AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
REGISTRATION NO.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
PHONETEL TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
OHIO 4813 34-1462198
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S.Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
---------------
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
(216) 241-2555
(Address and Telephone Number of
Principal Executive Offices and
Principal Place of Business)
---------------
TAMMY L. MARTIN, ESQ.
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER,
GENERAL COUNSEL AND SECRETARY
PHONETEL TECHNOLOGIES, INC.
1127 EUCLID AVENUE, SUITE 650
CLEVELAND, OHIO 44115-1601
(216) 241-2555
(Name, Address and Telephone
Number of Agent For Service)
---------------
Copies to:
Stephen M. Banker, Esq. Daniel J. Zubkoff, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Cahill Gordon & Reindel
919 Third Avenue 80 Pine Street
New York, New York 10022 New York, New York 10005
(212) 735-3000 (212) 701-3000
<TABLE>
<CAPTION>
=====================================================================================================
STATE OF PRIMARY STANDARD INDUSTRIAL I.R.S.
NAME OF ADDITIONAL REGISTRANTS* INCORPORATION CLASSIFICATION CODE NUMBER IDENTIFICATION NO.
- ------------------------------- -------------- --------------------------- ------------------
<S> <C> <C> <C>
Public Telephone Corporation Indiana 4813 34-1813512
World Communications, Inc. Missouri 4813 43-1724466
Paramount Communications Florida 4813 59-2822743
Systems, Inc.
Northern Florida Telephone Florida 4813 59-3025564
Corporation
Payphones of America, Inc. Ohio 4813 34-1838787
* Address and telephone number of principal executive offices and agent for service are
same as those of PhoneTel Technologies, Inc.
=====================================================================================================
</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. /_/
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================
PROPOSED
MAXIMUM
TITLE OF EACH CLASS PROPOSED AGGREGATE
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING OFFERING PRICE AMOUNT OF
REGISTERED REGISTERED PRICE PER UNIT (1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
___% SENIOR NOTES DUE
2006 OF PHONETEL TECH-
NOLOGIES, INC. (THE
"NOTES")................ $110,000,000 100% $110,000,000 $33,334
- ------------------------------------------------------------------------------------------------
GUARANTEES OF THE NOTES
BY REGISTRANTS OTHER
THAN PHONETEL TECHNO-
LOGIES, INC............ -- -- -- NONE (2)
================================================================================================
<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) Pursuant to Rule 457(n), no separate fee is being paid with respect to
the Guarantees.
</TABLE>
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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
PRELIMINARY PROSPECTUS DATED OCTOBER 31, 1996
[LOGO] PHONETEL TECHNOLOGIES, INC
$110,000,000
___% Senior Notes due 2006
INTEREST PAYABLE ___ AND ___
ISSUE PRICE: 100%
The ____% Senior Notes due 2006 (the "Notes") are being offered (the
"Offering") by PhoneTel Technologies, Inc. (the "Company"). Concurrently
herewith, the Company is offering (the "Concurrent Offering") _____ shares
of its Common Stock, $.01 par value (the "Common Stock"). The Concurrent
Offering is being made by separate prospectus. The closing of this Offering
and the placement of funds into escrow are not conditioned upon the
consummation of the Concurrent Offering.
The Notes will be guaranteed, jointly and severally, fully and
unconditionally, by: Public Telephone Corporation, World Communications,
Inc., Paramount Communications Systems, Inc., Northern Florida Telephone
Corporation and Payphones of America, Inc. (collectively, the "Subsidiary
Guarantors"). The Subsidiary Guarantors constitute all of the Company's
subsidiaries; any and all future subsidiaries of the Company will be
required to become Subsidiary Guarantors.
The Company expects to use the net proceeds of this Offering, together
with the proceeds of the Concurrent Offering and certain other funds, to
consummate the Cherokee Acquisition (as defined herein), to repay certain
indebtedness and for working capital and other general corporate purposes.
If the Cherokee Acquisition is not consummated prior to __________, 1997,
the Company will be required to offer to repurchase (the "Special Offer")
$35.0 million principal amount of the Notes on or prior to ______, 1997
(the "Special Offer Date") at a price (the "Special Offer Price") equal to
101% of the principal amount of the Notes plus accrued and unpaid interest
to the Special Offer Date.
The Notes will mature on ________, 2006, unless previously redeemed.
Interest on the Notes will be payable semiannually on ________ and
___________, commencing __________, 1997. The Notes will be redeemable, in
whole or in part, at the option of the Company at any time on or after
_________, 2001, at the redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption. In addition, at any time or
from time to time prior to __________, 1999, the Company, at its option,
may redeem up to ____% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds to the Company from one or
more Equity Offerings (as defined herein), other than the Concurrent
Offering, at a redemption price equal to ____% of the principal amount
thereof, plus accrued and unpaid interest to the date of redemption;
provided, however, that at least $75.0 million in aggregate principal
amount of the Notes remains outstanding immediately after any such
redemption. Upon a Change of Control (as defined herein), the Company will
have the obligation to offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
The Notes will be general unsecured obligations of the Company and will be
senior in right of payment to all existing and future indebtedness of the
Company that is expressly subordinated and will be pari passu in right of
payment with all other senior indebtedness of the Company. The Notes will
be effectively subordinated to all secured indebtedness of the Company to
the extent of the assets pledged to secure such indebtedness, including all
indebtedness of the Company under the New Credit Agreement (as defined
herein) which will be secured by all of the assets of the Company. The
Company does not currently have, and does not currently intend to issue,
significant indebtedness to which the Notes would be senior. The Subsidiary
Guarantees (as defined herein) will be senior unsecured obligations of the
Subsidiary Guarantors. The Subsidiary Guarantees will be effectively
subordinated to all secured indebtedness of the Subsidiary Guarantors to
the extent of the assets pledged to secure such indebtedness. As of
June 30, 1996, on a pro forma basis after giving effect to the
Offering, the Concurrent Offering and the other transactions described
herein, the Company would have had approximately $113.1 million of
indebtedness outstanding, of which $934,868 would have been secured and the
Subsidiary Guarantors would have had approximately $228,889 million of
indebtedness outstanding (other than the Subsidiary Guarantees) all of which
would have been secured. There is currently no trading market for the Notes
and the Company does not intend to list the Notes on any securities exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
===========================================================================
UNDERWRITING
PRICE TO COMPENSATION PROCEEDS TO
PUBLIC (1) (2) COMPANY (3)
- ---------------------------------------------------------------------------
Per Note 100% % %
- ---------------------------------------------------------------------------
TOTAL(3) $ $ $
- ---------------------------------------------- ----------------------------
(1) PLUS ACCRUED INTEREST, IF ANY, FROM THE DATE OF ISSUANCE.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"). SEE "UNDERWRITING."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
THE NOTES ARE BEING OFFERED BY THE UNDERWRITERS, SUBJECT TO PRIOR SALE,
WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS, AND SUBJECT
TO APPROVAL OF CERTAIN LEGAL MATTERS BY CAHILL GORDON & REINDEL, COUNSEL
FOR THE UNDERWRITERS, AND CERTAIN OTHER CONDITIONS. THE UNDERWRITERS
RESERVE THE RIGHT TO WITHDRAW, CANCEL OR MODIFY SUCH OFFER AND TO REJECT
ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE NOTES WILL
BE MADE THROUGH THE BOOK-ENTRY FACILITIES OF THE DEPOSITORY TRUST COMPANY,
AGAINST PAYMENT THEREFOR ON OR ABOUT , 1996.
J.P. MORGAN & CO.
CIBC WOOD GUNDY SECURITIES CORP.
