER THAN BERTHEL FISHER)
CCI and the Management Sellers, jointly and severally, and the
Sellers other than the Management Sellers and Berthel Fisher, severally,
represent and warrant to the Buyer as set forth in this Article III, provided
that, with respect to all Sellers other than the Management Sellers, such
representations and warranties are made to the best of their information and
knowledge.
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All references to CCI in this Article III shall refer to CCI and
its investments in CID, but not the Excluded Assets, except for Section 3.1(a)
and Section 3.6.
3.1 Organization and Standing; Subsidiaries. (a) CCI is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. CID Communications, S.A. de C.V. ("CID") is a corporation
duly organized, validly existing and in good standing under the laws of Mexico.
CCI has all requisite corporate power and authority to own, lease and operate
the properties and assets it now owns, operates and leases and to carry on its
businesses and operations as now being conducted. CCI is duly qualified or
licensed to do business and is in good standing in each of the jurisdictions in
which (i) the character or location of the properties and assets it owns, leases
or operates, (ii) the conduct of its business and operations as currently and
heretofore conducted or (iii) any other circumstance makes such qualification
necessary, except where the failure to be so qualified or licensed would not
have a material adverse effect on CCI.
(b) CCI has no investment in any corporation, partnership or
other entity except CID. CCI has good and valid title to such number of shares
of common stock of CID which constitutes 50% of the outstanding shares of the
only equity security of CID, free and clear of any Encumbrances.
3.2 Organizational Documents and Corporate Records. (a) CCI has
heretofore delivered to the Buyer complete and correct copies, with all
amendments thereto, of the Articles of Incorporation and By-laws of CCI, as
currently in effect. The minute books of CCI have been made available to the
Buyer for its inspection, and such minute books contain complete and correct
records of all meetings, and consents in lieu of a meeting, of the Board of
Directors of CCI (and any committees thereof) and the shareholders since the
incorporation of CCI, and accurately reflect all transactions referred to
therein.
The stock books and ledgers of CCI have been made available to
the Buyer for its inspection, and such books and ledgers are complete and
correct in all material respects.
(b) CCI has made available to the Buyer all accounting and
financial books and records (the "Accounting Books and Records") which relate to
the business of CCI. Such books and records have been maintained on a basis
consistent with past practice and GAAP, and fairly reflect the basis for CCI's
financial condition and results of operations as set forth in the Audited
Financial Statements.
3.3 Authorization. CCI has the requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and the Other Documents and to consummate the transactions contemplated hereby
and thereby. All corporate proceedings on the part of CCI which are necessary to
execute, deliver and perform this Agreement and the Other Documents and to
consummate the transactions contemplated hereby and thereby have been duly
authorized and taken. This Agreement has been, and at or prior to the Closing
the Other Documents required to be executed by CCI will be, duly and validly
executed by CCI, and constitute (or will constitute) valid and binding
obligations of CCI, enforceable against CCI in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization,
<PAGE> 22
or other laws affecting creditors' rights generally or by the availability of
equitable remedies generally. No power of attorney has been granted and is
currently in force by CCI with respect to any matter relating to CCI or its
business, operations or assets.
3.4 CCI Capitalization. The authorized capital stock of CCI
consists of 15,000,000 Common Shares, no par value, 5,320,467 of which are
issued and outstanding on the date hereof and owned by the Sellers as set forth
on Exhibit A hereto. In addition, on the date hereof CCI has outstanding (a)
options to purchase 849,795 Shares (the "Options"), (b) warrants to purchase
1,562,338 Shares (the "Warrants") and (c) 240,000 shares of Class A Cumulative
Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"),
convertible into 2,218,080 Shares, all of which are owned by the Sellers as set
forth on Exhibit A hereto (collectively, the "Convertibles"). CCI has heretofore
delivered to the Buyer a true and complete copy of all documents which set forth
the terms of the Convertibles outstanding as of the date hereof. CCI has no
other class of capital stock authorized or outstanding. None of CCI's shares of
capital stock have been reserved for any purpose, except for issuance upon
exercise or conversion of the Convertibles. All of the outstanding Securities
are, and upon exercise of the Options all Shares will be, duly authorized and
validly issued, fully paid, nonassessable and not issued in violation of any
preemptive rights. Except for the Convertibles and as set forth in Schedule 3.4
of the Disclosure Schedule, as of the date hereof there are no (i) options,
warrants, calls, commitments or rights of any character to purchase or otherwise
acquire from CCI shares of capital stock of any class, (ii) outstanding
securities of CCI that are convertible into or exchangeable or exercisable for
shares of any class of capital stock of CCI, (iii) options, warrants or other
rights to purchase from CCI any such convertible or exchangeable securities, or
(iv) contracts, commitments, agreements, understandings or arrangements of any
kind relating to the issuance or voting of any capital stock of CCI, any
options, warrants or rights, pursuant to which, in any of the foregoing cases,
CCI is or would be subject or bound.
3.5 Consents and Approvals; No Violation. Except as set forth on
Schedule 3.5(a) of the Disclosure Schedule, neither the execution and delivery
of this Agreement and the Other Documents, nor the consummation of the
transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof, will (a) conflict with any provision of the Articles of
Incorporation or By-laws (or other similar organizational documents) of CCI, (b)
require any consent, waiver, approval, authorization or permit of, or filing
with or notification to, or any other action by, any Governmental Authority by
CCI, (c) violate any Law of any Governmental Authority applicable to CCI, or by
which any of its business, properties or assets may be bound or affected or (d)
violate, breach, or conflict with, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or any obligation to pay or result in the
imposition of any Encumbrance upon any of the property) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, Encumbrance,
Contract, Permit, Order, or other instrument or obligation to which CCI is a
party or by which any of its business, properties or assets may be bound or
affected.
3.6 Financial Statements. CCI has furnished to the Buyer the
audited financial statements of CCI as of, and for the year ended, September 30
in each of the years 1994 and 1995 (together with the notes thereto), certified
by CCI's independent public accountants, and
<PAGE> 23
accompanied by their reports thereon (collectively, the "Audited Financial
Statements") and will, prior to December 31, 1996, furnish to the Buyer the
audited financial statements of CCI for the year ended September 30, 1996 (the
"1996 Audit"). CCI has furnished to the Buyer the unaudited financial statements
for CCI as of August 31, 1996 and for the eleven months then ended
(collectively, with the Audited Financial Statements, the "Financial
Statements"). The Financial Statements are attached hereto as Exhibit G. The
Financial Statements have been, and the 1996 Audit will be, prepared from and in
accordance with the books and records of CCI in accordance with GAAP (subject,
in the case of interim financial statements, to the absence of notes, normal
year-end adjustments and any other adjustment described therein), consistently
applied and maintained throughout the periods indicated (except as disclosed in
Schedule 3.10 of the Disclosure Schedule). The Financial Statements fairly
present, and the 1996 Audit will fairly present, in all material respects, (a)
the assets, liabilities and financial condition of CCI, as at the dates thereof,
and (b) the results of operations and cash flows of CCI for the periods then
ended. Except for the sale of approximately 700 phones located in the State of
Iowa during the fiscal year ended September 30, 1995, the statements of income
and retained earnings and cash flows included in the Financial Statements or in
the 1996 Audit do not and will not contain any material items of special or
nonrecurring income not earned in the ordinary course of business and consistent
with applicable industry standards and practice.
3.7 Absence of Undisclosed Liabilities. CCI does not have any
liabilities or obligations arising from or relating to its business and
operations of any nature (whether absolute, accrued, fixed, contingent,
liquidated, unliquidated or otherwise and whether due or to become due) which
were not reflected or reserved against in the Financial Statements, except for
liabilities or obligations incurred since September 30, 1995 in the ordinary
course of business and consistent with past practice. Schedule 3.7 of the
Disclosure Schedule sets forth a true, complete and accurate list of all
liabilities or obligations of CCI as of the date hereof with respect to borrowed
money (including accounts payable and accrued expenses), letters of credit and
any notes, bonds or similar instruments or under any capitalized leases of CCI.
The Merger will not cause the acceleration of or otherwise adversely affect the
terms or conditions of such liabilities or obligations, except for liabilities
and obligations to be satisfied in full on the Closing Date.
3.8 Accounts Receivable. Schedule 3.8 of the Disclosure Schedule
sets forth a true, complete and accurate (in all material respects) list of all
Accounts Receivable generated in connection with CCI Phones as of September 30,
1996. All Accounts Receivable reflected in the Financial Statements and all
Accounts Receivable acquired or generated since August 31, 1996 by CCI (a) arose
from bona fide transactions in the ordinary course of business consistent with
past practice, (b) are valid and genuine, (c) are not subject to any
counterclaim or setoff and (d) are not subject to any Encumbrance. Except as set
forth on Schedule 3.8, (i) no Account Receivable outstanding and due as of
September 30, 1996 has been outstanding for more than 120 days, (ii) no operator
service provider has refused or threatened to refuse to pay its obligations for
any reason and (iii) no Account Receivable debtor is insolvent or is the subject
of a bankruptcy petition.
3.9 Equipment. (a) Except as disclosed on Schedule 3.9 of the
Disclosure Schedule, all Equipment is owned by CCI free and clear of any
Encumbrance. All Equipment which is reflected in the Financial Statements is
valued at the lower of cost (on a first-in, first-out basis)
<PAGE> 24
or market in accordance with GAAP consistently applied and maintained throughout
the periods. All Equipment disposed of by CCI since September 30, 1995 has been
disposed of only (i) in the ordinary course of CCI's business and (ii) at prices
and under terms that are consistent with past practice.
(b) All Equipment is, including 95% of the Installed Phones,
usable, in good working condition, free of any material defects and suitable for
the purposes of its intended and current operational use.
3.10 Absence of Certain Changes or Events. Except as set forth on
Schedule 3.10 of the Disclosure Schedule, since September 30, 1995:
(a) CCI has operated its business in the ordinary course
consistent with past practice;
(b) there has not been any material adverse change in the
business, results of operations, assets, liabilities, financial condition of
CCI;
(c) CCI has not transferred, disposed of, abandoned or permitted
to lapse or otherwise failed to preserve any Permit or other form of
authorization issued by a Governmental Authority necessary to the operation of
its business;
(d) CCI has not made any change in any accounting methods,
principles or practices (including, without limitation, changes in depreciation
or amortization policies or rates or relating to the establishment of accrual of
reserves) or any material election with respect to Taxes;
(e) CCI has not terminated or amended, breached or failed to
perform in all material respects all obligations under any Material Contract and
no other party thereto has terminated or amended or, to the knowledge of CCI or
any Seller, breached, or failed to perform in all material respects all of its
obligations under any Material Contract;
(f) CCI has not experienced any actual or, to the knowledge of
CCI and the Sellers, threatened labor unrest, work stoppages or slow-downs or
had any material change in its relationship with its employees, salesmen,
distributors, or independent contractors;
(g) CCI has not failed to replenish its Inventory and supplies in
a manner consistent with past practice; and
(h) CCI has not agreed, whether in writing or otherwise, to take
any action described in this Section 3.10.
3.11 Properties and Assets. CCI has good, valid and marketable
title to, or valid and binding leases (all of which are set forth on Schedule
3.11(a) of the Disclosure Schedule) with respect to, all Equipment and other
non-real estate assets (whether personal or mixed, tangible or intangible (and
whether or not fully depreciated or expensed)) used in its business and
operations, and such items are subject to no Encumbrance, other than those set
forth on Schedule 3.11(b) of the Disclosure Schedule.
3.12 Contracts. (a) Schedule 3.12 of the Disclosure Schedule
<PAGE> 25
sets forth a complete and correct list of all Material Contracts including,
without limitation, all Contracts relating to at least 50 phones. Complete and
correct copies of all written Material Contracts including any and all
amendments and other modifications thereto have been delivered to or have been
made available for inspection by the Buyer. All written and all oral Material
Contracts (i) are valid and binding obligations of CCI and, to the knowledge of
CCI or any Seller, the other parties thereto, (ii) are in full force and effect
and are enforceable as to CCI and, to the knowledge of CCI or any Seller, the
other parties thereto, in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium,
reorganization, or other laws affecting creditors' rights generally or by the
availability of equitable remedies generally and (iii) have not been amended or
terminated except in the ordinary course of business consistent with past
practice.
(b) CCI is not in default under nor has it breached in any
material respect any Material Contract or any other Contracts which, in the
aggregate, are material to CCI. The aggregate obligations of CCI with respect to
oral Contracts which do not constitute Material Contracts do not exceed $10,000.
No other party to any Material Contract or any other Contracts which, in the
aggregate, are material to CCI (i) has, to the knowledge of CCI or any Seller,
breached such Contract or is in default thereunder, (ii) has given notice that
it intends to terminate such Contract or (iii) to the knowledge of CCI or any
Seller, has altered, in any way adverse to CCI, its performance under such
Contract. No event or condition has occurred (or is alleged by any other party
to a Material Contract or any other Contracts which, in the aggregate, are
material to CCI, to have occurred) which, with or without due notice or lapse of
time or both, would constitute a breach or event of default on the part of CCI,
would provide a basis for a valid claim or acceleration under any such Contract
as against CCI or would prevent CCI from exercising and obtaining the full
benefits of any rights or options contained therein.
(c) CCI has a license from Intellicall, Inc. for the use of
Intellistar circuit boards in all telephones owned by CCI presently or in the
future, through November 11, 2087, and no payments will be required of CCI in
respect of such license other than a royalty currently equal to 3.6% of the
revenue generated by the Intellistar circuit board, reducing to 3.25% for
calendar year 1997.
(d) From and after the Effective Time, the Surviving Corporation
shall have no obligations with respect to the use, lease or maintenance of any
aircraft.
3.13 Compliance with Laws and Permits.
(a) Except as set forth on Schedule 3.13(a) of the Disclosure
Schedule, the business and operations of CCI have been conducted and are now
being conducted in all material respects in compliance with all Laws and Orders
of all Governmental Authorities having jurisdiction over CCI and all Permits
relating to any of its properties or applicable to its business.
(b) Except as and to the extent set forth on Schedule 3.13(b) of
the Disclosure Schedule, CCI possesses all Permits necessary to own and operate
its property and assets and to conduct its business as it is currently
conducted. Such Permits are valid and subsisting in full force and effect, and
CCI has fulfilled its obligations under each of the Permits, and no event has
occurred or condition or state of facts exists
<PAGE> 26
which constitutes or, after notice or lapse of time or both, would constitute a
default or violation under any such Permit or would permit revocation or
termination of any such Permit. No proceeding which might involve the revocation
or termination of any such Permit is pending or, to the knowledge of CCI or the
Sellers, threatened.
(c) Except as set forth in Schedule 3.13(c) of the Disclosure
Schedule, CCI has made or will, prior to the Closing, make all filings and
received or will, prior to the Closing, receive all approvals in connection with
the Permits which are necessary for the Buyer to own and operate the property
and assets of CCI and to conduct CCI's business as it has currently and has
heretofore been conducted.
3.14 Litigation and Arbitration. (a) No claim, action, cause of
action, suit, proceeding, inquiry, investigation or Order is pending or, to the
knowledge of CCI and each Seller, threatened, against CCI or affecting its
business, operations or assets (including actions by or before any
administrative body, arbitration or mediation panel or Governmental Authority),
except as set forth on Schedule 3.14(a) of the Disclosure Schedule. No Order of
any Governmental Authority, arbitrator or mediator is outstanding against CCI,
its business, operations or assets.
(b) To the knowledge of CCI or any Seller, no claim, action,
suit, proceeding, inquiry or investigation has been instituted which threatens
to restrain or prohibit or otherwise challenge the legality or validity of the
transactions contemplated by this Agreement or the Other Documents.
3.15 Employee Matters. Except as set forth in Schedule 3.15 of
the Disclosure Schedule, CCI has no employee plans or agreements in effect. All
such plans and agreements are in compliance with all applicable laws and
regulations. CCI has taken no actions in violation of ERISA. The consummation of
the transactions contemplated by this Agreement will not entitle any current or
former employee or officer of CCI or any ERISA Affiliate to severance pay,
unemployment compensation or any other payment, except as expressly provided
herein.
There are no pending or, to the knowledge of CCI and each Seller,
threatened claims by or on behalf of any employee of CCI.
3.16 Labor Relations. CCI has at all times been in compliance in
all material respects with all applicable Laws in respect of employment and
employment practices.
3.17 Taxes. Except as set forth on Schedule 3.17 of the
Disclosure Schedule:
(a) CCI has (i) duly and timely filed with the appropriate
Governmental Authorities all Tax Returns required to be filed by it, and all
such Tax Returns are true, complete and correct in all material respects, and
(ii) has timely paid all Taxes due or claimed to be due from it by any taxing
authority.
(b) CCI has complied in all respects with all applicable Laws
relating to the payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
provisions under any foreign laws) and has, within the time and within the
manner prescribed by Law, withheld from employee wages and paid over to the
proper Governmental Authorities all amounts required to be
<PAGE> 27
withheld and paid over under all applicable Laws.
(c) There are no Encumbrances for Taxes upon CCI's assets except
for statutory liens for current Taxes not yet due.
(d) CCI has not requested any extension of time within which to
file any Tax Return in respect of any fiscal year which has not since been filed
and no outstanding waivers or comparable consents regarding the application of
the statute of limitations with respect to any Taxes or Tax Returns have been
given by CCI.
(e) No federal, state, local or foreign audits or other
administrative proceedings or court proceedings exist or have been initiated or
are presently pending with regard to any Taxes or Tax Returns of CCI.
(f) CCI is not required to include in income any adjustment
pursuant to Section 481(a) of the Code, by reason of a voluntary change in
accounting method (nor has any taxing authority proposed in writing to CCI any
such adjustment or change of accounting method).
(g) CCI has not received an adverse ruling from any taxing
authority, or signed a closing or other agreement with any taxing authority,
which could have an adverse effect on CCI.
(h) CCI is not a party to, is not bound by, and has no obligation
under, any Tax sharing agreement or similar contract or arrangement.
(i) No power of attorney has been granted by or with respect to
CCI with respect to any matter relating to Taxes which is currently in force.
(j) CCI has not filed a consent pursuant to Section 341(f) of the
Code (or any predecessor provision) or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such term is defined
in Section 341(f)(4) of the Code) owned by CCI.
(k) CCI is not a party to any agreement, contract, or arrangement
that will result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code.
(l) None of the income recognized for federal, state, local or
foreign income tax purposes by CCI during the period beginning from October 1,
1995 to the date hereof will be derived other than in the ordinary course of
business, other than income attributable to the sale or other disposition of the
Excluded Assets.
3.18 Intellectual Property. CCI owns or has the right to use all
Intellectual Property used in or necessary to conduct its business as currently
conducted, in each case without the payment of any royalties (other than as set
forth in Section 3.12). The activities and products of CCI do not infringe upon
the Intellectual Property rights of any other Person. To the knowledge of CCI
and the Sellers, there are no infringements by third parties of any Intellectual
Property owned by CCI.
3.19 Environmental Matters. Except as set forth in Schedule 3.19
of the Disclosure Schedule:
<PAGE> 28
(a) CCI has not used or stored any, and there are no, Hazardous
Materials at levels regulated by a governmental agency having jurisdiction in,
on or at any real property owned or, to the knowledge of CCI or any Seller,
leased by CCI except for substances which are used or are to be used in the
ordinary course of business (which inventories have been stored and used in
accordance with all currently applicable Laws relating to pollution, the
preservation of the environment and the discharge or release of any Hazardous
Material into the environment or workplace ("Environmental Laws") and
environmental permits. There is not now at any real property owned or, to the
knowledge of CCI or any Seller, leased by CCI any (i) underground storage tank
or surface impoundments, (ii) asbestos-containing materials or (iii)
polychlorinated biphenyls, except in compliance with applicable Environmental
Laws.
(b) No notice has been received by CCI from any Governmental
Authority or any other Person that CCI is responsible (or potentially
responsible) for any remedial action at any location or that any real property
owned or, to the knowledge of CCI or any Seller, leased by CCI is required or
may be required to be subject to remedial action. All remedial action previously
required under any Environmental Law with respect to any real property currently
owned or, to the knowledge of CCI or any Seller, leased by CCI has been
completed. Included within the Permits are all environmental Permits necessary
for the operation of CCI's business as presently operated. There is no (i)
civil, criminal or administrative claim, suit, proceeding or investigation
(including a request for information) pending or, to the knowledge of CCI and
the Sellers, threatened with respect to real property owned or, to the knowledge
of CCI or any Seller, leased by CCI relating in any way to any Environmental
Laws or environmental Permits or (ii) outstanding written orders or Contracts
with any Governmental Authority relating in any way to Environmental Laws or
environmental Permits. CCI has timely filed all reports and notifications
required to be filed with respect to, and obtained and maintained all
environmental Permits required for, the real property owned or, to the knowledge
of CCI or any Seller, leased by CCI, all improvements on the foregoing and all
operations conducted therein, and has generated and maintained all required
records and data under all currently applicable Environmental Laws, and all
operations conducted therein are in compliance in all material respects with
such Environmental Laws.
(c) During the period that CCI has owned or leased its real
properties and, to CCI's and the Sellers' knowledge, during any period prior
thereto, no condition has existed or event has occurred with respect to any
property owned or, to the knowledge of CCI or any Seller, leased by CCI that
could, with or without notice, passage of time or both, give rise to any present
or future liability with respect to any property owned or, to the knowledge of
CCI or any Seller, leased by CCI pursuant to any Environmental Law.
(d) CCI has not indemnified or agreed to indemnify any other
Person for any liability under, or violation of, Environmental Laws.
3.20 Insurance. Schedule 3.20(a) of the Disclosure Schedule sets
forth a complete and correct list as of the Closing of all primary, excess and
umbrella policies, bonds and other forms of insurance, and renewals thereof,
owned or held by or on behalf of or providing insurance coverage to or for the
benefit of CCI (copies of which have previously been provided to the Buyer),
with the amount of coverage, cost and expiration
<PAGE> 29
date set forth next to each policy thus listed. All of such insurance policies
are in full force and effect, all premiums currently payable or previously due
have been paid, no notice of cancellation or termination has been received by
CCI with respect to any such policy and no assignment of proceeds or Encumbrance
exists with respect to the proceeds of any such policy. Except as and to the
extent set forth on Schedule 3.20(b) of the Disclosure Schedule, there are no
pending claims against such policies. All such policies will remain in full
force and effect upon execution and delivery of this Agreement and the Other
Documents and the consummation of the transactions contemplated hereby and
thereby.
3.21 Bank Accounts. Schedule 3.21 of the Disclosure Schedule sets
forth a complete and correct list of (a) the names and locations of all
financial institutions at which CCI maintains a checking account, deposit
account, securities account, safety deposit box or other deposit or safekeeping
arrangement, (b) the number or other identification of all such accounts and
arrangements and (c) the names of all persons authorized to draw thereon or have
access thereto.
3.22 Customers and Suppliers. Schedule 3.22(a) sets forth a
complete and correct list of (a) the names of those customers generating the
greatest revenues for CCI (listing such number of customers as would, in the
aggregate, generate at least 40% of CCI's total revenues) and the amount of
revenues generated by each such customer in CCI's fiscal year ended September
30, 1996 and (b) the names of suppliers to whom CCI paid more than $50,000 in
CCI's fiscal year ended September 30, 1996 and the approximate total purchases
by CCI from each such supplier during such year. Except as and to the extent set
forth on Schedule 3.22(b) of the Disclosure Schedule, there have been no adverse
changes in the relationships between CCI and its customers and suppliers since
September 30, 1995. CCI has not been provided with any notice that any supplier,
manufacturer or customer intends to cease doing business with CCI.
3.23 Affiliate Transactions. Schedule 3.23 of the Disclosure
Schedule sets forth a correct and complete list of all arrangements or
transactions (other than salary, bonus and benefits generally available to the
employees of CCI) between CCI and the Sellers or any affiliate or associate of
the Sellers, or any business or entity in which the Sellers or any affiliate or
associate of any of the Sellers has any direct or indirect interest (the
"Sellers' Affiliates"), that involves an obligation or commitment on the part of
or for the benefit of CCI or such Sellers' Affiliate of more than $5,000 in any
calendar year (the "Affiliate Transactions").
3.24 Prior Acquisitions. Except as set forth in Schedule 3.24 of
the Disclosure Schedule, no claims, amounts owed, liabilities, Encumbrances,
legal proceedings or any other obligations of any kind are due or were incurred
or outstanding in connection with any acquisitions made by CCI, except as
already recorded on the Financial Statements heretofore delivered to the Buyer.
3.25 Interests in Real Property. (a) Schedule 3.25(a) of the
Disclosure Schedule sets forth a true and complete list, by deed reference or
otherwise, of all real properties owned by CCI. Except as set forth in Schedule
3.25(a) of the Disclosure Schedule, CCI has good and indefeasible title in fee
simple to all real properties shown in Section 3.25(a) of the Disclosure
Schedule, sufficient in each case for CCI to transfer good and indefeasible
title to a willing buyer. Except as disclosed in Section 3.25(a) of the
Disclosure Schedule, none of the real properties owned by
<PAGE> 30
CCI is subject to any Encumbrances; and, except for such Encumbrances, none of
such real properties is subject to any easements, rights of way, licenses,
grants, building or use restrictions, exceptions, reservations, limitations or
other impediments which materially and adversely affect the value thereof or
which materially interfere with or impair the present use thereof in the usual
or normal conduct of the business of CCI. All improvements on such real
properties conform in all material respects to all applicable health, fire,
environmental, safety, zoning and building laws, ordinances and administrative
regulations, except for possible nonconforming uses or violations which do not
materially interfere with the present use, operation or maintenance thereof by
CCI as now used, operated or maintained or access thereto, and which do not
materially and adversely affect the value thereof. All buildings, structures,
improvements and fixtures owned by CCI in the conduct of its business conform in
all material respects to all applicable codes and rules adopted by national and
local associations and boards of insurance underwriters; and all such buildings,
structures and improvements are in good operating condition and repair in all
material respects (normal wear and tear excepted).
(b) The buildings, driveways and all other structures and
improvements upon the properties described in Section 3.25(a) of the Disclosure
Schedule are all within the boundary lines of such property or have the benefit
of valid easements and there are no encroachments thereon that would materially
affect the use thereof. There are no outstanding requirements or recommendations
by any insurance company which has issued a policy covering any such property,
or by any board of fire underwriters or other body exercising similar functions,
requiring or recommending any repairs or work to be done on any such property.
(c) Except for the real properties set forth on Schedule 3.25(c),
CCI does not use or lease any real property.
(d) None of the property described on Section 3.25(a) of the
Disclosure Schedule is subject to any lease, license or other agreement granting
to any person any right to the use, occupancy or enjoyment of such property or
any portion thereof, except where such lease, license or other agreement would
not materially and adversely affect the use, occupancy or enjoyment of such real
property as it is currently being used, occupied or enjoyed.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Sellers as follows:
4.1 Organization and Standing. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio. The Buyer has all requisite corporate power and authority to own, lease
and operate the properties and assets it now owns, leases and operates and to
carry on its business and operations as it is now being conducted.
4.2 Authorization; Binding Obligation. The Buyer has all
requisite corporate power and authority to execute and deliver this Agreement
and the Other Documents to which it is a party and to consummate the
transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
Other Documents by the Buyer and the consummation of the
<PAGE> 31
transactions contemplated hereby and thereby by the Buyer have been duly and
validly authorized by the Board of Directors of the Buyer and no other corporate
proceedings on the part of the Buyer are necessary to authorize this Agreement
or the Other Documents or to consummate the transactions contemplated hereby or
thereby. This Agreement has been, and the Other Documents will be validly
executed and delivered by the Buyer and, assuming due authorization, execution
and delivery by the Sellers, constitute (or will constitute) legal, valid and
binding obligations of the Buyer, enforceable against the Buyer in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization, or other laws affecting
creditors' rights generally or by the availability of equitable remedies
generally.
4.3 Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement and the Other Documents, nor the consummation of
the transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof or thereof, will (a) conflict with any provision of the
Articles of Incorporation or Code of Regulations of the Buyer, (b) require any
consent, waiver, approval, authorization or permit of, or filing with or
notification to, or any other action by, any Governmental Authority by the
Buyer, (c) violate any law of any Governmental Authority applicable to the
Buyer, or by which any of its business, properties, or assets may be bound or
affected or (d) violate, breach, or conflict with, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, or acceleration or any obligation to pay or
result in the imposition of any Encumbrance upon any of the property) under, any
of the terms, conditions, or provisions of any note, bond, mortgage, indenture,
Encumbrance, Contract, Permit, Order, or other instrument or obligation to which
the Buyer is a party or by which any of its business, properties, or assets may
be bound or affected, except where such violation, breach, conflict or default
will be cured at or prior to the Closing or would not have a material adverse
effect on the ability of the Buyer to satisfy its obligations in this Agreement.
4.4 Buyer Shares. The Buyer has reserved sufficient Buyer Shares
out of its authorized but unissued common stock to satisfy it obligations under
this Agreement. Such Buyer Shares have been duly authorized for issuance, and
when issued to the Sellers as contemplated herein, will be validly issued, fully
paid and non-assessable.
4.5 SEC Documents. All reports, schedules, registration
statements and definitive proxy statements filed by the Buyer with the SEC since
July 1, 1995 (the "SEC Documents") complied as of their respective dates, in all
material respects, with the requirements of the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such SEC
Documents, and none of the SEC Documents 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, in light of the circumstances under
which they were made, not misleading.
ARTICLE V
ADDITIONAL COVENANTS
5.1 Transfer and Other Taxes; Preparation and Filing of Tax
Returns; Payment of Taxes; Tax Year.
<PAGE> 32
(a) Notwithstanding any other provision of this Agreement to the
contrary, the Sellers shall assume and promptly pay all sales, use, privilege,
transfer, documentary, gains, stamp, duties, recording and similar Taxes and
fees (including any penalties, interest or additions) imposed upon any party
incurred in connection with the transactions contemplated by this Agreement
(collectively, the "Transfer Taxes"), and the Sellers shall, at their own
expense, procure any stock transfer stamps required by, and the Sellers shall
accurately file all necessary Tax Returns and other documentation with respect
to, any Transfer Tax, provided that the obligations of the Sellers under this
Section 5.1(a) shall be several (and not joint) with respect to any Taxes
imposed on any Seller or with respect to Shares held by any Seller.
(b) Provided the Buyer allows the Sellers access to and the right
to copies of all relevant and appropriate information, the Sellers shall prepare
(in each case, at their own cost and expense and in a manner consistent with
past practice) on a timely basis all Tax Returns (including amendments thereof)
of CCI for all Pre-Closing Periods. The Sellers shall file or cause to be filed
each such Tax Return that will be filed prior to the Closing Date, provided,
however, that no later than 15 days prior to the filing of any such Tax Return,
the Sellers shall deliver copies of such Tax Returns to the Buyer and, if
requested by the Buyer, shall consult with the Buyer with respect to such Tax
Returns. In connection with any such Tax Return that has not been filed prior to
the Closing Date, the Sellers shall deliver to the Buyer each such Tax Return no
later than 15 days prior to the due date for the filing of such Tax Return
(including any extension requested and received) and the Buyer, upon its review
and consent, which consent shall not be unreasonably withheld or delayed, shall
file or cause such Tax Returns to be filed. To the extent permissible under
applicable law, (i) all such Tax Returns shall be prepared and filed in a timely
manner consistently with CCI's past practices and (ii) in accordance with
Section 5.1(g) of this Agreement, all such Tax Returns shall be prepared and
filed on the basis that, except as to Taxes of CCI for which applicable law
provides otherwise, the relevant taxable periods terminate on the Closing Date.
The Sellers shall pay all Taxes shown to be due and payable on such Tax Returns.
(c) The Buyer shall prepare and file, or cause the Surviving
Corporation to prepare and file, on a timely basis all Tax Returns of CCI
for all periods other than those provided in Section 5.1(b) hereof. Subject
to Section 7.7 hereof, the Buyer shall pay all Taxes shown to be due and
payable thereon. After the Closing Date, the Buyer shall not amend any Tax
Return of CCI relating to any Pre-Closing Periods nor make any material
changes to accounting allocations or procedures, in each case, that would
adversely affect the Sellers' liability to the Buyer pursuant to Section
7.7 hereof without the express written consent of Seller Representatives.
(d) The Sellers and the Buyer shall cooperate, and shall
cause their respective, officers, employees, agents, auditors and
representatives to cooperate, (i) in preparing, filing, and amending the
Tax Returns of CCI and (ii) with respect to any audit or other
administrative or court proceedings with respect to Taxes and Tax Returns
of CCI for periods ending on or before the Closing Date, in each case
including maintaining and making available to each other all records
necessary in connection with Taxes payable with respect to such Tax Returns
and in resolving all disputes and audits and refunds with respect to such
Tax Returns and Taxes.
<PAGE> 33
(e) Each Seller severally shall promptly notify Buyer of any
notices or materials received by it from any Governmental Authority which relate
to Taxes or the business or operations of CCI. The Buyer shall promptly notify
Seller Representatives of any notices or materials received by it from any
Governmental Authority which relate to Taxes for any Pre-Closing Period or
Straddle Period or the business or operations of CCI.
(f) The Buyer shall not make an election under Section 338 of the
Code. The parties to this Agreement acknowledge and agree that the Merger shall
be treated as a sale of stock.
(g) For purposes of determining when for federal income Tax
purposes the Tax year of CCI shall end, the parties shall follow the rule of
section 1.1502- 76(b)(1) of the United States Treasury regulations. Accordingly,
the parties hereby agree that (i) for federal income Tax purposes the Tax year
of CCI shall end on and include the Closing Date, and CCI shall become a member
of the Buyer's consolidated group beginning the day after the Closing Date, (ii)
the items of income, gain, deduction, loss and credit of CCI through and
including the date on which the Closing Date occurs shall be reported on the
federal income Tax Return filed for CCI and (iii) the items of income, gain,
deduction, loss and credit of CCI beginning the day after the Closing Date shall
be reported in the consolidated federal income Tax Return of the Buyer. To the
extent permissible under applicable law, similar principles shall apply in the
case of any state, local, foreign or other jurisdiction in which CCI files any
Tax Return.
5.2 Further Assurances; Cooperation. (a) The parties shall, from
time to time before and after the Closing, upon the request of any other party
and without further consideration, execute, acknowledge and deliver in proper
form any further instruments, and take such further actions as such other party
may reasonably require, to carry out effectively the intent of this Agreement
and the Other Documents.
(b) The parties shall cooperate with each other in connection
with any claim, action, suit, proceeding, inquiry or investigation with any
other Person which relates to the execution and delivery of this Agreement or
the Other Documents, or the consummation of the transactions contemplated
hereunder and thereunder.
5.3 Notification of Certain Matters. Each of the parties hereto
shall promptly notify the other parties, in the manner provided in Section 8.10
hereof, of (a) the filing or other initiation of any claim, action, suit,
proceeding, inquiry or investigation which relates to the execution and delivery
of this Agreement or the Other Documents, or the consummation of the
transactions contemplated hereunder or thereunder, (b) any circumstance or
development which could adversely impair or affect its ability to perform its
obligations under this Agreement and the Other Documents, (c) any notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated by
this Agreement and the Other Documents, (d) any notice or other communication
from any Governmental Authority in connection with the transactions contemplated
by this Agreement and the Other Documents and (e) any breach of this Agreement.