ING BARINGS
SOUTHCOAST CAPITAL CORPORATION
, 1996
[MAP DEPICTING LOCATION OF PHONES PER STATE]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE NOTES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the
Notes in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
the information contained herein is correct as of any date subsequent to
the date hereof or that there has been no change in the affairs of the
Company since the date hereof.
TABLE OF CONTENTS
PAGE
Available Information................................................. 4
Prospectus Summary.................................................... 5
Risk Factors......................................................... 16
The Pending Acquisitions............................................. 25
Use of Proceeds...................................................... 28
Capitalization....................................................... 29
Selected Financial Data.............................................. 31
Pro Forma Financial Data............................................. 34
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ......................................... 52
Business............................................................. 65
Management........................................................... 85
Security Ownership of Certain
Beneficial Owners and Management.................................. 92
Certain Transactions................................................. 96
Description of Capital Stock......................................... 97
Description of Certain
Indebtedness.......................................................102
Description of the Notes............................................ 104
Underwriting........................................................ 136
Legal Matters....................................................... 137
Experts............................................................. 137
Glossary............................................................ A-1
Index to Financial Statements....................................... F-1
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, such reports and other
information concerning the Company are available for inspection at the
offices of the National Association of Securities Dealers, Inc. located at
1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on
Form SB-2 filed by the Company with the Commission under the Securities
Act. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Notes offered hereby. Any statements
contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to such copy
filed as an exhibit to the Registration Statement or otherwise filed with
the Commission. Each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected without charge at the office of the Commis sion at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof
may be obtained from the Commission at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial
statements and the notes thereto appearing elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the
"Company" include PhoneTel Technologies, Inc. and its subsidiaries, and the
information in this Prospectus (i) gives effect to a one-for-six reverse
share split of the Common Stock ("Stock Split") effected on December 26,
1995 and (ii) assumes no exercise of the underwriters' over-allotment
option in the Concurrent Offering. Terms used in this Prospectus but not
otherwise defined herein have the meanings set forth in the Glossary, which
begins on page A-1 of this Prospectus.
THE COMPANY
PhoneTel Technologies, Inc. is currently the third largest
independent public pay telephone operator and the eleventh largest public
pay telephone operator in the United States. Upon consummation of the
Cherokee Acquisition (as defined herein) and the Texas Coinphone
Acquisition (as defined herein) (the Cherokee Acquisition and the Texas
Coinphone Acquisition collectively referred to herein as the "Pending
Acquisitions") the Company believes that it will be one of the two largest
independent public pay telephone operators in the United States. As of
September 30, 1996, after giving effect to the Pending Acquisitions, the
Company would have owned and operated 38,423 public pay telephones in 43
states, the District of Columbia and Mexico, of which approximately 96% are
located in 21 states. After giving effect to the Pending Acquisitions,
approximately 44% of the Company's public pay telephones will be located in
Florida, Texas and California, which are three of the four most populous
states. As of September 30, 1996, the Company owned and operated 24,732
public pay telephones, of which approxi mately 95% are located in 17 states
and approximately 46% are located in Florida, Texas and California. Since
September 1, 1995, the Company has added 19,581 public pay telephones,
primarily through a series of acquisitions by the Company of 6 independent
public pay telephone companies. In addition, the Company maintains an
active program of installing public pay telephones.
The Company owns, operates, services and maintains a system of
microprocessor controlled "smart" public pay telephones. The Company
derives substantially all of its revenues from calls placed from its public
pay telephones through the deposit of coins ("coin calls") and from calling
card, credit card, collect, third party billed and access code calls
(collectively, "non-coin calls"). The Company contracts with national,
regional and local accounts to operate public pay telephones at locations
where significant demand exists for public pay telephone service, such as
shopping malls, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals. As of September 30, 1996, the
average remaining life of the Company's contracts with its customers was
40.1 months (excluding the contracts acquired in connection with the
acquisition of POA (as defined herein)).
On an actual basis, the Company had revenues and EBITDA (as
defined in footnote 6 on page 15) of $16.8 million and $3.0 million,
respectively, for the six months ended June 30, 1996. The Company's EBITDA
margin has increased to 17.6% for the six months ended June 30, 1996 from
3.0% for the six months ended June 30, 1995. The increase in the EBITDA
margin is primarily due to the elimination of costs associated with the
closing of certain offices, the elimination of redundant executives and
administrative personnel in billing and other operational areas and
leveraging the Company's existing field technicians.
After giving pro forma effect to the 6 acquisitions completed from
September 1, 1995 to September 30, 1996, the Company would have achieved
revenues of $59.6 million and $30.2 million for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively, and EBITDA of
$10.4 million and $6.5 million for the year ended December 31, 1995 and the
six months ended June 30, 1996, respectively. After giving pro forma effect
to such 6 acquisitions and the Pending Acquisitions (collectively, the
"Acquisitions"), the Company would have achieved revenues of $91.5 million
and $46.6 million for the year ended December 31, 1995 and the six months
ended June 30, 1996, respectively, and EBITDA of $21.2 million and $10.2
million for the year ended December 31, 1995 and the six months ended June
30, 1996, respectively. See "Pro Forma Financial Data." Management believes
that as a result of certain recent regulatory changes implemented by the
Federal Communications Commission ("FCC") relating to compensation for
interstate dial-around calls, the Company will generate significant
additional revenues, net of related expenses and processing fees,
commencing November 6, 1996. See "--Recent Developments--Recent Regulatory
Development."
Public pay telephones are primarily owned or operated by Bell
Operating Companies ("BOCs"), other local exchange carriers ("LECs") and
independent public pay telephone companies. Of the approximately 2.54
million public pay telephones operated in the United States in 1995,
Multimedia Telecommunications Association estimates that approximately 87%
are operated by BOCs and other LECs and approximately 13% (approximately
342,000 public pay telephones) are operated by independent public pay
telephone companies. Management believes that the highly fragmented nature
of the independent public pay telephone industry presents a significant
number of attractive acquisition opportunities for the Company.
In June 1995, Peter Graf was appointed Chairman of the Board of
Directors and in September 1995 was appointed Chief Executive Officer of
the Company. In September 1995, Stuart Hollander, Joseph Abrams, Aron
Katzman and Steven Richman were appointed to the board of directors of the
Company, and the majority of the existing board resigned at that time. The
new management team identified and implemented the business strategy set
forth under "--Business Strategy" below.
The Company was incorporated under the laws of the State of Ohio on
December 24, 1984. The Company's executive offices are located at 1127
Euclid Avenue, Suite 650, Cleveland, Ohio 44115-1601 and its telephone
number is (216) 241-2555.
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale and cost savings. The
Company has implemented the following strategy to meet its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the public pay telephone industry. Selective acquisitions enable
the Company to expand its geographic presence and further its strategy of
clustering its public pay telephones more rapidly than with new
installations. The Company has been able to make acquisitions at attractive
prices because smaller companies typically are not able to achieve the
economies of scale realized by the Company. As a result, when acquisitions
are integrated, the Company can operate the public pay telephones at
significantly lower operating costs than the seller. 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 the Acquisitions. In
addition, as the Company grows to become the leading supplier of
independent public pay telephone services in an area, "fill-in" and
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 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 additional
acquisitions, the clustering of public pay telephones creates an
opportunity to generate savings through reduced field service and
collection expenses, the closing of duplicate offices, reduction in staff
and general corporate overhead expenses and reduced expenses associated
with interLATA and intraLATA traffic.
Form strong relationships with service providers and suppliers. As
part of its strategy to continue to reduce 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 lower cost agreements with
increasingly favorable terms.