5.4 Confidentiality and Exclusivity.
(a) CCI and each Seller severally shall not (and, in the
<PAGE> 34
case of CCI and each Seller which is a corporation, will cause its officers to
not) at any time after the Closing, without the prior written consent of the
Buyer, disclose or use any information obtained during the negotiation or due
diligence process nor any other confidential information (relating to either the
Buyer or CCI) otherwise obtained except (i) as may be necessary in connection
with their Tax filing and reporting obligations; (ii) information publicly known
or which becomes publicly known through no unauthorized act of such party; (iii)
information approved by the other party for disclosure; or (iv) information
required to be disclosed pursuant to a requirement of a Governmental Authority
or law if the disclosing party provides the other party with notice of this
requirement a reasonable time prior to disclosure. The provisions of this
Section 5.4(a) will survive the expiration or termination of this Agreement for
any reason.
(b) CCI and each Seller severally agrees not to engage in any
negotiations with any party (other than the Buyer), sell or otherwise transfer
or agree to sell or transfer any of the stock or assets of CCI, or to furnish
any confidential information regarding CCI or its business to any party
expressing an interest in any such transaction, except to the Buyer.
5.5 Publicity. Neither CCI nor any Seller severally shall issue
any press release or make any public statement regarding the transactions
contemplated hereby, without the prior approval of the Buyer, which approval
shall not be unreasonably withheld or delayed. The Buyer shall not issue any
press release or make any public statement regarding the transactions
contemplated hereby, without prior approval of CCI and Seller Representatives,
which approval shall not be unreasonably withheld or delayed.
5.6 Expenses.
(a) Except as otherwise specifically provided for herein, each
party hereto shall be solely responsible for all expenses incurred by it or on
its behalf in connection with the preparation and execution of this Agreement
and the Other Documents and the consummation of the transactions contemplated
hereby and thereby, including, without limitation, the fees and expenses of its
counsel, accountants, brokers, finders, financial advisors and other
representatives, provided, however, that at or prior to the Closing CCI shall
pay all expenses of the Sellers incurred through such date. Neither CCI nor any
Seller shall be responsible for any expenses incurred by the Buyer in connection
with any registration statement or public offering.
(b) The Sellers and the Buyer agree that in the event any dispute
between them, either occurring under, relating to or in connection with any of
the provisions of this Agreement or the Other Documents, is submitted to a
Governmental Authority or other appropriate entity, then all costs and expenses
of the parties (including reasonable legal fees) shall be paid by the party
against whom a determination by such Governmental Authority or entity is made
or, in the absence of a determination wholly against one party, as such
Governmental Authority or entity shall direct.
5.7 Due Diligence. Until the Closing Date, CCI will allow the
Buyer and its representatives and agents such access to the books, records,
facilities and personnel of CCI is as necessary to facilitate a smooth transfer
of ownership, provided that such access does not unreasonably interfere with the
operations of CCI.
<PAGE> 35
5.8 Interim Conduct of Business. Except as otherwise contemplated
by this Agreement, during the period from the date hereof to the Closing, CCI
shall, and the Sellers severally (to the extent they have the authority) shall
cause CCI to (i) operate the business of CCI only in the ordinary course of
business consistent with past practice, (ii) maintain, keep and preserve the
assets of CCI in the ordinary course of business, and (iii) use commercially
reasonable efforts to preserve intact the present organization of CCI, keep
available the services of the present employees of CCI, preserve CCI's
relationships with customers, suppliers, licensors, licensees, contractors and
others having significant business dealings with CCI. Without limiting the
generality of the foregoing, from the date of this Agreement, CCI shall not, and
the Sellers severally (to the extent they have the authority) shall not permit
CCI to, without the prior written consent of the Buyer (which consent shall not
be unreasonably withheld or delayed):
(a)(i) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any shares of the capital stock of CCI or any other securities or equity
equivalents (except for (A) the issuance of Shares and/or the grant of options
to purchase Shares which, in the aggregate, do not exceed 464,984 Shares, and
(B) the issuance of Shares upon the exercise or conversion of the Convertibles;
in the event that CCI issues any Shares or grants any options after the date
hereof, it shall deliver to the Buyer a revised Exhibit A to reflect such
issuance or grant, which shall replace the Exhibit A attached hereto as part of
this Agreement), (ii) split, combine or reclassify any shares of such capital
stock or (iii) amend the terms of any such securities or agreements outstanding
on the date hereof;
(b) amend or propose to amend the Articles of Incorporation or
By-laws of CCI;
(c)(i) assume, guarantee, endorse or otherwise become liable
(whether directly, contingently or otherwise) for the obligations of any other
person or (ii) make any loans, advances or capital contributions to, or
investments in, any other person except, in each case, if such transaction is
satisfied, paid or released at or before the Closing;
(d) permit any assets of CCI to suffer any lien thereupon, except
in the normal course of business;
(e) change any of the accounting principles or practices used by
CCI (except as required by GAAP);
(f) enter into, adopt, amend or terminate any employee benefit
plan, increase in any manner the compensation or fringe benefits of any officer
or employee (except for annual salary increases in the normal course of
business) or enter into any contract, agreement, commitment or arrangement to do
any of the foregoing;
(g) enter into or offer to enter into any employment or
consulting agreement with any person;
(h)(i) enter into, amend or terminate any Material Contract
(other than the execution of new site licenses or agreements to acquire new
phones or to otherwise increase the number of Installed Phones or Contract
Phones) or (ii) take any action or fail to take any action that, with or without
notice or lapse of time, would constitute a default under any
<PAGE> 36
Material Contract;
(i) sell, lease, transfer or otherwise dispose of any of its
assets except in the ordinary course of business;
(j) install, or agree to install, any telephones, except
consistent with standards employed by CCI immediately prior to October 16, 1996;
(k) pay any dividend or make any other distribution to the
Sellers with respect to their Securities, other than a dividend paid in cash;
(l) make any election with respect to the Taxes or Tax Returns of
CCI;
(m) permit its level of Inventory (other than Contract Phones) to
fluctuate in a manner inconsistent with its historical practices; or
(n) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any representation or warranty
of CCI or Sellers contained in this Agreement untrue or incorrect as of the date
when made or as of any future date or which could prevent the satisfaction of
any condition to Closing set forth in Article VI hereof.
5.9 Excluded Assets. On or before the Closing Date, the Sellers
shall cause the assets relating to CCI's hospitality division listed on Exhibit
H hereto (the "Excluded Assets") (and any related liabilities) to be transferred
out of CCI and to be acquired and assumed by the Sellers or one or more other
parties (other than CCI or the Buyer). Notwithstanding anything to the contrary
contained herein, after the Closing, the Buyer shall permit the Sellers to
pursue in the name of CCI, that certain litigation styled Cherokee
Communications, Inc. vs. Superior Phones, Ltd. and Wanda Baucom, Individually;
provided that (a) all expenses incurred and all damages, settlements and other
and monies recovered in such litigation shall be for the account and benefit of
the Sellers, Pro Rata and (b) nothing in connection with the prosecution,
adjudication or settlement of such litigation shall have an adverse effect on
CCI or the Buyer.
5.10 1996 Audit. Not later than 10 business days prior to the
Closing Date, CCI shall deliver to the Buyer the 1996 Audit.
5.11 Permits. Provided the Buyer cooperates with all reasonable
requests made by CCI and the Sellers, at CCI's sole cost and expense, CCI and
the Sellers will use commercially reasonable efforts to cause all Permits or
consents to transfer which are required to be obtained for Buyer to legally
operate CCI's business, a complete listing of which is set forth on Exhibit I
hereto, to be issued or fully assigned to Buyer within 90 days after the Closing
Date.
5.12 Consents; Waivers; Assignments. (a) The Sellers or CCI will,
prior to the Closing, have obtained and delivered all consents, waivers,
assignments and assumptions which would be required in order to not breach any
Material Contracts (or any other Contracts which, in the aggregate, are
material) to which CCI is a party and pertaining to the Buyer's assumption of
CCI's debts by operation of law, a complete listing
<PAGE> 37
of which is set forth on Exhibit J hereto.
(b) All purchase money security agreements relating to any item
of Equipment have been or will be released prior to the Closing, or all required
consents, assignments or waivers will be obtained and delivered to the Buyer.
5.13 Cooperation in Financings. CCI and the Sellers agree to
cooperate with, and provide reasonable assistance to, the Buyer, at the Buyer's
expense, in connection with any sale or distribution of securities (whether
registered or otherwise) made by the Buyer or any of its affiliates in
connection with the consummation of the transactions contemplated hereby,
including, without limitation, using their reasonable best efforts to (a) make
available on a timely basis such financial information of CCI as may reasonably
be required in connection with any such sale or distribution, (b) obtain "cold
comfort" letters and updates thereof from CCI's independent certified public
accountants and opinion letters from CCI's attorneys, with such letters to be in
customary form and to cover matters of the type customarily covered by
accountants and attorneys in such transactions, and (c) make reasonably
available representatives of CCI and its accountants and attorneys in connection
with any such sale or distribution, including for purposes of due diligence and
marketing efforts related thereto.
5.14 Options. At or prior to the Closing, each Seller who holds
Options shall exercise all Options held by him.
5.15 Payment of Certain Liabilities. In the event that the
Consideration shall be adjusted pursuant to Section 1.4(e) due to Liabilities in
the form of accrued and unpaid dividends or interest, any obligation to pay the
sum of such accrued and unpaid dividends or accrued interest, as the case may
be, shall be assumed by the Surviving Corporation.
ARTICLE VI
CONDITIONS
6.1 Conditions Precedent to Obligations of the Buyer. The
obligation of the Buyer to consummate the transactions contemplated hereby is
subject to the satisfaction or waiver by the Buyer (subject to applicable law)
on or before the Closing Date, of each of the following conditions:
(a) Accuracy of Representations and Warranties. Each of the
representations and warranties of the Sellers and CCI contained in this
Agreement, the Disclosure Schedule, or in any Other Document to be executed and
delivered by the Sellers or CCI on or before the Closing Date pursuant hereto
shall have been true and correct in all material respects when made, and shall
be true and correct in all material respects as of the Closing Date as though
made on and as of such date.
(b) Performance or Agreements. The Sellers and CCI shall have
performed and complied in all material respects with all of the covenants and
agreements contained in this Agreement to be performed or complied with by them
at or before the Closing.
(c) Adverse Proceedings. No claim, action, suit, investigation
or governmental proceeding shall be pending and no Law of any
<PAGE> 38
Governmental Authority shall be enacted, rendered or in force, which would
render it unlawful, as of the Closing Date, to effect the transactions
contemplated by this Agreement and the Other Documents to be executed and
delivered pursuant hereto.
(d) Consents and Approvals. All necessary consents, approvals or
waivers from third parties and Governmental Authorities shall have been received
by CCI and the Buyer.
(e) Environmental. The Buyer shall be satisfied with the results
of an environmental audit of the real property owned by CCI.
(f) EBITDA. The EBITDA for the three months ending December 31,
1996 shall not be more than 6.5% lower than the EBITDA for the three months
ended December 31, 1995.
6.2 Conditions Precedent to Obligations of CCI and the Sellers.
The obligations of CCI and the Sellers to consummate the transactions
contemplated hereby are subject to the satisfaction or waiver by CCI (subject to
applicable Law) on or before the Closing Date of each of the following
conditions:
(a) Accuracy of Representations and Warranties. Each of the
representations and warranties of the Buyer contained in this Agreement or in
any Other Document to be executed and delivered by the Buyer on or before the
Closing Date pursuant hereto shall have been true and correct in all material
respects when made, and shall be true and correct in all material respects as of
the Closing Date as though made on and as of such date.
(b) Performance of Agreements. The Buyer shall have performed and
complied in all material respects with all of the covenants and agreements
contained in this Agreement to be performed or complied with by the Buyer at or
before the Closing.
(c) Adverse Proceedings. No claim, action, suit, investigation or
governmental proceeding shall be pending, and no Law of any Governmental
Authority shall be enacted, rendered or in force, which would render it
unlawful, as of the Closing Date, to effect the transactions contemplated by
this Agreement and the Other Documents to be executed and delivered pursuant
hereto.
(d) Preferred Stock Approval. The holder of the Preferred Stock
shall have approved this Agreement and the transactions contemplated hereby; the
execution of this Agreement by such holder shall constitute such approval, and
shall be irrevocable.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
7.1 Survival of Representations and Warranties. All
representations and warranties of the Sellers and the Buyer contained herein or
made pursuant hereto shall survive the Closing and any investigation at any time
made by or on behalf of any party hereto until December 31, 1998 except that the
representations and warranties contained in Sections 3.14 (Litigation and
Arbitration) and 3.17 (Taxes) shall both survive until 45 days following the
expiration of the applicable statute of
<PAGE> 39
limitations (including extensions thereof). Provided that a claim with respect
to a breach of representation or warranty is made within the applicable period
in accordance with the provisions of Section 7.6 hereof, such claim and any
related claims may continue to be asserted beyond such period.
7.2 Statements as Representations. All statements contained
herein or in any Schedule contained in the Disclosure Schedule or in any Exhibit
hereto shall be deemed representations and warranties within the meaning of
Sections 7.1, 7.3(a), 7.3(b)(i) and 7.4(a) hereof.
7.3 Indemnification by the Sellers.
(a) Subject to the provisions of this Article VII, each Seller
shall severally indemnify, defend and hold harmless the Buyer, any parent,
subsidiary or affiliate of the Buyer, and any director, officer, employee, agent
or advisor of any of them, or any of their respective successors or assigns (a
"Buyer Indemnified Party"), from and against any and all Losses asserted
against, resulting to, imposed upon or incurred by any Buyer Indemnified Party,
directly or indirectly, by reason of or resulting from the breach of or any
inaccuracy in any of the representations and warranties of such Seller contained
in or made pursuant to Article II hereof, or any facts or circumstances
constituting such breach or inaccuracy.
(b) Subject to the provisions of this Article VII, each
Management Seller shall jointly and severally indemnify, defend and hold
harmless each Buyer Indemnified Party from and against any and all Losses
asserted against, resulting to, imposed upon or incurred by such Buyer
Indemnified Party, directly or indirectly, by reason of or resulting from:
(i) the breach of or any inaccuracy in any of the
representations and warranties of the Sellers or CCI contained in
or made pursuant to any Section of this Agreement (other than a
Section in Article II hereof), or any facts or circumstances
constituting such breach or inaccuracy;
(ii) the breach or nonperformance of any covenant or
agreement of the Sellers or CCI contained in or made pursuant to
this Agreement or any facts or circumstances constituting such
breach or nonperformance;
(iii) any liabilities relating to the Excluded
Assets;
(iv) any unrecorded expenses and liabilities (net of
any unrecorded income and Current Assets) of CCI relating to
occurrences prior to the Effective Time;
(v) any litigation or legal claims against CCI or for
which CCI is or may be liable relating to occurrences prior to
the Effective Time; and
(vi) all liability and remediation costs imposed by
Environmental Laws or by any Governmental Authority in respect of
Environmental Laws;
(c) Subject to the provisions of this Article VII, each Seller
(other than the Management Sellers and Berthel Fisher) and Berthel
<PAGE> 40
Fisher (only with respect to clauses (ii) and (v) below), shall severally
indemnify, defend and hold harmless each Buyer Indemnified Party from and
against any and all Losses asserted against, resulting to, imposed upon or
incurred by such Buyer Indemnified Party, directly or indirectly, by reason of
or resulting from:
(i) the breach of or any inaccuracy in any of the
representations and warranties of such Seller contained in or
made pursuant to any Section of this Agreement (other than a
Section in Article II hereof), or any facts or circumstances
constituting such breach or inaccuracy;
(ii) the breach or nonperformance of any covenant or
agreement of such Seller contained in or made pursuant to this
Agreement or any facts or circumstances constituting such breach
or nonperformance;
(iii) its Pro Rata portion of any liabilities
relating to the Excluded Assets;
(iv) its Pro Rata portion of any unrecorded expenses
and liabilities (net of any unrecorded income and Current Assets)
of CCI relating to occurrences prior to the Effective Time;
(v) its Pro Rata portion of any litigation or legal
claims against CCI or for which CCI is or may be liable relating
to occurrences prior to the Effective Time; and
(vi) its Pro Rata portion of all liabilities and
remediation costs imposed by Environmental Laws or by any
Governmental Authority in respect of Environmental Laws.
7.4 Indemnification by the Buyer. Subject to the provisions of
this Article VII, the Buyer shall indemnify, defend and hold harmless the
Sellers, any parent, subsidiary or affiliate of the Sellers, and any director,
officer, employee, agent or advisor of any of them or any of their respective
heirs, successors or assigns (a "Seller Indemnified Party"), from and against
any and all Losses asserted against, resulting to, imposed upon or incurred by
any Seller Indemnified Party, directly or indirectly, by reason of or resulting
from:
(a) the breach of or any inaccuracy in any of the
representations and warranties of the Buyer contained in or made
pursuant to this Agreement or any facts or circumstances
constituting such breach or inaccuracy;
(b) the breach or non-performance of any agreement of
the Buyer contained in or made pursuant to this Agreement or any
facts or circumstances constituting such breach or
nonperformance, and
(c) the operations or business of the Surviving
Corporation after the Effective Time.
7.5 Limitations on Indemnification
(a) The indemnifications in favor of the Buyer Indemnified
Parties contained in Section 7.3(b)(i) (except with respect to Sections 3.1,
3.2, 3.3, 3.4 and 3.5(a) hereof, Taxes, litigation and legal claims
<PAGE> 41
relating to occurrences prior to the Effective Time), Section 7.3(b)(ii) (except
with respect to Article I hereof), Section 7.3(b)(iv), Section 7.3(c)(i) (except
with respect to Article II, Sections 3.1, 3.2, 3.3, 3.4 and 3.5(a) hereof,
Taxes, litigation and legal claims relating to occurrences prior to the
Effective Time), Section 7.3(c)(ii) (except with respect to Article I hereof)
and Section 7.3(c)(iv) shall be effective only to the extent that the aggregate
dollar amount of all Losses indemnified against under such Sections (i) exceeds
$100,000 and (ii) shall not exceed $2,000,000.
(b) The indemnifications in favor of the Seller Indemnified
Parties contained in Section 7.4(a) (except with respect to Sections 4.1, 4.2
and 4.3(a) hereof) and Section 7.4(b) (except with respect to Article I hereof,
and the employment and non-competition agreements attached hereto as Exhibits C,
D and E) shall be effective only to the extent that the aggregate dollar amount
of all Losses indemnified against under such Section (i) exceeds $100,000 and
(ii) shall not exceed $2,000,000.
(c) No Buyer Indemnified Party or Seller Indemnified Party shall
be entitled to recover any amounts pursuant to this Article VII to the extent
such Person is entitled to recover such amounts under insurance policies.
(d) The Buyer and the Sellers shall not be entitled to
indemnification under this Article VII in respect of any breach of this
Agreement (except with respect to Section 3.19) if the Buyer or the Seller
Representatives, respectively, knowingly waived such breach at the Closing in
writing.
(e) Any payment to the Buyer under this Article VII (except in
respect of Article I hereof) shall be made pursuant to the Escrow Agreement, to
the extent the Escrow Amount has not been depleted.
(f) The obligations of each Seller under Section 7.3 shall be
limited to his or its Pro Rata share of the Consideration.
7.6 Indemnification Procedures.
(a) Notice. If any legal proceeding shall be threatened or
instituted or any claim or demand shall be asserted by any Buyer Indemnified
Party or Seller Indemnified Party in respect of which indemnification may be
sought under the provisions of this Agreement, the party seeking indemnification
(the "Claiming Party") shall promptly cause written notice of the assertion of
any such claim, demand or proceeding of which it has knowledge to be forwarded
to the party from whom it is claiming indemnification (the "Indemnitor"). Such
notice shall contain a reference to the provisions hereof or of such other
agreement, instrument or certificate delivered pursuant hereto, in respect of
which such claim is being made, and shall specify, in reasonable detail, the
amount of such Loss if determinable at such time. The Claiming Party's failure
to give the Indemnitor prompt notice shall not preclude the Claiming Party from
seeking indemnification from the Indemnitor unless the Claiming Party's failure
has materially prejudiced the Indemnitor's ability to defend the claim, demand
or proceeding.
(b) Third Party Claims. If the Claiming Party seeks
indemnification from the Indemnitor as a result of a claim or demand being made
by a third party (a "Third Party Claim"), the Indemnitor shall have the right to
promptly assume the control of the defense of such Third
<PAGE> 42
Party Claim, including, at its own expense, employment by it of counsel
reasonably satisfactory to the Claiming Party. The Claiming Party may, in its
sole discretion and at its own expense, employ counsel to represent it in the
defense of the Third Party Claim, and in such event counsel for the Indemnitor
shall cooperate with counsel for the Claiming Party in such defense, provided
that the Indemnitor shall direct and control the defense of such Third Party
Claim or proceeding. Except with the written consent of the Claiming Party, the
Indemnitor shall not consent to the entry of any judgment nor enter into any
settlement of such Third Party Claim which (i) does not include as an
unconditional term thereof the release of the Claiming Party from all liability
in respect of such Third Party Claim and (ii) results in the imposition on the
Claiming Party of any remedy other than money damages; provided, however, that
the Claiming Party shall not unreasonably withhold or delay its consent to the
entry of any judgment or any settlement of a Third Party Claim. If the
Indemnitor elects not to exercise its rights to assume the defense of the Third
Party Claim, or if injunctive relief is sought which would have an adverse
effect on the Claiming Party, the Claiming Party may, but shall have no
obligation to, defend against such Third Party Claim or legal proceeding in such
manner as it may deem appropriate, and the Claiming Party may compromise or
settle such Third Party Claim and proceeding with the Indemnitor's consent,
which shall not be unreasonably withheld or delayed.
(c) Payment. After any final judgment or award shall have been
rendered by a court, arbitration board or administrative agency of competent
jurisdiction and the time in which to appeal therefrom shall have expired, or a
settlement shall have been consummated, or the Claiming Party and the Indemnitor
shall arrive at a mutually binding agreement with respect to each separate
matter alleged to be indemnified by the Indemnitor hereunder, the Claiming Party
shall forward to the Indemnitor notice of any sums due and owing by it with
respect to such matter (in accordance with Section 8.10 hereof) and the
Indemnitor shall pay all of the sums so owing to the Claiming Party by wire
transfer, certified or bank cashier's check within 10 days after the date of
such notice.
7.7 Tax Indemnification. (a) Except to the extent included in the
adjustment to Consideration contemplated by Section 1.4 hereof, the Management
Sellers shall jointly and severally, and the other Sellers shall severally (on a
Pro Rata basis), indemnify, defend, and hold harmless the Buyer Indemnified
Parties from and against any and all Losses asserted against, resulting to,
imposed on, sustained, incurred or suffered by, or asserted against any of the
Buyer Indemnified Parties, directly or indirectly, by reason of or resulting
from any and all Taxes imposed upon CCI with respect to (i) any Pre-Closing
Period, (ii) any Straddle Period but only with respect to the portion of such
Straddle Period ending on the close of business on the Closing Date and in the
manner provided in paragraph 7.7(d) hereof and (iii) any Transfer Taxes for
which the Sellers are liable pursuant to Section 5.1(a).
(b) Without limiting the generality of Section 7.7(a) above, the
Sellers shall indemnify, defend, and hold harmless the Buyer Indemnified Parties
from and against any and all Losses asserted against, resulting to, imposed on,
sustained, incurred or suffered by, or asserted against any of the Buyer
Indemnified Parties, directly or indirectly, by reason of or resulting from the
imposition of Taxes on CCI as a result of the sale, transfer, assignment or
distribution of any of the Excluded Assets. Notwithstanding anything to the
contrary contained herein, the Sellers shall not be liable for any Losses
incurred by any of the Buyer Indemnified Parties by reason of or resulting from
(i) the imposition of
<PAGE> 43
Taxes on CCI as a result actions of CCI on the Closing Date that are caused by
the Buyer and not contemplated by this Agreement, or (ii) from the failure of
the Buyer to file all Tax Returns required to be filed by the Buyer pursuant to
Section 5.1(b) on a timely basis, provided, however, in the case of clause (ii)
hereof, the Sellers have prepared and delivered such Tax Returns to the Buyer in
the time and manner prescribed in Section 5.1(b).
(c) The Buyer shall indemnify, defend and hold harmless the
Seller Indemnified Parties from and against any and all Losses asserted
against, resulting to, imposed on, sustained, incurred or suffered by, or
asserted against any of the Seller Indemnified Parties, directly
or indirectly, by reason of or resulting from any and all Taxes imposed on CCI
with respect to (i) any Post-Closing Period and (ii) any Straddle Period, but
only with respect to the portion of such Straddle Period beginning the day
after the Closing Date and in the manner provided for in paragraph 7.7(d)
hereof.
(d) For purposes of determining the amount of Taxes for or which
relate to a Straddle Period, the Closing Date shall be treated as the last day
of a taxable period, and the portion of any such Tax that is allocable to the
taxable period that is so deemed to end on and include the Closing Date: (i) in
the case of Taxes that are either (x) based upon or related to income or
receipts (and corresponding losses and deductions) or (y) imposed in connection
with any sale, transfer, assignment or distribution of property (real or
personal, tangible or intangible) (and corresponding losses and deductions),
shall be deemed equal to the amount which would be payable if the period for
which such Tax is assessed ended on and included the Closing Date, and (ii) in
the cases of Taxes other than Taxes described in clause (i) hereof, shall be
computed on a per diem basis.
(e) In the event of the realization of any loss or credit for tax
purposes of CCI attributable to any Post-Closing Period, CCI may, in its sole
discretion, to the extent permitted under applicable law, elect not to carry
back such loss or credit to a Pre-Closing Period.
(f) The Sellers shall be entitled to all refunds of Taxes of CCI
for any Pre-Closing Period, and the Buyer shall be entitled to all refunds of
Taxes of CCI for any Post-Closing Period. Notwithstanding the foregoing, the
Buyer shall be entitled to any refund of Taxes of CCI for any Pre-Closing Period
which results from either (i) the carryback of a tax attribute from a
Post-Closing Period or (ii) a timing difference with respect to certain tax
matters (for example, depreciation or inventory). Refunds relating to any
Straddle Period shall be equitably apportioned between the Sellers and the Buyer
in accordance with the provisions of this Agreement governing such periods. A
party receiving a refund to which the other party is entitled pursuant to this
Agreement shall pay the amount to which such other party is entitled within five
days of receiving such refund. The Sellers shall be allowed reasonable access to
the books and records of CCI in order to be able to confirm whether CCI has
received any refund with respect to which the Sellers are entitled pursuant to
this Section 7.7(f).
(g) If a notice of deficiency, proposed adjustment, adjustment,
assessment, audit, examination, suit, dispute or other claim (a "Tax Claim")
shall be delivered, sent, commenced, or initiated to or against CCI by any
taxing authority with respect to Taxes for which any Person is entitled to
indemnification hereunder, the Buyer shall promptly
<PAGE> 44
notify Seller Representatives in writing of the Tax Claim. If a Tax Claim with
respect to Taxes for which any Person is entitled to indemnification hereunder
shall be delivered, sent, commenced or initiated to or against the Sellers by
any taxing authority, the Sellers shall promptly notify the Buyer in writing of
such Tax Claim.
(h) Seller Representatives may, upon timely notice to the Buyer,
assume and control the defense of a Tax Claim involving only Pre-Closing Periods
at the Sellers' own cost and expense and with their own counsel and the Buyer
and its affiliates agree to cooperate with the Sellers and their counsel in
pursuing such contest. If Seller Representatives elect to assume the defense of
any such Tax Claim, notwithstanding anything to the contrary contained herein,
(i) the Sellers shall consult with the Buyer and shall not enter into any
settlement with respect to any such Tax Claim without the Buyer's prior written
consent if the effect of such settlement would be to increase the liability for
Taxes of CCI for any Post-Closing Period or Straddle Period with respect to the
portion of such Straddle Period beginning the day after the Closing Date; (ii)
the Sellers shall keep the Buyer informed of all material developments and
events relating to such Tax Claim (including promptly notifying the Buyer of any
telephone conversations, meetings or other contacts with the Internal Revenue
Service (the "Service") or any other taxing authority relating to such Tax Claim
and allowing the Buyer to listen in on or be present at, as the case may be, any
such phone conversations, meetings or other contact with the Service or any
other taxing authority relating to such Tax Claim); and (iii) at its own cost
and expense, the Buyer shall have the right to participate in (but not to
control) the defense of such Tax Claim.
(i) In connection with the contest of any Tax Claim that relates
to (i) any Post-Closing Period, (ii) any Straddle Period and (iii) any Tax Claim
that the Sellers have the ability to control but do not timely elect to control
pursuant to Section 7.7(f), such contest shall be controlled by the Buyer, and
the Sellers agree to cooperate with Buyer and its affiliates in pursuing such
contest. In connection with any such contest that relates to (ii) or (iii)
above, the Buyer shall keep Seller Representatives informed of all material
developments and events relating to such Tax Claim (including, promptly
notifying Seller Representatives of any telephone conversations, meetings or
other contacts with the Service or any other taxing authority relating to such
Tax Claim and allowing Seller Representatives to listen in on or be present at,
as the case may be, any such phone conversations, meetings or other contact with
the Service or any other taxing authority relating to such Tax Claim) and the
Sellers, at their own cost and expense, shall have the right to participate in
(but not control) the defense of such Tax Claim. Nothing contained herein shall
be construed as limiting the Buyer's right to indemnification under this Section
7.7.
ARTICLE VIII
MISCELLANEOUS
8.1 Consent to Service. Each Seller hereby designates and
appoints Seller Representatives as its authorized agents upon whom process may
be served in any suit, proceeding or other action against such Seller instituted
by the Buyer and relating to this Agreement. Such designation and appointment
shall, to the extent permitted by law, be irrevocable, unless and until a
successor authorized agent acceptable to the Buyer shall have been appointed by
the Sellers, such successor shall have accepted such
<PAGE> 45
appointment and written notice thereof shall have been given to the Buyer. Each
Seller further agrees that service of process upon such authorized agent or
successor shall be deemed in every respect service of process upon such Seller
in any such suit, proceeding or other action. Each Seller further agrees to take
any and all action, including the execution and filing of all such instruments
and documents, as may be necessary to continue such designation and appointment
of such authorized agent in full force and effect.
8.2 Parties in Interest; No Third Party Beneficiaries.
(a) This Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns. This Agreement and the rights and obligations of the
Buyer and the Sellers hereunder may not be assigned by any of the parties hereto
without the prior written consent of the other parties.
(b) This Agreement is not intended, nor shall it be construed, to
confer upon any Person except the parties hereto and their heirs, successors and
permitted assigns any rights or remedies under or by reason of this Agreement.
8.3 Exhibits and Disclosure Schedule. All Exhibits annexed hereto
and the Disclosure Schedule referred to herein are hereby incorporated in and
made a part of this Agreement as if set forth in full herein.
8.4 Entire Agreement. This Agreement, including the Exhibits
hereto and the documents, schedules, certificates and instruments referred to
herein, embody the entire agreement and understanding of the parties hereto in
respect of the transactions contemplated by this Agreement. This Agreement
supersedes all prior agreements, arrangements and understandings of the parties
with respect to such transactions.
8.5 Waiver of Compliance. No amendment, modification, alteration,
supplement or waiver of compliance with any obligation, covenant, agreement,
provision or condition hereof or consent pursuant to this Agreement shall be
effective unless evidenced by an instrument in writing executed by all of the
parties or in the case of a waiver, the party against whom enforcement of any
waiver, is sought. Any waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement, provision or condition shall not operate
as a waiver of, or estoppel with respect to, any subsequent or other failure.
8.6 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8.8 Headings. The table of contents, article and section headings
contained in this Agreement are for convenience only and shall not control or
affect in any way the meaning or interpretation of the provisions of this
Agreement.
<PAGE> 46
8.9 Governing Law; Arbitration. (a) This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas
without giving effect to the conflicts of law principles of such jurisdiction.
(b) Any controversy or claim arising out of or relating to this
Agreement, including the termination, validity, interpretation or breach thereof
shall be settled by arbitration before a single arbitrator conducted in Atlanta,
Georgia in accordance with then applicable Commercial Arbitration Rules of the
American Arbitration Association, as modified in this Agreement (the "Rules").
Within 20 days after its receipt of claimant's notice of intention to arbitrate
and statement of claim, respondent shall serve claimant with its answering
statement and any counterclaims. Claimant shall serve its answer to any
counterclaims within ten days after its receipt thereof. The hearing shall be
held no later than 30 days after the designation of the arbitrator, and shall
last no more than two business days absent good cause shown. The arbitrator
shall render its written decision within 30 days after such hearing is
conducted. The rendering of the decision by the arbitrator within the aforesaid
period of time is a condition to the parties' obligation to pay the fees of the
arbitrator. The powers of the arbitrator shall include, but not be limited to,
the awarding of injunctive or other equitable relief but shall not include the
power to modify or amend in any respect the provisions of this Agreement. The
arbitrator shall include in any award the amount of the reasonable attorneys'
fees and expenses and all other reasonable costs and expenses of the arbitration
incurred by the prevailing party and a direction that it be paid by the other
party within ten days after the making of such award. In the event that the
arbitrator does not rule in favor of the prevailing party in respect of all the
claims alleged by such party, the arbitrator shall include in any award the
portion of the amount of the reasonable attorneys' fees and other expenses of
the arbitration incurred by the prevailing party as the arbitrator deems just
and equitable under the circumstances, together with a direction that such
amounts be paid by the other party within ten days thereof. Except as provided
above, each party shall bear his or its own attorneys' fees and expenses and the
parties shall bear equally all other costs and expenses of the arbitration.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
(c) Nothing contained in this Section 8.9 shall be construed to
limit or preclude a party from bringing any action in any court of competent
jurisdiction for interim or provisional relief pending establishment of the
arbitral tribunal and the arbitral tribunal's determination of the merits of the
dispute to protect the rights or property of that party or to compel another
party to comply with its obligations under this Agreement during the pendency of
the arbitration proceedings.
8.10 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally, telecopied (with confirmation of receipt),
delivered by nationally-recognized overnight express service or sent by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses:
(a) If to the Buyer to:
PhoneTel Technologies, Inc.
1127 Euclid Avenue
<PAGE> 47
Cleveland, Ohio 44115
Telephone: (216) 241-2555
Telecopy: (216) 241-2574
Attention: Chief Executive Officer
Copy to:
Skadden, Arps, Slate,
Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 735-3000
Telecopy: (212) 735-2000
Attention: Stephen M Banker, Esq.
(b) If to a Seller:
Seller's address, as set forth on Exhibit A
hereto.
Copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
Telephone: (214) 999-3000
Telecopy: (214) 999-4667
Attention: Alan J. Perkins, Esq.
(c) If to CCI:
Cherokee Communications, Inc.
506 E. Rusk
P.O. Box 549
Jacksonville, Texas 75766
Telephone: (903) 586-6671
Telecopy: (903) 586-5150
Attention: Chairman and
Chief Executive Officer
Copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
Telephone: (214) 999-3000
Telecopy: (214) 999-4667
Attention: Alan J. Perkins, Esq.
or to such other address as the person to whom notice is to be given may
have previously furnished to the other in writing in the manner set forth
above, provided that notice of a change of address shall be deemed given
only upon receipt.