Use of state-of-the-art technology. The Company's public pay
telephones are "smart" telephones and are operated by means of advanced
microprocessor technology that enables the telephones to perform
substantially all of the necessary coin-driven and certain non coin-driven
functions independent of the Company's central office. Unlike "dumb"
telephones used by most BOCs and other LECs, smart telephones, in concert
with the Company's management information systems, enable the Company to
determine each telephone's operability and need for service as well as its
readiness for coin collection. In addition, rate changes and other
software-dependent functions can also be performed from the central office
without dispatching service technicians to individual public pay
telephones. As a result, the Company can increase the number of public pay
telephones it owns while reducing the costs on a per phone basis of
telephone service and maintenance and coin collection.
Provide superior customer service. The Company strives to maximize
the number of its 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 to ensure superior customer
service. This technology also enables the Company to (i) maintain accurate
records of telephone activity which can be verified by customers and (ii)
respond quickly to equipment malfunctions. The Company's standard of
performance is to repair malfunctions within 24 hours of their occurrence.
Achieve market recognition. With the greater financial resources
available to the Company following the Offering and the Concurrent
Offering, the Company intends to promote actively its brand and customer
service capabilities. The Company seeks to promote and achieve recognition
of its products and services by posting on all of its public pay telephones
the "PhoneTel" label and through advertisements in trade magazines. The
Company believes that achieving market recognition will facilitate its
expansion strategy by enhancing its ability to obtain additional accounts
and encouraging the use of its public pay telephones in locations where
consumers have multiple public pay telephone options.
RECENT DEVELOPMENTS
RECENT REGULATORY DEVELOPMENTS
On September 20, 1996, the FCC adopted new rules pursuant to the
Telecommunications Act (as defined herein) which require certain providers
of long distance services to pay to the Company (and all other owners of
public pay telephones) a flat fee of $45.85 per month per telephone as
compensation for interstate dial-around calls from November 6, 1996 to
October 1, 1997 (which was established by the FCC by multiplying $0.35 per
call times the estimated industry average of 131 access code calls and
"800" calls per pay telephone per month). This replaces the $6.00 flat fee
per month per telephone in place since May 1992. In October 1997, the flat
fee will be replaced by a per-call compensation mechanism, at a rate
initially set at $0.35 per call and for periods after October 1, 1998 at
the local coin drop rate. Management believes that as a result of these
changes, the Company will generate significant additional revenues, net of
related expenses and processing fees, commencing November 6, 1996. The
FCC's new rules include other changes, the effect of which on the Company's
operations cannot be estimated by 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 public pay telephones (located
primarily in California, Colorado and Washington) from Amtel Communications
Services, Inc. and certain of its affiliates (collectively, "Amtel") as of
September 13, 1996 (the "Amtel Acquisition"). The Company acquired the
public pay telephones in the Amtel Acquisition for a purchase price of $13
million, in a combination of cash and Common Stock. The Company acquired
3,115 public pay telephones (located primarily in Illinois, Florida,
Missouri and Virginia) from Payphones of America, Inc. ("POA") as of August
1, 1996 (the "POA Acquisition"). The Company acquired the public pay
telephones in the POA Acquisition, for a purchase price of approximately
$13 million, in a combination of cash, Common Stock and the assumption of
certain liabilities.
PENDING ACQUISITIONS
On October 16, 1996, the Company entered into a letter of intent to
acquire Cherokee Communications, Inc. ("Cherokee"), including approximately
14,000 public pay telephones (located primarily in Texas, New Mexico,
Colorado, Utah and Montana) and certain other assets owned by Cherokee.
The Company will acquire Cherokee (the "Cherokee Acquisition") for a purchase
price of $54 million plus related fees and expenses, subject to certain
purchase price adjustments, which may include an increase of up to $6 million
if certain new regulatory changes are not implemented by the end of 1998.
In addition, the Company will pay $1.25 million in connection with certain
non-competition agreements. See "Pending Acquisitions--The Cherokee Acqui-
sition." On October 9, 1996, the Company entered into a letter of intent to
acquire 1,200 public pay telephones located in Texas from Texas Coinphone
("Texas Coinphone"). The Company will acquire such assets from Texas
Coinphone for a purchase price of approximately $3.7 million, subject to
certain purchase price adjustments. See "Pending Acquisitions--The Texas
Coinphone Acquisition." The closings of the Pending Acquisitions are
expected to occur in January 1997, although there can be no assurance that
either acquisition will be consummated or, if consummat ed, as to the final
terms thereof. The consummation of the Offering is not conditioned upon the
consummation of the Cherokee Acquisition or the Texas Coinphone
Acquisition. However, the Company will be required to make an offer to
purchase $35.0 million aggregate principal amount of the Notes on the
Special Offer Date at the Special Offer Price if the Cherokee Acquisition
is not consummated prior to ________, 1997. A portion of the net proceeds
of this Offering equal to the amount sufficient to permit the Company to
purchase $35.0 million aggregate principal amount of the Notes on the
Special Offer Date at the Special Offer Price (such amount referred to
herein as the "Trust Funds") will be held by and pledged to the Trustee (as
defined herein) for the benefit of the holders of the Notes. The Trust
Funds will be invested in cash, treasury securities and certain other cash
equivalents. See "Risk Factors--Possible Non-Consummation of the Pending
Acquisitions" and "Description of the Notes--Special Offer to Purchase."
THE OFFERING AND CONCURRENT OFFERING
Concurrently with or prior to the completion of the Offering, it is
anticipated that the Company will consummate the Concurrent Offering. The
Company intends to use the estimated net proceeds to the Company of $22.5
million from the Concurrent Offering to repay approximately $8.0 million of
the debt outstanding under the Credit Agreement and the balance for working
capital and other general corporate purposes. See "Use of Proceeds."
The following table sets forth the estimated sources and uses of the
proceeds to be received by the Company from the Offering and the Concurrent
Offering (determined as of September 30, 1996):
In millions Amount
------
SOURCES OF FUNDS:
Concurrent Offering....................................... $ 25.0
% Senior Notes due 2006............................... 110.0
-------
Total sources of funds............................... $ 135.0
======
USES OF FUNDS:
Cherokee Acquisition (1) .................................. $ 55.8
Texas Coinphone Acquisition............................... 3.7
Repay Credit Agreement.................................... 41.0
Repay capitalized lease obligations....................... 7.8
Repay POA Notes (as defined herein)....................... 3.6
Related fees and expenses (2)............................. 9.0
Working capital and general corporate purposes (3)........ 14.1
-------
Total uses of funds.................................. $ 135.0
=======
- -------------------
(1) Represents the purchase price of $54 million plus related fees and
expenses of approximately $1.1 million and a $625,000 initial payment
for the non-competition agreements.
(2) Represents (i) estimated underwriting discount and other expenses of
the Concurrent Offering of $2.5 million, (ii) estimated underwriting
discount and other expenses of the Offering of $5.85 million, and
(iii) fees and expenses incurred in connection with the New
Credit Agreement of $650,000.
(3) If the Offering and the Concurrent Offering are consummated, the Company
may elect, at its option, to redeem approximately $5.5 million of 14%
Preferred in lieu of using such funds for working capital purposes.
THE OFFERING
SECURITIES OFFERED............... $ aggregate principal amount of %
Senior Notes due 2006.
MATURITY DATE.................... , 2006.
INTEREST PAYMENT DATES........... and , commencing
, 1997.
SPECIAL OFFER TO PURCHASE........ If the Cherokee Acquisition is not
consummated prior to , 1997,
the Company will be required to offer
to purchase (the "Special Offer") $35.0
million principal amount of the Notes on or
prior to , 1997 (the "Special Offer
Date") at a price (the "Special Offer
Price") equal to 101% of the principal
amount of the Notes plus accrued and
unpaid interest to the Special Offer
Date. Prior to the consummation of the
Cherokee Acquisition, the portion of the
net proceeds of the Offering, equal to
the amount sufficient to permit the
Company to purchase $35.0 million
principal amount of the Notes on the
Special Offer Date at the Special Offer
Price, will be held by and pledged to
the Trustee for the benefit of the
holders of the Notes and the obligation
of the Company to consummate the Special
Offer will be secured by such funds (the
"Trust Funds").
OPTIONAL REDEMPTION
BY THE COMPANY................... The Notes will be redeemable, in whole or
in part, at the option of the Company at
any time on or after , 2001, at the
redemption prices set forth herein, plus
accrued and unpaid interest to the date
fixed for redemption. In addition, at
any time prior to , 1999, the Company,
at its option, may redeem up to % of the
aggregate principal amount of the Notes
originally issued with the cash proceeds
received by the Company from one or more
Equity Offerings, other than the
Concurrent Offering, at any time or from
time to time, at a redemption price
equal to % of the principal amount
thereof, plus accrued and unpaid
interest to the date of redemp tion;
provided, however, that at least $75.0
million in aggregate principal amount of
the Notes remains outstanding
immediately after any such redemption.
CHANGE OF CONTROL OFFER.......... Upon a Change of Control, the Company has
the obligation to offer to purchase all
the outstanding Notes at a price equal
to 101% of the principal amount thereof,
plus accrued and unpaid interest to the
date of purchase. See "Description of
the Notes--Change of Control" for a
discussion of the circumstances in which
the Company may not be required to make
a Change of Control Offer (as defined
herein).
OFFERS TO PURCHASE............... In the event of certain asset sales, the
Company will be required to offer to
purchase the Notes at 100% of their
principal amount plus accrued and unpaid
interest, if any, to the date of
purchase with the net proceeds of such
asset sales.
RANKING.......................... The Notes will be senior unsecured
obligations of the Company and will rank
senior in right of payment to all
indebtedness of the Company which is by
its terms expressly subordinated in
right of payment to the Notes and pari
passu in right of payment with all other
existing or future senior indebtedness of
the Company. As of June 30, 1996, on a
proforma basis after giving effect to
the acquisitions of POA and Amtel, the
Offering and the Concurrent Offering, there
was approximately $113.1 million of
indebtedness which would have ranked pari
passu in right of payment with the Notes,
of which $934,868 would have been secured.
Any right of the holders of the Notes to
participate in the assets of the Company
will be subject to the prior claims of
secured creditors, such as the lenders
under the New Credit Agreement, with respect
to those assets securing such claims. At
the date of issuance of the Notes, there
will not be any indebtedness ranking junior
in right of payment to the Notes.
SUBSIDIARY GUARANTEES............ The Notes will be guaranteed, jointly
and severally, fully and uncondi-
tionally, on a senior basis by the
Subsidiary Guarantors (the "Subsidiary
Guaran tees").
PRINCIPAL COVENANTS.............. The Indenture for the Notes (the
"Indenture") will impose certain
limitations on the ability of the
Company and its subsidiaries to, among
other things, incur additional
indebtedness, pay dividends or make
certain other restricted payments,
consum mate certain asset sales, enter
into certain transac tions with
interested persons, incur liens, impose
restrictions on the ability of a
subsidiary to pay dividends or make
certain payments to the Com pany,
conduct business other than the pay
telephone and ancillary businesses,
merge or consolidate with any other
person or sell, assign, transfer, lease,
convey or otherwise dispose of all or
substantially all of the assets of the
Company].
USE OF PROCEEDS.................. The Company intends to use the proceeds
from the sale of the Notes, together
with the proceeds of the Concurrent
Offering, to (i) finance the Pending
Acquisitions, (ii) retire all of the
indebtedness under the Credit Agreement
(as defined herein), (iii) to repay
approximately $7.8 million of
obligations under certain capital lease
obligations, (iv) to repay approximately
$3.6 million of notes payable owed to
the sellers of POA, (v) pay related fees
and expenses and (vi) for working
capital and other general corporate
purposes, including the possible
redemption of approximately $5.5 million
of 14% Preferred (as defined herein).
However, in the event the Cherokee
Acquisition is not consummated prior to
, 1997, the Company will be
obligated to offer to purchase $35.0 million
aggregate principal amount of the Notes.
See "Business--The Cherokee Acqui
sition" and "Description of the
Notes--Special Offer to Purchase."
RISK FACTORS
Prospective investors should consider carefully all of the information
set forth in this Prospectus, particularly the matters set forth under the
caption "Risk Factors."
<TABLE>
<CAPTION>
SUMMARY FINANCIAL AND OPERATING DATA
===============================================================================================
YEAR ENDED DECEMBER SIX MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 31, 1995 JUNE 30 JUNE 30, 1996
------------------------ -------------------------- ---------------- -------------------------
PRO FORMA PRO FORMA
PRO FORMA FOR 1995 FOR 1996
FOR 1995 AND 1996 PRO FORMA ACQUISTIONS,
AND 1996 ACQUISITIONS, FOR 1996 PENDING
ACQUISITIONS, PENDING ACQUISITIONS, ACQUISITIONS,
CONCURRENT ACQUISITIONS, CONCURRENT CONCURRENT
OFFERING CONCURRENT OFFERING OFFERING
AND OFFERING AND AND
OFFERING AND OFFERING OFFERING OFFERING
1993 1994 1995 (1) (2) 1995 1996 (3) (4)
--------- --------- --------- ----------- ---------- --------- --------- ---------- -----------
(In thousands, except per share
data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.............. $ 11,070 $ 15,866 $ 18,718 $ 59,610 $ 91,496 $ 7,878 $ 16,806 $ 30,240 $ 46,566
Cost and expenses........... 11,683 17,180 24,007 68,892 101,132 9,077 24,497 38,042 56,008
Loss from operations........ (613) (1,314) (5,289) ( 9,282) (9,636) (1,199) (7,691) (7,802) (9,442)
Interest expense............ 175 388 837 12,253 15,309 220 2,091 5,872 6,922
Loss before extraordinary
items.. (779) (1,695) (6,110) (21,174) (25,326) (1,413) (9,780) (13,210) (16,442)
Net loss.................... (779) (1,695) (6,110) (1,413) (10,047)
Net loss applicable to
common shareholders....... (986) (1,987) (6,419) (21,828) (25,979) (1,568) (12,185) (13,345) (16,577)
Net loss per common
share (5)................. (0.96) (1.35) (3.29) (1.80) (2.14) (0.99) (3.41) (1.04) (1.29)
Weighted average number of
common shares............... 1,031,384 1,470,188 1,950,561 12,115,561 12,115,561 1,586,142 3,576,381 12,871,427 12,871,427
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA (6)................. $283 $922 $1,264 $10,381 $21,244 $233 $2,956 $6,397 $10,177
EBITDA margin (7).......... 2.56% 5.81% 6.75% 17.42% 23.22% 2.96% 17.59% 21.15% 21.86%
Ratio of EBITDA to
interest expense......... 1.62 2.38 1.51 .85 1.38 1.06 1.41 1.09 1.47
Number of public pay
telephones in service.... 2,350 4,891 9,458 24,074 39,274 5,038 14,826 24,813 40,013
Ratio of earnings to
fixed charges (8).........