8.11 Termination or Abandonment. This Agreement shall
terminate on January 31, 1997, upon notice by either CCI or Buyer to the
other if the Merger has not been consummated by such date. Notwithstanding
anything contained in this Agreement to the contrary, this Agreement may be
<PAGE> 48
terminated and abandoned at any time prior to the Closing:
(a) by the mutual written consent of CCI and the Buyer; or
(b) by CCI or the Buyer, if any court of competent
jurisdiction or governmental body, authority or agency having jurisdiction
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and nonappealable.
8.12 Effect of Termination. If any party terminates this
Agreement pursuant to Section 8.11 above, all obligations of the parties
hereunder shall terminate without any liability of any party to any other
party (except for any liability of any party then in breach (subject to
Section 1.6 hereof) and except that the provisions of Sections 5.4 and 5.6
shall survive termination of this Agreement). Notwithstanding the
foregoing, in the event the Buyer terminates this Agreement because of a
breach of a representation or warranty by CCI or any Seller, CCI and the
Sellers shall have no liability to the Buyer in respect of such breach
unless the facts supporting such breach were known by CCI or any Seller on
the date hereof.
ARTICLE IX
DEFINITIONS
9.1 Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Accounting Books and Records" shall have the meaning set forth
in Section 3.2 hereof.
"Accounts Receivable" shall mean all of the accounts receivable
and notes receivable of CCI.
"Adjustment Schedule" shall have the meaning set forth in Section
1.5 hereof.
"Affiliate Transactions" shall have the meaning set forth in
Section 3.23 hereof.
"Articles of Merger" shall have the meaning set forth in Section
1.8 hereof.
"AT&T Rate" shall mean the time of day discounted rate charged by
AT&T for long distance calls, or the blended rate charged by AT&T, MCI and
Sprint (or such other rate as may be used by the FCC in imposing Rate Caps), for
minutes of use, the calling card surcharge and the surcharge for collect calls
or operator assistance as of a Rate Cap Effective Date.
"Audited Financial Statements" shall have the meaning set forth
in Section 3.6 hereof.
"Average Term" shall mean the average remaining term of the
written contracts for the placement of Installed Phones; provided that, in
<PAGE> 49
calculating the term of any such contract, (a) an Installed Phone without a
written contract shall be treated as if there is a contract with no remaining
term; (b) any renewal term at the option of CCI shall be considered part of the
term; (c) any contract which automatically renews unless the other party gives
notice of its intention to terminate the contract or permit it to expire, shall
be deemed to terminate as if such notice is given at the earliest permissible
date; and (d) such calculation shall be weighted to take into account the number
of telephones under each such contract.
"Berthel Fisher" shall mean Berthel Fisher & Company Investments,
Inc.
"Buyer" shall mean PhoneTel Technologies, Inc., an Ohio
corporation.
"Buyer Indemnified Party" shall have the meaning set forth in
Section 7.3 hereof.
"CID" shall have the meaning set forth in Section 3.1 hereof.
"Claiming Party" shall have the meaning set forth in Section
7.6(a) hereof.
"Closing" shall have the meaning set forth in Section 1.8 hereof.
"Closing Date" shall have the meaning set forth in Section 1.8
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consideration" shall have the meaning set forth in Section 1.2
hereof.
"Contract Phones" shall mean the telephones to be installed by
CCI pursuant to location contracts entered into by CCI, provided CCI has
available new or refurbished state of the art equipment in inventory for the
installation of such telephones and provided further that the locations for the
installation of such telephones have been selected and approved consistent with
standards employed by CCI immediately prior to October 16, 1996.
"Contracts" shall mean and include all leases, contracts,
agreements, licenses, license agreements, purchase orders, invoices, sales
orders, instruments evidencing indebtedness for borrowed money, mortgages or
other documents securing any indebtedness for borrowed money, commitments and
understandings, written or oral, and all amendments or modifications thereto, to
which CCI is a party or by which CCI is bound.
"Convertibles" shall have the meaning set forth in Section 3.4
hereof.
"Current Assets" shall be determined in accordance with GAAP,
consistent with prior periods (except as described in Schedule 3.10 of the
Disclosure Schedule), and shall mean all (i) cash, (ii) accounts receivable (net
of allowance for doubtful accounts), (iii) prepaid expenses
<PAGE> 50
and (iv) all cash equivalents of CCI, but shall not include inventories or
supplies.
"Disclosure Schedule" shall mean the disclosure schedule
delivered in connection herewith.
"EBITDA" for any period shall mean CCI's earnings from continuing
operations before interest, taxes, depreciation and amortization (excluding the
Excluded Assets), after adding back the amount of expenses incurred in
connection with the transactions contemplated hereby, any expenses relating to
the issuance of capital stock and any other extraordinary, non-recurring
expenses, for such period, determined in accordance with GAAP from the financial
statements of CCI, applied on a consistent basis, and assuming the state of the
law with respect to dial around compensation as it existed prior to September
20, 1996.
"Effective Time" shall have the meaning set forth in Section 1.8
hereof.
"Encumbrance" shall mean any lien, encumbrance, proxy, voting
trust arrangement, pledge, security interest, collateral security agreement,
financing statement (and similar notices) filed with any Governmental Authority,
claim (including any claim as defined in the Code), charge, equities, mortgage,
pledge, objection, title defect, option, restrictive covenant or restriction on
transfer of any nature whatsoever, and the interest of the lessor in any
property subject to a capital lease.
"Environmental Laws" shall have the meaning set forth in Section
3.19 hereof.
"Equipment" shall mean all telephones, all Inventory and all
other items of plant and equipment (including, without limitation, vehicles,
furniture, machinery, computers, office equipment and office supplies) which are
owned, leased or otherwise used by CCI in the operations of its businesses.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, and the rules and regulations promulgated
thereunder.
"ERISA Affiliate" shall mean any trade or business, whether or
not incorporated, which (within the meaning of Section 4001 of ERISA) would, in
conjunction with CCI, be deemed a "single employer".
"Escrow Agent" shall have the meaning set forth in Section
1.6(a).
"Escrow Amount" shall have the meaning set forth in Section
1.6(a) hereof, as may be modified by Section 1.6(b) hereof.
"Excluded Assets" shall have the meaning set forth in Section 5.9
hereof.
"FCC" shall mean the Federal Communications Commission.
"Financial Statements" shall have the meaning set forth in
Section 3.6 hereof.
"First Rate Cap Year" shall mean the twelve-month period
<PAGE> 51
from the Closing Date through the first anniversary of the Closing Date.
"GAAP" shall mean generally accepted accounting principles as in
effect on the date hereof.
"Governmental Authority" shall mean any government or political
subdivision thereof, whether federal, state, local or foreign, or any agency,
department, commission, board, bureau, court, tribunal, body, administrative or
regulatory authority or instrumentality of any such government or political
subdivision.
"Hazardous Material" shall mean any substance that is defined as
a "hazardous waste," "hazardous substance," "pollutant" or "contaminant" under
any Environmental Law or whose presence requires an investigation or remediation
under any Environmental Law, including, without limitation, gasoline, diesel
fuel and other petroleum hydrocarbons.
"Indemnitor" shall have the meaning set forth in Section 7.6
hereof.
"Installed Phones" shall mean the microprocessor-based pay
telephones owned by CCI and 50% of such telephones owned by CID, in each case
which are active and generating income, but not including any telephones
installed after the date hereof inconsistent with standards employed by CCI
immediately prior to October 16, 1996.
"Intellectual Property" shall mean (a) all computer software
applications (whether licensed or otherwise and whether customized or
otherwise), U.S. and foreign patents and patent applications, registered and
unregistered copyrights and copyright applications (including copyrights in
proprietary computer software and databases), trademarks, service marks, trade
dress, logos, trade names and similar business identifiers, including, in each
case, all registrations and applications therefore, (b) all trade secrets,
know-how, formulae, processes, inventions (whether patentable or unpatentable)
and other technical information and (c) the goodwill of the business symbolized
by any of the foregoing.
"Inventory" shall mean and include all inventory owned or held by
CCI and used in the conduct of its business and operations, including raw
materials, components, repair parts, works-in-progress, finished goods and other
similar items, whether new or used.
"Law" shall mean any law (including common law), rule,
regulation, restriction (including zoning), code, statute, ordinance, order,
writ, injunction, judgment, decree or other requirement of a Governmental
Authority.
"Liabilities" shall be determined in accordance with GAAP,
consistent with prior periods (except as described in Schedule 3.10 of the
Disclosure Schedule), and shall mean (without double-counting), all (i) current
liabilities, (ii) long-term liabilities, (iii) costs associated with the
installation of all Contract Phones included within the calculation provided in
Section 1.4(a) hereof, including commissions and signing bonuses (but excluding
the labor cost of CCI employees), (iv) payments due on automobile leases after
the Effective Time, (v) accrued and unpaid dividends, (vi) accrued interest,
(vii) payments due on all leases after the Effective Time (except leases of real
property, a lease on postal equipment, and license payments to Intellicall, Inc.
as described in Section 3.12) and (viii) accrued vacation days; provided that
Liabilities
<PAGE> 52
shall not include (x) accrued Taxes (including income taxes payable and deferred
income tax liabilities), (y) all normal, recurring monthly expenses incurred
during the month of the Closing Date (including telephone bills, property taxes,
leases of real property and payroll) to the extent allocated to the Buyer based
on the number of days occurring after the Effective Time, and (z) the car loans
for the three automobiles currently used by Bill H. Bailey, Jr., Edward L.
Marshall and Jerry T. Beddow.
"Losses" shall mean and include all demands, claims, actions,
causes of action, assessments, damages, losses, liabilities, judgments,
settlements, fines, penalties, sanctions, costs and expenses (including, without
limitation, interest, penalties, reasonable attorneys' fees and expenses as
incurred, and all other reasonable costs of investigating and defending third
party claims as incurred).
"Management Sellers" shall mean Bill H. Bailey, Jr., Jerry T.
Beddow, Edward L. Marshall and C. Nelson Trimble, III.
"Material Contract" shall mean any Contract that (i) is with any
of the Sellers' Affiliates, (ii) involves an obligation or commitment or
financial risk of more than $25,000 or (iii) which extends, without a right of
cancellation by CCI, for a period exceeding 180 days.
"Merger" shall have the meaning set forth in Section 1.1.
"Merger Sub" shall mean PhoneTel CCI, Inc., a Texas corporation
and a wholly owned subsidiary of Buyer.
"1996 Audit" shall have the meaning set forth in Section 3.6
hereof.
"Options" shall have the meaning set forth in Section 3.4 hereof.
"Order" shall mean any order, judgment, injunction, award,
decree, writ, rule or similar action of any Governmental Authority.
"Other Documents" shall have the meaning set forth in Section 1.8
hereof.
"Permits" shall mean any franchise, license, certificate,
approval, identification number, registration, permit, authorization, order or
approval of, and any required registration with, any Governmental Authority
(including those required by local business ordinances and regulations of public
utility commissions).
"Person" shall mean any individual, partnership, firm, trust,
association, corporation, joint venture, joint stock company, unincorporated
organization, Governmental Authority or other entity.
"Post-Closing Period" shall mean any taxable year beginning after
the Closing Date.
"Pre-Closing Period" shall mean any taxable year which ends on or
before the Closing Date.
"Preferred Stock" shall have the meaning set forth in Section 3.4
hereof.
<PAGE> 53
"Pro Rata" shall mean in accordance with the percentages set
forth in Exhibit A hereto.
"Rate Cap Effective Date" shall mean any date on which any Rate
Cap is actually applicable to calls placed on such date.
"Rate Caps" shall mean the benchmark rate limitation adopted and
made effective by the FCC in its CC Docket No. 92-77 proceeding (Second Further
Notice of Proposed Rulemaking, FCC 96-253), and imposed upon interexchange and
exchange carriers that routinely accept interstate collect calls, credit card
calls, and/or third-party billing.
"SEC" shall mean the United States Securities and Exchange
Commission, or its successors.
"Second Rate Cap Year" shall mean the twelve-month period from
the end of the First Rate Cap Year through the second anniversary of the Closing
Date.
"Securities" shall have the meaning set forth in Section 1.2(a)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Seller Indemnified Party" shall have the meaning set forth in
Section 7.4 hereof.
"Seller Representatives" shall have the meaning set forth in
Section 1.7 hereof.
"Sellers" shall have the meaning set forth in the preamble.
"Sellers' Affiliates" shall have the meaning set forth in Section
3.23 hereof.
"Service" shall have the meaning set forth in Section 7.7(h)
hereof.
"Shares" shall have the meaning set forth in Section 1.2(a)
hereof.
"Straddle Period" shall mean any taxable year that begins before
and ends after the Closing Date.
"Surviving Corporation" shall have the meaning set forth in
Section 1.1 hereof.
"Tax Claim" shall have the meaning set forth in Section 7.7(g)
hereof.
"Tax Return" shall mean any return, report, information return or
other document (including any related or supporting information) with respect to
Taxes.
"Taxes" shall mean all taxes, charges, fees, duties, levies,
penalties or other assessments imposed by any federal, state, local or foreign
taxing Governmental Authority, including, but not limited to, income, gross
receipts, excise, property, sales, gain, use, license,
<PAGE> 54
capital stock, transfer, franchise, payroll, withholding, social security or
other taxes, including any interest, penalties or additions attributable
thereto.
"Third Party Claim" shall have the meaning set forth in Section
7.6(b) hereof.
"Transfer Taxes" shall have the meaning set forth in Section
5.1(a) hereof.
"Warrants" shall have the meaning set forth in Section 3.4
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, on the day and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
PHONETEL CCI, INC.
By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman and Chief
Executive Officer
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Bill H. Bailey, Jr.
----------------------------------
Bill H. Bailey, Jr.
Chairman and
Chief Executive Officer
SELLERS:
/s/ Bill H. Bailey, Jr.
---------------------------------
BILL H. BAILEY, JR., individually
/s/ Edward L. Marshall
---------------------------------
EDWARD L. MARSHALL, individually
/s/ Jerry T. Beddow
---------------------------------
JERRY T. BEDDOW, individually
/s/ C. Nelson Trimble
---------------------------------
C. NELSON TRIMBLE, individually
<PAGE> 55
BERTHEL FISHER & COMPANY INVESTMENTS, INC.
By: /s/ James D. Thorp
-------------------------------
Name:
Title:
CAPITAL SOUTHWEST CORPORATION
By: /s/ J. Bruce Duty
-------------------------------
Name:
Title:
CAPITAL SOUTHWEST VENTURE CORPORATION
By: /s/ J. Bruce Duty
-------------------------------
Name:
Title:
BANC ONE CAPITAL PARTNERS, L.P.
By BOCP Corporation
General Partner
By: /s/ Suzanne B. Kriscunas
-------------------------------
Name: Suzanne B. Kriscunas
Title: Authorized Signer
SELLER REPRESENTATIVES
/s/ Bill H. Bailey, Jr.
----------------------------------
BILL H. BAILEY, JR.
/s/ J. Bruce Duty
----------------------------------
J. BRUCE DUTY
Note: The exhibits listed on the Table of Contents and the following
disclosure schedules that are attachments to the Agreement and Plan of Merger
have been intentionally omitted pursuant to Item 601(b)(2) of Regulation S-B.
PhoneTel Technologies, Inc. agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Securities and Exchange Commission upon
request.
DISCLOSURE SCHEDULES
Schedule 2.2 Restrictions on Transferability
Schedule 2.3 Consents and Approvals
Schedule 3.4 Rights to Purchase Securities
Schedule 3.5(a) Consents and Approvals
Schedule 3.7 CCI Obligations
Schedule 3.8 Accounts Receivable - CCI Phones as of September 30,
1996
Schedule 3.9 Equipment Encumbrances
Schedule 3.10 Absences of Changes or Events
Schedule 3.11(a) Leases
Schedule 3.11(b) Asset Encumbrances
Schedule 3.12 Material Contracts
Schedule 3.13(a) Compliance with Laws
Schedule 3.13(b) Material Permits to be Obtained
Schedule 3.13(c) Permit Approvals Not to be Obtained Prior to Closing
Schedule 3.14(a) Litigation/Arbitration
Schedule 3.15 Employee Matters
Schedule 3.17 Taxes
Schedule 3.19 Environmental Matters
Schedule 3.20(a) Insurance Policies
Schedule 3.20(b) Pending Insurance Claims
Schedule 3.21 Bank Accounts
Schedule 3.22(a) Material Customers and Suppliers
Schedule 3.22(b) Change in Customer/Supplier Relations
Schedule 3.23 Affiliate Transactions
Schedule 3.24 Prior Acquisitions
Schedule 3.25(a) Owned Real Property
Schedule 3.25(c) Leased Real Property
<PAGE> 56
[PHONETEL LOGO]
EXHIBIT B
October 9, 1996
Pete Catalena - Dennis Goehring, Partners
Texas Coinphone
2706 Finfeather
Bryan, TX 77801
RE: LETTER OF INTENT
Gentlemen:
This letter agreement sets forth the terms which will govern the proposed
acquisition of all of the assets of Texas Coinphone (the "Seller"), a Texas
partnership, by PhoneTel Technologies, Inc. (the "Buyer"), an Ohio corporation.
It is currently contemplated that the terms of this agreement will be
incorporated into an asset purchase agreement (the "Agreement") governing this
transaction, pursuant to which the assets of Seller will be acquired by Buyer.
The parties, including each of the Partners of Seller, hereto intend to be
bound by the following terms:
1. CONSIDERATION
(a) The purchase price paid at closing to the Seller will be $3,050 per pay
telephone. It is assumed that at closing Seller will have a minimum of
1,200 operational pay telephones. The closing consideration price shall be
paid by wire transfer or bank check at closing and all liabilities of any
nature whatsoever of the Partners shall have been paid or they shall
reduce the purchase price mentioned in this paragraph. The cash and
receivables at the day of closing can either be used to offset liabilities
or shall increase the purchase price. Expenses incurred during the month
of the closing shall be allocated between Buyer and Seller according to
the number of days before and after the closing.
<PAGE> 57
Texas Coinphone
October 9, 1996
Page 2 of 7 Pages
(b) It is assumed that (i) the average net income of the Installed Telephones
(calculated as gross revenues minus telephone bills and commissions) is at
least $90 in a per installed telephone basis which amount shall exclude
any increase in "dial-around" compensation mandated by the Federal
Communications Council; (ii) that no material location contracts associated
with the Installed Telephones has a remaining term of less than twelve (12)
months; and (iii) that the average contract length is at least thirty-six
(36) months. Seller will represent and warrant to the assumptions, or the
consideration will be proportionately reduced according to Seller's failure
to meet these requirements at which time the Seller will represent and
warrant to such adjusted assumptions.
(c) It is expected that a base of approximately 1,200 Installed Telephones is
in operation as of the date hereof. Telephones installed subsequent to
the date hereof ("Additional Phones") will be subject to Buyer's approval
before the consideration will be adjusted for the Additional Phones.
2. ASSETS
Buyer will receive, free and clear of all encumbrances, any and all assets
used in the ordinary course of conducting the business and operations of
the Seller, including but not limited to all installed pay phones, location
contracts, inventories, vehicles, spare parts, computers and management
systems. In the event any asset is encumbered as of the date of closing,
Buyer, at Buyer's option, may elect to assume said liability and the
Aggregate Consideration shall be reduced accordingly.
3. DEPOSIT AND ESCROW
At the time of the signing of a definitive agreement to purchase the assets
of Seller, the Buyer will deposit $150,000 in escrow with an attorney of
Seller's choice. Said amount shall be non-refundable to Buyer in the event
the transaction contemplated hereby is not consummated due to the fault of
the Buyer. Upon closing of the transaction, an additional $180,000 shall
be placed in escrow.
<PAGE> 58
Texas Coinphone
October 9, 1996
Page 3 of 7 Pages
The escrow agent will be an attorney or financial institution, mutually
agreed upon by both Seller and Buyer. At the time of closing the Escrow
Balance shall be put into an Escrow Account for any adjustment of
unrecorded liabilities, breaches of representation and/or warranties and
any pro rata adjustments called for due to timing of the closing. The
escrow amount less any claims shall be released as follows:
(i) $150,000 ninety days after closing.
(ii) Remainder of escrow amount one year after closing.
4. LIABILITIES
The Seller will personally continue to be liable during the period of the
statute of limitations for any taxes and/or legal actions filed against the
Partnership for any action occurring prior to the closing date.
5. NON-COMPETITION AGREEMENT
Pete Catalena and Dennis Goehring will enter into a non-competition
agreement which shall be effective for a period of three years from the
date of closing. The agreement shall prohibit solicitation of any customers
of the Seller for a period of five (5) years. It is intended that the
non-competition agreement entered into by Seller should not apply to any
telephones installed by Seller pursuant to a prison phone contract. Any
amount paid as consideration for the non-competition agreement shall reduce
the consideration paid to the Seller pursuant to Paragraph 1 hereinabove.
6. WARRANTIES AND REPRESENTATIONS
The Sellers will provide the usual Warranties and Representations common to
the Asset Purchase Agreement.
<PAGE> 59
Texas Coinphone
October 9, 1996
Page 4 of 7 Pages
7. AGREEMENT
A draft of the Asset Purchase Agreement shall be delivered to the Sellers
no later than November 15, 1996 and the parties will use their best efforts
to execute said Agreement no later than December 30, 1996. Buyer and Seller
shall each pay their own expenses in connection with this transaction
including any fees of counsel, accountants, investment bankers, brokers or
other advisors.
8. CLOSING
The closing will take place between January 2, 1997 and January 15, 1997 at
a date and place to be mutually agreed upon by the parties. In the event
that the transaction does not close prior to January 15, 1997, the Seller
shall provide a thirty day extension to close said transaction during which
time no penalties shall attach hereto and during which time the provisions
of the Agreement shall remain in full force and effect.
9. DUE DILIGENCE
Buyer may conduct due diligence as it deems necessary from the date of the
execution of this agreement until the closing of the transaction.
10. CONDUCT OF BUSINESS
Seller shall, until closing, continue to conduct business in the ordinary
course and in accordance with previous custom.
11. EXCLUSIVE RIGHTS
Seller will not negotiate with any other party, sell or otherwise transfer
or agree to sell or transfer any of the assets referenced hereunder until
November 30, 1996, or until such time as this agreement terminates.
<PAGE> 60
Texas Coinphone
October 9, 1996
Page 5 of 7 Pages
12. TERMINATION
This agreement shall terminate on November 30, 1996, unless an extension
thereof is mutually agreed upon by the parties in writing.
13. RETURN OF PAPERS
Buyer agrees to return all papers and any copies thereof to the respective
owners upon termination of this agreement.
14. CONFIDENTIALITY
The parties shall continue to be governed by the provision of the
confidentiality agreement until closing. In addition, except as may be
required by law, including securities regulations, or which may be
necessary in connection with securing sources of financing, no disclosure
of the transaction contemplated hereby will be disclosed to any third party
prior to the execution of the Asset Purchase Agreement. Notwithstanding the
foregoing, Buyer may disclose the terms of this Agreement in connection
with any debt or equity financing sought by Buyer.
15. LICENSES AND PERMITS
All licenses and permits required to operate the Seller's business and
operations in accordance with law (including local business ordinances and
regulations of public utility commissions) will be fully assignable to
Buyer at closing.
16. APPLICABLE LAW
This Agreement and any and all subsequent documents relating to this
transaction shall be interpreted in accordance with the laws of the State
of New York.
<PAGE> 61
Texas Coinphone
October 9, 1996
Page 6 of 7 Pages
17. SCOPE OF LETTER
This Letter of Intent is intended to set forth the proposed business terms
upon which Buyer is willing to consummate the transactions proposed hereby.
It does not contain all of the terms and conditions which will be included
in the definitive agreement with respect to the transactions proposed
hereby, which will embody the foregoing and additional terms and conditions
in more detail, and therefore does not create any legally binding
obligations on any party, and neither party will be legally bound hereby
unless and until the parties have entered into the Agreement.
Notwithstanding the foregoing, the provisions of Paragraphs 9, 10, 11, 13,
14, and 16 shall be legally binding obligations of the parties upon
acceptance of this proposal by Seller and until superseded by the
Agreement or until this proposal is terminated as provided herein and the
parties agree to negotiate in good faith and to proceed, subject to their
Due Diligene and their negotiations, to consummate the transactions as
promptly as practicable.
18. EXPIRATION
This Letter Agreement and the terms and conditions set forth herein shall
expire at the close of business on Friday, October 11, 1996, unless
executed by all parties prior to said date.
<PAGE> 62
Texas Coinphone
October 9, 1996
Page 7 of 7 Pages
Your execution below indicates your acceptance of and your agreement to be
bound by the terms hereof.
Very truly yours,
PhoneTel Technologies, Inc
/s/ Peter Graf 10/9/96
- ---------------------------------- --------------------------------
Peter Graf Date
Chairman of the Board
Chief Executive Officer
Accepted and Agreed to,
TEXAS COINPHONE
/s/ Pete Catalena /s/ Dennis Goehring
- ---------------------------------- -------------------------------
Pete Catalena Dennis Goehring
Partner Partner
10/9/96 10/9/96
- ---------------------------------- -------------------------------
Date Date
<PAGE> 63
EXHIBIT C
SUPPLEMENT TO WARRANT PURCHASE AGREEMENT
----------------------------------------
This SUPPLEMENT TO WARRANT PURCHASE AGREEMENT (the "SUPPLEMENT"), dated
as of November __, 1996, among PHONETEL TECHNOLOGIES, INC., an Ohio corporation
(the "COMPANY"), ING (U.S.) CAPITAL CORPORATION (formerly known as
Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation
("ING") and CERBERUS PARTNERS, L.P., a Delaware limited partnership ("CERBERUS";
ING and Cerberus, each a "PURCHASER", and collectively, the "PURCHASERS"),
constituting all of the Purchasers under the Warrant Purchase Agreement
referenced below.
W I T N E S S E T H:
--------------------
RECITALS:
A. The Company and the Purchasers have entered into a certain Warrant
Purchase Agreement, dated as of March 15, 1996 (as amended to the date hereof,
the "WARRANT PURCHASE AGREEMENT"). Capitalized terms used herein and not
otherwise defined shall have the meanings ascribed to such terms in the Warrant
Purchase Agreement.
B. The Company and the Purchasers have also entered into that certain
side letter (the "SIDE LETTER"), dated as of March 15, 1996, whereby in
connection with the Purchasers' extensions of credit to the Company under the
Credit Agreement, dated as of March 15, 1996, among the Company, the Purchasers
and ING in its capacity as agent for itself and Cerberus (as amended to the date
hereof, the "CREDIT AGREEMENT"), the Company is obligated to deliver certain
Warrants to the Purchasers.
C. In order to fulfill a condition precedent to the effectiveness of
the Seventh Amendment to Credit Agreement, dated as of even date herewith, among
the Company, ING, Cerberus and ING in its capacity as agent for itself and
Cerberus, the Company desires to supplement the Warrant Purchase Agreement to
set forth the understanding of the parties with respect to the Side Letter.
D. The Purchasers are agreeable to supplementing the Warrant Purchase
Agreement on the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. AGREEMENT REGARDING DELIVERY OF WARRANT SHARES.
Notwithstanding the procedure set forth in the Warrant Purchase Agreement for
the Company to issue Warrant
<PAGE> 64
Shares, the Company agrees that, if a Holder exercises any Warrants for Stock to
be sold in a public offering or pursuant to a registration statement, the
Company shall issue and cause to be delivered to or, subject to the provisions
of SECTION 10 of the Warrant Purchase Agreement, upon the written order of the
Holder, in the name of the Holder or the Holder's nominee, a certificate or
certificates for the number of full Warrant Shares issuable upon the exercise of
such Warrants together with such other property (including cash) and securities
as may then be deliverable upon such exercise, including cash for fractional
Warrant Shares, in a timely manner which allows the Holder to deliver
certificates representing the Warrant Shares in compliance with the delivery
requirements of the Securities Act.
SECTION 2. AGREEMENT REGARDING NUMBER OF WARRANTS. Notwithstanding the
terms of the Side Letter, the Company and the Purchasers hereby agree that the
Purchasers are entitled to retain all of the 102,412 Warrants issued to each of
them by the Company on March 15, 1996. Unless a manifest error in determining
the number of Warrants to which the Purchasers are entitled was made which
results in the 102,412 Warrants representing materially less than the required
number of Warrants each Purchaser was to receive as set forth in the Warrant
Purchase Agreement and the Side Letter, the Purchasers agree that the Company
will not be required to issue additional Warrants to the Purchasers on the basis
of the Warrant Purchase Agreement and the Side Letter as of March 15, 1996.
SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. In order to
induce the Lenders and the Agent to enter into this Amendment and to consummate
the transactions contemplated herein, the Borrower hereby reaffirms and makes
each of the representations and warranties set forth in Section 5 of the Warrant
Purchase Agreement on and as of the date hereof as if fully set forth in this
Supplement.
SECTION 4. EFFECTIVENESS. This Supplement shall become effective upon
receipt by the Purchasers of a copy of this Supplement, duly executed by each of
the Company and the Purchasers.
SECTION 5. CONTINUING EFFECTIVENESS OF WARRANT PURCHASE AGREEMENT. The
Warrant Purchase Agreement and each of the other Warrant Documents shall remain
in full force and effect in accordance with their respective terms, except as
expressly amended or modified by this Supplement.
SECTION 6. COST AND EXPENSES. The Borrower agrees to pay all reasonable
out-of-pocket expenses of the Agent and each of the Lenders party to this
Supplement for the negotiation, preparation, execution and delivery of this
Supplement (including reasonable fees and expenses of counsel to the
Purchasers).
- 2 -
<PAGE> 65
SECTION 7. HEADINGS. The various headings of this Supplement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Supplement or any provision hereof.
SECTION 8. COUNTERPARTS. This Supplement may be executed by the parties
hereto in several counterparts, each of which shall be executed by the Company
and the Purchasers and shall be deemed to be an original and all of which shall
constitute together but one and the same agreement.
SECTION 9. GOVERNING LAW. THIS SUPPLEMENT SHALL BE DEEMED TO BE
A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF NEW YORK.
SECTION 10. SUCCESSORS AND ASSIGNS. This Supplement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that the Borrower may not assign or
transfer its rights or obligations hereunder or under the Warrant Purchase
Agreement except in accordance with the terms of the Warrant Purchase Agreement.
- 3 -
<PAGE> 66
IN WITNESS WHEREOF, the parties hereto have caused this Supplement to
be executed by their respective officers thereunto duly authorized as of the day
and year first above written.
PHONETEL TECHNOLOGIES, INC.
By:
-------------------------------
Name:
Title:
[CORPORATE SEAL]
ING (U.S.) CAPITAL CORPORATION
By:
-------------------------------
Name:
Title:
CERBERUS PARTNERS, L.P.
By: CERBERUS ASSOCIATES, L.P.,
its General Partner
By:
---------------------------
Name:
Title:
(SIGNATURE PAGE TO THE SUPPLEMENT TO WARRANT PURCHASE AGREEMENT)
<PAGE> 67
EXHIBIT D
[SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP LETTERHEAD]
November 22, 1996
To: Each Addressee
Listed on Schedule 1 hereto
Re: PhoneTel Technologies, Inc.
---------------------------
Ladies and Gentlemen:
We have acted as special counsel to PhoneTel Technologies, Inc., an Ohio
corporation (the "BORROWER"), and each of its subsidiaries listed on Schedule 2
hereto (each such subsidiary and the Borrower, an "OPINION PARTY" and,
collectively, the "OPINION PARTIES") in connection with (i) the preparation,
execution and delivery of the Seventh Amendment to Credit Agreement, dated as of
the date hereof (the "AMENDMENT"), among the Borrower, the various lenders party
thereto (the "LENDERS"), and ING (U.S.) Capital Corporation (formerly known as
Internationale Nederlanden (U.S.) Capital Corporation) ("ING"), as agent (ING in
such capacity, the "AGENT"), which Amendment amends that certain Credit
Agreement, dated as of March 15, 1996 as amended to the date hereof (the
"Credit Agreement"), among the Borrower, the Lenders and the Agent and (ii) the
preparation, execution and delivery of the other documents relating thereto.
This opinion is being delivered pursuant to Section 9 of the Amendment.
Capitalized terms used herein and not otherwise defined herein shall have the
same meanings herein as ascribed thereto in the Credit Agreement.
In our examination we have assumed the genuineness of all signatures
including endorsements, the legal capacity of natural persons, the authenticity
of all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic copies,
and the authenticity of the originals of such copies. As to any facts material
to this opinion which we did not independently establish or verify, we have
relied upon representations of the Opinion Parties in the Opinion Documents (as
hereinafter defined) and of public officials.
<PAGE> 68
To Each Addressee
November 22, 1996
Page 2
In rendering the opinions set forth herein, we have examined and relied on
originals or copies of the following:
1. the Amendment and the Credit Agreement (as amended by the Amendment);
2. the replacement Revolving B Note; dated as of even date herewith,
payable to the order of Cerberus Partners, L.P. in the original principal amount
of $3,375,000;
3. the replacement Revolving B Note, dated as of even date herewith,
payable to the order of ING in the original principal amount of $3,375,000;
4. the Subsidiary Guaranty and the Acknowledgment and Consent attached to
the Amendment;
5. the acknowledgment copies of financing statements naming the Opinion
Parties listed on Schedule 3 as debtor (the "Filing Opinion Parties") and
"Internationale Nederlanden (U.S.) Capital Corporation, as agent" as secured
party filed in the filing offices listed on Schedule 3 beneath the name of each
such Filing Opinion Party (the "Original UCC Financing Statements");
6. the acknowledgment copy of a financing statement naming "PhoneTel
Technologies, Inc." as debtor and "Internationale Nederlanden (U.S.) Capital
Corporation, as agent" as secured party filed in the Office of the Secretary of
State of the State of California (the "California UCC Financing Statement"); and
7. such other documents as we have deemed necessary or appropriate as a
basis for the opinions set forth below.
The documents listed at items 1 through 4 above shall hereinafter be referred to
collectively as the "OPINION DOCUMENTS". The documents listed at items 2 and 3
above shall hereinafter be referred to collectively as the "NOTES". Unless
otherwise indicated, references to the "New York UCC" shall mean the Uniform
Commercial Code as in effect on the date hereof in the State of New York,
references to the "Illinois UCC" shall mean the Uniform
<PAGE> 69
To Each Addressee
November 22, 1996
Page 3
Commercial Code as in effect on the date hereof in the State of Illinois,
references to the "California UCC" shall mean the Uniform Commercial Code as in
effect on the date hereof in the State of California and references to the
"Applicable UCC" shall mean the New York UCC, the Illinois UCC or the California
UCC, as applicable.
Unless otherwise indicated, the following terms shall have the
following meanings when used herein;
(i) "APPLICABLE CONTRACTS" shall mean those agreements or
instruments listed in Item 14 to the Disclosure Schedule;
(ii) "APPLICABLE LAWS" shall mean those laws, rules and regulations
of the State of New York and the federal law of the United States of
America which, in our experience, are normally applicable to
transactions of the type contemplated by the Opinion Documents, except that
such term shall not include blue sky laws of any jurisdiction.
(iii) "APPLICABLE ORDERS" shall mean those orders or decrees of
Governmental Authorities identified to us by the Opinion Parties as being
all of the orders, judgments or decrees against the Opinion Parties;
(iv) "GOVERNMENTAL APPROVAL" shall mean any consent, approval,
license, authorization or validation of, or filing, recording or
registration with, any Governmental Authority pursuant to Applicable Laws;
and
(v) "GOVERNMENTAL AUTHORITY" shall mean any New York or federal
executive, legislative, judicial, administrative or regulatory body.
We express no opinion as to the laws of any jurisdiction other than (i)
the laws of the State of New York, (ii) with respect to our security interest
opinion in paragraph 11 hereof, the Applicable UCC and (iii) the federal laws of
the United States of America. In addition, we express no opinion as to the rules
and regulations of any self-regulatory organization within the
3
<PAGE> 70
To Each Addressee
November 22, 1996
Page 4
meaning of the Securities Exchange Act of 1934 (including the National
Association of Securities Dealers, Inc.)
We have previously delivered to you (i) our opinion dated March 15,
1996 (the "Original Security Interest Opinion") with respect to the
enforceability of the Security Agreement, the Borrower Pledge Agreement and the
Subsidiary Pledge Agreement and the validity and perfection of the security
interests created thereby, (ii) our opinion dated September 13, 1996 (the
"Phonetel III Security Interest Opinion") with respect to the enforceability of
the PhoneTel III Pledge Agreement and the validity and perfection of security
interest created thereby and (iii) our opinion dated September 13, 1996 (the
"California Security Interest Opinion" and together with the Original Security
Interest Opinion and the PhoneTel III Security Interest Opinion, the "Security
Interest Opinions") with respect to the perfection under the California UCC of
the security interest in the Article 9 Filing Collateral (as defined in the
California Security Interest Opinion). Such opinions are subject to certain
assumptions and qualifications and the opinions set forth herein are subject to
such assumptions and qualifications.
The opinions set forth below are subject to the qualification that
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and by
general principles of equity (regardless of whether enforcement is sought in
equity or at law).
Based upon the foregoing and subject to the limitations,
qualifications, exceptions and assumptions set forth herein, we are of the
opinion that, after giving effect to the transactions contemplated by the
Amendment to occur on the date hereof:
1. Each of the Opinion Documents constitutes the valid and binding
obligation of each Opinion Party that is a party thereto enforceable against
such Opinion Party in accordance with its terms. Our opinion in this paragraph
is subject to the following qualifications:
(a) we express no opinion regarding the second sentence of Section 3.7
of the Credit Agreement to
4
<PAGE> 71
To Each Addressee
November 22, 1996
Page 5
the extent that it authorizes or permits any purchaser of a participation
interest from any Lender to set-off or apply any deposit, property or
indebtedness with respect to any participation interest;
(b) we express no opinion as to those portions of Section 10.9 of the
Credit Agreement and similar sections of the other Opinion Documents that
purport to establish a New York State or Federal Court located in the
County of New York, New York as the exclusive forum for any action or
proceeding brought by any Opinion Party against the Agent or any Lender in
connection with the Opinion Documents;
(c) insofar as our opinion herein relates to any provision of the
Opinion Documents providing for the performance by any Opinion Party of any
agreement or instrument that is not an Opinion Document, our opinion is
limited to the enforceability of the provisions of the Opinion Documents
and we express no opinion as to the enforceability of such other agreements
or instruments; and
(d) we express no opinion as to the enforceability of any rights to
contribution or indemnification provided for in the Opinion Documents which
are violative of the public policy underlying any law, rule or regulation
(including any federal or state securities law, rule or regulation).
2. The execution and delivery by each Opinion Party of each Opinion
Document to which it is a party and the performance by such Opinion Party of its
obligations thereunder do not violate any provision of any Applicable Law or
Applicable Order. We express no opinion in this paragraph 2, however, with
respect to any securities laws of any jurisdiction.
3. No Governmental Approval is required under any Applicable Law to
authorize, or is required in connection with, the execution and delivery by each
Opinion Party of each Opinion Document to which it is a party and the
performance by each Opinion Party of its obligations thereunder, except all such
Governmental Approvals which have been obtained or made prior to the date
hereof. We
5
<PAGE> 72
To Each Addressee
November 22, 1996
Page 6
express no opinion in this paragraph 3, however, with respect to any securities
laws of any jurisdiction.
To the extent our opinions in paragraph 2 and 3 relate to any
provision of the Opinion Documents providing for the performance by any Opinion
Party of any agreement or instrument that is not an Opinion Document, we express
no opinion as to such other agreements or instruments.
4. The execution and delivery by each Opinion Party of each of the
Opinion Documents to which it is a party and the performance by such Opinion
Party of its obligations under each of the Opinion Documents to which it is a
party, each in accordance with its terms, will not (x) violate, conflict with or
constitute a default under, or result in the termination of, any Applicable
Contract to which such Opinion Party is a party or (y) cause or require the
creation of any security interest or Lien upon any of the properties or assets
of such Opinion Party pursuant to any Applicable Contract. We do not express any
opinion, however, as to whether the execution, delivery or performance by any
such Opinion Party of the Opinion Documents will constitute a violation of or a
default under any covenant, restriction or provision with respect to financial
ratios or tests or any aspect of the financial condition or results of
operations of such Opinion Party.
5. Assuming the proceeds of the Loans are used solely for the
purposes set forth in and in accordance with the provisions of, the Amendment
and the Credit Agreement (as amended by the Amendment), neither the making of
the Loans nor such use of proceeds violates the provisions of Regulations G, U
or X of the Board of Governors of the Federal Reserve System.
6. No Opinion Party is subject to registration as an "investment
company" under the Investment Company Act of 1940.
7. No Opinion Party is a "public utility" or a "holding company"
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
6
<PAGE> 73
To Each Addressee
November 22, 1996
Page 7
8. To our knowledge, based solely upon our review of a certificate of
the General Counsel of the Borrower and inquiry of attorneys in our firm working
on the transactions contemplated by the Amendment to occur on the date hereof,
there is no action, suit or proceeding pending against any Opinion Party before
any court, tribunal, arbitration board, or other governmental authority that
involves any of the transactions that the Opinion Documents contemplate will
occur on the date hereof.
9. The Amendment does not, of itself, adversely affect the validity,
perfection or priority of the security interest of the Agent for the benefit of
the Lenders in the Pledged Shares (as such term is collectively defined in the
Borrower Pledge Agreement, the Subsidiary Pledge Agreement and the PhoneTel III
Pledge Agreement) and after giving effect to the Amendment, the security
interest of the Agent for the benefit of the Lenders in the Pledged Shares will
be entitled to the same status as a valid and perfected security interest, and
entitled to the same priority, to which it would have otherwise been entitled
immediately prior to giving effect to the Amendment. The Notes are entitled to
the benefit of the security interest of the Agent for the benefit of the Lenders
in the Pledged Shares and, except to the extent set forth in Sections 9-301(4)
and 9-312(7) of the New York UCC, such security interest will have the same
priority as the security interest with respect to the notes replaced.
10. The Amendment does not, of itself, adversely affect the validity
of the security interest of the Agent for the benefit of the Lenders in any
Collateral (as defined in the Security Agreement) which is subject to Article 9
of the New York UCC (the "Article 9 Collateral") and after giving effect to the
Amendment, the security interest of the Agent for the benefit of the Lenders in
the Article 9 Collateral will be entitled to the same status as a valid security
interest to which it would otherwise have been entitled immediately prior to
giving effect to the Amendment. The Notes are entitled to the benefit of the
validity of the security interest of the Agent for the benefit of the Lenders in
the Article 9 Collateral under the New York UCC to the same extent as the notes
replaced.
7
<PAGE> 74
To Each Addressee
November 22, 1996
Page 8
11. The Amendment does not, of itself, adversely affect the
perfection of the security interest of the Agent for the benefit of the Lenders
in any Collateral (as defined in the Security Agreement) as to which the filing
of a financing statement is a permissible method of perfection under the
Applicable UCC and which is described in the Original UCC Financing Statements
and the California UCC Financing Statement (the "Article 9 Filing Collateral").
After giving effect to the Amendment, such security interest of the Agent for
the benefit of the Lenders in the Article 9 Filing Collateral will be entitled
to the same status as a perfected security interest under the Applicable UCC to
which it would otherwise have been entitled immediately prior to giving effect
to the Amendment. The Notes are entitled to the benefit of the perfection of the
security interest of the Agent for the benefit of the Lenders in the Article 9
Filing Collateral under the Applicable UCC to the same extent as the notes
replaced.
The opinions rendered in paragraphs 9, 10 and 11 are subject to the
following assumptions and qualifications:
(i) our security interest opinion set forth in paragraph 9 is
limited to Article 8 of the New York UCC and therefore such opinion
does not address (i) laws of jurisdictions other than New York, and of
New York except for Article 8 of the New York UCC, (ii) collateral of
a type not subject to Article 8 of the New York UCC and (iii) under
Section 9-103 of the New York UCC, what law governs perfection of the
security interests granted in the collateral covered by this opinion;
(ii) our security interest opinion set forth in paragraph 10 is
limited to Article 9 of the New York UCC and therefore such opinion
does not address (i) laws of jurisdictions other than New York, and of
New York except for Article 9 of the New York UCC, (ii) collateral of
a type not subject to Article 9 of the New York UCC and (iii) under
Section 9-103 of the New York UCC, what law governs perfection of
8
<PAGE> 75
To Each Addressee
November 22, 1996
Page 9
the security interests granted in the collateral covered by this
opinion;
(iii) our security interest opinion set forth in paragraph 11 is
limited to Article 9 of the Applicable UCC and therefore such opinion
does not address (i) laws of jurisdictions other than California,
Illinois and New York, as applicable, and of California, Illinois and
New York, as applicable, except for Article 9 of the Applicable UCC,
(ii) collateral of a type not subject to Article 9 of the Applicable
UCC and (iii) under Section 9-103 of the Applicable UCC, what law
governs perfection of the security interests granted in the collateral
covered by this opinion;
(iv) we have assumed that the Security Agreement, the Borrower
Pledge Agreement, the Subsidiary Pledge Agreement and the Original UCC
Financing Statements have not been amended, modified or supplemented
and no rights pursuant thereto have been released, waived or modified
subsequent to the date of our Original Security Interest Opinion
except, with respect to the Borrower Pledge Agreement, pursuant to the
First Supplement to the Pledge Agreement, dated as of August 1, 1996;
(v) we have assumed that the PhoneTel III Pledge Agreement has
not been amended, modified or supplemented and no rights pursuant
thereto have been released, waived or modified subsequent to the dated
of our PhoneTel III Security Interest Opinion;
(vi) we have assumed that the California UCC Financing Statement
has not been amended, modified or supplemented and no rights pursuant
thereto have been released, waived or modified subsequent to the date
of our California Security Interest Opinion;
(vii) we have assumed that all actions specified, assumed or
relied upon in the Security Interest Opinions have been taken and that
9
<PAGE> 76
To Each Addressee
November 22, 1996
Page 10
all of the facts and conditions specified, assumed or relied upon
in the Security Interest Opinions remain correct;
(viii) we have assumed that the Pledged Shares are, and at
all times since delivery thereof to the Agent have been, in the
continuous possession of the Agent in the State of New York; and
(ix) we note that the Agent has changed its name from
Internationale Nederlanden (U.S.) Capital Corporation to ING
(U.S.) Capital Corporation. We recommend that the Original UCC
Financing Statements and the California Financing Statement be
amended to reflect the Agent's name change as secured party.
Although our security interest opinions herein address only the
effect of the Amendment on the security interests described in
each opinion, we call to your attention that we have not
considered the effect of the Agent's name change on the Original
UCC Financing Statements and the California UCC Financing
Statement.
12. Except for nominal filing fees, no fees shall be payable to the
State of New York or any jurisdiction therein on account of the execution,
delivery or filing or record of any of the Opinion Documents, except that we
express no opinion, however, with respect to any such fees except to the extent
such fees are related to Article 9 Collateral. Solely by virtue of the
transactions contemplated by the Opinion Documents, no taxes shall be payable to
the State of New York or any jurisdiction therein on account of the execution,
delivery or filing of record of the Opinion Documents, except that we express no
opinion with respect to income or franchise taxes.
GENERAL QUALIFICATIONS AND ASSUMPTIONS
--------------------------------------
In rendering the foregoing opinions, we have assumed, with your
consent, that:
10
<PAGE> 77
To Each Addressee
November 22, 1996
Page 11
(a) each Opinion Party has been duly incorporated and is in
good standing under the laws of the jurisdiction of its
incorporation;
(b) each Opinion Party has the corporate power and corporate
authority to execute and deliver all Opinion Documents to which it
is a party and perform all of its obligations thereunder, and the
execution and delivery of such Opinion Documents and the
consummation by each Opinion Party of the transactions
contemplated thereby have been duly authorized by all requisite
corporate action on the part of such Opinion Party;
(c) each of the Opinion Documents has been duly executed and
delivered by each Opinion Party that is a party thereto;
(d) the execution and delivery by each Opinion Party of the
Opinion Documents to which it is a party and the performance of
its obligations thereunder do not and will not violate or
constitute a default under (i) the Articles or Certificate of
Incorporation or the By-laws of such Opinion Party, (ii) any
agreement or instrument to which such Opinion Party or its
property is subject (other than Applicable Contracts, as to which
we express our opinion in paragraph 4 herein), (iv) any law, rule,
or regulation to which any Opinion Party is subject (other than
Applicable Laws, as to which we express our opinion in paragraph 2
herein), (v) any judicial or administrative order or decree of any
governmental authority (other than Applicable Orders, as to which
we express our opinion in paragraph 2 herein) or (vi) any consent,
approval, license, authorization or validation of, or filing,
recording or registration with any governmental authority (other
than Governmental Approvals as to which we express our opinion in
paragraph 3 herein); and
(e) no authorization, consent or other approval of, notice to
or filing with any court, governmental authority or regulatory
body (other than Governmental Approvals as to which we express our
opinion in paragraph 3 herein) is required to authorize or is
required in connection with the
11
<PAGE> 78
To Each Addressee
November 22, 1996
Page 12
execution, delivery or performance by each Opinion Party of any Opinion
Document to which it is a party or the transactions contemplated thereby.
We understand that you are separately receiving an opinion with
respect to certain of the foregoing matters from Tammy L. Martin, General
Counsel to the Borrower and its Subsidiaries. We are advised that such opinion
contains certain qualifications. Our opinions herein stated are based upon the
assumptions set forth herein, and we express no opinion as to the effect on the
opinions herein stated of the qualifications stated in such opinion. Without
having made any independent investigation with respect thereto, nothing has come
to our attention which would lead us to believe that our reliance on such
assumptions would be inappropriate under the circumstances.
Our opinions are also subject to the following assumptions and
qualifications:
(A) each of the Opinion Documents constitutes the legal, valid
and binding obligations of each party to such Opinion Document (other than
the Opinion Parties party thereto) enforceable against such party (other
than the Opinion Parties party thereto) in accordance with its terms;
(b) we express no opinion as to the effect on the opinions
expressed herein of (i) the compliance or non-compliance of the Agent or
the Lenders or any party (other than the Opinion Parties to the extent set
forth herein) to the Opinion Documents with any state, federal or other
laws or regulations applicable to them or (ii) the legal or regulatory
status or the nature of the business of the Agent or the Lenders; and
(c) in rendering our opinion expressed herein, we express no
opinion as to the applicability or effect of any fraudulent transfer or
similar law on the Opinion Documents or any transactions contemplated
thereby.
This opinion is being furnished only to you and is solely for your
benefit and the benefit of each Person
12
<PAGE> 79
To Each Addressee
November 22, 1996
Page 13
that becomes a Purchasing Lender after the date hereof and is not to be used,
circulated, quoted, relied upon or otherwise referred to by any other Person or
for any other purpose without our prior written consent, provided that this
opinion may be disclosed to any Governmental Authority as may be required by
law.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
13
<PAGE> 80
Schedule 1 to
SASMF Opinion
-------------
Addressees of Opinion
---------------------
ING (U.S.) Capital Corporation, as Agent and Lender Cerberus Partners,
L.P., as Lender
1-1
<PAGE> 81
Schedule 2 to
SASMF Opinion
-------------
Subsidiaries
------------
Paramount Communication Systems, Inc., a Florida corporation
Public Telephone Corporation, an Indiana corporation
World Communications, Inc., a Missouri corporation
Northern Florida Telephone Corporation, a Florida corporation
Payphones of America, Inc., an Ohio corporation
2-1
<PAGE> 82
Schedule 3 to
SASMF Opinion
-------------
Filing Opinion Parties and Filing Offices
-----------------------------------------
PhoneTel Technologies, Inc.
- ---------------------------
Secretary of State of Illinois
Secretary of State of New York
County Clerk of Erie County, New York
County Clerk of Niagara County, New York
County Clerk of Westchester County, New York
Public Telephone Corporation
- ----------------------------
Secretary of State of Illinois
World Communications, Inc.
- --------------------------
Secretary of State of Illinois
1-1
<PAGE> 83
Exhibit 1
---------
OFFICER'S CERTIFICATE
---------------------
I, Tammy L. Martin, am Secretary of PhoneTel Technologies, Inc. (the
"Borrower"). I understand that pursuant to Section 9 of the Seventh Amendment to
Credit Agreement, dated as of November 22, 1996 (the "Amendment"), by and among
the Borrower, various lenders as are, or may become, parties thereto from time
to time (the "Lenders") and ING (U.S.) Capital Corporation (formerly known as
Internationale Nederlanden (U.S.) Capital Corporation), as agent for the Lenders
(the "Agent"), Skadden, Arps, Slate, Meagher & Flom is rendering an opinion
dated the date hereof (the "Opinion") to the Lenders. Capitalized terms used
hereof but not otherwise defined shall have the meanings set forth in the Credit
Agreement, dated as of March 15, 1996, among the Borrower, the Lenders and the
Agent, as amended on or prior to the date hereof by the First, Second, Third,
Fourth, Fifth and Sixth Amendments thereto and by the Amendment (as so amended,
the "Credit Agreement"). I further understand that Skadden, Arps, Slate, Meagher
& Flom is relying on this officer's certificate and the statements made herein
in rendering such Opinion.
With regard to the foregoing, on behalf of the Borrower, I certify
that:
1. Set forth on Schedule I hereto are all of the agreements and
instruments to which the Borrower is a party or by which the Borrower or any of
its assets are bound and which are material to the business or operation of the
Borrower.
2. Set forth on Schedule II hereto are all of the orders, judgments and
decrees of any Governmental Authority which are specifically applicable to the
Borrower.
3. The Borrower is a telecommunications company engaged in the
installation of commercial private pay telephones on a revenue sharing basis,
and the Borrower is also engaged in selling operator assisted long distance and
other access services and national and regional account management pursuant to
which it manages certain telecommunications operations for owners and managers
of multi-location properties such as shopping malls, hospitals and hotels.
1-1
<PAGE> 84
4. Less than 20 percent of the assets of the Borrower and its
Subsidiaries on a consolidated basis and on an unconsolidated basis consist of
margin stock (as such terms is defined in Regulation G or Regulation U of the
Board of Governors of the Federal Reserve System).
5. The Borrower (a) is primarily engaged, directly or through a
wholly-owned subsidiary or subsidiaries, in a business or businesses other than
that of investing, reinvesting, owning holding or trading in securities, (b) is
not engaged and does not propose to engage in the business of issuing
face-amount certificates of the installment type, and has not been engaged in
such business and does not have any such certificate outstanding, and (c) is not
engaged and does not propose to engage in the business of investing,
reinvesting, owning, holding or trading in securities, and does not own or
propose to acquire investment securities (as defined in Section 3(a) of the
Investment Company Act of 1940, as amended) having a value exceeding 40 percent
of the value of the Borrower's total assets (exclusive of government securities
and cash items) on an unconsolidated basis.
6. The Borrower does not own or operate facilities used for the
generation, transmission or distribution of electric energy for sale ("electric
utility facilities").
7. The Borrower does not own or operate facilities used for the
distribution at retail of natural or manufactured gas for heat, light or power
("gas utility facilities").
8. The Borrower, directly or indirectly, or through one or more
intermediary companies, does not own, control or hold with power to vote (a) 10%
or more of the outstanding securities, such as notes, drafts, stock, treasury
stock, bonds, debentures, certificates of interest or participation in any
profit-sharing agreements or in oil, gas, other mineral royalties or leases,
collateral-trust certificates, preorganization certificates or subscriptions,
transferable shares, investment contracts, voting-trust certificates,
certificates of deposit for a security, receiver's or trustee's certificates or
instruments commonly known as a "security" (including certificates of interest
or participation in, temporary or interim certificates for, receipt for,
guaranty of, assumption of liability on or warrants or right to subscribe to or
purchase any of the foregoing) presently entitling it to vote in the direction
or management of,
1-2
<PAGE> 85
or any such instrument issued under or pursuant to any trust, agreement or
arrangement whereby a trustee or trustees or agent or agents for the owner or
holder of such instrument is presently entitled to vote in the direction or
management of, any corporation, partnership, association, joint-stock company,
joint venture or trust that owns or operates any electric utility facilities or
gas utility facilities or (b) any other interest, directly or indirectly, or
through one or more intermediary entities, in (i) any corporation, partnership
association, joint-stock company, joint venture or trust that owns or operates
any electric utility facilities or gas utility facilities or (ii) any of the
foregoing types of entities which have received notice of the sort described in
Paragraph 16 below.
9. The Borrower has not received notice that the Securities and
Exchange Commission has determined, or may determine, that the Borrower
exercises a controlling influence over the management or direction of the
policies of a gas utility company or any electric utility company as to make it
subject to the obligations, duties and liabilities imposed upon holding
companies by the Public Utility Holding Company Act of 1935, as amended.
10. Except as set forth in Item 4 ("Litigation") of the Disclosure
Schedule to the Credit Agreement, to our knowledge, there is no pending or
threatened litigation, arbitration or governmental investigation, proceeding or
inquiry against the Borrower or to which any of the properties, assets or
revenues of the Borrower is subject which, if adversely determined, could result
in a Material Adverse Change or could impair its ability in a Material Adverse
Change or could impair its ability to perform its obligations under the Opinion
Documents (as defined in the Opinion). None of the proceedings set forth in such
Item 4 seeks to amend, modify or enjoin the transactions contemplated by the
Opinion Documents.
11. Attached hereto as Exhibit AA are true, correct and complete
copies of the resolutions duly adopted by the Board of Directors of the Borrower
which constitute all the resolutions of the Board of Directors of the Borrower
relating to the Amendments and the other Loan Documents; and all such
resolutions are in full force and effect on the date hereof and have not been
amended, modified or rescinded.
1-3
<PAGE> 86
IN WITNESS WHEREOF, I have executed this certificate on this ____ day
of November, 1996.
_____________________________________
Tammy L. Martin
Secretary
1-4
<PAGE> 87
SCHEDULE I
APPLICABLE CONTRACTS
--------------------
PHONETEL TECHNOLOGIES, INC.
- ---------------------------
1. Master Lease Agreement with The Edward J. DeBartolo Corporation for the
installation of approximately 680 pay telephones with an expiration date of
April 30, 1996.
2. Master Lease Agreement with The Cafaro Company for the installation of
approximately 180 pay telephones with an expiration date of December 31,
2002.
3. Lease with Trebmal Construction Company relating to space in the Statler
Office Tower which expires on December 31, 1997.
4. Agreements with Intellicall, Inc. for the provision of operator and long
distance services.
5. Acquisition agreement between Amtel Communications Payphones, Inc. and
various other companies for the purchase of certain pay telephone assets.
6. Settlement Agreement with Daniel J. Moos.
WORLD COMMUNICATIONS, INC.
- --------------------------
7. MCI Agreements for discounted long distance services for certain pay
telephones.
8. Contract with TelTrust for discounted operator services for telephones.
9. Lease Agreement with Bakewell Properties for office space expiring in June
1999.
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
- --------------------------------------
10. Agreement between Broward County, Florida and Paramount Communications
Systems, Inc. providing for the installation of approximately 250 public pay
telephones and long distance services for Broward County public locations.
I-1
<PAGE> 88
PHONETEL III, INC.
- ------------------
11. Certain Lease agreements between PhoneTel III, Inc. and Berthel Fisher
Leasing.
12. Management Agreement between PhoneTel III, Inc. and PhoneTel Technologies,
Inc.
I-2
<PAGE> 89
SCHEDULE II
APPLICABLE ORDERS
-----------------
Bankruptcy Order, dated August 29, 1996, certified by the Clerk of the United
States Bankruptcy Court for the Southern District of California, in the
bankruptcy case IN RE: ACI-HDT SUPPLY COMPANY (Consolidated Case No.
95-08253-All).
II-1
<PAGE> 90
Exhibit E
[PHONETEL LOGO]
PHONETEL TECHNOLOGIES, INC.
November 22, 1996
ING (U.S.) Capital Corporation,
individually and as Agent
135 East 57th Street
New York, New York 10022
Attn: Chief Credit Officer
Cerberus Partners, L.P.
950 Third Avenue, 20th Floor
New York, New York 10022
The Purchasing Lenders from time
to time parties to the Credit
Agreement referenced herein
Re: PhoneTel Technologies, Inc.
Ladies and Gentlemen:
I am the General Counsel of PhoneTel Technologies, Inc., an Ohio
corporation (the "Borrower"), Payphones of America, Inc., an Ohio corporation
("PhoneTel III"), Paramount Communications Systems, Inc., a Florida corporation
("Paramount"), Public Telephone Corporation, an Indiana corporation
("Public"), World Communications, Inc., a Missouri corporation ("World") and
Northern Florida Telephone Corporation, a Florida corporation ("Northern", each
of the Borrower, PhoneTel III, Paramount, Public, World and Northern, an
"Opinion Party" and, collectively, the "Opinion Parties"), and am rendering
this opinion to you in connection with the Seventh Amendment to Credit
Agreement, dated as of November 19, 1996 (the "Amendment"), by and among the
Borrower, the various lenders party thereto (the "Lenders") and ING (U.S.)
Capital Corporation (formerly known as Internationale Nederlanden (U.S.)
Capital Corporation) ("ING") as agent for the Lenders (the "Agent"). This
opinion is being delivered pursuant to Section 9 of the Amendment. All
capitalized terms used and not defined herein shall have the meanings ascribed
to them in the Credit Agreement dated as of March 15, 1996 among the
<PAGE> 91
Borrower, the Lenders party thereto and the Agent, as amended pursuant to the
First, Second, Third, Fourth, Fifth and Sixth Amendments thereto and the
Amendment (as so amended, the "Credit Agreement").
For purposes of the opinions expressed herein, I have examined copies
of the following documents (items 1 through 4 below are collectively referred
to herein as the "Opinion Documents").
1. the Amendment and the Credit Agreement (as amended by the
Amendment);
2. the Revolving B Note, dated as of even date herewith, payable
to the order of Cerberus Partners, L.P. in the original
principal amount of $3,375,000;
3. the Revolving B Note, dated as of even date herewith,
payable to the order of ING in the original principal amount
of $3,375,000;
4. the Acknowledgment and Consent attached to the Amendment; and
5. such other documents as we have deemed necessary or appropriate
as a basis for the options set forth below.
In addition, I have examined original, photostatic or certified copies
of such other corporate records of the Opinion Parties, certificates of public
officials and of officers of the Opinion Parties and such other agreements,
instruments and documents as I have deemed necessary as a basis for the
opinions expressed below.
In my examination I have assumed the genuineness of all signatures
(other than those of officers of the Opinion Parties) including endorsements,
the legal capacity of natural persons, the authenticity of all documents
submitted to me as originals, the conformity to original documents of all
documents submitted to me as certified or photostatic copies, and the
authenticity of the originals of such copies. As to any facts material to this
opinion which I did not independently establish
2
<PAGE> 92
or verify, I have relied upon representations of the Opinion Parties and of
public officials.
Unless otherwise indicated herein, the following terms shall have the
following meanings when used herein.
(i) "Applicable Laws" shall mean those laws, rules and regulations
of the State of Ohio, which in my experience, are normally
applicable to transactions of the type contemplated by the
Opinion Documents;
(ii) "Governmental Approval" shall mean any consent, approval,
license, authorization or validation of, or filing, recording
or registration with, any Governmental Authority pursuant to
Applicable Laws; and
(iii) "Governmental Authority" shall mean any Ohio executive,
legislative, judicial, administrative or regulatory body.
Based upon the foregoing, and subject to the qualifications and
assumption set forth herein, I am of the opinion that:
1. Each of the Borrower and PhoneTel III is a corporation validly
organized and existing and in good standing under the laws of the State of Ohio,
and is duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction where the failure to qualify could result in a
Material Adverse Change. Each of the Borrower and PhoneTel III has the
requisite power and authority, and holds all governmental licenses, permits
and other approvals required under the laws of the State of Ohio to own and
hold under lease its property and to conduct its business as currently
conducted by it, except for governmental licenses, permits and other approvals
the absence of which will not result in a Material Adverse Change in the
Borrower, PhoneTel III or their respective businesses.
2. Each of the Borrower and PhoneTel III has the requisite corporate
power and authority under the
3
<PAGE> 93
laws of the State of Ohio to enter into and perform its obligations under each
Opinion Document executed by it.
3. Each Opinion Document to which an Opinion Party is a party has been
duly executed and delivered by such Opinion Party. The execution and delivery
by each Opinion Party of each Opinion Document executed by it, and the
performance by such Opinion Party of its obligations thereunder, (a) have been
duly authorized by all necessary corporate action, (b) do not require any
Governmental Approval under the Applicable Laws of the State of Ohio, (c) do not
and will not result in a violation of, or constitute a default under, any
provision of its Articles of Incorporation or Code of Regulations, and (d) do
not violate any provision of Applicable Law.
4. No Governmental Approvals (except as heretofore have been obtained
or made) by any Governmental Authority of the State of Ohio is required to
authorize, or is required in connection with, (i) the execution, delivery and
performance of any Opinion Document executed by any Opinion Party or (ii) the
legality, validity, binding effect or enforceability of any such Opinion
Document.
5. No Opinion Party is subject to any regulation under the Applicable
Laws of the State of Ohio limiting its ability to incur Indebtedness or to
execute, deliver or perform the Opinion Documents executed by it.
6. Except as set forth in Item 4 ("Litigation") of the Disclosure
Schedule, to my knowledge there is no pending or threatened litigation,
arbitration or governmental investigation, proceeding or inquiry against any
Opinion Party or to which any of the properties, assets or revenues of any
Opinion Party is subject which, if adversely determined, could result in a
Material Adverse Change or could impair such Opinion Party's ability to perform
its obligations under the Opinion Documents to which it is a party. To my
knowledge, none of the proceedings set forth in such Item 4 seeks to amend,
modify or enjoin the transactions contemplated by the Opinion Documents.
I am a member of the bar of the State of Ohio, and express no opinion
as to any laws other than the laws
4
<PAGE> 94
of the State of Ohio as they exist on the date of this opinion.
This opinion is furnished by me pursuant to Section 9 of the Amendment
for the sole benefit of the addressees and their respective counsel, and may not
be used or relied upon by any other Person or in connection with any other
transaction without my prior written consent as required or requested by a
Governmental Authority or representative thereof or pursuant to legal process.
5
<PAGE> 95
This opinion is given as of the date hereof and I undertake no
obligation to update this opinion after such date.
Very truly yours,
/s/ Tammy L. Martin
General Counsel
6
<PAGE> 96
PhoneTel Technologies, Inc.
Use of Proceeds of
November 21, 1996 Additional Advance of $2 Million
(amounts in 000's)
Amount
Deposits for Acquisitions
Cherokee $520 Due at Signing of Purchase Agreement
Texas Coin Phone 150 Due at Signing of Purchase Agreement
------
670
------
Advance Commissions
BART 250 Due at Signing of Contract Extension
Broward County 15 Contract Provisions
------
265
------
------
Phone Bills 526
------
Other aged accounts payable 539
(Operating expenses, other than
commissions and phone bills,
plus financing fees)
------
$2,000
======
Copies To: Seth Plattus
Steve Fleenor
Peter Graf
Tammy Martin
Prepared by: R. Kebert
11/21/96
1
<PAGE> 1
Exhibit 10.76
AGREEMENT AND PLAN OF MERGER
among
PHONETEL TECHNOLOGIES, INC.,
PHONETEL CCI, INC.,
CHEROKEE COMMUNICATIONS, INC.
and
ALL OF THE SHAREHOLDERS OF
CHEROKEE COMMUNICATIONS, INC.