</TABLE>
==========================================
AS OF JUNE 30, 1996
------------------------------------------
PRO FORMA
PRO FORMA FOR THE
FOR POA POA AND AMTEL
AND AMTEL ACQUISITIONS,
ACQUISITIONS, THE PENDING
THE OFFERING ACQUISITIONS,
AND THE OFFERING AND
CONCURRENT CONCURRENT
ACTUAL OFFERING (9) OFFERING (10)
------ ------------ ----------------
BALANCE SHEET DATA:
Total assets..................... $52,043 $115,571 $151,842
Long-term debt and obligations
under capital leases
(including current
installments) (11)............. 28,764 77,552 113,114
14% Redeemable Preferred Stock... 6,404 6,404 6,404
Non-mandatorily redeemable pre-
ferred stock, common
stock and other
shareholders'equity............ 10,117 26,225 26,225
Working capital (deficit) (12)... (8,984) 34,027 10,928
(1) Gives effect to the acquisitions of International Pay Phones, Inc. of
Tennessee and of International Pay Phones, Inc. of South Carolina
(herein collectively referred to as "IPP"), Paramount Communications
Systems, Inc. ("Paramount"), POA and Amtel (collectively, the "1996
Acquisitions") and the acquisitions of World Communications, Inc.
("World") and Public Telephone Corporation ("Public Telephone")
(together, the "1995 Acquisitions"), the Concurrent Offering and the
Offering, as if such transactions had occurred on January 1, 1995,
and assuming $35 million is escrowed for 3 months and then utilized
to purchase Notes from the bondholders. Such unaudited pro forma
financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, and the
Pending Acquisitions (collectively, the "Acquisitions."), the
Concurrent Offering and the Offering, as if such transactions had
occurred on January 1, 1995. Such unaudited pro forma financial data
is not necessarily indicative of the results of operations that might
have occurred if the transactions had taken place on such date or
which might occur in any future period.
(3) Gives effect to the 1996 Acquisitions, the Concurrent Offering
and the Offering, as if such transactions had occurred on January 1,
1996, and assuming $35 million is escrowed for 3 months and then
utilized to purchase Notes from the bondholders. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period.
(4) Gives effect to the 1996 Acquisitions, the Pending Acquisitions,
the Concurrent Offering and the Offering, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data
is not necessarily indicative of the results of operations that might
have occurred if the transactions had taken place on such date or
which might occur in any future period.
(5) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption
of 10% Preferred (as defined herein), 8% Preferred (as defined
herein) and 7% Preferred (as defined herein) realized in March 1996.
(6) EBITDA represents earnings before interest income, interest expense,
income taxes, depreciation, amortization and other unusual charges
and settlements of employment contracts. EBITDA is not intended to
represent an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or as an
alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a
measure of liquidity. The Company believes that EBITDA is a
meaningful measure of performance because it is commonly used in the
public pay telephone industry to analyze comparable public pay
telephone companies on the basis of operating performance, leverage
and liquidity.
(7) EBITDA margin is calculated by dividing (a) EBITDA by (b) total
revenues. EBITDA margin is a measure commonly used in the Company's
industry as an indicator of the efficiency of the Company's
operations.
(8) Earnings of the Company are inadequate to cover fixed charges. The
dollar amount of earnings required to attain a ratio of one-to-one
for the years ended December 31, 1993, 1994, 1995 and the six months
ended June 30, 1996 were $778,875, $1,695,122, $6,109,697 and
$9,780,136, respectively. The dollar amount of earnings required to
attain a ratio of one-to-one for the year ended December 31, 1995 and
the six months ended June 30, 1996 after giving pro forma effect to
the 1995 and 1996 Acquisitions were $3,297,995 and $1,256,932,
respectively. The dollar amount of earnings required to attain a ratio
of one-to-one for the year ended December 31, 1995 and the six months
ended June 30, 1996 after giving pro forma effect to the 1995 and 1996
Acquisitions, Pending Acquisitions, Concurrent Offering and Offering
were $24,200,690 and $16,425,002, respectively. For purposes of this
computation, earnings are defined as income (loss) before income taxes
and fixed charges. Fixed charges are defined as the sum of (i) interest
costs (including capitalized interest expense) and (ii) amortization of
deferred financing costs.
(9) Gives effect to the acquisitions of POA and Amtel, the Offering and
the Concurrent Offering, as if such transactions had occurred on June 30,
1996 and assuming the $35 million escrowed for 3 months is then utilized
to purchase Notes from the bondholders.
(10) Gives effect to the acquisitions of POA and Amtel and the Pending
Acquisitions, and the Offering and the Concurrent Offering, as
if such transactions had occurred on June 30, 1996.
(11) Excludes $5,850 constituting the unamortized portion of long-term debt
discount, which arose from the original allocation of proceeds to
warrants issued to the Lenders (as defined herein) in connection with
the Credit Agreement.
(12) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
RISK FACTORS
Investment in the Notes offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
in evaluating the Company and its business before purchasing any of the
Notes offered hereby.
SUBSTANTIAL LEVERAGE AND EFFECT ON ABILITY TO PAY INDEBTEDNESS
The Company will have substantial indebtedness upon the consummation
of this Offering. As of June 30, 1996 on a pro forma basis after giving
effect to the Acquisitions, the Offering and the Concurrent Offering, the
Company's total indebtedness was $118.9 million, its total assets were
$157.5 million and its mandatorily redeemable preferred stock and other
equity was $32.3 million, with the ability, subject to certain limitations
described herein to incur approximately $50 million of additional
indebtedness under a new senior credit facility expected to be entered into
by the Company upon consummation of the Offering (the "New Credit
Agreement"). In addition, earnings were insufficient to cover fixed charges
by approximately $6.1 million and $9.8 million for the year ended December
31, 1995 and the six months ended June 30, 1996, respectively.
The Company's high degree of leverage could have important
consequences for the Company, including: (i) the ability of the Company to
obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such
financing may not be on terms favorable to the Company; (ii) a substantial
portion of the Company's cash flow will be used to pay the Company's
interest expense, which will reduce the funds that would otherwise be
available to the Company for its operations and future business
opportunities; (iii) a decrease in net operating cash flows or an increase
in expenses of the Company could make it difficult for the Company to meet
its debt service require ments 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, the proceeds to the
Company from the Offering and the Concurrent Offering, the Company believes
that it will have the funds necessary to meet the principal and interest
payments on its debt as they become due and to operate its business. However,
there can be no assurance that the Company will be able to do so. If the
Company is unable to generate sufficient earnings and cash flow to meet its
obligations with respect to its outstanding indebtedness, including the
Notes, refinancing of certain of the debt obligations or asset dispositions
might be required. In the event debt refinancing is required, there can be
no assurance that the Company can effect such refinancing on satisfactory
terms or that the refinancing will be permitted by the lenders under the New
Credit Agreement, the other creditors of the Company or by the terms of the
Indenture pursuant to which the Notes will be issued. In addition, asset
dispositions may be made under circumstances which might not be favorable
to realizing the best price for such assets. Moreover, there can be no
assurance that assets can be sold promptly enough, or for amounts
sufficient to satisfy outstanding debt obligations. The New Credit
Agreement is expected to contain certain restrictions on the Company's
ability to sell assets and on the use of proceeds from permitted assets
sales. See "Description of Certain Indebtedness--The New Credit Agreement."
For restrictions on debt refinancing and asset dispositions under the
Indenture, see "Description of the Notes."
GOVERNMENT REGULATION
The operations of the public pay telephone industry are regulated by
the public service or utility commissions of the various states and, to a
lesser extent, 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 telecommunica tions industry generally and the public pay
telephone industry specifically. Court decisions interpreting laws
applicable to the telecommunications industry may also have a significant
effect on the public pay telephone industry. Changes in existing laws and
regulations as well as the creation of new ones, applicable to the
activities of the Company or other telecommunication businesses (including
the extent of competition, the charges of providers of interexchange and
operator services and the implementation of new technologies), particularly
in the states of Florida, Texas and California, may have a material adverse
effect on the Company's business, results of operations or financial
condition.