November 21, 1996
TABLE OF CONTENTS
Page
ARTICLE I
PURCHASE AND SALE OF THE SHARES; THE CLOSING................. 2
1.1 The Merger................................................... 2
1.2 Consideration for Conversion of Shares....................... 2
1.3 Closing Payment.............................................. 3
1.4 Consideration Adjustments.................................... 4
1.5 Adjustment Schedule.......................................... 6
1.6 Escrow....................................................... 8
1.7 Appointment of the Seller Representatives.................... 9
1.8 The Closing.................................................. 10
1.9 Deliveries by the Sellers. .................................. 11
1.10 Deliveries by the Buyer...................................... 14
1.11 Articles of Incorporation; By-Laws........................... 15
1.12 Directors and Officers of the Surviving
Corporation.................................................. 15
1.13 Rate Cap Consideration Adjustments........................... 16
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SELLER...... 17
2.1 Authorization; Binding Obligation............................ 17
2.2 Title to the Securities...................................... 18
<PAGE> 2
2.3 Consents and Approvals; No Violation......................... 19
2.4 Fees To Brokers or Other Parties. ........................... 20
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CCI AND THE SELLERS
(OTHER THAN BERTHEL FISHER)............... 20
3.1 Organization and Standing; Subsidiaries. .................... 21
3.2 Organizational Documents and Corporate
Records...................................................... 22
3.3 Authorization................................................ 23
3.4 CCI Capitalization........................................... 23
3.5 Consents and Approvals; No Violation......................... 25
3.6 Financial Statements......................................... 26
3.7 Absence of Undisclosed Liabilities........................... 27
3.8 Accounts Receivable.......................................... 28
3.9 Equipment.................................................... 29
3.10 Absence of Certain Changes or Events......................... 29
3.11 Properties and Assets........................................ 31
3.12 Contracts.................................................... 31
3.13 Compliance with Laws and Permits............................. 33
3.14 Litigation and Arbitration................................... 34
3.15 Employee Matters............................................. 35
3.16 Labor Relations.............................................. 35
3.17 Taxes........................................................ 36
3.18 Intellectual Property........................................ 38
3.19 Environmental Matters........................................ 38
3.20 Insurance.................................................... 41
3.21 Bank Accounts................................................ 42
3.22 Customers and Suppliers...................................... 42
3.23 Affiliate Transactions....................................... 43
3.24 Prior Acquisitions........................................... 43
3.25 Interests in Real Property................................... 43
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER....... 46
4.1 Organization and Standing.................................... 46
4.2 Authorization; Binding Obligation............................ 46
4.3 Consents and Approvals; No Violation......................... 47
4.4 Buyer Shares................................................. 48
4.5 SEC Documents................................................ 48
ARTICLE V
ADDITIONAL COVENANTS................... 49
5.1 Transfer and Other Taxes; Preparation
and Filing of Tax Returns; Payment of
Taxes; Tax Year.............................................. 49
5.2 Further Assurances; Cooperation.............................. 53
5.3 Notification of Certain Matters.............................. 54
5.4 Confidentiality and Exclusivity.............................. 54
5.5 Publicity.................................................... 55
<PAGE> 3
5.6 Expenses..................................................... 56
5.7 Due Diligence................................................ 57
5.8 Interim Conduct of Business.................................. 57
5.9 Excluded Assets.............................................. 60
5.10 1996 Audit................................................... 61
5.11 Permits...................................................... 61
5.13 Cooperation in Financings.................................... 62
5.14 Options...................................................... 63
5.15 Payment of Certain Liabilities............................... 63
ARTICLE VI
CONDITIONS.............................................. 63
6.1 Conditions Precedent to Obligations of
the Buyer.................................................... 63
6.2 Conditions Precedent to Obligations of
CCI and the Sellers.......................................... 65
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION................... 66
7.1 Survival of Representations and Warranties................... 66
7.2 Statements as Representations................................ 67
7.3 Indemnification by the Sellers............................... 67
7.4 Indemnification by the Buyer. ............................... 70
7.5 Limitations on Indemnification............................... 71
7.6 Indemnification Procedures................................... 73
7.7 Tax Indemnification.......................................... 76
ARTICLE VIII
MISCELLANEOUS...................................... 82
8.1 Consent to Service........................................... 82
8.2 Parties in Interest; No Third Party
Beneficiaries................................................ 83
8.3 Exhibits and Disclosure Schedule............................. 83
8.4 Entire Agreement. ........................................... 83
8.5 Waiver of Compliance......................................... 84
8.6 Validity..................................................... 84
8.7 Counterparts................................................. 84
8.8 Headings..................................................... 84
8.9 Governing Law; Arbitration................................... 85
8.10 Notices...................................................... 87
8.11 Termination or Abandonment................................... 89
8.12 Effect of Termination........................................ 89
ARTICLE IX
DEFINITIONS............................................. 90
9.1 Definitions.................................................. 90
<PAGE> 4
Exhibit A - Shareholders of CCI
Exhibit B - Escrow Agreement
Exhibit C - Bailey Employment Agreement
Exhibit D - Marshall Employment Agreement
Exhibit E - Beddow Employment Agreement
Exhibit F - Certificate of Non-Foreign Status
Exhibit G - Financial Statements
Exhibit H - Excluded Assets
Exhibit I - Permits Required
Exhibit J - Consents Required
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of November
21, 1996, among PhoneTel Technologies, Inc., an Ohio corporation (the "Buyer"),
Phonetel CCI, Inc., a Texas corporation and a wholly owned subsidiary of Buyer
("Merger Sub"), Cherokee Communications, Inc., a Texas corporation ("CCI"), and
all of the shareholders of CCI and the holders of options, warrants and
convertible preferred stock of CCI (collectively, the "Sellers"), whose names,
addresses and holdings in CCI are set forth on Exhibit A hereto. WHEREAS, CCI is
engaged in the business of owning and operating microprocessor-based pay
telephones and related activities; and WHEREAS, the Boards of Directors of the
Buyer, Merger Sub and CCI have each approved, and deem it advisable and in the
best interests of their respective shareholders to consummate, the merger of
Merger Sub with and into CCI, with CCI as the Surviving Corporation, upon the
terms and subject to the conditions set forth herein; NOW, THEREFORE, in
consideration of the mutual agreements, covenants, representations and
warranties set forth herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF THE SHARES; THE CLOSING
1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement and in accordance with Article 5.06 of the Texas Business
Corporation Act, at the Effective Time, Merger Sub shall be merged with and into
CCI (the "Merger") and the separate corporate existence of Merger Sub shall
cease. After the Merger, CCI shall continue as the surviving corporation
(sometimes hereinafter referred to as the "Surviving Corporation"). The Merger
shall have the effect as provided in the applicable provisions of the Texas
Business Corporation Act and this Agreement. Without limiting the generality of
the foregoing, upon the Merger, all the rights, privileges, immunities, powers
and franchises of CCI and Merger Sub shall vest in the Surviving Corporation
and, except as otherwise provided for in this Agreement, all obligations,
duties, debts and liabilities of CCI and Merger Sub shall be the obligations,
duties, debts and liabilities of the Surviving Corporation. 1.2 Consideration
for Conversion of Shares. At the Effective Time:
(a) Each share of common stock, no par value per share, of CCI
(the "Shares") and each Convertible (collectively, the "Securities"),
outstanding immediately prior to the Effective Time shall be converted into
<PAGE> 5
the right to receive a portion of the Consideration set forth in Exhibit A
hereto. The "Consideration" shall equal the sum of $54,000,000, subject to
adjustment as set forth in Sections 1.4 and 1.13 hereof.
(b) Each share of common stock of Merger Sub outstanding
immediately prior to the Effective Time shall be converted into one share
of common stock, no par value per share, of the Surviving Corporation and
shall constitute the only outstanding shares of capital stock of the
Surviving Corporation.
1.3 Closing Payment.
(a) Not later than three business days prior to the Closing,
Seller Representatives shall deliver to the Buyer a good faith estimate of
the adjustments to the Consideration required by Section 1.4 hereof, as of
the Closing Date, including all the detail required by Section 1.4 hereof.
(b) At the Closing, the Buyer shall pay to Seller
Representatives by wire transfer or certified check (for distribution Pro
Rata to the Sellers, adjusted as agreed among the Sellers) an amount equal
to the Consideration which would be payable if adjusted pursuant to Section
1.4 (using the good faith estimates delivered pursuant to paragraph (a)
above); provided that such amount shall be reduced by the Escrow Amount.
1.4 Consideration Adjustments.
(a) 1996 EBITDA. The Consideration shall be reduced by the
same percentage, if any, that EBITDA for the year ended September 30, 1996
(as determined from the 1996 Audit) is less than $7,900,000.
(b) First Quarter EBITDA. The Consideration (as adjusted
pursuant to Section 1.4(a)) shall be further reduced by the same percentage
(but not greater than 6.5%), if any, that EBITDA for the three months
ending December 31, 1996 is less than EBITDA for the three months ended
December 31, 1995.
(c) Average Term. If at the Closing Date the Average Term is
less than 46 months, then the Consideration (as adjusted pursuant to
Sections 1.4(a) and (b)) shall be further adjusted by multiplying it by a
fraction, the numerator of which is the Average Term and the denominator of
which is 46.
(d) Installed Phones. If the number of Installed Phones as
of the Closing Date is less than 14,000, the Consideration (as adjusted
pursuant to Sections 1.4(a), (b) and (c)) shall be decreased by the amount
of $3,950 multiplied by the difference between (i) 14,000 and (ii) the
number of Installed Phones as of the Closing Date, provided that, for
purposes of this Section 1.4(d), the number of Installed Phones shall
include up to 650 Contract Phones.
(e) Liabilities/Current Assets.
(i) The Consideration (as adjusted pursuant to
Sections 1.4(a), (b), (c) and (d)) shall be decreased by an amount
equal to the excess, if any, of (A) the sum of all Liabilities as
of the Effective Time over (B) the sum of all Current Assets as of
the Effective Time; or
(ii) the Consideration (as adjusted pursuant to
<PAGE> 6
Sections 1.4(a), (b), (c) and (d)) shall be increased by an amount
equal to the excess, if any, of (A) the sum of all Current Assets
as of the Effective Time over (B) the sum of all Liabilities as of
the Effective Time.
1.5 Adjustment Schedule.
(a) As soon as practicable after the Closing Date (but in
any event not more than 150 days after the Closing Date), the Buyer shall
cause to be prepared and delivered to Seller Representatives and the Escrow
Agent a schedule (the "Adjustment Schedule") which shows, as of the
Effective Time, the calculation of the Consideration as provided in Section
1.2(a) and as adjusted pursuant to Section 1.4.
(b) Upon receipt of the Adjustment Schedule, Seller
Representatives shall have the right during the succeeding 30-day period to
examine the Adjustment Schedule and all records used to prepare such
Adjustment Schedule. Seller Representatives shall notify the Buyer in
writing, on or before the last day of the 30-day period, of any good faith
objections to the Adjustment Schedule, setting forth a reasonably specific
description of such objections and the dollar amount of each objection.
(c) If Seller Representatives in good faith object to the
Adjustment Schedule, Seller Representatives and the Buyer shall attempt to
resolve any such objections within 30 days of the Buyer's receipt of such
objections. If the Buyer and Seller Representatives are unable to resolve
the matter within such 30-day period, they shall jointly appoint a mutually
acceptable firm of independent certified public accountants (or, if they
cannot agree on a mutually acceptable firm, they shall cause their
respective accounting firms to select such firm) within five days after the
end of such 30-day period. The fees of such independent certified public
accountants shall be divided equally between the Buyer and Seller
Representatives (on behalf of all Sellers). Such firm's resolution of the
dispute shall be conclusive and binding upon the Sellers and the Buyer.
(d) The Adjustment Schedule shall be deemed complete upon
the earlier of (i) the 31st day after the Buyer's delivery of the
Adjustment Schedule to Seller Representatives, unless prior to such day
Seller Representatives shall have notified the Buyer of an objection in
accordance with Section 1.5(b), and (ii) the resolution of all objections,
pursuant to Section 1.5(c). Within five business days following completion
of the Adjustment Schedule as aforesaid, either
(A) the Buyer shall pay Seller Representatives, on behalf of
the Sellers, the amount, if any, by which the Consideration
(as adjusted) exceeds the amount paid pursuant to Section
1.3(b); or (B) Seller Representatives, on behalf of the
Sellers, shall pay to the Buyer the amount, if any, by which
the amount paid pursuant to Section 1.3(b) exceeds the
Consideration (as adjusted).
All payments pursuant to this Section 1.5(d) shall be made by wire transfer
or certified check.
1.6 Escrow.
(a) Simultaneously herewith, the Buyer, CCI, Seller
Representatives (on behalf of the Sellers) and Comerica Bank-Texas, as
escrow agent (the "Escrow Agent") are entering into an Escrow Agreement in
<PAGE> 7
the form attached hereto as Exhibit B, and the Buyer is depositing $520,000 (as
may be increased pursuant to Section 1.6(b) below, the "Escrow Amount") with the
Escrow Agent, to be held and disposed of by the Escrow Agent pursuant to the
Escrow Agreement. In the event the Closing does not occur due to a material
breach of this Agreement by the Buyer (including, without limitation, failure to
close by January 31, 1997 for any reason other than a material breach of this
Agreement by CCI or the Sellers), Seller Representatives (on behalf of all
Sellers, Pro Rata) shall be entitled to receive the entire Escrow Amount, as
liquidated damages, and the Sellers and CCI shall have no other rights or
remedies in respect of this Agreement.
(b) At the Closing, the Buyer shall deposit an additional
$6,480,000 with the Escrow Agent, which shall become part of the Escrow
Amount.
(c) Delivery of funds by the Escrow Agent to the applicable
parties shall be pursuant to the terms of the Escrow Agreement.
1.7 Appointment of the Seller Representatives.
(a) Each Seller hereby irrevocably appoints Bill H. Bailey, Jr.
and J. Bruce Duty ("Seller Representatives") as such Seller's attorneys-in-fact
and representatives, to do any and all things specifically provided for by this
Agreement and the other documents contemplated hereby. The Buyer shall be
entitled to rely, as being binding upon such Seller, upon any document or other
writing executed by Seller Representatives pursuant to the authority granted in
this Section 1.7(a), and the Buyer shall not be liable to any Seller for any
action taken or omitted to be taken by the Buyer in reliance thereon. All action
taken by Seller Representatives shall be valid and binding only if both Seller
Representatives have approved such action.
(b) In the event of the death or incapacity of either Seller
Representative or any other inability or refusal by either Seller Representative
to continue acting in such capacity, (i) in the case of Bill H. Bailey, Jr., a
majority in interest of the Management Sellers (determined Pro Rata), and (ii)
in the case of J. Bruce Duty, a majority in interest of the Sellers other than
the Management Sellers (determined Pro Rata), may, by document submitted to the
Buyer, select a substitute Seller Representative. Upon acceptance of such
appointment, the substitute Seller Representative shall have all the powers and
obligations of the Seller Representative who such substitute Seller
Representative is replacing.
1.8 The Closing. Upon the terms and subject to the conditions
contained in this Agreement, the Closing of the transactions contemplated hereby
(the "Closing") will take place at the offices of Gardere & Wynne, L.L.P., 3000
Thanksgiving Tower, Dallas, Texas (or such other place as the Buyer and Seller
Representatives may agree) on a date mutually agreeable to all parties, but no
earlier than January 2, 1997 and no later than January 31, 1997 without the
consent of the Buyer and Seller Representatives (the "Closing Date"),
simultaneously with the execution of the other agreements, documents,
instruments and writings to be executed and delivered pursuant hereto or in
connection herewith (collectively, the "Other Documents"). At the Closing, the
actions described in Sections 1.6(b), 1.8, 1.9 and 1.10 hereof shall be taken.
All such actions shall be deemed to have occurred simultaneously. On the Closing
Date, the Buyer and CCI will cause appropriate Articles of Merger (the "Articles
of Merger") to be executed and filed with the Secretary of State of Texas in
such form and
<PAGE> 8
executed as provided in Article 5.04 of the Texas Business Corporation Act. The
Merger shall become effective at the close of business on the date on which the
Articles of Merger have been duly filed with the Secretary of State of Texas or
such other time as is agreed upon by the parties and specified in the Articles
of Merger, and such time is hereinafter referred to as the "Effective Time".
1.9 Deliveries by the Sellers. At the Closing, the Sellers shall
deliver to the Buyer (unless previously delivered) the following:
(a) (i) stock certificates representing all the Shares and
Preferred Stock, and (ii) documentation reasonably satisfactory to the Buyer as
to (A) the cancellation of the Warrants and (B) the exercise of the Options, in
the case of the Shares and Preferred Stock accompanied by stock powers duly
endorsed in blank or accompanied by duly executed instruments of transfer, with
all necessary transfer tax and other revenue stamps affixed thereto;
(b) a receipt for the payment provided for by Section 1.3(b)
hereof;
(c) Certificates of Good Standing for CCI from the Texas
Secretary of State and from the Secretary of State of each state in which the
subsidiaries of CCI are organized and Certificates of Qualification to do
Business in each other state in which CCI is qualified to do business as a
foreign corporation;
(d) the resignations of such officers of CCI as the Buyer shall
request;
(e) the stock books, stock ledgers and minute books of CCI (all
other records of CCI being located on the premises of CCI);
(f) certified resolutions of the Board of Directors of CCI
approving this Agreement and the Other Documents and the transactions
contemplated hereby and thereby;
(g) certified resolutions of the shareholders of CCI approving
this Agreement and the transactions contemplated hereby;
(h) all consents, assignments or waivers required to be obtained
in connection with the Contracts, in order for the Buyer to assume the
operations and conduct the business of CCI without breaching the provisions of
any Contract;
(i) executed employment and non-competition agreements, in the
forms attached hereto as Exhibits C, D and E, between Buyer and Bill H. Bailey,
Jr., Edward L. Marshall and Jerry T. Beddow, respectively;
(j) a certificate from an officer of CCI certifying that all
representations and warranties contained in Article III are true and correct in
all material respects as of the Closing Date;
(k) a certificate from each Seller certifying that all
representations and warranties contained in Articles II and a certificate from
such Seller other than Berthel Fisher certifying that all representations and
warranties contained in Article III are true and correct in all material
respects as of the Closing Date, provided that each Seller other than the
Management Sellers and Berthel Fisher shall so
<PAGE> 9
certify as to Article III only to the best of their information and
knowledge;
(l) an executed amendment to the lease for the headquarters of
CCI extending the term for five years after the Closing Date, subject to the
option of the Buyer, exercisable on 90 days notice, to terminate the lease at
any time after the second anniversary of the Closing Date;
(m) a Certificate of Non-Foreign Status from each Seller in the
form attached as Exhibit F hereto. Notwithstanding anything to the contrary
herein, if any Seller fails to provide the Buyer with such Certificate, Buyer
shall be entitled to withhold the requisite amounts from the Consideration in
accordance with Section 1445 of the Code.
1.10 Deliveries by the Buyer. At the Closing, the Buyer shall
deliver to Seller Representatives (unless previously delivered) the following:
(a) the payment provided for in Section 1.3(b) hereof;
(b) a Certificate of Good Standing of the Buyer under the laws of
the State of Ohio;
(c) certified resolutions of the Boards of Directors of the Buyer
and Merger Sub approving this Agreement, the Other Documents and the
transactions contemplated hereby and thereby;
(d) the executed contracts attached as Exhibits C, D, and E,
respectively;
(e) a certificate from an officer of the Buyer certifying that
all representations and warranties contained in Article IV are true and correct
in all material respects as of the Closing Date; and
(f) an executed amendment to the lease for the headquarters of
CCI extending the term for five years after the Closing Date, subject to the
option of the Buyer, exercisable on 90 days notice, to terminate the lease at
any time after the end of the second anniversary of the Closing Date.
1.11 Articles of Incorporation; By-Laws. Pursuant to the Merger,
(A) the Articles of Incorporation of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by law and such Articles of
Incorporation and (B) the By-Laws of Merger Sub, as in effect immediately prior
to the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law, the Articles of Incorporation and such
By-Laws.
1.12 Directors and Officers of the Surviving Corporation.
(a) The directors of Merger Sub immediately prior to the
Effective Time shall, from and after the Effective Time, be the directors of the
Surviving Corporation until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
ByLaws.
(b) The officers of Merger Sub immediately prior to the
<PAGE> 10
Effective Time shall be the initial officers of the Surviving Corporation and
shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal.
1.13 Rate Cap Consideration Adjustments.
(a) First Rate Cap Year. (i) If there is no Rate Cap Effective
Date in the First Rate Cap Year, then the Buyer shall pay Seller Representatives
(on behalf of the Sellers Pro Rata), as additional Consideration, the sum of
$3,000,000.
(ii) If there is a Rate Cap Effective Date during the First Rate
Cap Year, the Buyer shall pay Seller Representatives (on behalf of the Sellers
Pro Rata), as additional Consideration, the sum of $3,000,000, reduced for each
day during the First Rate Cap Year which is a Rate Cap Effective Date by the
product of $111.07 and the number of percentage points (not exceeding 74) that
the Rate Cap is less than 89% above the AT&T Rate.
(b) Second Rate Cap Year. (i) If there is no Rate Cap Effective
Date during the Second Rate Cap Year, then the Buyer shall pay Seller
Representatives (on behalf of the Sellers Pro Rata), as additional Consideration
(in addition to the amount provided in Section 1.13(a)), the sum of $3,000,000.
(ii) If there is a Rate Cap Effective Date during the Second Rate
Cap Year, the Buyer shall pay Seller Representatives (on behalf of the Sellers
Pro Rata), as additional Consideration (in addition to the amount provided in
Section 1.13(a)), the sum of $3,000,000, reduced for each day during the Second
Rate Cap Year which is a Rate Cap Effective Date by the product of $111.07 and
the number of percentage points (not exceeding 74) that the Rate Cap is less
than 89% above the AT&T Rate.
(c) Manner of Payment. Not later than 10 days after the end of
each of the First Rate Cap Year and the Second Rate Cap Year, the Buyer shall
notify Seller Representatives of the amount payable in respect of this Section
1.13, and shall direct the Escrow Agent to pay such amount to Seller
Representatives, on behalf of the Sellers Pro Rata, in cash or by wire transfer
or certified check.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF EACH SELLER
Each Seller severally represents and warrants to the Buyer as
follows:
2.1 Authorization; Binding Obligation. This Agreement has been,
and each the Other Documents to which it is a party will be, duly and validly
executed and delivered by such Seller and, assuming due authorization, execution
and delivery by the other parties hereto or thereto, constitutes or, in the case
of the Other Documents, will constitute a legal, valid and binding obligation of
such Seller, enforceable against such Seller in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization, or other laws affecting creditors'
rights generally or by the availability of equitable remedies generally. Such
Seller has the legal capacity and all requisite power and authority, whether
corporate or otherwise, to execute and deliver this Agreement and
<PAGE> 11
the Other Documents to which it is (or is required to be) a party and to
consummate the transactions contemplated hereby and thereby and to perform such
Seller's obligations hereunder and thereunder. Such execution, delivery and
consummation has been duly and validly authorized by all necessary action on the
part of such Seller, and no other corporate proceedings on the part of such
Seller are necessary to authorize such execution, delivery and consummation.
Except as set forth in Section 1.7 hereof, no power of attorney has been granted
by such Seller with respect to any matter relating to CCI or the Shares.
2.2 Title to the Securities. Such Seller is the record and
beneficial owner of, and has good and marketable title to, the number of
Securities set forth next to such Seller's name on Exhibit A hereto, free and
clear of all Encumbrances except for Encumbrances to be satisfied prior to or
contemporaneously with Closing. Except as set forth in Schedule 2.2 of the
Disclosure Schedule, such Securities are not subject to any restrictions on
transferability other than those imposed by the Securities Act and applicable
state securities laws. Except as set forth in Schedule 2.2 of the Disclosure
Schedule, there are no (a) options, warrants, calls, commitments or rights of
any character to purchase or otherwise acquire Securities from such Seller
pursuant to which such Seller may be obligated to sell or transfer any
Securities or (b) agreements, arrangements, understandings or special rights
with respect to the voting of Shares.
2.3 Consents and Approvals; No Violation. Except as set forth in
Schedule 2.3 of the Disclosure Schedule, neither the execution and delivery of
this Agreement and the Other Documents by such Seller, nor the consummation of
the transactions contemplated hereby or thereby by such Seller, nor compliance
with any of the provisions hereof by such Seller, will (a) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
or any other action by, any Governmental Authority by such Seller, (b) violate
any Law of any Governmental Authority which may be applicable to such Seller, or
by which any of such Seller's businesses, properties or assets (including,
without limitation, such Seller's Securities) may be bound or affected or (c)
violate, breach, or conflict with, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or any obligation to pay or result in the
imposition of any Encumbrance upon such Seller's Securities) except to the
extent consent of same is obtained prior to Closing.
2.4 Fees To Brokers or Other Parties. The Buyer and the Sellers
shall each pay their own expenses in connection with this transaction. Neither
CCI nor any Seller has or will have any obligation to pay any broker's,
finder's, investment banker's, financial advisor's or similar fee to any party,
in connection with this Agreement or the Other Documents, or the transactions
contemplated hereby or thereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CCI AND THE SELLERS
(OTHER THAN BERTHEL FISHER)
CCI and the Management Sellers, jointly and severally, and the
Sellers other than the Management Sellers and Berthel Fisher, severally,
represent and warrant to the Buyer as set forth in this Article III, provided
that, with respect to all Sellers other than the Management Sellers, such
representations and warranties are made to the best of their information and
knowledge.
<PAGE> 12
All references to CCI in this Article III shall refer to CCI and
its investments in CID, but not the Excluded Assets, except for Section 3.1(a)
and Section 3.6.
3.1 Organization and Standing; Subsidiaries. (a) CCI is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. CID Communications, S.A. de C.V. ("CID") is a corporation
duly organized, validly existing and in good standing under the laws of Mexico.
CCI has all requisite corporate power and authority to own, lease and operate
the properties and assets it now owns, operates and leases and to carry on its
businesses and operations as now being conducted. CCI is duly qualified or
licensed to do business and is in good standing in each of the jurisdictions in
which (i) the character or location of the properties and assets it owns, leases
or operates, (ii) the conduct of its business and operations as currently and
heretofore conducted or (iii) any other circumstance makes such qualification
necessary, except where the failure to be so qualified or licensed would not
have a material adverse effect on CCI.
(b) CCI has no investment in any corporation, partnership or
other entity except CID. CCI has good and valid title to such number of shares
of common stock of CID which constitutes 50% of the outstanding shares of the
only equity security of CID, free and clear of any Encumbrances.
3.2 Organizational Documents and Corporate Records. (a) CCI has
heretofore delivered to the Buyer complete and correct copies, with all
amendments thereto, of the Articles of Incorporation and By-laws of CCI, as
currently in effect. The minute books of CCI have been made available to the
Buyer for its inspection, and such minute books contain complete and correct
records of all meetings, and consents in lieu of a meeting, of the Board of
Directors of CCI (and any committees thereof) and the shareholders since the
incorporation of CCI, and accurately reflect all transactions referred to
therein.
The stock books and ledgers of CCI have been made available to
the Buyer for its inspection, and such books and ledgers are complete and
correct in all material respects.
(b) CCI has made available to the Buyer all accounting and
financial books and records (the "Accounting Books and Records") which relate to
the business of CCI. Such books and records have been maintained on a basis
consistent with past practice and GAAP, and fairly reflect the basis for CCI's
financial condition and results of operations as set forth in the Audited
Financial Statements.
3.3 Authorization. CCI has the requisite corporate power and
authority to execute, deliver and perform its obligations under this Agreement
and the Other Documents and to consummate the transactions contemplated hereby
and thereby. All corporate proceedings on the part of CCI which are necessary to
execute, deliver and perform this Agreement and the Other Documents and to
consummate the transactions contemplated hereby and thereby have been duly
authorized and taken. This Agreement has been, and at or prior to the Closing
the Other Documents required to be executed by CCI will be, duly and validly
executed by CCI, and constitute (or will constitute) valid and binding
obligations of CCI, enforceable against CCI in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization,
<PAGE> 13
or other laws affecting creditors' rights generally or by the availability of
equitable remedies generally. No power of attorney has been granted and is
currently in force by CCI with respect to any matter relating to CCI or its
business, operations or assets.
3.4 CCI Capitalization. The authorized capital stock of CCI
consists of 15,000,000 Common Shares, no par value, 5,320,467 of which are
issued and outstanding on the date hereof and owned by the Sellers as set forth
on Exhibit A hereto. In addition, on the date hereof CCI has outstanding (a)
options to purchase 849,795 Shares (the "Options"), (b) warrants to purchase
1,562,338 Shares (the "Warrants") and (c) 240,000 shares of Class A Cumulative
Convertible Preferred Stock, par value $1.00 per share (the "Preferred Stock"),
convertible into 2,218,080 Shares, all of which are owned by the Sellers as set
forth on Exhibit A hereto (collectively, the "Convertibles"). CCI has heretofore
delivered to the Buyer a true and complete copy of all documents which set forth
the terms of the Convertibles outstanding as of the date hereof. CCI has no
other class of capital stock authorized or outstanding. None of CCI's shares of
capital stock have been reserved for any purpose, except for issuance upon
exercise or conversion of the Convertibles. All of the outstanding Securities
are, and upon exercise of the Options all Shares will be, duly authorized and
validly issued, fully paid, nonassessable and not issued in violation of any
preemptive rights. Except for the Convertibles and as set forth in Schedule 3.4
of the Disclosure Schedule, as of the date hereof there are no (i) options,
warrants, calls, commitments or rights of any character to purchase or otherwise
acquire from CCI shares of capital stock of any class, (ii) outstanding
securities of CCI that are convertible into or exchangeable or exercisable for
shares of any class of capital stock of CCI, (iii) options, warrants or other
rights to purchase from CCI any such convertible or exchangeable securities, or
(iv) contracts, commitments, agreements, understandings or arrangements of any
kind relating to the issuance or voting of any capital stock of CCI, any
options, warrants or rights, pursuant to which, in any of the foregoing cases,
CCI is or would be subject or bound.
3.5 Consents and Approvals; No Violation. Except as set forth on
Schedule 3.5(a) of the Disclosure Schedule, neither the execution and delivery
of this Agreement and the Other Documents, nor the consummation of the
transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof, will (a) conflict with any provision of the Articles of
Incorporation or By-laws (or other similar organizational documents) of CCI, (b)
require any consent, waiver, approval, authorization or permit of, or filing
with or notification to, or any other action by, any Governmental Authority by
CCI, (c) violate any Law of any Governmental Authority applicable to CCI, or by
which any of its business, properties or assets may be bound or affected or (d)
violate, breach, or conflict with, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or any obligation to pay or result in the
imposition of any Encumbrance upon any of the property) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, Encumbrance,
Contract, Permit, Order, or other instrument or obligation to which CCI is a
party or by which any of its business, properties or assets may be bound or
affected.
3.6 Financial Statements. CCI has furnished to the Buyer the
audited financial statements of CCI as of, and for the year ended, September 30
in each of the years 1994 and 1995 (together with the notes thereto), certified
by CCI's independent public accountants, and
<PAGE> 14
accompanied by their reports thereon (collectively, the "Audited Financial
Statements") and will, prior to December 31, 1996, furnish to the Buyer the
audited financial statements of CCI for the year ended September 30, 1996 (the
"1996 Audit"). CCI has furnished to the Buyer the unaudited financial statements
for CCI as of August 31, 1996 and for the eleven months then ended
(collectively, with the Audited Financial Statements, the "Financial
Statements"). The Financial Statements are attached hereto as Exhibit G. The
Financial Statements have been, and the 1996 Audit will be, prepared from and in
accordance with the books and records of CCI in accordance with GAAP (subject,
in the case of interim financial statements, to the absence of notes, normal
year-end adjustments and any other adjustment described therein), consistently
applied and maintained throughout the periods indicated (except as disclosed in
Schedule 3.10 of the Disclosure Schedule). The Financial Statements fairly
present, and the 1996 Audit will fairly present, in all material respects, (a)
the assets, liabilities and financial condition of CCI, as at the dates thereof,
and (b) the results of operations and cash flows of CCI for the periods then
ended. Except for the sale of approximately 700 phones located in the State of
Iowa during the fiscal year ended September 30, 1995, the statements of income
and retained earnings and cash flows included in the Financial Statements or in
the 1996 Audit do not and will not contain any material items of special or
nonrecurring income not earned in the ordinary course of business and consistent
with applicable industry standards and practice.
3.7 Absence of Undisclosed Liabilities. CCI does not have any
liabilities or obligations arising from or relating to its business and
operations of any nature (whether absolute, accrued, fixed, contingent,
liquidated, unliquidated or otherwise and whether due or to become due) which
were not reflected or reserved against in the Financial Statements, except for
liabilities or obligations incurred since September 30, 1995 in the ordinary
course of business and consistent with past practice. Schedule 3.7 of the
Disclosure Schedule sets forth a true, complete and accurate list of all
liabilities or obligations of CCI as of the date hereof with respect to borrowed
money (including accounts payable and accrued expenses), letters of credit and
any notes, bonds or similar instruments or under any capitalized leases of CCI.
The Merger will not cause the acceleration of or otherwise adversely affect the
terms or conditions of such liabilities or obligations, except for liabilities
and obligations to be satisfied in full on the Closing Date.
3.8 Accounts Receivable. Schedule 3.8 of the Disclosure Schedule
sets forth a true, complete and accurate (in all material respects) list of all
Accounts Receivable generated in connection with CCI Phones as of September 30,
1996. All Accounts Receivable reflected in the Financial Statements and all
Accounts Receivable acquired or generated since August 31, 1996 by CCI (a) arose
from bona fide transactions in the ordinary course of business consistent with
past practice, (b) are valid and genuine, (c) are not subject to any
counterclaim or setoff and (d) are not subject to any Encumbrance. Except as set
forth on Schedule 3.8, (i) no Account Receivable outstanding and due as of
September 30, 1996 has been outstanding for more than 120 days, (ii) no operator
service provider has refused or threatened to refuse to pay its obligations for
any reason and (iii) no Account Receivable debtor is insolvent or is the subject
of a bankruptcy petition.
3.9 Equipment. (a) Except as disclosed on Schedule 3.9 of the
Disclosure Schedule, all Equipment is owned by CCI free and clear of any
Encumbrance. All Equipment which is reflected in the Financial Statements is
valued at the lower of cost (on a first-in, first-out basis)
<PAGE> 15
or market in accordance with GAAP consistently applied and maintained throughout
the periods. All Equipment disposed of by CCI since September 30, 1995 has been
disposed of only (i) in the ordinary course of CCI's business and (ii) at prices
and under terms that are consistent with past practice.
(b) All Equipment is, including 95% of the Installed Phones,
usable, in good working condition, free of any material defects and suitable for
the purposes of its intended and current operational use.
3.10 Absence of Certain Changes or Events. Except as set forth on
Schedule 3.10 of the Disclosure Schedule, since September 30, 1995:
(a) CCI has operated its business in the ordinary course
consistent with past practice;
(b) there has not been any material adverse change in the
business, results of operations, assets, liabilities, financial condition of
CCI;
(c) CCI has not transferred, disposed of, abandoned or permitted
to lapse or otherwise failed to preserve any Permit or other form of
authorization issued by a Governmental Authority necessary to the operation of
its business;
(d) CCI has not made any change in any accounting methods,
principles or practices (including, without limitation, changes in depreciation
or amortization policies or rates or relating to the establishment of accrual of
reserves) or any material election with respect to Taxes;
(e) CCI has not terminated or amended, breached or failed to
perform in all material respects all obligations under any Material Contract and
no other party thereto has terminated or amended or, to the knowledge of CCI or
any Seller, breached, or failed to perform in all material respects all of its
obligations under any Material Contract;
(f) CCI has not experienced any actual or, to the knowledge of
CCI and the Sellers, threatened labor unrest, work stoppages or slow-downs or
had any material change in its relationship with its employees, salesmen,
distributors, or independent contractors;
(g) CCI has not failed to replenish its Inventory and supplies in
a manner consistent with past practice; and
(h) CCI has not agreed, whether in writing or otherwise, to take
any action described in this Section 3.10.
3.11 Properties and Assets. CCI has good, valid and marketable
title to, or valid and binding leases (all of which are set forth on Schedule
3.11(a) of the Disclosure Schedule) with respect to, all Equipment and other
non-real estate assets (whether personal or mixed, tangible or intangible (and
whether or not fully depreciated or expensed)) used in its business and
operations, and such items are subject to no Encumbrance, other than those set
forth on Schedule 3.11(b) of the Disclosure Schedule.
3.12 Contracts. (a) Schedule 3.12 of the Disclosure Schedule
<PAGE> 16
sets forth a complete and correct list of all Material Contracts including,
without limitation, all Contracts relating to at least 50 phones. Complete and
correct copies of all written Material Contracts including any and all
amendments and other modifications thereto have been delivered to or have been
made available for inspection by the Buyer. All written and all oral Material
Contracts (i) are valid and binding obligations of CCI and, to the knowledge of
CCI or any Seller, the other parties thereto, (ii) are in full force and effect
and are enforceable as to CCI and, to the knowledge of CCI or any Seller, the
other parties thereto, in accordance with their respective terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium,
reorganization, or other laws affecting creditors' rights generally or by the
availability of equitable remedies generally and (iii) have not been amended or
terminated except in the ordinary course of business consistent with past
practice.
(b) CCI is not in default under nor has it breached in any
material respect any Material Contract or any other Contracts which, in the
aggregate, are material to CCI. The aggregate obligations of CCI with respect to
oral Contracts which do not constitute Material Contracts do not exceed $10,000.
No other party to any Material Contract or any other Contracts which, in the
aggregate, are material to CCI (i) has, to the knowledge of CCI or any Seller,
breached such Contract or is in default thereunder, (ii) has given notice that
it intends to terminate such Contract or (iii) to the knowledge of CCI or any
Seller, has altered, in any way adverse to CCI, its performance under such
Contract. No event or condition has occurred (or is alleged by any other party
to a Material Contract or any other Contracts which, in the aggregate, are
material to CCI, to have occurred) which, with or without due notice or lapse of
time or both, would constitute a breach or event of default on the part of CCI,
would provide a basis for a valid claim or acceleration under any such Contract
as against CCI or would prevent CCI from exercising and obtaining the full
benefits of any rights or options contained therein.
(c) CCI has a license from Intellicall, Inc. for the use of
Intellistar circuit boards in all telephones owned by CCI presently or in the
future, through November 11, 2087, and no payments will be required of CCI in
respect of such license other than a royalty currently equal to 3.6% of the
revenue generated by the Intellistar circuit board, reducing to 3.25% for
calendar year 1997.
(d) From and after the Effective Time, the Surviving Corporation
shall have no obligations with respect to the use, lease or maintenance of any
aircraft.
3.13 Compliance with Laws and Permits.
(a) Except as set forth on Schedule 3.13(a) of the Disclosure
Schedule, the business and operations of CCI have been conducted and are now
being conducted in all material respects in compliance with all Laws and Orders
of all Governmental Authorities having jurisdiction over CCI and all Permits
relating to any of its properties or applicable to its business.
(b) Except as and to the extent set forth on Schedule 3.13(b) of
the Disclosure Schedule, CCI possesses all Permits necessary to own and operate
its property and assets and to conduct its business as it is currently
conducted. Such Permits are valid and subsisting in full force and effect, and
CCI has fulfilled its obligations under each of the Permits, and no event has
occurred or condition or state of facts exists
<PAGE> 17
which constitutes or, after notice or lapse of time or both, would constitute a
default or violation under any such Permit or would permit revocation or
termination of any such Permit. No proceeding which might involve the revocation
or termination of any such Permit is pending or, to the knowledge of CCI or the
Sellers, threatened.
(c) Except as set forth in Schedule 3.13(c) of the Disclosure
Schedule, CCI has made or will, prior to the Closing, make all filings and
received or will, prior to the Closing, receive all approvals in connection with
the Permits which are necessary for the Buyer to own and operate the property
and assets of CCI and to conduct CCI's business as it has currently and has
heretofore been conducted.
3.14 Litigation and Arbitration. (a) No claim, action, cause of
action, suit, proceeding, inquiry, investigation or Order is pending or, to the
knowledge of CCI and each Seller, threatened, against CCI or affecting its
business, operations or assets (including actions by or before any
administrative body, arbitration or mediation panel or Governmental Authority),
except as set forth on Schedule 3.14(a) of the Disclosure Schedule. No Order of
any Governmental Authority, arbitrator or mediator is outstanding against CCI,
its business, operations or assets.
(b) To the knowledge of CCI or any Seller, no claim, action,
suit, proceeding, inquiry or investigation has been instituted which threatens
to restrain or prohibit or otherwise challenge the legality or validity of the
transactions contemplated by this Agreement or the Other Documents.
3.15 Employee Matters. Except as set forth in Schedule 3.15 of
the Disclosure Schedule, CCI has no employee plans or agreements in effect. All
such plans and agreements are in compliance with all applicable laws and
regulations. CCI has taken no actions in violation of ERISA. The consummation of
the transactions contemplated by this Agreement will not entitle any current or
former employee or officer of CCI or any ERISA Affiliate to severance pay,
unemployment compensation or any other payment, except as expressly provided
herein.
There are no pending or, to the knowledge of CCI and each Seller,
threatened claims by or on behalf of any employee of CCI.
3.16 Labor Relations. CCI has at all times been in compliance in
all material respects with all applicable Laws in respect of employment and
employment practices.
3.17 Taxes. Except as set forth on Schedule 3.17 of the
Disclosure Schedule:
(a) CCI has (i) duly and timely filed with the appropriate
Governmental Authorities all Tax Returns required to be filed by it, and all
such Tax Returns are true, complete and correct in all material respects, and
(ii) has timely paid all Taxes due or claimed to be due from it by any taxing
authority.
(b) CCI has complied in all respects with all applicable Laws
relating to the payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
provisions under any foreign laws) and has, within the time and within the
manner prescribed by Law, withheld from employee wages and paid over to the
proper Governmental Authorities all amounts required to be
<PAGE> 18
withheld and paid over under all applicable Laws.
(c) There are no Encumbrances for Taxes upon CCI's assets except
for statutory liens for current Taxes not yet due.
(d) CCI has not requested any extension of time within which to
file any Tax Return in respect of any fiscal year which has not since been filed
and no outstanding waivers or comparable consents regarding the application of
the statute of limitations with respect to any Taxes or Tax Returns have been
given by CCI.
(e) No federal, state, local or foreign audits or other
administrative proceedings or court proceedings exist or have been initiated or
are presently pending with regard to any Taxes or Tax Returns of CCI.
(f) CCI is not required to include in income any adjustment
pursuant to Section 481(a) of the Code, by reason of a voluntary change in
accounting method (nor has any taxing authority proposed in writing to CCI any
such adjustment or change of accounting method).
(g) CCI has not received an adverse ruling from any taxing
authority, or signed a closing or other agreement with any taxing authority,
which could have an adverse effect on CCI.
(h) CCI is not a party to, is not bound by, and has no obligation
under, any Tax sharing agreement or similar contract or arrangement.
(i) No power of attorney has been granted by or with respect to
CCI with respect to any matter relating to Taxes which is currently in force.
(j) CCI has not filed a consent pursuant to Section 341(f) of the
Code (or any predecessor provision) or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as such term is defined
in Section 341(f)(4) of the Code) owned by CCI.
(k) CCI is not a party to any agreement, contract, or arrangement
that will result, separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code.
(l) None of the income recognized for federal, state, local or
foreign income tax purposes by CCI during the period beginning from October 1,
1995 to the date hereof will be derived other than in the ordinary course of
business, other than income attributable to the sale or other disposition of the
Excluded Assets.
3.18 Intellectual Property. CCI owns or has the right to use all
Intellectual Property used in or necessary to conduct its business as currently
conducted, in each case without the payment of any royalties (other than as set
forth in Section 3.12). The activities and products of CCI do not infringe upon
the Intellectual Property rights of any other Person. To the knowledge of CCI
and the Sellers, there are no infringements by third parties of any Intellectual
Property owned by CCI.
3.19 Environmental Matters. Except as set forth in Schedule 3.19
of the Disclosure Schedule:
<PAGE> 19
(a) CCI has not used or stored any, and there are no, Hazardous
Materials at levels regulated by a governmental agency having jurisdiction in,
on or at any real property owned or, to the knowledge of CCI or any Seller,
leased by CCI except for substances which are used or are to be used in the
ordinary course of business (which inventories have been stored and used in
accordance with all currently applicable Laws relating to pollution, the
preservation of the environment and the discharge or release of any Hazardous
Material into the environment or workplace ("Environmental Laws") and
environmental permits. There is not now at any real property owned or, to the
knowledge of CCI or any Seller, leased by CCI any (i) underground storage tank
or surface impoundments, (ii) asbestos-containing materials or (iii)
polychlorinated biphenyls, except in compliance with applicable Environmental
Laws.
(b) No notice has been received by CCI from any Governmental
Authority or any other Person that CCI is responsible (or potentially
responsible) for any remedial action at any location or that any real property
owned or, to the knowledge of CCI or any Seller, leased by CCI is required or
may be required to be subject to remedial action. All remedial action previously
required under any Environmental Law with respect to any real property currently
owned or, to the knowledge of CCI or any Seller, leased by CCI has been
completed. Included within the Permits are all environmental Permits necessary
for the operation of CCI's business as presently operated. There is no (i)
civil, criminal or administrative claim, suit, proceeding or investigation
(including a request for information) pending or, to the knowledge of CCI and
the Sellers, threatened with respect to real property owned or, to the knowledge
of CCI or any Seller, leased by CCI relating in any way to any Environmental
Laws or environmental Permits or (ii) outstanding written orders or Contracts
with any Governmental Authority relating in any way to Environmental Laws or
environmental Permits. CCI has timely filed all reports and notifications
required to be filed with respect to, and obtained and maintained all
environmental Permits required for, the real property owned or, to the knowledge
of CCI or any Seller, leased by CCI, all improvements on the foregoing and all
operations conducted therein, and has generated and maintained all required
records and data under all currently applicable Environmental Laws, and all
operations conducted therein are in compliance in all material respects with
such Environmental Laws.
(c) During the period that CCI has owned or leased its real
properties and, to CCI's and the Sellers' knowledge, during any period prior
thereto, no condition has existed or event has occurred with respect to any
property owned or, to the knowledge of CCI or any Seller, leased by CCI that
could, with or without notice, passage of time or both, give rise to any present
or future liability with respect to any property owned or, to the knowledge of
CCI or any Seller, leased by CCI pursuant to any Environmental Law.
(d) CCI has not indemnified or agreed to indemnify any other
Person for any liability under, or violation of, Environmental Laws.
3.20 Insurance. Schedule 3.20(a) of the Disclosure Schedule sets
forth a complete and correct list as of the Closing of all primary, excess and
umbrella policies, bonds and other forms of insurance, and renewals thereof,
owned or held by or on behalf of or providing insurance coverage to or for the
benefit of CCI (copies of which have previously been provided to the Buyer),
with the amount of coverage, cost and expiration
<PAGE> 20
date set forth next to each policy thus listed. All of such insurance policies
are in full force and effect, all premiums currently payable or previously due
have been paid, no notice of cancellation or termination has been received by
CCI with respect to any such policy and no assignment of proceeds or Encumbrance
exists with respect to the proceeds of any such policy. Except as and to the
extent set forth on Schedule 3.20(b) of the Disclosure Schedule, there are no
pending claims against such policies. All such policies will remain in full
force and effect upon execution and delivery of this Agreement and the Other
Documents and the consummation of the transactions contemplated hereby and
thereby.
3.21 Bank Accounts. Schedule 3.21 of the Disclosure Schedule sets
forth a complete and correct list of (a) the names and locations of all
financial institutions at which CCI maintains a checking account, deposit
account, securities account, safety deposit box or other deposit or safekeeping
arrangement, (b) the number or other identification of all such accounts and
arrangements and (c) the names of all persons authorized to draw thereon or have
access thereto.
3.22 Customers and Suppliers. Schedule 3.22(a) sets forth a
complete and correct list of (a) the names of those customers generating the
greatest revenues for CCI (listing such number of customers as would, in the
aggregate, generate at least 40% of CCI's total revenues) and the amount of
revenues generated by each such customer in CCI's fiscal year ended September
30, 1996 and (b) the names of suppliers to whom CCI paid more than $50,000 in
CCI's fiscal year ended September 30, 1996 and the approximate total purchases
by CCI from each such supplier during such year. Except as and to the extent set
forth on Schedule 3.22(b) of the Disclosure Schedule, there have been no adverse
changes in the relationships between CCI and its customers and suppliers since
September 30, 1995. CCI has not been provided with any notice that any supplier,
manufacturer or customer intends to cease doing business with CCI.
3.23 Affiliate Transactions. Schedule 3.23 of the Disclosure
Schedule sets forth a correct and complete list of all arrangements or
transactions (other than salary, bonus and benefits generally available to the
employees of CCI) between CCI and the Sellers or any affiliate or associate of
the Sellers, or any business or entity in which the Sellers or any affiliate or
associate of any of the Sellers has any direct or indirect interest (the
"Sellers' Affiliates"), that involves an obligation or commitment on the part of
or for the benefit of CCI or such Sellers' Affiliate of more than $5,000 in any
calendar year (the "Affiliate Transactions").
3.24 Prior Acquisitions. Except as set forth in Schedule 3.24 of
the Disclosure Schedule, no claims, amounts owed, liabilities, Encumbrances,
legal proceedings or any other obligations of any kind are due or were incurred
or outstanding in connection with any acquisitions made by CCI, except as
already recorded on the Financial Statements heretofore delivered to the Buyer.
3.25 Interests in Real Property. (a) Schedule 3.25(a) of the
Disclosure Schedule sets forth a true and complete list, by deed reference or
otherwise, of all real properties owned by CCI. Except as set forth in Schedule
3.25(a) of the Disclosure Schedule, CCI has good and indefeasible title in fee
simple to all real properties shown in Section 3.25(a) of the Disclosure
Schedule, sufficient in each case for CCI to transfer good and indefeasible
title to a willing buyer. Except as disclosed in Section 3.25(a) of the
Disclosure Schedule, none of the real properties owned by
<PAGE> 21
CCI is subject to any Encumbrances; and, except for such Encumbrances, none of
such real properties is subject to any easements, rights of way, licenses,
grants, building or use restrictions, exceptions, reservations, limitations or
other impediments which materially and adversely affect the value thereof or
which materially interfere with or impair the present use thereof in the usual
or normal conduct of the business of CCI. All improvements on such real
properties conform in all material respects to all applicable health, fire,
environmental, safety, zoning and building laws, ordinances and administrative
regulations, except for possible nonconforming uses or violations which do not
materially interfere with the present use, operation or maintenance thereof by
CCI as now used, operated or maintained or access thereto, and which do not
materially and adversely affect the value thereof. All buildings, structures,
improvements and fixtures owned by CCI in the conduct of its business conform in
all material respects to all applicable codes and rules adopted by national and
local associations and boards of insurance underwriters; and all such buildings,
structures and improvements are in good operating condition and repair in all
material respects (normal wear and tear excepted).
(b) The buildings, driveways and all other structures and
improvements upon the properties described in Section 3.25(a) of the Disclosure
Schedule are all within the boundary lines of such property or have the benefit
of valid easements and there are no encroachments thereon that would materially
affect the use thereof. There are no outstanding requirements or recommendations
by any insurance company which has issued a policy covering any such property,
or by any board of fire underwriters or other body exercising similar functions,
requiring or recommending any repairs or work to be done on any such property.
(c) Except for the real properties set forth on Schedule 3.25(c),
CCI does not use or lease any real property.
(d) None of the property described on Section 3.25(a) of the
Disclosure Schedule is subject to any lease, license or other agreement granting
to any person any right to the use, occupancy or enjoyment of such property or
any portion thereof, except where such lease, license or other agreement would
not materially and adversely affect the use, occupancy or enjoyment of such real
property as it is currently being used, occupied or enjoyed.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Sellers as follows:
4.1 Organization and Standing. The Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio. The Buyer has all requisite corporate power and authority to own, lease
and operate the properties and assets it now owns, leases and operates and to
carry on its business and operations as it is now being conducted.
4.2 Authorization; Binding Obligation. The Buyer has all
requisite corporate power and authority to execute and deliver this Agreement
and the Other Documents to which it is a party and to consummate the
transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
Other Documents by the Buyer and the consummation of the
<PAGE> 22
transactions contemplated hereby and thereby by the Buyer have been duly and
validly authorized by the Board of Directors of the Buyer and no other corporate
proceedings on the part of the Buyer are necessary to authorize this Agreement
or the Other Documents or to consummate the transactions contemplated hereby or
thereby. This Agreement has been, and the Other Documents will be validly
executed and delivered by the Buyer and, assuming due authorization, execution
and delivery by the Sellers, constitute (or will constitute) legal, valid and
binding obligations of the Buyer, enforceable against the Buyer in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization, or other laws affecting
creditors' rights generally or by the availability of equitable remedies
generally.
4.3 Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement and the Other Documents, nor the consummation of
the transactions contemplated hereby or thereby, nor compliance with any of the
provisions hereof or thereof, will (a) conflict with any provision of the
Articles of Incorporation or Code of Regulations of the Buyer, (b) require any
consent, waiver, approval, authorization or permit of, or filing with or
notification to, or any other action by, any Governmental Authority by the
Buyer, (c) violate any law of any Governmental Authority applicable to the
Buyer, or by which any of its business, properties, or assets may be bound or
affected or (d) violate, breach, or conflict with, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, or acceleration or any obligation to pay or
result in the imposition of any Encumbrance upon any of the property) under, any
of the terms, conditions, or provisions of any note, bond, mortgage, indenture,
Encumbrance, Contract, Permit, Order, or other instrument or obligation to which
the Buyer is a party or by which any of its business, properties, or assets may
be bound or affected, except where such violation, breach, conflict or default
will be cured at or prior to the Closing or would not have a material adverse
effect on the ability of the Buyer to satisfy its obligations in this Agreement.
4.4 Buyer Shares. The Buyer has reserved sufficient Buyer Shares
out of its authorized but unissued common stock to satisfy it obligations under
this Agreement. Such Buyer Shares have been duly authorized for issuance, and
when issued to the Sellers as contemplated herein, will be validly issued, fully
paid and non-assessable.
4.5 SEC Documents. All reports, schedules, registration
statements and definitive proxy statements filed by the Buyer with the SEC since
July 1, 1995 (the "SEC Documents") complied as of their respective dates, in all
material respects, with the requirements of the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such SEC
Documents, and none of the SEC Documents 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, in light of the circumstances under
which they were made, not misleading.
ARTICLE V
ADDITIONAL COVENANTS
5.1 Transfer and Other Taxes; Preparation and Filing of Tax
Returns; Payment of Taxes; Tax Year.
<PAGE> 23
(a) Notwithstanding any other provision of this Agreement to the
contrary, the Sellers shall assume and promptly pay all sales, use, privilege,
transfer, documentary, gains, stamp, duties, recording and similar Taxes and
fees (including any penalties, interest or additions) imposed upon any party
incurred in connection with the transactions contemplated by this Agreement
(collectively, the "Transfer Taxes"), and the Sellers shall, at their own
expense, procure any stock transfer stamps required by, and the Sellers shall
accurately file all necessary Tax Returns and other documentation with respect
to, any Transfer Tax, provided that the obligations of the Sellers under this
Section 5.1(a) shall be several (and not joint) with respect to any Taxes
imposed on any Seller or with respect to Shares held by any Seller.
(b) Provided the Buyer allows the Sellers access to and the right
to copies of all relevant and appropriate information, the Sellers shall prepare
(in each case, at their own cost and expense and in a manner consistent with
past practice) on a timely basis all Tax Returns (including amendments thereof)
of CCI for all Pre-Closing Periods. The Sellers shall file or cause to be filed
each such Tax Return that will be filed prior to the Closing Date, provided,
however, that no later than 15 days prior to the filing of any such Tax Return,
the Sellers shall deliver copies of such Tax Returns to the Buyer and, if
requested by the Buyer, shall consult with the Buyer with respect to such Tax
Returns. In connection with any such Tax Return that has not been filed prior to
the Closing Date, the Sellers shall deliver to the Buyer each such Tax Return no
later than 15 days prior to the due date for the filing of such Tax Return
(including any extension requested and received) and the Buyer, upon its review
and consent, which consent shall not be unreasonably withheld or delayed, shall
file or cause such Tax Returns to be filed. To the extent permissible under
applicable law, (i) all such Tax Returns shall be prepared and filed in a timely
manner consistently with CCI's past practices and (ii) in accordance with
Section 5.1(g) of this Agreement, all such Tax Returns shall be prepared and
filed on the basis that, except as to Taxes of CCI for which applicable law
provides otherwise, the relevant taxable periods terminate on the Closing Date.
The Sellers shall pay all Taxes shown to be due and payable on such Tax Returns.
(c) The Buyer shall prepare and file, or cause the Surviving
Corporation to prepare and file, on a timely basis all Tax Returns of CCI
for all periods other than those provided in Section 5.1(b) hereof. Subject
to Section 7.7 hereof, the Buyer shall pay all Taxes shown to be due and
payable thereon. After the Closing Date, the Buyer shall not amend any Tax
Return of CCI relating to any Pre-Closing Periods nor make any material
changes to accounting allocations or procedures, in each case, that would
adversely affect the Sellers' liability to the Buyer pursuant to Section
7.7 hereof without the express written consent of Seller Representatives.
(d) The Sellers and the Buyer shall cooperate, and shall
cause their respective, officers, employees, agents, auditors and
representatives to cooperate, (i) in preparing, filing, and amending the
Tax Returns of CCI and (ii) with respect to any audit or other
administrative or court proceedings with respect to Taxes and Tax Returns
of CCI for periods ending on or before the Closing Date, in each case
including maintaining and making available to each other all records
necessary in connection with Taxes payable with respect to such Tax Returns
and in resolving all disputes and audits and refunds with respect to such
Tax Returns and Taxes.
<PAGE> 24
(e) Each Seller severally shall promptly notify Buyer of any
notices or materials received by it from any Governmental Authority which relate
to Taxes or the business or operations of CCI. The Buyer shall promptly notify
Seller Representatives of any notices or materials received by it from any
Governmental Authority which relate to Taxes for any Pre-Closing Period or
Straddle Period or the business or operations of CCI.
(f) The Buyer shall not make an election under Section 338 of the
Code. The parties to this Agreement acknowledge and agree that the Merger shall
be treated as a sale of stock.
(g) For purposes of determining when for federal income Tax
purposes the Tax year of CCI shall end, the parties shall follow the rule of
section 1.1502- 76(b)(1) of the United States Treasury regulations. Accordingly,
the parties hereby agree that (i) for federal income Tax purposes the Tax year
of CCI shall end on and include the Closing Date, and CCI shall become a member
of the Buyer's consolidated group beginning the day after the Closing Date, (ii)
the items of income, gain, deduction, loss and credit of CCI through and
including the date on which the Closing Date occurs shall be reported on the
federal income Tax Return filed for CCI and (iii) the items of income, gain,
deduction, loss and credit of CCI beginning the day after the Closing Date shall
be reported in the consolidated federal income Tax Return of the Buyer. To the
extent permissible under applicable law, similar principles shall apply in the
case of any state, local, foreign or other jurisdiction in which CCI files any
Tax Return.
5.2 Further Assurances; Cooperation. (a) The parties shall, from
time to time before and after the Closing, upon the request of any other party
and without further consideration, execute, acknowledge and deliver in proper
form any further instruments, and take such further actions as such other party
may reasonably require, to carry out effectively the intent of this Agreement
and the Other Documents.
(b) The parties shall cooperate with each other in connection
with any claim, action, suit, proceeding, inquiry or investigation with any
other Person which relates to the execution and delivery of this Agreement or
the Other Documents, or the consummation of the transactions contemplated
hereunder and thereunder.
5.3 Notification of Certain Matters. Each of the parties hereto
shall promptly notify the other parties, in the manner provided in Section 8.10
hereof, of (a) the filing or other initiation of any claim, action, suit,
proceeding, inquiry or investigation which relates to the execution and delivery
of this Agreement or the Other Documents, or the consummation of the
transactions contemplated hereunder or thereunder, (b) any circumstance or
development which could adversely impair or affect its ability to perform its
obligations under this Agreement and the Other Documents, (c) any notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated by
this Agreement and the Other Documents, (d) any notice or other communication
from any Governmental Authority in connection with the transactions contemplated
by this Agreement and the Other Documents and (e) any breach of this Agreement.
5.4 Confidentiality and Exclusivity.
(a) CCI and each Seller severally shall not (and, in the
<PAGE> 25
case of CCI and each Seller which is a corporation, will cause its officers to
not) at any time after the Closing, without the prior written consent of the
Buyer, disclose or use any information obtained during the negotiation or due
diligence process nor any other confidential information (relating to either the
Buyer or CCI) otherwise obtained except (i) as may be necessary in connection
with their Tax filing and reporting obligations; (ii) information publicly known
or which becomes publicly known through no unauthorized act of such party; (iii)
information approved by the other party for disclosure; or (iv) information
required to be disclosed pursuant to a requirement of a Governmental Authority
or law if the disclosing party provides the other party with notice of this
requirement a reasonable time prior to disclosure. The provisions of this
Section 5.4(a) will survive the expiration or termination of this Agreement for
any reason.
(b) CCI and each Seller severally agrees not to engage in any
negotiations with any party (other than the Buyer), sell or otherwise transfer
or agree to sell or transfer any of the stock or assets of CCI, or to furnish
any confidential information regarding CCI or its business to any party
expressing an interest in any such transaction, except to the Buyer.
5.5 Publicity. Neither CCI nor any Seller severally shall issue
any press release or make any public statement regarding the transactions
contemplated hereby, without the prior approval of the Buyer, which approval
shall not be unreasonably withheld or delayed. The Buyer shall not issue any
press release or make any public statement regarding the transactions
contemplated hereby, without prior approval of CCI and Seller Representatives,
which approval shall not be unreasonably withheld or delayed.
5.6 Expenses.
(a) Except as otherwise specifically provided for herein, each
party hereto shall be solely responsible for all expenses incurred by it or on
its behalf in connection with the preparation and execution of this Agreement
and the Other Documents and the consummation of the transactions contemplated
hereby and thereby, including, without limitation, the fees and expenses of its
counsel, accountants, brokers, finders, financial advisors and other
representatives, provided, however, that at or prior to the Closing CCI shall
pay all expenses of the Sellers incurred through such date. Neither CCI nor any
Seller shall be responsible for any expenses incurred by the Buyer in connection
with any registration statement or public offering.
(b) The Sellers and the Buyer agree that in the event any dispute
between them, either occurring under, relating to or in connection with any of
the provisions of this Agreement or the Other Documents, is submitted to a
Governmental Authority or other appropriate entity, then all costs and expenses
of the parties (including reasonable legal fees) shall be paid by the party
against whom a determination by such Governmental Authority or entity is made
or, in the absence of a determination wholly against one party, as such
Governmental Authority or entity shall direct.
5.7 Due Diligence. Until the Closing Date, CCI will allow the
Buyer and its representatives and agents such access to the books, records,
facilities and personnel of CCI is as necessary to facilitate a smooth transfer
of ownership, provided that such access does not unreasonably interfere with the
operations of CCI.
<PAGE> 26
5.8 Interim Conduct of Business. Except as otherwise contemplated
by this Agreement, during the period from the date hereof to the Closing, CCI
shall, and the Sellers severally (to the extent they have the authority) shall
cause CCI to (i) operate the business of CCI only in the ordinary course of
business consistent with past practice, (ii) maintain, keep and preserve the
assets of CCI in the ordinary course of business, and (iii) use commercially
reasonable efforts to preserve intact the present organization of CCI, keep
available the services of the present employees of CCI, preserve CCI's
relationships with customers, suppliers, licensors, licensees, contractors and
others having significant business dealings with CCI. Without limiting the
generality of the foregoing, from the date of this Agreement, CCI shall not, and
the Sellers severally (to the extent they have the authority) shall not permit
CCI to, without the prior written consent of the Buyer (which consent shall not
be unreasonably withheld or delayed):
(a)(i) authorize for issuance, issue, sell, deliver or agree or
commit to issue, sell or deliver (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise)
any shares of the capital stock of CCI or any other securities or equity
equivalents (except for (A) the issuance of Shares and/or the grant of options
to purchase Shares which, in the aggregate, do not exceed 464,984 Shares, and
(B) the issuance of Shares upon the exercise or conversion of the Convertibles;
in the event that CCI issues any Shares or grants any options after the date
hereof, it shall deliver to the Buyer a revised Exhibit A to reflect such
issuance or grant, which shall replace the Exhibit A attached hereto as part of
this Agreement), (ii) split, combine or reclassify any shares of such capital
stock or (iii) amend the terms of any such securities or agreements outstanding
on the date hereof;
(b) amend or propose to amend the Articles of Incorporation or
By-laws of CCI;
(c)(i) assume, guarantee, endorse or otherwise become liable
(whether directly, contingently or otherwise) for the obligations of any other
person or (ii) make any loans, advances or capital contributions to, or
investments in, any other person except, in each case, if such transaction is
satisfied, paid or released at or before the Closing;
(d) permit any assets of CCI to suffer any lien thereupon, except
in the normal course of business;
(e) change any of the accounting principles or practices used by
CCI (except as required by GAAP);
(f) enter into, adopt, amend or terminate any employee benefit
plan, increase in any manner the compensation or fringe benefits of any officer
or employee (except for annual salary increases in the normal course of
business) or enter into any contract, agreement, commitment or arrangement to do
any of the foregoing;
(g) enter into or offer to enter into any employment or
consulting agreement with any person;
(h)(i) enter into, amend or terminate any Material Contract
(other than the execution of new site licenses or agreements to acquire new
phones or to otherwise increase the number of Installed Phones or Contract
Phones) or (ii) take any action or fail to take any action that, with or without
notice or lapse of time, would constitute a default under any
<PAGE> 27
Material Contract;
(i) sell, lease, transfer or otherwise dispose of any of its
assets except in the ordinary course of business;
(j) install, or agree to install, any telephones, except
consistent with standards employed by CCI immediately prior to October 16, 1996;
(k) pay any dividend or make any other distribution to the
Sellers with respect to their Securities, other than a dividend paid in cash;
(l) make any election with respect to the Taxes or Tax Returns of
CCI;
(m) permit its level of Inventory (other than Contract Phones) to
fluctuate in a manner inconsistent with its historical practices; or
(n) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any representation or warranty
of CCI or Sellers contained in this Agreement untrue or incorrect as of the date
when made or as of any future date or which could prevent the satisfaction of
any condition to Closing set forth in Article VI hereof.
5.9 Excluded Assets. On or before the Closing Date, the Sellers
shall cause the assets relating to CCI's hospitality division listed on Exhibit
H hereto (the "Excluded Assets") (and any related liabilities) to be transferred
out of CCI and to be acquired and assumed by the Sellers or one or more other
parties (other than CCI or the Buyer). Notwithstanding anything to the contrary
contained herein, after the Closing, the Buyer shall permit the Sellers to
pursue in the name of CCI, that certain litigation styled Cherokee
Communications, Inc. vs. Superior Phones, Ltd. and Wanda Baucom, Individually;
provided that (a) all expenses incurred and all damages, settlements and other
and monies recovered in such litigation shall be for the account and benefit of
the Sellers, Pro Rata and (b) nothing in connection with the prosecution,
adjudication or settlement of such litigation shall have an adverse effect on
CCI or the Buyer.
5.10 1996 Audit. Not later than 10 business days prior to the
Closing Date, CCI shall deliver to the Buyer the 1996 Audit.
5.11 Permits. Provided the Buyer cooperates with all reasonable
requests made by CCI and the Sellers, at CCI's sole cost and expense, CCI and
the Sellers will use commercially reasonable efforts to cause all Permits or
consents to transfer which are required to be obtained for Buyer to legally
operate CCI's business, a complete listing of which is set forth on Exhibit I
hereto, to be issued or fully assigned to Buyer within 90 days after the Closing
Date.
5.12 Consents; Waivers; Assignments. (a) The Sellers or CCI will,
prior to the Closing, have obtained and delivered all consents, waivers,
assignments and assumptions which would be required in order to not breach any
Material Contracts (or any other Contracts which, in the aggregate, are
material) to which CCI is a party and pertaining to the Buyer's assumption of
CCI's debts by operation of law, a complete listing
<PAGE> 28
of which is set forth on Exhibit J hereto.
(b) All purchase money security agreements relating to any item
of Equipment have been or will be released prior to the Closing, or all required
consents, assignments or waivers will be obtained and delivered to the Buyer.
5.13 Cooperation in Financings. CCI and the Sellers agree to
cooperate with, and provide reasonable assistance to, the Buyer, at the Buyer's
expense, in connection with any sale or distribution of securities (whether
registered or otherwise) made by the Buyer or any of its affiliates in
connection with the consummation of the transactions contemplated hereby,
including, without limitation, using their reasonable best efforts to (a) make
available on a timely basis such financial information of CCI as may reasonably
be required in connection with any such sale or distribution, (b) obtain "cold
comfort" letters and updates thereof from CCI's independent certified public
accountants and opinion letters from CCI's attorneys, with such letters to be in
customary form and to cover matters of the type customarily covered by
accountants and attorneys in such transactions, and (c) make reasonably
available representatives of CCI and its accountants and attorneys in connection
with any such sale or distribution, including for purposes of due diligence and
marketing efforts related thereto.
5.14 Options. At or prior to the Closing, each Seller who holds
Options shall exercise all Options held by him.
5.15 Payment of Certain Liabilities. In the event that the
Consideration shall be adjusted pursuant to Section 1.4(e) due to Liabilities in
the form of accrued and unpaid dividends or interest, any obligation to pay the
sum of such accrued and unpaid dividends or accrued interest, as the case may
be, shall be assumed by the Surviving Corporation.
ARTICLE VI
CONDITIONS
6.1 Conditions Precedent to Obligations of the Buyer. The
obligation of the Buyer to consummate the transactions contemplated hereby is
subject to the satisfaction or waiver by the Buyer (subject to applicable law)
on or before the Closing Date, of each of the following conditions:
(a) Accuracy of Representations and Warranties. Each of the
representations and warranties of the Sellers and CCI contained in this
Agreement, the Disclosure Schedule, or in any Other Document to be executed and
delivered by the Sellers or CCI on or before the Closing Date pursuant hereto
shall have been true and correct in all material respects when made, and shall
be true and correct in all material respects as of the Closing Date as though
made on and as of such date.
(b) Performance or Agreements. The Sellers and CCI shall have
performed and complied in all material respects with all of the covenants and
agreements contained in this Agreement to be performed or complied with by them
at or before the Closing.
(c) Adverse Proceedings. No claim, action, suit, investigation
or governmental proceeding shall be pending and no Law of any
<PAGE> 29
Governmental Authority shall be enacted, rendered or in force, which would
render it unlawful, as of the Closing Date, to effect the transactions
contemplated by this Agreement and the Other Documents to be executed and
delivered pursuant hereto.
(d) Consents and Approvals. All necessary consents, approvals or
waivers from third parties and Governmental Authorities shall have been received
by CCI and the Buyer.
(e) Environmental. The Buyer shall be satisfied with the results
of an environmental audit of the real property owned by CCI.
(f) EBITDA. The EBITDA for the three months ending December 31,
1996 shall not be more than 6.5% lower than the EBITDA for the three months
ended December 31, 1995.
6.2 Conditions Precedent to Obligations of CCI and the Sellers.
The obligations of CCI and the Sellers to consummate the transactions
contemplated hereby are subject to the satisfaction or waiver by CCI (subject to
applicable Law) on or before the Closing Date of each of the following
conditions:
(a) Accuracy of Representations and Warranties. Each of the
representations and warranties of the Buyer contained in this Agreement or in
any Other Document to be executed and delivered by the Buyer on or before the
Closing Date pursuant hereto shall have been true and correct in all material
respects when made, and shall be true and correct in all material respects as of
the Closing Date as though made on and as of such date.
(b) Performance of Agreements. The Buyer shall have performed and
complied in all material respects with all of the covenants and agreements
contained in this Agreement to be performed or complied with by the Buyer at or
before the Closing.
(c) Adverse Proceedings. No claim, action, suit, investigation or
governmental proceeding shall be pending, and no Law of any Governmental
Authority shall be enacted, rendered or in force, which would render it
unlawful, as of the Closing Date, to effect the transactions contemplated by
this Agreement and the Other Documents to be executed and delivered pursuant
hereto.
(d) Preferred Stock Approval. The holder of the Preferred Stock
shall have approved this Agreement and the transactions contemplated hereby; the
execution of this Agreement by such holder shall constitute such approval, and
shall be irrevocable.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; INDEMNIFICATION
7.1 Survival of Representations and Warranties. All
representations and warranties of the Sellers and the Buyer contained herein or
made pursuant hereto shall survive the Closing and any investigation at any time
made by or on behalf of any party hereto until December 31, 1998 except that the
representations and warranties contained in Sections 3.14 (Litigation and
Arbitration) and 3.17 (Taxes) shall both survive until 45 days following the
expiration of the applicable statute of
<PAGE> 30
limitations (including extensions thereof). Provided that a claim with respect
to a breach of representation or warranty is made within the applicable period
in accordance with the provisions of Section 7.6 hereof, such claim and any
related claims may continue to be asserted beyond such period.
7.2 Statements as Representations. All statements contained
herein or in any Schedule contained in the Disclosure Schedule or in any Exhibit
hereto shall be deemed representations and warranties within the meaning of
Sections 7.1, 7.3(a), 7.3(b)(i) and 7.4(a) hereof.