The recently enacted Section 276 ("Section 276") of the
Telecommunications Act of 1996 (the "Telecommunications Act") and the
implementing rules adopted by the FCC pursuant to Section 276 are expected
to have a significant effect on the public pay telephone industry. For a
discussion of the potential effects of Section 276 on the public pay
telephone industry and competition within this industry, including the
FCC's rules to implement Section 276, see "Busi ness--Governmental
Regulations" and "--Competition." Since neither Section 276 nor the FCC
rules have yet been interpreted by the courts, there can be no assurance
that the rules and policies ultimately adopted thereunder will not
adversely affect the Company.
HISTORY OF LOSSES
The Company was incorporated in 1984 and began providing commercial
public pay telephone services in 1986. Although the Company has experienced
revenue growth since the beginning of its operation, the Company has
operated at a loss since its inception. For the year ended December 31,
1995 and for the six months ended June 30, 1996, the Company has incurred
losses before taxes and extraordinary items of approximately $6,109,697 and
$10,047,417, respectively, and on a pro forma basis after giving effect to
the Acquisitions, the Offering and the Concurrent Offering would have
incurred losses before taxes and extraordinary items of $25,271,191 and
$16,913,519, respectively. There can be no assurance that revenue growth
will continue or that the Company will ever achieve or sustain
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial
statements of the Company and notes thereto contained elsewhere in this
Prospectus.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS; IMPACT OF ASSET
ENCUM BRANCES
The terms and conditions of the New Credit Agreement and the
Indenture to be entered into by the Company will impose restrictions that
affect, among other things, the ability of the Company to incur debt, pay
dividends, merge, dispose of assets, create liens and make investments and
capital expenditures. See "Description of Certain Indebtedness" and
"Description of the Notes." The New Credit Agreement is expected to be
secured and guaranteed by the Subsidiary Guarantors. The Credit Agreement
requires, and the New Credit Agreement is expected to require, the Company
to satisfy certain financial covenants on a quarterly basis. The Company
was not in compliance with various financial covenants contained in the
Credit Agreement at June 30, 1996 and subsequently received a waiver of
such non-compliance from the Lenders. The Credit Agreement was amended on
October 8, 1996 to make the covenants less restrictive and, although there
can be no assurance, the Company expects to be in compliance with such
covenants as of September 30, 1996. The ability of the Company to comply
with such financial covenants can be affected by events beyond the
Company's control, and there can be no assurance that the Company will
achieve operating results that comply with such covenants. A breach of any
of these covenants could result in a default under the New Credit Agreement
and other indebtedness of the Company. In the event of any such default,
the lenders could elect to declare all amounts borrowed under the New
Credit Agreement, together with accrued interest, to be due and payable. If
the Company were unable to pay such amounts, the lenders could proceed
against their collateral. If the New Credit Agreement indebtedness were to
be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay in full such indebtedness and the other
indebtedness of the Company, including the Notes.
The Notes will be senior obligations of the Company ranking pari
passu in right of payment with all existing and future senior obligations
of the Company, including indebtedness under the New Credit Agreement and
any refinancing thereof. However, the Notes will be unsecured obligations
while substantially all of the assets of the Company will be pledged to
secure the Company's obligations under the New Credit Agreement.
Indebtedness under the New Credit Agreement and any other secured
indebtedness of the Company will effectively rank prior to the Notes to the
extent of the collateral securing such indebtedness in the event of a
realization upon the collateral or a dissolution, liquidation,
reorganization or similar proceeding related to the Company. After any such
realization or proceeding, there can be no assurance that there will be
sufficient available proceeds or other assets for holders of the Notes to
recover all or any portion of their claims against the Company under the
Notes and the Indenture. See "Manage ment's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness--The New Credit
Agreement."
LIMITATION ON CHANGE OF CONTROL
A Change of Control under the Indenture is expected to result in a
default under the New Credit Agreement. The exercise by the holders of the
Notes of their right to require the Company to repurchase the Notes upon a
Change of Control could also cause a default under other indebtedness of
the Company, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Company. The Company's ability
to pay cash to the holders of the Notes upon a repurchase may be limited by
the Company's then existing financial resources. See "Description of the
Notes--Change of Control" and "Description of Certain Indebtedness."
POSSIBLE NON-CONSUMMATION OF THE PENDING ACQUISITIONS
The consummation of the Cherokee Acquisition, which is anticipated to
occur in January 1997, is subject to certain closing conditions, including
the negotiation and execution of a definitive purchase agreement by
November 30, 1996 and the receipt of approval from the board of directors
and stockholders of Cherokee. The consummation of the Texas Coinphone
Acquisition, which is also anticipated to occur in January 1997, is also
subject to similar closing conditions. Although management believes that
all such conditions to consummating the Pending Acquisitions will be
satisfied, there can be no assurance that such conditions will be satisfied
or waived or that the closing will occur. A portion of the Notes will be
subject to an offer to repurchase by the Company to be made on the Special
Offer Date at the Special Offer Price if the Cherokee Acquisition is not
consummated prior to ________ __, 1997. See "Description of the
Notes--Special Offer to Purchase."
RISKS OF GROWTH STRATEGY
The Company is subject to various risks associated with an
acquisition growth strategy, including the risk that the Company will be
unable to integrate successfully and manage the acquired companies or to
identify and acquire suitable companies in the future or to integrate
successfully and manage any additional acquired companies. Since September
1, 1995, the Company has acquired 19,053 public pay telephones, which represent
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
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. While management believes that pursuing its growth strategy
will improve its overall market position and, ultimately, its
profitability, there can be no assurance that this will occur. The
Company's ability to grow internally by installing additional public pay
telephones depends on numerous factors, including locating satisfactory
sites for public pay telephones, hiring qualified employees to service the
sites and raising additional capital or otherwise financing such expansion.
See "Business--Business Strategy."
The Company's growth strategy requires substantial capital
investment. Capital is needed not only for acquisitions, but also for the
effective integration, operation and expansion of such businesses. The
Company may incur additional debt to finance its expansion strategy which
may cause an increase in its interest expense and divert cash flow which
would otherwise be available to the Company for its operations and future
business opportunities. The Company may issue shares of Common Stock or
other equity-related securities to finance future acquisitions, which may
result in the dilution of the Company's shareholders. In the event that the
Company chooses to issue Common Stock as acquisition consideration and the
Common Stock does not maintain a sufficient valuation, or potential
acquisition candidates are unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to continue
its acquisition program. There can be no assurance that acceptable
financing for future acquisitions or for the 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 providers be operational 24 hours per day, 365 days
per year. The Company's long distance and OSPs may experience temporary
service interruptions or equipment failure which may result from causes
beyond the Company's control. In addition, the Company's public pay
telephones may experience line interruptions in their connections to the
LECs due to weather conditions or other natural occurrences such as
earthquakes or floods which are beyond the Company's control. Any such
event could have a material adverse effect on the Company.
DEPENDENCE UPON THIRD-PARTY PROVIDERS
The Company's ability to complete operator service and direct dial
long distance calls is dependent upon third party carriers for the
transmission of calls, with providers of operator support, validation of
credit card and calling card billing information and with billing and
collection services. While the Company believes that it has access to
several providers of these services at competitive rates and expects to
continue to have such access in the foreseeable future, the continuing
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 thereby
reducing the Company's profits. The Company also competes with long
distance companies that provide operator services to owners of property on
which LEC-owned public pay telephones are located and to hotels, motels and
similar locations. In addition, the Company com petes 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 (1) met the requirements of the Telecommunications Act's fourteen
point competitive checklist and (2) en tered 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 both business and residential service (or that by a date certain
no such competitors have "requested" interconnec tion 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
tele phone providers. This potential competition for locations may have a
material adverse effect on the Company's business, results of operation or
financial condition.
TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving
industry standards. The Company believes that its future success will
depend on its ability to anticipate and respond to such changes on a timely
basis. There can be no assurance that the Company will have sufficient
resources to make the investments necessary to acquire new technology or to
introduce new services that would satisfy an expanded range of customer
needs.
SEASONALITY
The Company's revenues have fluctuated seasonally on a historical
basis. The Company's public pay telephones in the northern and western
states, some of which are located outdoors, typically experience reduced
revenues in the first quarter due to weather conditions, which may have a
material adverse effect on the Company's operating performance. Revenues
are typically highest in the fourth quarter because of the increased volume
of calls made during the holiday season.
DEPENDENCE ON SIGNIFICANT CUSTOMER
The Company's public pay telephone operations are diversified on both
a geographical and customer account basis. Currently, it owns and operates
public pay telephones in 41 states and the District of Columbia
(approximately 95% of which public pay telephones are located in 17 states)
through agreements with both multi-station customers such as shopping
malls, convenience stores, service stations and grocery stores as well as
with single station customers. After giving effect to the consummation of
the Pending Acquisitions, the Company will own and operate public pay
telephones in 43 states, the District of Columbia and Mexico (approximately
96% of which public pay telephones are located in 21 states).
The Company owns and operates the public pay telephones for certain
properties owned by The Edward J. DeBartolo Corporation and its affiliates
(which merged with Simon Property Group L.P. in 1996 and is now known as
Simon DeBartolo Group ("Simon DeBartolo")). The Company derived
approximately 15% and 8% of its total revenue for the year ended December
31, 1995 and the six months ended June 30, 1996, respectively, from the
operation of these public pay telephones. As the Company expands its
installed public pay telephone base through additional acquisitions and
internal growth, it expects that the percentage of total revenue derived
from Simon DeBartolo will continue to decline. There can be no assurance
that the agreements will be renewed upon expiration. Other than Simon
DeBartolo, no single customer generated more than 5% of the Company's total
revenue for the year ended December 31, 1995 or the six months ended June
30, 1996. On a pro forma basis after giving effect to the Pending
Acquisitions, no single customer would have accounted for more than 5% of
the Company's total revenue for the year ended December 31, 1995 or the six
months ended June 30, 1996.
FRAUDULENT CONVEYANCE RISKS
The Company's obligations under the Notes will be guaranteed, jointly
and severally, on a senior basis by each of the Subsidiary Guarantors.
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be applied by a court on behalf of any unpaid creditor or
a representative of the Company's creditors in a lawsuit to subordinate or
avoid the Notes or any Subsidiary Guarantee in favor of other existing or
future creditors of the Company or a Subsidiary Guarantor. To the extent
that a court were to find that: (i) the Notes or a Subsidiary Guarantee was
incurred with intent to hinder, delay or defraud any present or future
creditor of the Company or the Subsidiary Guarantor, as the case may be, or
contemplated insolvency with a design to prefer one or more creditors to
the exclusion in whole or in part of others or (ii) the Company or a
Subsidiary Guarantor did not receive fair consideration or reasonably
equivalent value for issuing the Notes or a Subsidiary Guarantee, as the
case may be, and the Company or a Subsidiary Guarantor (a) was insolvent,
(b) was rendered insolvent by reason of the issuance of the Notes or a
Subsidiary Guarantee, (c) was engaged or about to engage in business or
transaction for which the remaining assets of the Company or such
Subsidiary Guarantor constitute unreasonably small capital to carry on it
business, (d) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature or (e) was a defendant
in an action for money damages or had a judgment for money damages docketed
against it (if in either case, after final judgment, the judgment is
unsatisfied), then in each such case, a court could avoid or subordinate
the Notes or a Subsidiary Guarantee in favor of other creditors of the
Company or a Subsidiary Guarantor, as the case may be. Among other things,
a legal challenge of the Notes or a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the
Company or the Subsidiary Guarantor as a result of the issuance by the
Company of the Notes.
To the extent that any Subsidiary Guarantee were to be avoided as a
fraudulent conveyance or held unenforceable for any other reason, holders
of the Notes would cease to have any claim in respect of such Subsidiary
Guarantor and would be creditors solely of the Company and any Subsidiary
Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable.
In such event, the claims of the holders of the Notes against the issuer of
an invalid Subsidiary Guarantee would be subject to the prior payment of
all liabilities of such Subsidiary Guarantor. There can be no assurance
that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any
voided Subsidiary Guarantee.
Based upon financial and other information currently available to it,
the Company believes that the Notes and the Subsidiary Guarantees are being
incurred for proper purposes and in good faith, and that the Company and
each of the Subsidiary Guarantors (i) is solvent and will continue to be
solvent after issuing the Notes or its Subsidiary Guarantee, as the case
may be, (ii) will have sufficient capital for carrying on its business
after such issuance and (iii) will be able to pay its debts as they mature.
There can be no assurance that the assumptions and methodologies used by
the Company in reaching its conclusions about its solvency would be adopted
by a court or that a court would concur with those conclusions.
LACK OF PUBLIC MARKET
There is currently no trading market for the Notes. The Company does
not intend to list the Notes on any securities exchange. The Company has
been advised by the Underwriters that the Underwriters currently intend to
make a market in the Notes; however, the Underwriters are not obligated to
do so and may discontinue any such market making activities at any time
without notice. No assurance can be given as to the development or
liquidity of any trading market for the Notes.
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus that reflect projections or
expectations of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations,
including those relating to the Company's services and ability to generate
additional revenues, are "forward looking" statements, within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Such statements include, but are not limited to, the anticipated effects of
Section 276 of the Telecommunications Act and the FCC's implementing
regulations, the achievement of cost savings from the acquisitions
described herein and the availability of capital resources.
No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated
in any such forward looking statements. Important factors that could result
in such differences, in addition to the risk factors identified above,
include: general economic conditions in the Company's markets, including
recession, interest rates and other economic factors; disruption of
operations; and other factors that generally affect businesses.
THE PENDING ACQUISITIONS
THE CHEROKEE ACQUISITION
The Company has entered into a letter of intent dated October 16,
1996 (the "Cherokee Letter of Intent") to acquire all of the capital stock
of Cherokee for a purchase price of $54 million plus related fees and
expenses, subject to certain purchase price adjustments, which may include
an increase of up to $6 million in cash or common stock payable in two
equal installments due January 1998 and 1999 if the FCC fails to implement
certain rate caps, rate guidelines or third party preferences during 1997
or 1998, as the case may be. In addition, the Company will pay $1.25
million in connection with certain non-competition agreements. Cherokee,
with corporate headquarters in Jacksonville, Texas, is the fifth largest
independent public pay telephone operator in the United States. At
September 30, 1996, Cherokee owned and operated 12,344 public pay
telephones in 14 states, of which approximately 85% were located in Texas,
New Mexico, Colorado, Utah and Montana. Upon consummation of the Cherokee
Acquisition, the Company expects to acquire approximately 14,000 public pay
telephones from Cherokee (of which 13,500 will be installed), which include
300 public pay telephones in Monterrey, Mexico which are owned by a joint
venture in which Cherokee has an approximate 50% interest. The Company will
also acquire Cherokee's public pay telephone enclosure refurbishing and
manufacturing facilities in Jacksonville. Upon consummation of the Cherokee
Acquisition and the Texas Coinphone Acquisition, the Company believes that
it will be one of the two largest independent public pay telephone
operators in the United States. After giving effect to the Pending
Acquisitions, the Company will own and operate 38,423 public pay telephones,
approximately 44% of which will be located in Texas, Florida and California.