7.3 Indemnification by the Sellers.
(a) Subject to the provisions of this Article VII, each Seller
shall severally indemnify, defend and hold harmless the Buyer, any parent,
subsidiary or affiliate of the Buyer, and any director, officer, employee, agent
or advisor of any of them, or any of their respective successors or assigns (a
"Buyer Indemnified Party"), from and against any and all Losses asserted
against, resulting to, imposed upon or incurred by any Buyer Indemnified Party,
directly or indirectly, by reason of or resulting from the breach of or any
inaccuracy in any of the representations and warranties of such Seller contained
in or made pursuant to Article II hereof, or any facts or circumstances
constituting such breach or inaccuracy.
(b) Subject to the provisions of this Article VII, each
Management Seller shall jointly and severally indemnify, defend and hold
harmless each Buyer Indemnified Party from and against any and all Losses
asserted against, resulting to, imposed upon or incurred by such Buyer
Indemnified Party, directly or indirectly, by reason of or resulting from:
(i) the breach of or any inaccuracy in any of the
representations and warranties of the Sellers or CCI contained in
or made pursuant to any Section of this Agreement (other than a
Section in Article II hereof), or any facts or circumstances
constituting such breach or inaccuracy;
(ii) the breach or nonperformance of any covenant or
agreement of the Sellers or CCI contained in or made pursuant to
this Agreement or any facts or circumstances constituting such
breach or nonperformance;
(iii) any liabilities relating to the Excluded
Assets;
(iv) any unrecorded expenses and liabilities (net of
any unrecorded income and Current Assets) of CCI relating to
occurrences prior to the Effective Time;
(v) any litigation or legal claims against CCI or for
which CCI is or may be liable relating to occurrences prior to
the Effective Time; and
(vi) all liability and remediation costs imposed by
Environmental Laws or by any Governmental Authority in respect of
Environmental Laws;
(c) Subject to the provisions of this Article VII, each Seller
(other than the Management Sellers and Berthel Fisher) and Berthel
<PAGE> 31
Fisher (only with respect to clauses (ii) and (v) below), shall severally
indemnify, defend and hold harmless each Buyer Indemnified Party from and
against any and all Losses asserted against, resulting to, imposed upon or
incurred by such Buyer Indemnified Party, directly or indirectly, by reason of
or resulting from:
(i) the breach of or any inaccuracy in any of the
representations and warranties of such Seller contained in or
made pursuant to any Section of this Agreement (other than a
Section in Article II hereof), or any facts or circumstances
constituting such breach or inaccuracy;
(ii) the breach or nonperformance of any covenant or
agreement of such Seller contained in or made pursuant to this
Agreement or any facts or circumstances constituting such breach
or nonperformance;
(iii) its Pro Rata portion of any liabilities
relating to the Excluded Assets;
(iv) its Pro Rata portion of any unrecorded expenses
and liabilities (net of any unrecorded income and Current Assets)
of CCI relating to occurrences prior to the Effective Time;
(v) its Pro Rata portion of any litigation or legal
claims against CCI or for which CCI is or may be liable relating
to occurrences prior to the Effective Time; and
(vi) its Pro Rata portion of all liabilities and
remediation costs imposed by Environmental Laws or by any
Governmental Authority in respect of Environmental Laws.
7.4 Indemnification by the Buyer. Subject to the provisions of
this Article VII, the Buyer shall indemnify, defend and hold harmless the
Sellers, any parent, subsidiary or affiliate of the Sellers, and any director,
officer, employee, agent or advisor of any of them or any of their respective
heirs, successors or assigns (a "Seller Indemnified Party"), from and against
any and all Losses asserted against, resulting to, imposed upon or incurred by
any Seller Indemnified Party, directly or indirectly, by reason of or resulting
from:
(a) the breach of or any inaccuracy in any of the
representations and warranties of the Buyer contained in or made
pursuant to this Agreement or any facts or circumstances
constituting such breach or inaccuracy;
(b) the breach or non-performance of any agreement of
the Buyer contained in or made pursuant to this Agreement or any
facts or circumstances constituting such breach or
nonperformance, and
(c) the operations or business of the Surviving
Corporation after the Effective Time.
7.5 Limitations on Indemnification
(a) The indemnifications in favor of the Buyer Indemnified
Parties contained in Section 7.3(b)(i) (except with respect to Sections 3.1,
3.2, 3.3, 3.4 and 3.5(a) hereof, Taxes, litigation and legal claims
<PAGE> 32
relating to occurrences prior to the Effective Time), Section 7.3(b)(ii) (except
with respect to Article I hereof), Section 7.3(b)(iv), Section 7.3(c)(i) (except
with respect to Article II, Sections 3.1, 3.2, 3.3, 3.4 and 3.5(a) hereof,
Taxes, litigation and legal claims relating to occurrences prior to the
Effective Time), Section 7.3(c)(ii) (except with respect to Article I hereof)
and Section 7.3(c)(iv) shall be effective only to the extent that the aggregate
dollar amount of all Losses indemnified against under such Sections (i) exceeds
$100,000 and (ii) shall not exceed $2,000,000.
(b) The indemnifications in favor of the Seller Indemnified
Parties contained in Section 7.4(a) (except with respect to Sections 4.1, 4.2
and 4.3(a) hereof) and Section 7.4(b) (except with respect to Article I hereof,
and the employment and non-competition agreements attached hereto as Exhibits C,
D and E) shall be effective only to the extent that the aggregate dollar amount
of all Losses indemnified against under such Section (i) exceeds $100,000 and
(ii) shall not exceed $2,000,000.
(c) No Buyer Indemnified Party or Seller Indemnified Party shall
be entitled to recover any amounts pursuant to this Article VII to the extent
such Person is entitled to recover such amounts under insurance policies.
(d) The Buyer and the Sellers shall not be entitled to
indemnification under this Article VII in respect of any breach of this
Agreement (except with respect to Section 3.19) if the Buyer or the Seller
Representatives, respectively, knowingly waived such breach at the Closing in
writing.
(e) Any payment to the Buyer under this Article VII (except in
respect of Article I hereof) shall be made pursuant to the Escrow Agreement, to
the extent the Escrow Amount has not been depleted.
(f) The obligations of each Seller under Section 7.3 shall be
limited to his or its Pro Rata share of the Consideration.
7.6 Indemnification Procedures.
(a) Notice. If any legal proceeding shall be threatened or
instituted or any claim or demand shall be asserted by any Buyer Indemnified
Party or Seller Indemnified Party in respect of which indemnification may be
sought under the provisions of this Agreement, the party seeking indemnification
(the "Claiming Party") shall promptly cause written notice of the assertion of
any such claim, demand or proceeding of which it has knowledge to be forwarded
to the party from whom it is claiming indemnification (the "Indemnitor"). Such
notice shall contain a reference to the provisions hereof or of such other
agreement, instrument or certificate delivered pursuant hereto, in respect of
which such claim is being made, and shall specify, in reasonable detail, the
amount of such Loss if determinable at such time. The Claiming Party's failure
to give the Indemnitor prompt notice shall not preclude the Claiming Party from
seeking indemnification from the Indemnitor unless the Claiming Party's failure
has materially prejudiced the Indemnitor's ability to defend the claim, demand
or proceeding.
(b) Third Party Claims. If the Claiming Party seeks
indemnification from the Indemnitor as a result of a claim or demand being made
by a third party (a "Third Party Claim"), the Indemnitor shall have the right to
promptly assume the control of the defense of such Third
<PAGE> 33
Party Claim, including, at its own expense, employment by it of counsel
reasonably satisfactory to the Claiming Party. The Claiming Party may, in its
sole discretion and at its own expense, employ counsel to represent it in the
defense of the Third Party Claim, and in such event counsel for the Indemnitor
shall cooperate with counsel for the Claiming Party in such defense, provided
that the Indemnitor shall direct and control the defense of such Third Party
Claim or proceeding. Except with the written consent of the Claiming Party, the
Indemnitor shall not consent to the entry of any judgment nor enter into any
settlement of such Third Party Claim which (i) does not include as an
unconditional term thereof the release of the Claiming Party from all liability
in respect of such Third Party Claim and (ii) results in the imposition on the
Claiming Party of any remedy other than money damages; provided, however, that
the Claiming Party shall not unreasonably withhold or delay its consent to the
entry of any judgment or any settlement of a Third Party Claim. If the
Indemnitor elects not to exercise its rights to assume the defense of the Third
Party Claim, or if injunctive relief is sought which would have an adverse
effect on the Claiming Party, the Claiming Party may, but shall have no
obligation to, defend against such Third Party Claim or legal proceeding in such
manner as it may deem appropriate, and the Claiming Party may compromise or
settle such Third Party Claim and proceeding with the Indemnitor's consent,
which shall not be unreasonably withheld or delayed.
(c) Payment. After any final judgment or award shall have been
rendered by a court, arbitration board or administrative agency of competent
jurisdiction and the time in which to appeal therefrom shall have expired, or a
settlement shall have been consummated, or the Claiming Party and the Indemnitor
shall arrive at a mutually binding agreement with respect to each separate
matter alleged to be indemnified by the Indemnitor hereunder, the Claiming Party
shall forward to the Indemnitor notice of any sums due and owing by it with
respect to such matter (in accordance with Section 8.10 hereof) and the
Indemnitor shall pay all of the sums so owing to the Claiming Party by wire
transfer, certified or bank cashier's check within 10 days after the date of
such notice.
7.7 Tax Indemnification. (a) Except to the extent included in the
adjustment to Consideration contemplated by Section 1.4 hereof, the Management
Sellers shall jointly and severally, and the other Sellers shall severally (on a
Pro Rata basis), indemnify, defend, and hold harmless the Buyer Indemnified
Parties from and against any and all Losses asserted against, resulting to,
imposed on, sustained, incurred or suffered by, or asserted against any of the
Buyer Indemnified Parties, directly or indirectly, by reason of or resulting
from any and all Taxes imposed upon CCI with respect to (i) any Pre-Closing
Period, (ii) any Straddle Period but only with respect to the portion of such
Straddle Period ending on the close of business on the Closing Date and in the
manner provided in paragraph 7.7(d) hereof and (iii) any Transfer Taxes for
which the Sellers are liable pursuant to Section 5.1(a).
(b) Without limiting the generality of Section 7.7(a) above, the
Sellers shall indemnify, defend, and hold harmless the Buyer Indemnified Parties
from and against any and all Losses asserted against, resulting to, imposed on,
sustained, incurred or suffered by, or asserted against any of the Buyer
Indemnified Parties, directly or indirectly, by reason of or resulting from the
imposition of Taxes on CCI as a result of the sale, transfer, assignment or
distribution of any of the Excluded Assets. Notwithstanding anything to the
contrary contained herein, the Sellers shall not be liable for any Losses
incurred by any of the Buyer Indemnified Parties by reason of or resulting from
(i) the imposition of
<PAGE> 34
Taxes on CCI as a result actions of CCI on the Closing Date that are caused by
the Buyer and not contemplated by this Agreement, or (ii) from the failure of
the Buyer to file all Tax Returns required to be filed by the Buyer pursuant to
Section 5.1(b) on a timely basis, provided, however, in the case of clause (ii)
hereof, the Sellers have prepared and delivered such Tax Returns to the Buyer in
the time and manner prescribed in Section 5.1(b).
(c) The Buyer shall indemnify, defend and hold harmless the
Seller Indemnified Parties from and against any and all Losses asserted
against, resulting to, imposed on, sustained, incurred or suffered by, or
asserted against any of the Seller Indemnified Parties, directly
or indirectly, by reason of or resulting from any and all Taxes imposed on CCI
with respect to (i) any Post-Closing Period and (ii) any Straddle Period, but
only with respect to the portion of such Straddle Period beginning the day
after the Closing Date and in the manner provided for in paragraph 7.7(d)
hereof.
(d) For purposes of determining the amount of Taxes for or which
relate to a Straddle Period, the Closing Date shall be treated as the last day
of a taxable period, and the portion of any such Tax that is allocable to the
taxable period that is so deemed to end on and include the Closing Date: (i) in
the case of Taxes that are either (x) based upon or related to income or
receipts (and corresponding losses and deductions) or (y) imposed in connection
with any sale, transfer, assignment or distribution of property (real or
personal, tangible or intangible) (and corresponding losses and deductions),
shall be deemed equal to the amount which would be payable if the period for
which such Tax is assessed ended on and included the Closing Date, and (ii) in
the cases of Taxes other than Taxes described in clause (i) hereof, shall be
computed on a per diem basis.
(e) In the event of the realization of any loss or credit for tax
purposes of CCI attributable to any Post-Closing Period, CCI may, in its sole
discretion, to the extent permitted under applicable law, elect not to carry
back such loss or credit to a Pre-Closing Period.
(f) The Sellers shall be entitled to all refunds of Taxes of CCI
for any Pre-Closing Period, and the Buyer shall be entitled to all refunds of
Taxes of CCI for any Post-Closing Period. Notwithstanding the foregoing, the
Buyer shall be entitled to any refund of Taxes of CCI for any Pre-Closing Period
which results from either (i) the carryback of a tax attribute from a
Post-Closing Period or (ii) a timing difference with respect to certain tax
matters (for example, depreciation or inventory). Refunds relating to any
Straddle Period shall be equitably apportioned between the Sellers and the Buyer
in accordance with the provisions of this Agreement governing such periods. A
party receiving a refund to which the other party is entitled pursuant to this
Agreement shall pay the amount to which such other party is entitled within five
days of receiving such refund. The Sellers shall be allowed reasonable access to
the books and records of CCI in order to be able to confirm whether CCI has
received any refund with respect to which the Sellers are entitled pursuant to
this Section 7.7(f).
(g) If a notice of deficiency, proposed adjustment, adjustment,
assessment, audit, examination, suit, dispute or other claim (a "Tax Claim")
shall be delivered, sent, commenced, or initiated to or against CCI by any
taxing authority with respect to Taxes for which any Person is entitled to
indemnification hereunder, the Buyer shall promptly
<PAGE> 35
notify Seller Representatives in writing of the Tax Claim. If a Tax Claim with
respect to Taxes for which any Person is entitled to indemnification hereunder
shall be delivered, sent, commenced or initiated to or against the Sellers by
any taxing authority, the Sellers shall promptly notify the Buyer in writing of
such Tax Claim.
(h) Seller Representatives may, upon timely notice to the Buyer,
assume and control the defense of a Tax Claim involving only Pre-Closing Periods
at the Sellers' own cost and expense and with their own counsel and the Buyer
and its affiliates agree to cooperate with the Sellers and their counsel in
pursuing such contest. If Seller Representatives elect to assume the defense of
any such Tax Claim, notwithstanding anything to the contrary contained herein,
(i) the Sellers shall consult with the Buyer and shall not enter into any
settlement with respect to any such Tax Claim without the Buyer's prior written
consent if the effect of such settlement would be to increase the liability for
Taxes of CCI for any Post-Closing Period or Straddle Period with respect to the
portion of such Straddle Period beginning the day after the Closing Date; (ii)
the Sellers shall keep the Buyer informed of all material developments and
events relating to such Tax Claim (including promptly notifying the Buyer of any
telephone conversations, meetings or other contacts with the Internal Revenue
Service (the "Service") or any other taxing authority relating to such Tax Claim
and allowing the Buyer to listen in on or be present at, as the case may be, any
such phone conversations, meetings or other contact with the Service or any
other taxing authority relating to such Tax Claim); and (iii) at its own cost
and expense, the Buyer shall have the right to participate in (but not to
control) the defense of such Tax Claim.
(i) In connection with the contest of any Tax Claim that relates
to (i) any Post-Closing Period, (ii) any Straddle Period and (iii) any Tax Claim
that the Sellers have the ability to control but do not timely elect to control
pursuant to Section 7.7(f), such contest shall be controlled by the Buyer, and
the Sellers agree to cooperate with Buyer and its affiliates in pursuing such
contest. In connection with any such contest that relates to (ii) or (iii)
above, the Buyer shall keep Seller Representatives informed of all material
developments and events relating to such Tax Claim (including, promptly
notifying Seller Representatives of any telephone conversations, meetings or
other contacts with the Service or any other taxing authority relating to such
Tax Claim and allowing Seller Representatives to listen in on or be present at,
as the case may be, any such phone conversations, meetings or other contact with
the Service or any other taxing authority relating to such Tax Claim) and the
Sellers, at their own cost and expense, shall have the right to participate in
(but not control) the defense of such Tax Claim. Nothing contained herein shall
be construed as limiting the Buyer's right to indemnification under this Section
7.7.
ARTICLE VIII
MISCELLANEOUS
8.1 Consent to Service. Each Seller hereby designates and
appoints Seller Representatives as its authorized agents upon whom process may
be served in any suit, proceeding or other action against such Seller instituted
by the Buyer and relating to this Agreement. Such designation and appointment
shall, to the extent permitted by law, be irrevocable, unless and until a
successor authorized agent acceptable to the Buyer shall have been appointed by
the Sellers, such successor shall have accepted such
<PAGE> 36
appointment and written notice thereof shall have been given to the Buyer. Each
Seller further agrees that service of process upon such authorized agent or
successor shall be deemed in every respect service of process upon such Seller
in any such suit, proceeding or other action. Each Seller further agrees to take
any and all action, including the execution and filing of all such instruments
and documents, as may be necessary to continue such designation and appointment
of such authorized agent in full force and effect.
8.2 Parties in Interest; No Third Party Beneficiaries.
(a) This Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties hereto and their respective successors
and permitted assigns. This Agreement and the rights and obligations of the
Buyer and the Sellers hereunder may not be assigned by any of the parties hereto
without the prior written consent of the other parties.
(b) This Agreement is not intended, nor shall it be construed, to
confer upon any Person except the parties hereto and their heirs, successors and
permitted assigns any rights or remedies under or by reason of this Agreement.
8.3 Exhibits and Disclosure Schedule. All Exhibits annexed hereto
and the Disclosure Schedule referred to herein are hereby incorporated in and
made a part of this Agreement as if set forth in full herein.
8.4 Entire Agreement. This Agreement, including the Exhibits
hereto and the documents, schedules, certificates and instruments referred to
herein, embody the entire agreement and understanding of the parties hereto in
respect of the transactions contemplated by this Agreement. This Agreement
supersedes all prior agreements, arrangements and understandings of the parties
with respect to such transactions.
8.5 Waiver of Compliance. No amendment, modification, alteration,
supplement or waiver of compliance with any obligation, covenant, agreement,
provision or condition hereof or consent pursuant to this Agreement shall be
effective unless evidenced by an instrument in writing executed by all of the
parties or in the case of a waiver, the party against whom enforcement of any
waiver, is sought. Any waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement, provision or condition shall not operate
as a waiver of, or estoppel with respect to, any subsequent or other failure.
8.6 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, each of which shall remain in full force and
effect.
8.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
8.8 Headings. The table of contents, article and section headings
contained in this Agreement are for convenience only and shall not control or
affect in any way the meaning or interpretation of the provisions of this
Agreement.
<PAGE> 37
8.9 Governing Law; Arbitration. (a) This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas
without giving effect to the conflicts of law principles of such jurisdiction.
(b) Any controversy or claim arising out of or relating to this
Agreement, including the termination, validity, interpretation or breach thereof
shall be settled by arbitration before a single arbitrator conducted in Atlanta,
Georgia in accordance with then applicable Commercial Arbitration Rules of the
American Arbitration Association, as modified in this Agreement (the "Rules").
Within 20 days after its receipt of claimant's notice of intention to arbitrate
and statement of claim, respondent shall serve claimant with its answering
statement and any counterclaims. Claimant shall serve its answer to any
counterclaims within ten days after its receipt thereof. The hearing shall be
held no later than 30 days after the designation of the arbitrator, and shall
last no more than two business days absent good cause shown. The arbitrator
shall render its written decision within 30 days after such hearing is
conducted. The rendering of the decision by the arbitrator within the aforesaid
period of time is a condition to the parties' obligation to pay the fees of the
arbitrator. The powers of the arbitrator shall include, but not be limited to,
the awarding of injunctive or other equitable relief but shall not include the
power to modify or amend in any respect the provisions of this Agreement. The
arbitrator shall include in any award the amount of the reasonable attorneys'
fees and expenses and all other reasonable costs and expenses of the arbitration
incurred by the prevailing party and a direction that it be paid by the other
party within ten days after the making of such award. In the event that the
arbitrator does not rule in favor of the prevailing party in respect of all the
claims alleged by such party, the arbitrator shall include in any award the
portion of the amount of the reasonable attorneys' fees and other expenses of
the arbitration incurred by the prevailing party as the arbitrator deems just
and equitable under the circumstances, together with a direction that such
amounts be paid by the other party within ten days thereof. Except as provided
above, each party shall bear his or its own attorneys' fees and expenses and the
parties shall bear equally all other costs and expenses of the arbitration.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
(c) Nothing contained in this Section 8.9 shall be construed to
limit or preclude a party from bringing any action in any court of competent
jurisdiction for interim or provisional relief pending establishment of the
arbitral tribunal and the arbitral tribunal's determination of the merits of the
dispute to protect the rights or property of that party or to compel another
party to comply with its obligations under this Agreement during the pendency of
the arbitration proceedings.
8.10 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally, telecopied (with confirmation of receipt),
delivered by nationally-recognized overnight express service or sent by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses:
(a) If to the Buyer to:
PhoneTel Technologies, Inc.
1127 Euclid Avenue
<PAGE> 38
Cleveland, Ohio 44115
Telephone: (216) 241-2555
Telecopy: (216) 241-2574
Attention: Chief Executive Officer
Copy to:
Skadden, Arps, Slate,
Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 735-3000
Telecopy: (212) 735-2000
Attention: Stephen M Banker, Esq.
(b) If to a Seller:
Seller's address, as set forth on Exhibit A
hereto.
Copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
Telephone: (214) 999-3000
Telecopy: (214) 999-4667
Attention: Alan J. Perkins, Esq.
(c) If to CCI:
Cherokee Communications, Inc.
506 E. Rusk
P.O. Box 549
Jacksonville, Texas 75766
Telephone: (903) 586-6671
Telecopy: (903) 586-5150
Attention: Chairman and
Chief Executive Officer
Copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
Telephone: (214) 999-3000
Telecopy: (214) 999-4667
Attention: Alan J. Perkins, Esq.
or to such other address as the person to whom notice is to be given may
have previously furnished to the other in writing in the manner set forth
above, provided that notice of a change of address shall be deemed given
only upon receipt.
8.11 Termination or Abandonment. This Agreement shall
terminate on January 31, 1997, upon notice by either CCI or Buyer to the
other if the Merger has not been consummated by such date. Notwithstanding
anything contained in this Agreement to the contrary, this Agreement may be
<PAGE> 39
terminated and abandoned at any time prior to the Closing:
(a) by the mutual written consent of CCI and the Buyer; or
(b) by CCI or the Buyer, if any court of competent
jurisdiction or governmental body, authority or agency having jurisdiction
shall have issued an order, decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and nonappealable.
8.12 Effect of Termination. If any party terminates this
Agreement pursuant to Section 8.11 above, all obligations of the parties
hereunder shall terminate without any liability of any party to any other
party (except for any liability of any party then in breach (subject to
Section 1.6 hereof) and except that the provisions of Sections 5.4 and 5.6
shall survive termination of this Agreement). Notwithstanding the
foregoing, in the event the Buyer terminates this Agreement because of a
breach of a representation or warranty by CCI or any Seller, CCI and the
Sellers shall have no liability to the Buyer in respect of such breach
unless the facts supporting such breach were known by CCI or any Seller on
the date hereof.
ARTICLE IX
DEFINITIONS
9.1 Definitions. For purposes of this Agreement, the following
terms shall have the meanings set forth below (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Accounting Books and Records" shall have the meaning set forth
in Section 3.2 hereof.
"Accounts Receivable" shall mean all of the accounts receivable
and notes receivable of CCI.
"Adjustment Schedule" shall have the meaning set forth in Section
1.5 hereof.
"Affiliate Transactions" shall have the meaning set forth in
Section 3.23 hereof.
"Articles of Merger" shall have the meaning set forth in Section
1.8 hereof.
"AT&T Rate" shall mean the time of day discounted rate charged by
AT&T for long distance calls, or the blended rate charged by AT&T, MCI and
Sprint (or such other rate as may be used by the FCC in imposing Rate Caps), for
minutes of use, the calling card surcharge and the surcharge for collect calls
or operator assistance as of a Rate Cap Effective Date.
"Audited Financial Statements" shall have the meaning set forth
in Section 3.6 hereof.
"Average Term" shall mean the average remaining term of the
written contracts for the placement of Installed Phones; provided that, in
<PAGE> 40
calculating the term of any such contract, (a) an Installed Phone without a
written contract shall be treated as if there is a contract with no remaining
term; (b) any renewal term at the option of CCI shall be considered part of the
term; (c) any contract which automatically renews unless the other party gives
notice of its intention to terminate the contract or permit it to expire, shall
be deemed to terminate as if such notice is given at the earliest permissible
date; and (d) such calculation shall be weighted to take into account the number
of telephones under each such contract.
"Berthel Fisher" shall mean Berthel Fisher & Company Investments,
Inc.
"Buyer" shall mean PhoneTel Technologies, Inc., an Ohio
corporation.
"Buyer Indemnified Party" shall have the meaning set forth in
Section 7.3 hereof.
"CID" shall have the meaning set forth in Section 3.1 hereof.
"Claiming Party" shall have the meaning set forth in Section
7.6(a) hereof.
"Closing" shall have the meaning set forth in Section 1.8 hereof.
"Closing Date" shall have the meaning set forth in Section 1.8
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consideration" shall have the meaning set forth in Section 1.2
hereof.
"Contract Phones" shall mean the telephones to be installed by
CCI pursuant to location contracts entered into by CCI, provided CCI has
available new or refurbished state of the art equipment in inventory for the
installation of such telephones and provided further that the locations for the
installation of such telephones have been selected and approved consistent with
standards employed by CCI immediately prior to October 16, 1996.
"Contracts" shall mean and include all leases, contracts,
agreements, licenses, license agreements, purchase orders, invoices, sales
orders, instruments evidencing indebtedness for borrowed money, mortgages or
other documents securing any indebtedness for borrowed money, commitments and
understandings, written or oral, and all amendments or modifications thereto, to
which CCI is a party or by which CCI is bound.
"Convertibles" shall have the meaning set forth in Section 3.4
hereof.
"Current Assets" shall be determined in accordance with GAAP,
consistent with prior periods (except as described in Schedule 3.10 of the
Disclosure Schedule), and shall mean all (i) cash, (ii) accounts receivable (net
of allowance for doubtful accounts), (iii) prepaid expenses
<PAGE> 41
and (iv) all cash equivalents of CCI, but shall not include inventories or
supplies.
"Disclosure Schedule" shall mean the disclosure schedule
delivered in connection herewith.
"EBITDA" for any period shall mean CCI's earnings from continuing
operations before interest, taxes, depreciation and amortization (excluding the
Excluded Assets), after adding back the amount of expenses incurred in
connection with the transactions contemplated hereby, any expenses relating to
the issuance of capital stock and any other extraordinary, non-recurring
expenses, for such period, determined in accordance with GAAP from the financial
statements of CCI, applied on a consistent basis, and assuming the state of the
law with respect to dial around compensation as it existed prior to September
20, 1996.
"Effective Time" shall have the meaning set forth in Section 1.8
hereof.
"Encumbrance" shall mean any lien, encumbrance, proxy, voting
trust arrangement, pledge, security interest, collateral security agreement,
financing statement (and similar notices) filed with any Governmental Authority,
claim (including any claim as defined in the Code), charge, equities, mortgage,
pledge, objection, title defect, option, restrictive covenant or restriction on
transfer of any nature whatsoever, and the interest of the lessor in any
property subject to a capital lease.
"Environmental Laws" shall have the meaning set forth in Section
3.19 hereof.
"Equipment" shall mean all telephones, all Inventory and all
other items of plant and equipment (including, without limitation, vehicles,
furniture, machinery, computers, office equipment and office supplies) which are
owned, leased or otherwise used by CCI in the operations of its businesses.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, and the rules and regulations promulgated
thereunder.
"ERISA Affiliate" shall mean any trade or business, whether or
not incorporated, which (within the meaning of Section 4001 of ERISA) would, in
conjunction with CCI, be deemed a "single employer".
"Escrow Agent" shall have the meaning set forth in Section
1.6(a).
"Escrow Amount" shall have the meaning set forth in Section
1.6(a) hereof, as may be modified by Section 1.6(b) hereof.
"Excluded Assets" shall have the meaning set forth in Section 5.9
hereof.
"FCC" shall mean the Federal Communications Commission.
"Financial Statements" shall have the meaning set forth in
Section 3.6 hereof.
"First Rate Cap Year" shall mean the twelve-month period
<PAGE> 42
from the Closing Date through the first anniversary of the Closing Date.
"GAAP" shall mean generally accepted accounting principles as in
effect on the date hereof.
"Governmental Authority" shall mean any government or political
subdivision thereof, whether federal, state, local or foreign, or any agency,
department, commission, board, bureau, court, tribunal, body, administrative or
regulatory authority or instrumentality of any such government or political
subdivision.
"Hazardous Material" shall mean any substance that is defined as
a "hazardous waste," "hazardous substance," "pollutant" or "contaminant" under
any Environmental Law or whose presence requires an investigation or remediation
under any Environmental Law, including, without limitation, gasoline, diesel
fuel and other petroleum hydrocarbons.
"Indemnitor" shall have the meaning set forth in Section 7.6
hereof.
"Installed Phones" shall mean the microprocessor-based pay
telephones owned by CCI and 50% of such telephones owned by CID, in each case
which are active and generating income, but not including any telephones
installed after the date hereof inconsistent with standards employed by CCI
immediately prior to October 16, 1996.
"Intellectual Property" shall mean (a) all computer software
applications (whether licensed or otherwise and whether customized or
otherwise), U.S. and foreign patents and patent applications, registered and
unregistered copyrights and copyright applications (including copyrights in
proprietary computer software and databases), trademarks, service marks, trade
dress, logos, trade names and similar business identifiers, including, in each
case, all registrations and applications therefore, (b) all trade secrets,
know-how, formulae, processes, inventions (whether patentable or unpatentable)
and other technical information and (c) the goodwill of the business symbolized
by any of the foregoing.
"Inventory" shall mean and include all inventory owned or held by
CCI and used in the conduct of its business and operations, including raw
materials, components, repair parts, works-in-progress, finished goods and other
similar items, whether new or used.
"Law" shall mean any law (including common law), rule,
regulation, restriction (including zoning), code, statute, ordinance, order,
writ, injunction, judgment, decree or other requirement of a Governmental
Authority.
"Liabilities" shall be determined in accordance with GAAP,
consistent with prior periods (except as described in Schedule 3.10 of the
Disclosure Schedule), and shall mean (without double-counting), all (i) current
liabilities, (ii) long-term liabilities, (iii) costs associated with the
installation of all Contract Phones included within the calculation provided in
Section 1.4(a) hereof, including commissions and signing bonuses (but excluding
the labor cost of CCI employees), (iv) payments due on automobile leases after
the Effective Time, (v) accrued and unpaid dividends, (vi) accrued interest,
(vii) payments due on all leases after the Effective Time (except leases of real
property, a lease on postal equipment, and license payments to Intellicall, Inc.
as described in Section 3.12) and (viii) accrued vacation days; provided that
Liabilities
<PAGE> 43
shall not include (x) accrued Taxes (including income taxes payable and deferred
income tax liabilities), (y) all normal, recurring monthly expenses incurred
during the month of the Closing Date (including telephone bills, property taxes,
leases of real property and payroll) to the extent allocated to the Buyer based
on the number of days occurring after the Effective Time, and (z) the car loans
for the three automobiles currently used by Bill H. Bailey, Jr., Edward L.
Marshall and Jerry T. Beddow.
"Losses" shall mean and include all demands, claims, actions,
causes of action, assessments, damages, losses, liabilities, judgments,
settlements, fines, penalties, sanctions, costs and expenses (including, without
limitation, interest, penalties, reasonable attorneys' fees and expenses as
incurred, and all other reasonable costs of investigating and defending third
party claims as incurred).
"Management Sellers" shall mean Bill H. Bailey, Jr., Jerry T.
Beddow, Edward L. Marshall and C. Nelson Trimble, III.
"Material Contract" shall mean any Contract that (i) is with any
of the Sellers' Affiliates, (ii) involves an obligation or commitment or
financial risk of more than $25,000 or (iii) which extends, without a right of
cancellation by CCI, for a period exceeding 180 days.
"Merger" shall have the meaning set forth in Section 1.1.
"Merger Sub" shall mean PhoneTel CCI, Inc., a Texas corporation
and a wholly owned subsidiary of Buyer.
"1996 Audit" shall have the meaning set forth in Section 3.6
hereof.
"Options" shall have the meaning set forth in Section 3.4 hereof.
"Order" shall mean any order, judgment, injunction, award,
decree, writ, rule or similar action of any Governmental Authority.
"Other Documents" shall have the meaning set forth in Section 1.8
hereof.
"Permits" shall mean any franchise, license, certificate,
approval, identification number, registration, permit, authorization, order or
approval of, and any required registration with, any Governmental Authority
(including those required by local business ordinances and regulations of public
utility commissions).
"Person" shall mean any individual, partnership, firm, trust,
association, corporation, joint venture, joint stock company, unincorporated
organization, Governmental Authority or other entity.
"Post-Closing Period" shall mean any taxable year beginning after
the Closing Date.
"Pre-Closing Period" shall mean any taxable year which ends on or
before the Closing Date.
"Preferred Stock" shall have the meaning set forth in Section 3.4
hereof.
<PAGE> 44
"Pro Rata" shall mean in accordance with the percentages set
forth in Exhibit A hereto.
"Rate Cap Effective Date" shall mean any date on which any Rate
Cap is actually applicable to calls placed on such date.
"Rate Caps" shall mean the benchmark rate limitation adopted and
made effective by the FCC in its CC Docket No. 92-77 proceeding (Second Further
Notice of Proposed Rulemaking, FCC 96-253), and imposed upon interexchange and
exchange carriers that routinely accept interstate collect calls, credit card
calls, and/or third-party billing.
"SEC" shall mean the United States Securities and Exchange
Commission, or its successors.
"Second Rate Cap Year" shall mean the twelve-month period from
the end of the First Rate Cap Year through the second anniversary of the Closing
Date.
"Securities" shall have the meaning set forth in Section 1.2(a)
hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Seller Indemnified Party" shall have the meaning set forth in
Section 7.4 hereof.
"Seller Representatives" shall have the meaning set forth in
Section 1.7 hereof.
"Sellers" shall have the meaning set forth in the preamble.
"Sellers' Affiliates" shall have the meaning set forth in Section
3.23 hereof.
"Service" shall have the meaning set forth in Section 7.7(h)
hereof.
"Shares" shall have the meaning set forth in Section 1.2(a)
hereof.
"Straddle Period" shall mean any taxable year that begins before
and ends after the Closing Date.
"Surviving Corporation" shall have the meaning set forth in
Section 1.1 hereof.
"Tax Claim" shall have the meaning set forth in Section 7.7(g)
hereof.
"Tax Return" shall mean any return, report, information return or
other document (including any related or supporting information) with respect to
Taxes.
"Taxes" shall mean all taxes, charges, fees, duties, levies,
penalties or other assessments imposed by any federal, state, local or foreign
taxing Governmental Authority, including, but not limited to, income, gross
receipts, excise, property, sales, gain, use, license,
<PAGE> 45
capital stock, transfer, franchise, payroll, withholding, social security or
other taxes, including any interest, penalties or additions attributable
thereto.
"Third Party Claim" shall have the meaning set forth in Section
7.6(b) hereof.
"Transfer Taxes" shall have the meaning set forth in Section
5.1(a) hereof.
"Warrants" shall have the meaning set forth in Section 3.4
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, on the day and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
PHONETEL CCI, INC.
By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman and Chief
Executive Officer
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Bill H. Bailey, Jr.
----------------------------------
Bill H. Bailey, Jr.
Chairman and
Chief Executive Officer
SELLERS:
/s/ Bill H. Bailey, Jr.
---------------------------------
BILL H. BAILEY, JR., individually
/s/ Edward L. Marshall
---------------------------------
EDWARD L. MARSHALL, individually
/s/ Jerry T. Beddow
---------------------------------
JERRY T. BEDDOW, individually
/s/ C. Nelson Trimble
---------------------------------
C. NELSON TRIMBLE, individually
<PAGE> 46
BERTHEL FISHER & COMPANY INVESTMENTS, INC.
By: /s/ James D. Thorp
-------------------------------
Name:
Title:
CAPITAL SOUTHWEST CORPORATION
By: /s/ J. Bruce Duty
-------------------------------
Name:
Title:
CAPITAL SOUTHWEST VENTURE CORPORATION
By: /s/ J. Bruce Duty
-------------------------------
Name:
Title:
BANC ONE CAPITAL PARTNERS, L.P.
By BOCP Corporation
General Partner
By: /s/ Suzanne B. Kriscunas
-------------------------------
Name: Suzanne B. Kriscunas
Title: Authorized Signer
SELLER REPRESENTATIVES
/s/ Bill H. Bailey, Jr.
----------------------------------
BILL H. BAILEY, JR.
/s/ J. Bruce Duty
----------------------------------
J. BRUCE DUTY
Note: The exhibits listed on the Table of Contents and the following
disclosure schedules that are attachments to the Agreement and Plan of Merger
have been intentionally ommitted pursuant to Item 601(b)(2) of Regulation S-B.
PhoneTel Technologies, Inc agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Securities and Exchange Commission upon
request.
DISCLOSURE SCHEDULES
Schedule 2.2 Restrictions on Transferability
Schedule 2.3 Consents and Approvals
Schedule 3.4 Rights to Purchase Securities
Schedule 3.5(a) Consents and Approvals
Schedule 3.7 CCI Obligations
Schedule 3.8 Accounts Receivable - CCI Phones as of September 30,
1996
Schedule 3.9 Equipment Encumbrances
Schedule 3.10 Absences of Changes or Events
Schedule 3.11(a) Leases
Schedule 3.11(b) Asset Encumbrances
Schedule 3.12 Material Contracts
Schedule 3.13(a) Compliance with Laws
Schedule 3.13(b) Material Permits to be Obtained
Schedule 3.13(c) Permit Approvals Not to be Obtained Prior to Closing
Schedule 3.14(a) Litigation/Arbitration
Schedule 3.15 Employee Matters
Schedule 3.17 Taxes
Schedule 3.19 Environmental Matters
Schedule 3.20(a) Insurance Policies
Schedule 3.20(b) Pending Insurance Claims
Schedule 3.21 Bank Accounts
Schedule 3.22(a) Material Customers and Suppliers
Schedule 3.22(b) Change in Customer/Supplier Relations
Schedule 3.23 Affiliate Transactions
Schedule 3.24 Prior Acquisitions
Schedule 3.25(a) Owned Real Property
Schedule 3.25(c) Leased Real Property
<PAGE> 1
Exhibit 10.77
EXHIBIT B
---------
ESCROW AGREEMENT
This ESCROW AGREEMENT is made and entered into as of November 21, 1996
("Escrow Agreement") by and among Comerica Bank-Texas (the "Escrow Agent"),
Cherokee Communications, Inc., a Texas corporation ("CCI"), Bill H. Bailey, Jr.
and J. Bruce Duty, as duly authorized agents ("Sellers' Representatives") for
all of the shareholders and other security holders of CCI (the "Sellers"),
PhoneTel Technologies, Inc., an Ohio corporation ("PhoneTel"), and Bill H.
Bailey, Jr. ("Bailey"), Jerry T. Beddow ("Beddow") and Edward L. Marshall
("Marshall"), individually.
WHEREAS, PhoneTel, CCI and all of the Sellers are parties to an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement") pursuant to
which PhoneTel has agreed to acquire all of the Shares (as defined in the Merger
Agreement) and other outstanding securities, upon the terms and subject to the
conditions in the Merger Agreement;
WHEREAS, Section 1.6 of the Merger Agreement provides for PhoneTel to
deposit into escrow the amount of $520,000 (the "Deposit Escrow Amount"), being
delivered by PhoneTel upon the signing of this Escrow Agreement, and an
additional $480,000 (together with the Deposit Escrow Amount, the "Merger Escrow
Amount") at the Closing (as defined in the Merger Agreement);
WHEREAS, Section 1.6 of the Merger Agreement provides for PhoneTel to
deposit into escrow the amount of $6,000,000 (the "Rate Cap Escrow Amount");
WHEREAS, at the Closing, Bailey will enter into an Employment Agreement
with PhoneTel which provides for a payment of $208,333 (the "Bailey Escrow
Amount") being delivered at the Closing by PhoneTel for deposit into escrow;
WHEREAS, at the Closing, Beddow will enter into an Employment Agreement
with PhoneTel which provides for a payment of $208,333 (the "Beddow Escrow
Amount") being
<PAGE> 2
delivered at the Closing by PhoneTel for deposit into escrow;
WHEREAS, at the Closing, Marshall will enter into an Employment Agreement
with PhoneTel which provides for a payment of $208,333 (the "Marshall Escrow
Amount") being delivered at the Closing by PhoneTel for deposit into escrow (the
Deposit Escrow Amount, the Merger Escrow Amount, the Rate Cap Escrow Amount, the
Bailey Escrow Amount, the Beddow Escrow Amount and the Marshall Escrow Amount
are hereinafter collectively referred to as the "Escrow Amounts");
WHEREAS, CCI, Sellers' Representatives, PhoneTel, Bailey, Beddow and
Marshall wish to enter into this Escrow Agreement providing for the terms and
conditions upon which the Escrow Amounts will be held and released by the Escrow
Agent, and the Escrow Agent wishes to act as Escrow Agent pursuant to the terms
and conditions of this Escrow Agreement; and
WHEREAS, all capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Merger Agreement;
NOW, THEREFORE, in consideration of the premises and intending to be
legally bound hereby, the parties hereto agree as follows:
Section 1. DEPOSITS INTO ESCROW ACCOUNTS.
(a) On the date of this Agreement, PhoneTel is depositing the Deposit
Escrow Amount with the Escrow Agent into an interest bearing escrow account
established with the Escrow Agent entitled PhoneTel Escrow Account (the "Escrow
Account").
(b) At the Closing, PhoneTel shall deposit with the Escrow Agent:
(i) an additional $480,000 for deposit into the Escrow Account;
(ii) the Rate Cap Escrow Amount into an interest bearing escrow
account established with the Escrow Agent entitled PhoneTel Rate Cap Escrow
Account (the "Rate Cap Escrow Account");
(iii) the Bailey Escrow Amount into an interest bearing escrow account
established with the
2
<PAGE> 3
Escrow Agent entitled PhoneTel Bailey Escrow Account (the "Bailey Escrow
Account");
(iv) the Beddow Escrow Amount into an interest bearing escrow account
established with the Escrow Agent entitled PhoneTel Beddow Escrow Account (the
"Beddow Escrow Account"); and
(v) the Marshall Escrow Amount into an interest bearing escrow account
established with the Escrow Agent entitled PhoneTel Marshall Escrow Account (the
"Marshall Escrow Account").
Section 2. INVESTMENTS AND EARNINGS. (a) The Escrow Agent is hereby
authorized and directed to invest the Deposit Escrow Amount (prior to the
Closing), the Rate Cap Escrow Amount, the Bailey Escrow Amount, the Beddow
Escrow Amount and the Marshall Escrow Amount in (i) any security issued or
guaranteed by the United States government or a governmental authority of the
United States, (ii) certificates of deposit issued by a bank in the United
States having a combined surplus of at least $500 million, (iii) commercial
paper with a rating of at least "Prime-1" by Moody's Investors Services, Inc.
("Moody's"), (iv) corporate bonds with a rating of Aaa or Aa by Moody's or (v)
publicly-traded money market funds investing in only the foregoing, in each case
as specified by PhoneTel to the Escrow Agent in writing, or (vi) such other
investments as PhoneTel and Sellers' Representatives jointly shall specify to
the Escrow Agent in writing. The Escrow Agent is hereby authorized and directed
to invest the Merger Escrow Amount (after the Closing) in (i) any security
issued or guaranteed by the United States government or a governmental authority
of the United States, (ii) certificates of deposit issued by a bank in the
United States having a combined surplus of at least $500 million, (iii)
commercial paper with a rating of at least "Prime-1" by Moody's, (iv) corporate
bonds with a rating of Aaa or Aa by Moody's or (v) publicly-traded money market
funds investing in only the foregoing, in each case as specified by Sellers'
Representatives to the Escrow Agent in writing, or (vi) such other investments
as PhoneTel and Sellers' Representatives jointly shall specify to the Escrow
Agent in writing. In any event, PhoneTel and Sellers' Representatives shall not
select any investment with a maturity which does not allow for sufficient
liquidity to satisfy the
3
<PAGE> 4
obligations hereunder, which has a stated maturity greater than 2 years from its
date of purchase, or which is purchased at a price which exceeds its face amount
or par value at the original date of issuance.
(b) The Escrow Agent shall remit to PhoneTel at the Closing all earnings
and interest (adjusted for any increase or decrease in the principal value of
any investment or any capital gain or loss, as the case may be) upon the Deposit
Escrow Amount on or prior to the Closing. After the Closing, all earnings and
interest upon the Merger Escrow Amount shall increase the Merger Escrow Amount
and the Escrow Agent shall remit all earnings and interest (adjusted for any
increase or decrease in the principal value of any investment or any capital
gain or loss, as the case may be) upon the Rate Cap Escrow Amount, the Bailey
Escrow Amount, the Beddow Escrow Amount and the Marshall Escrow Amount to
PhoneTel.
Section 3. ESCROW AMOUNTS AND DELIVERY. The Escrow Agent shall hold the
Escrow Amounts until the following (as applicable):
3.1 TERMINATION OF MERGER AGREEMENT. (a) In the event that the Merger
Agreement is terminated prior to the Closing, (i) PhoneTel may notify the Escrow
Agent of such termination and thereby request delivery of the Deposit Escrow
Amount, (ii) the Escrow Agent must thereupon promptly notify Sellers'
Representatives of PhoneTel's request, (iii) Sellers' Representatives then shall
have ten (10) days within which they can respond to the Escrow Agent and object
to PhoneTel's request on the basis that the Sellers are entitled to the Deposit
Escrow Amount pursuant to Section 1.6(a) of the Merger Agreement, (iv) failure
to respond within ten days of the Escrow Agent's notification will be deemed as
consent on the part of Sellers' Representatives to the Escrow Agent's delivering
the Deposit Escrow Amount to PhoneTel and (v) actual or deemed consent by
Sellers' Representatives will result in the Escrow Agent's delivery of the
entire Deposit Escrow Amount to PhoneTel. In the event of a dispute, the
obligations of the Escrow Agent shall be governed by Section 3.8 hereof.
(b) In the event that the Merger Agreement is terminated due to a
material breach of the Merger Agreement by PhoneTel (including, without
limitation,
4
<PAGE> 5
failure to close by January 31, 1997), (i) Sellers' Representatives may notify
the Escrow Agent of such termination and thereby request delivery of the Deposit
Escrow Amount pursuant to Section 1.6(a) of the Merger Agreement, (ii) the
Escrow Agent must thereupon promptly notify PhoneTel of Sellers'
Representatives' request, (iii) PhoneTel then shall have ten (10) days within
which it can respond to the Escrow Agent and object to Sellers' Representatives'
request, (iv) failure to respond within ten days of the Escrow Agent's
notification will be deemed as consent on the part of PhoneTel to the Escrow
Agent's delivering the Deposit Escrow Amount to Sellers' Representatives and (v)
actual or deemed consent by PhoneTel will result in the Escrow Agent's delivery
of the entire Deposit Escrow Amount to Sellers' Representatives. In the event of
a dispute, the obligations of the Escrow Agent shall be governed by Section 3.8
hereof.
3.2 INDEMNIFICATION. In the event any Buyer Indemnified Party is entitled
to indemnification pursuant to Article VII of the Merger Agreement, (i) PhoneTel
may notify the Escrow Agent and thereby request delivery of funds from the
Escrow Account to satisfy such right to indemnification, (ii) the Escrow Agent
must thereupon promptly notify Sellers' Representatives of PhoneTel's request,
(iii) Sellers' Representatives then shall have ten (10) days within which they
can respond to the Escrow Agent and object to PhoneTel's request, (iv) failure
to respond within ten days of the Escrow Agent's notification will be deemed as
consent on the part of the Sellers' Representatives to the Escrow Agent's
delivering the requested amount to PhoneTel and (v) actual or deemed consent by
the Sellers' Representatives will result in the Escrow Agent's delivery of such
amount to PhoneTel. In the event of a dispute, the obligations of the Escrow
Agent shall be governed by Section 3.8 hereof.
3.3 FINAL RELEASE OF MERGER ESCROW AMOUNT. (a) On the date which is 90 days
after the Closing, the Escrow Agent shall pay to Sellers' Representatives an
amount equal to the excess, if any, of $250,000 over the amount, if any,
previously paid to PhoneTel from the Escrow Account.
(b) On the date which is 180 days after the Closing, the Escrow Agent shall
pay to Sellers' Representatives an amount equal to the excess, if any, of
5
<PAGE> 6
$500,000 over the amount previously paid to PhoneTel from the Escrow Account.
(c) On the date which is 270 days after the Closing, the Escrow Agent shall
pay to Sellers' Representatives the remainder of the Merger Escrow Amount.
3.4 RELEASE OF RATE CAP ESCROW AMOUNT. (a) On a date which is not later
than 10 days after the first anniversary of the Closing, (i) PhoneTel shall
notify the Escrow Agent and thereby request delivery of funds from the Rate Cap
Escrow Account to Sellers' Representatives, to be calculated pursuant to Section
1.13(a) of the Merger Agreement, (ii) the Escrow Agent must thereupon promptly
notify Sellers' Representatives of PhoneTel's request, (iii) Sellers'
Representatives then shall have ten (10) days within which they can respond to
the Escrow Agent and object to PhoneTel's calculation of such funds to be
delivered, (iv) failure to respond within ten days of the Escrow Agent's
notification will be deemed as consent on the part of Sellers' Representatives
to the Escrow Agent's delivering the requested amount to Sellers'
Representatives and (v) actual or deemed consent by Sellers' Representatives
will result in the Escrow Agent's delivery of such amount to Sellers'
Representatives. If the amount to be paid to Sellers' Representatives pursuant
to this Section 3.4(a) is less than $3,000,000, the Escrow Agent shall, at the
time such payment is made, remit such difference to PhoneTel. In the event of a
dispute, the obligations of the Escrow Agent shall be governed by Section 3.8
hereof.
(b) On a date which is not later than 10 days after the second anniversary
of the Closing, (i) PhoneTel shall notify the Escrow Agent and thereby request
delivery of funds from the Rate Cap Escrow Account to Sellers' Representatives,
to be calculated pursuant to Section 1.13(b) of the Merger Agreement, (ii) the
Escrow Agent must thereupon promptly notify Sellers' Representatives of
PhoneTel's request, (iii) Sellers' Representatives then shall have ten (10) days
within which they can respond to the Escrow Agent and object to PhoneTel's
calculation of such funds to be delivered, (iv) failure to respond within ten
days of the Escrow Agent's notification will be deemed as consent on the part of
Sellers' Representatives to the Escrow Agent's delivering the requested amount
to Sellers' Representatives and (v)
6
<PAGE> 7
actual or deemed consent by Sellers' Representatives will result in the Escrow
Agent's delivery of such amount to Sellers' Representatives. If the amount to be
paid to Sellers' Representatives pursuant to this Section 3.4(b) is less than
the remaining balance in the Rate Cap Escrow Account, the Escrow Agent shall, at
the time such payment is made, remit such balance to PhoneTel. In the event of a
dispute, the obligations of the Escrow Agent shall be governed by Section 3.8
hereof.
(c) In the event Rate Caps are adopted at any time prior to the required
release of any portion of the Rate Cap Escrow Amount, PhoneTel and Sellers'
Representatives shall negotiate in good faith with a goal of determining a final
release of the Rate Cap Escrow Amount, consistent with the intent of Section
1.13 of the Merger Agreement, as promptly as possible.
3.5 RELEASE OF BAILEY ESCROW AMOUNT. On the date which is 120 days after
the Closing, the Escrow Agent shall pay to Bailey the Bailey Escrow Amount
unless, on or before such date, PhoneTel notifies the Escrow Agent that Bailey
is not entitled to such amount under the terms of his Employment Agreement, and
requests delivery of the Bailey Escrow Amount to PhoneTel. In the event that
PhoneTel delivers such notice to the Escrow Agent, (i) the Escrow Agent must
thereupon promptly notify Bailey of PhoneTel's request, (ii) Bailey then shall
have ten (10) days within which he can respond to the Escrow Agent and object to
PhoneTel's request, (iii) failure to respond within ten days of the Escrow
Agent's notification will be deemed as consent on the part of Bailey to the
Escrow Agent's delivering the Bailey Escrow Amount to PhoneTel and (iv) actual
or deemed consent by Bailey will result in the Escrow Agent's delivery of the
Bailey Escrow Amount to PhoneTel. In the event of a dispute, the obligations of
the Escrow Agent shall be governed by Section 3.8 hereof.
3.6 RELEASE OF BEDDOW ESCROW AMOUNT. On the date which is 120 days after
the Closing, the Escrow Agent shall pay to Beddow the Beddow Escrow Amount
unless, on or before such date, PhoneTel notifies the Escrow Agent that Beddow
is not entitled to such amount under the terms of his Employment Agreement, and
requests delivery of the Beddow Escrow Amount to PhoneTel. In the
7
<PAGE> 8
event that PhoneTel delivers such notice to the Escrow Agent, (i) the Escrow
Agent must thereupon promptly notify Beddow of PhoneTel's request, (ii) Beddow
then shall have ten (10) days within which he can respond to the Escrow Agent
and object to PhoneTel's request, (iii) failure to respond within ten days of
the Escrow Agent's notification will be deemed as consent on the part of Beddow
to the Escrow Agent's delivering the Beddow Escrow Amount to PhoneTel and (iv)
actual or deemed consent by Beddow will result in the Escrow Agent's delivery of
the Beddow Escrow Amount to PhoneTel. In the event of a dispute, the obligations
of the Escrow Agent shall be governed by Section 3.8 hereof.
3.7 RELEASE OF MARSHALL ESCROW AMOUNT. On the date which is 120 days after
the Closing, the Escrow Agent shall pay to Marshall the Marshall Escrow Amount
unless, on or before such date, PhoneTel notifies the Escrow Agent that Marshall
is not entitled to such amount under the terms of his Employment Agreement, and
requests delivery of the Marshall Escrow Amount to PhoneTel. In the event that
PhoneTel delivers such notice to the Escrow Agent, (i) the Escrow Agent must
thereupon promptly notify Marshall of PhoneTel's request, (ii) Marshall then
shall have ten (10) days within which he can respond to the Escrow Agent and
object to PhoneTel's request, (iii) failure to respond within ten days of the
Escrow Agent's notification will be deemed as consent on the part of Marshall to
the Escrow Agent's delivering the Marshall Escrow Amount to PhoneTel and (iv)
actual or deemed consent by Marshall will result in the Escrow Agent's delivery
of the Marshall Escrow Amount to PhoneTel. In the event of a dispute, the
obligations of the Escrow Agent shall be governed by Section 3.8 hereof.
3.8 DISPUTES. Should any dispute arise with respect to the payment and/or
ownership or right of possession of any portion of the Escrow Amounts, the
Escrow Agent is authorized and directed to retain in its possession such
disputed portion until either (i) PhoneTel and either Sellers' Representatives,
Bailey, Beddow or Marshall, as applicable, direct the application or payment
thereof by delivering a writing to the Escrow Agent; or (ii) the Escrow Agent
shall receive a certified copy of a final judgment of a court of competent
jurisdiction or duly appointed arbitrator with respect to such disputed amount.
Upon receipt of such written direction
8
<PAGE> 9
or not later than five business days after receipt of such certified copy of a
judgment or arbitrator's award, the Escrow Agent shall take action with respect
to such disputed amount as required by such direction or such judgment, as the
case may be.
3.9 TAXES. The party who receives any portion of the Escrow Amounts
pursuant to this Section 3 shall indemnify the other parties for the amount of
any income taxes required to be and actually paid to a taxing authority of the
United States or a political subdivision thereof by such other parties with
respect to any interest or other earnings on such portion.
Section 4. INTERPLEADER PROVISION. Nothing contained in this Escrow
Agreement shall preclude the right of the Escrow Agent to seek an adjudication
in a court of competent jurisdiction as to the rights of the parties under this
Escrow Agreement, and the Escrow Agent shall not be liable for any delay
occasioned because of such resort to court. The Escrow Agent will be reimbursed
for expenses, including reasonable counsel fees, in connection with performance
of the Escrow Agent's duties under this Agreement, to be paid 50% by PhoneTel
and 50% by Sellers' Representatives on behalf of all of the Sellers.
Section 5. TERMINATION. This Escrow Agreement shall terminate upon the
final distribution of the funds held by the Escrow Agent pursuant to this Escrow
Agreement, other than the provisions of Section 3.9, which shall terminate upon
the joint written consent of PhoneTel and Sellers' Representatives and the
provisions of Section 8(e), which shall survive the termination or expiration of
this agreement for any reason whatsoever.
Section 6. PAYMENTS TO SELLERS' REPRESENTATIVES. All payments to Sellers'
Representatives under Sections 2, 3.1, 3.3 and 3.4 are for the benefit of the
Sellers, Pro Rata (as defined in the Merger Agreement), and it shall be the
obligation of Sellers' Representatives to forward amounts to the Sellers.
Section 7. COMPENSATION OF ESCROW AGENT. For normal services Escrow Agent
will be paid a set up fee of $1,500 and a minimum escrow fee of $1,500 per year
or part thereof, paid in advance. For services in addition
9
<PAGE> 10
to normal services a reasonable fee based upon the time spent by Escrow Agent's
officers, employees or agents in performing such additional services, and
reimbursement to the Escrow Agent for all legal fees, expenses, disbursements
and advances incurred or made by the Escrow agent in the performance of its
services. All such fees, expenses, out-of-pocket expenses, disbursements, and
advances shall be a joint and several liability of the parties, but shall be
paid by PhoneTel and Sellers' Representatives within a reasonable period of time
not to exceed thirty (30) days after billing. In the event that payment is not
received by Escrow Agent within thirty (30) days after billing, Escrow Agent's
fees may be deducted from the Rate Cap Escrow Account. All fees, expenses,
out-of-pocket expenses, disbursements and advances hereunder shall be paid
one-half by PhoneTel and one-half by Sellers' Representatives.
SECTION 8. ESCROW AGENT.
(a) The Escrow Agent may resign and be discharged from its duties
hereunder at any time by giving notice of such resignation to Sellers'
Representatives and PhoneTel, which shall specify a date (not less than 30 days
following the date of such notice) when such resignation shall take effect. Upon
such notice, a successor escrow agent shall be selected by Sellers'
Representatives and PhoneTel, such successor escrow agent to become the Escrow
Agent hereunder upon the resignation date specified in such notice. If Sellers'
Representatives and PhoneTel are unable to agree upon a successor escrow agent
within 30 days after the date of such notice, the Escrow Agent shall be entitled
to appoint its successor. The Escrow Agent shall continue to serve hereunder
until its successor accepts the escrow and acknowledges receipt of the Escrow
Amounts.
(b) Sellers' Representatives and PhoneTel agree to release and hold
the Escrow Agent harmless and indemnify it from any loss or claim whatsoever in
conjunction with the performance of the duties of the Escrow Agent (including
attorney's fees) as long as the Escrow Agent has complied with the provisions of
this Escrow Agreement. Said indemnification shall be borne 50% by PhoneTel and
50% by Sellers' Representatives (unless otherwise determined by a court of
competent jurisdiction) and survive the termination of this Agreement.
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<PAGE> 11
(c) The Escrow Agent is not a party to, and is not bound by, or
charged with notice of, any agreement out of which this escrow may arise. The
Escrow Agent shall not be bound by any modification, amendment or revision of
this Agreement unless the same shall be in writing and signed by all of the
parties hereto.
(d) The Escrow Agent acts hereunder as a depository only, and is not
responsible or liable in any manner whatever for the sufficiency, correctness,
genuineness or validity of the subject matter of the escrow, or any part
thereof. Further, the Escrow Agent shall not be responsible for determining (i)
the accuracy of any notices or instructions delivered hereunder, or the form of
execution thereof, or (ii) the identity or authority of any person executing or
delivering this Agreement, any property delivered hereunder, or any instructions
delivered in connection herewith.
(e) In the event the Escrow Agent becomes involved in any claim,
controversies, or legal proceedings in connection with this Escrow Agreement,
PhoneTel, on the one hand, and Sellers Representatives, on the other, each
agrees to indemnify and save the Escrow Agent harmless from 50% of all loss,
cost, damages, expenses, including attorneys' fees suffered or incurred by the
Escrow Agent as a result thereof except in the case of the Escrow Agent's gross
negligence or willful misconduct. Payment of such costs, damages, expenses or
fees shall be paid by PhoneTel and Sellers' Representatives within a reasonable
period of time not to exceed thirty (30) days after billing. In the event that
payment is not received by Escrow Agent within thirty (30) days after billing,
Escrow Agent's costs, damages, expenses and fees may be deducted from the Rate
Cap Escrow Account. The obligations of PhoneTel and Sellers' Representatives
under this paragraph shall be performable at the office of the Escrow Agent in
Dallas, Texas, and shall survive the termination of this Agreement for any
reason whatsoever.
(f) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, certificate, receipt, authorization, power of
attorney or other paper or document that the Escrow Agent in good faith believes
to be genuine and what it purports to be.
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<PAGE> 12
(g) The Escrow Agent shall not be liable for anything which it may do
or refrain from doing in connection herewith, except in the case of the Escrow
Agent's own gross negligence or willful misconduct.
(h) The Escrow Agent may, at its sole discretion, consult with legal
counsel in the event of any dispute or question as to the construction of any of
the provisions hereof or its duties hereunder, and it shall incur no liability
and shall be fully protected in acting in accordance with the opinion and
instructions of such counsel except in the case of the Escrow Agent's gross
negligence or willful misconduct. PhoneTel, on the one hand, and Sellers'
Representatives, on the other, each agrees to reimburse Escrow Agent for 50% of
any legal fees incurred by Escrow Agent in connection with its serving as Escrow
Agent hereunder.
Section 9. NOTICES. Any notices or other communications required or
permitted hereunder shall be given in writing and shall be delivered by hand or
air courier or sent by certified or registered mail, postage prepaid, addressed
as follows:
If to PhoneTel, to:
PhoneTel Technologies, Inc.
650 Statler Office Tower
1127 Euclid Avenue
Cleveland, Ohio 44115
Attn: Chairman
with copy to:
Skadden, Arps, Slate, Meagher
& Flom LLP
919 Third Avenue
New York, NY 10022
Telephone Number: 212-735-3000
Facsimile Number: 212-735-2000
Attn: Stephen M. Banker, Esq.
or:
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<PAGE> 13
If to the Escrow Agent, to:
if by mail:
Comerica Bank-Texas
P.O. Box 226405
Dallas, TX 75222-6405
Attn: Charles Holmes, Trust Officer
if by delivery:
Comerica Bank-Texas
5th Floor
1300 North Park Center
Dallas, TX 75225
Attn: Charles Holmes, Trust Officer
or:
If to Sellers' Representatives, to:
Bill H. Bailey, Jr.
1907 O'Keefe Road
Jacksonville, TX 75766
and
J. Bruce Duty
Capital Southwest Corporation
12900 Preston Road, Suite 700
Dallas, TX 75230
with copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, TX 75201
Attn: Alan J. Perkins, Esq.
or:
If to Bailey, to:
Mr. Bill H. Bailey, Jr.
1907 O'Keefe Road
Jacksonville, TX 75766
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<PAGE> 14
with copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, TX 75201
Attn: Alan J. Perkins, Esq.
or:
If to Beddow, to:
Mr. Jerry T. Beddow
c/o Cherokee Communications, Inc.
506 East Rusk
Jacksonville, TX 75766
with copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, TX 75201
Attn: Alan J. Perkins, Esq.
or:
If to Marshall to:
Mr. Edward L. Marshall
c/o Cherokee Communications, Inc.
506 East Rusk
Jacksonville, TX 75766
with copy to:
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
Dallas, TX 75201
Attn: Alan J. Perkins, Esq.
or to such other address as shall be furnished in writing by such party, and any
such notice or communication shall be effective and be deemed to have been given
(a) as of the date delivered if by hand, (b) the day after delivery to the air
courier service if sent by overnight mail, and (c) five days following the date
of mailing if mailed.
14
<PAGE> 15
Section 10. ENTIRE AGREEMENT. This Escrow Agreement is the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, with respect thereto.
Section 11. AMENDMENTS; WAIVER. This Escrow Agreement may be amended,
modified, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived only by written instrument signed by the parties
hereto or, in the case of a waiver, the party waiving compliance.
Section 12. ASSIGNMENT. No assignment of any rights or delegations of any
obligations provided for herein may be made by any party without the express
written consent of all the other parties hereto, except as provided in Section
8(a) hereof. Any purported assignment or delegation of this Agreement contrary
to the terms hereof shall be void.
Section 13. COUNTERPARTS. This Escrow Agreement may be executed in two more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
Section 14. GOVERNING LAW; DISPUTE RESOLUTION. (a) This Agreement shall be
construed in accordance with and governed by the internal laws of the State of
Texas.
(b) Any controversy or claim arising out of or relating to this Escrow
Agreement, including the termination, validity, interpretation or breach hereof
or the delivery of any portion of the Escrow Amounts shall be settled by
arbitration before a single arbitrator conducted in Atlanta, Georgia in
accordance with then applicable Commercial Arbitration Rules of the American
Arbitration Association, as modified in this Escrow Agreement (the "Rules").
Within 20 days after its receipt of claimant's notice of intention to arbitrate
and statement of claim, respondent shall serve claimant with its answering
statement and any counterclaims. Claimant shall serve its answer to any
counterclaims within ten days after its receipt thereof. The hearing shall be
held no later than 30 days after the designation of the arbitrator, and shall
last no more than two business days absent good cause shown. The arbitrator
shall render its written decision within 30 days after such hearing is
15
<PAGE> 16
conducted. The rendering of the decision by the arbitrator within the aforesaid
period of time is a condition to the parties' obligation to pay the fees of the
arbitrator. Within two days after designation of the arbitrator, PhoneTel and
Sellers' Representatives shall notify the Escrow Agent of his identity.
(c) The powers of the arbitrator shall include, but not be limited to, the
awarding of injunctive or other equitable relief but shall not include the power
to modify or amend in any respect the provisions of this Escrow Agreement. The
arbitrator shall include in any award the amount of the reasonable attorneys'
fees and expenses and all other reasonable costs and expenses of the arbitration
incurred by the prevailing party and a direction that it be paid by the other
party within ten days after the making of such award. In the event that the
arbitrator does not rule in favor of the prevailing party in respect of all the
claims alleged by such party, the arbitrator shall include in any award the
portion of the amount of the reasonable attorneys' fees and other expenses of
the arbitration incurred by the prevailing party as the arbitrator deems just
and equitable under the circumstances, together with a direction that such
amounts be paid by the other party within ten days thereof. Except as provided
above, each party shall bear his or its own attorneys' fees and expenses and the
parties shall bear equally all other costs and expenses of the arbitration.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
(d) Nothing contained in this Section 14 shall be construed to limit or
preclude a party from bringing any action in any court of competent jurisdiction
for interim or provisional relief pending establishment of the arbitral tribunal
and the arbitral tribunal's determination of the merits of the dispute to
protect the rights or property of that party or to compel another party to
comply with its obligations under this Escrow Agreement during the pendency of
the arbitration proceedings.
Section 15. ACTION BY SELLERS' REPRESENTATIVES. All action taken by
Sellers' Representatives shall be valid and binding only if both Seller
Representatives have approved such action.
16
<PAGE> 17
Section 16. BENEFIT. Subject to Section 12 hereof, this Escrow Agreement
shall be binding upon and inure to the benefit of the parties hereto and the
successors and assigns of each of them.
Section 17. TITLE TO ESCROW. PhoneTel and the other parties hereto
acknowledge and agree that the Escrow Amounts are not property of PhoneTel and
shall not be property of its estate pursuant to the provisions of 11 U.S.C. ss.
541 in the event of a bankruptcy proceeding of PhoneTel, except that PhoneTel
has a contingent right to a refund of all or a portion of the Escrow Amounts as
provided herein and in the Merger Agreement. PhoneTel acknowledges that the
Escrow Amounts are being transferred to the Escrow Agent to assure payment to
the Sellers of all amounts due and owing to the Sellers pursuant to the
requirements of the Merger Agreement and this Escrow Agreement, and that
PhoneTel relinquishes all rights, title and interest in and to the Escrow
Amounts, other than its contingent right to a refund of all or a portion thereof
as provided herein and in the Merger Agreement.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have affixed their signatures to
this Escrow Agreement upon the date first set forth above.
COMERICA BANK-TEXAS
By: /s/ Charles Holmes
----------------------------------------------
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Bill H. Bailey, Jr.
----------------------------------------------
Name: Bill H. Bailey, Jr.
Title: Chairman and Chief Executive Officer
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
----------------------------------------------
Name: Peter G. Graf
Title: Chairman and Chief Excutive Officer
/s/ Bill H. Bailey, Jr.
----------------------------------------------
Bill H. Bailey, Jr.
Sellers' Representative
/s/ J. Bruce Duty
----------------------------------------------
J. Bruce Duty
Sellers' Representative
18
<PAGE> 19
/s/ Bill H. Bailey, Jr.
---------------------------------
BILL H. BAILEY, JR., individually
/s/ Edward L. Marshall
---------------------------------
EDWARD L. MARSHALL, individually
/s/ Jerry T. Beddow
---------------------------------
JERRY T. BEDDOW, individually
19
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated March 29, 1996 relating
to the financial statements of PhoneTel Technologies, Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
December 11, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated May 17, 1996 relating to
the financial statements of Paramount Communications Systems, Inc., which
appears in such Prospectus. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
December 11, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in Amendment No. 2 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
December 9, 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
December 10, 1996
<PAGE> 1
EXHIBIT 23.5
December 9, 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
December 10, 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. 2 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
December 10, 1996
<PAGE> 1
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement on
Form SB-2 (No. 333-13767) of PhoneTel Technologies, Inc. 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
December 9, 1996