The consummation of the Cherokee Acquisition is subject to certain
closing conditions, including the negotiation and execution of a purchase
agreement by November 30, 1996 and the receipt of approval from Cherokee's
board of directors and stockholders. The Cherokee Acquisition is currently
expected to close in January 1997; however, there can be no assurance that
the closing conditions will be satisfied or waived or that the Cherokee
Acquisition will be consummated or if consummated, as to the final terms
thereof. However, the Company will be required to make an offer to repurchase
approximately $35.0 million aggregate principal amount of the Notes on the
Special Offer Date at the Special Offer Price if the Cherokee Acquisition
is not consummated prior to ________ __, 1997. See "Risk Factors--Possible
Non-Consummation of the Pending Acquisitions" and "Description of the
Notes--Special Offer to Purchase."
Pursuant to the Cherokee Letter of Intent, at the time of execution
of the purchase agreement, the Company will be required to deposit $520,000
in escrow to be credited toward the purchase price for the Cherokee
Acquisition, which deposit will be forfeited by the Company if the Company
breaches its obligations under the purchase agreement or the Cherokee
Acquisition otherwise fails to close by January 31, 1997. The Company and
Cherokee have agreed that at the closing the Company will deposit an
additional $480,000 into an escrow account, representing an aggregate of $1
million of the purchase price held in escrow to fund certain
indemnification arrangements and purchase price adjustments. To the extent
not utilized to fund such payments, the escrowed funds will be released as
follows: (i) $250,000 on the 90th day after closing, (ii) $250,000 on the
180th day after closing and (iii) the balance on the 270th day after
closing. Pursuant to the Cherokee Letter of Intent, the sellers in the
Cherokee Acquisition have each agreed to be personally liable for any
unrecorded expenses and liabilities in excess of $100,000, up to a maximum
of $2,000,000. There can be no assurance, however, that the escrowed funds
will be sufficient to satisfy such unrecorded expenses and liabilities of
Cherokee assumed by the Company or that the sellers will satisfy their
personal indemnification obligations to the Company.
Pursuant to the Cherokee Letter of Intent, certain key employees of
Cherokee will enter into employment and/or non-competition agreements with
the Company upon consummation of the Cherokee Acquisition.
The Cherokee Letter of Intent requires that the purchase agreement to
be entered into by the Company and Cherokee include customary
representations and warranties with respect to the condition and operation
of Cherokee's business.
The Indenture provides that the Trust Funds will be released to the
Company on the closing date for the Cherokee Acquisition.
THE TEXAS COINPHONE ACQUISITION
The Company has entered into a letter of intent dated October 9, 1996
(the "Texas Coinphone Letter of Intent") to acquire 1,200 installed public
pay telephones from Texas Coinphone for a purchase price of approximately
$3.7 million, subject to certain purchase price adjustments. Texas
Coinphone, with corporate headquarters in Bryan, Texas, owns and operates
1,200 public pay telephones in Texas, including Dallas, Houston, San
Antonio and the Bryan/College Station area. The Company expects to realize
significant costs savings in connection with the integration of the Texas
Coinphone business because all the public pay telephones being acquired are
located in Texas.
The consummation of the Texas Coinphone Acquisition is subject to
certain closing conditions, including the negotiation and execution of a
purchase agreement by November 30, 1996. The Texas Coinphone Acquisition is
currently expected to close in January 1997; however, there can be no
assurance that the closing conditions will be satisfied or waived or that
the Texas Coinphone Acquisition will be consummated, or if consummated, as
to the final terms thereof.
Pursuant to the Texas Coinphone Letter of Intent, at the time of
execution of the purchase agreement the Company will be required to deposit
$150,000 in escrow to be credited toward the purchase price for the Texas
Coinphone Acquisition, which deposit will be forfeited by the Company if
the Texas Coinphone Acquisition is not consummated as a result of the
Company's actions. The Company and Texas Coinphone have agreed that at the
closing the Company will deposit an additional $180,000 into an escrow
account, representing an aggregate of $330,000 of the purchase price held
in escrow to fund certain indemnification arrangements and purchase price
adjustments. To the extent not utilized to fund such payments, the escrowed
funds will be released as follows: (i) $150,000 on the 90th day after
closing and (ii) the balance on the first anniversary date of the closing.
There can be no assurance, however, that the escrowed funds will be
sufficient to satisfy such liabilities of Texas Coinphone assumed by the
Company.
Pursuant to the Texas Coinphone Letter of Intent, certain key
employees of Texas Coinphone will enter into non-competition agreements
with the Company upon consummation of the Texas Coinphone Acquisition.
The Texas Coinphone Letter of Intent requires that the purchase
agreement to be entered into by the Company and Texas Coinphone include
customary representations and warranties.
USE OF PROCEEDS
The proceeds to the Company from the Offering are estimated to be
approximately $106.6 million (net of underwriting discounts and
commissions). The Company intends to use the proceeds of the Offering,
together with the estimated proceeds of $23.3 million from the Concurrent
Offering (net of underwriting discounts and commissions), to (i) finance
the approximately $55.8 million purchase price (subject to certain
adjustments), including related fees and expenses, relating to the Cherokee
Acquisition and the $3.7 million purchase price (subject to certain
adjustments), including related fees and expenses, relating to the Texas
Coinphone Acquisition, (ii) retire all of the outstanding debt under the
Company's Credit Agreement (of which $41.0 million was outstanding at
September 30, 1996 and up to $43.0 million is expected to be outstanding at
the date of this Prospectus), (iii) to repay approximately $7.8 million of
capital lease obligations, (iv) to repay approximately $3.6 million of
notes payable owed to the sellers of POA (the "POA Notes") and (v) pay
related fees and expenses of approximately $3.8 million. The Company will
use the balance of the proceeds of approximately $14.1 million for working
capital and other general corporate purposes, including for acquisitions
(subject to restrictions contained in the New Credit Agreement), and the
possible redemption of the mandatorily redeemable 14% Preferred having an
aggregate stated value and redemption price of approximately $5.5 million.
If, however, the Cherokee Acquisition is not consummated by ______, 1997,
the Company will be required to offer to repurchase $35.0 million aggregate
principal amount of the Notes at the Special Offer Price which is equal to
101% of the principal amount of the Notes plus accrued and unpaid interest
to the Special Offer Date. See "Description of the Notes--Special
Offer to Purchase."
A portion of the borrowings being repaid under the Credit Agreement
matures on March 31, 1997, while another portion matures on December 31,
1997 and the remainder matures on June 30, 1999, and all borrowings
thereunder bear interest at the prime rate plus 5%. The capital lease
obligations will expire in January 2002 and currently bear interest at 13%
per annum (which rate increases to 14% effective January 1997). The several
POA Notes mature in either May 2002 or June 2002, and currently bear
interest at 10% per annum (which rate increases to 14% effective January
1997). See "The Pending Acquisitions--The Cherokee Acquisition" for a
description of the Cherokee Acquisition, "The Pending Acquisitions--The
Texas Coinphone Acquisition" for a description of the Texas Coinphone
Acquisition, "Description of Certain Indebtedness" for descriptions of the
Credit Agreement and the New Credit Agreement and "Description of Capital
Stock--Preferred Stock--14% Preferred" for a description of the 14%
Preferred.
Capitalization
The following table sets forth the capitalization of the Company at
June 30, 1996 (i) on an actual basis, (ii) on a pro forma basis to give
effect to the acquisitions of POA and Amtel, the Offering and Concurrent
Offering as if such transactions had occurred on June 30, 1996 and assuming
the $35.0 million held in escrow for three months is then utilized to purchase
Notes from the bondholders and (iii) on a pro forma basis as set forth in the
preceding clause (ii) (except for the repurchase by the Company of the $35
million of Notes from the bondholders) and as adjusted to reflect the
Pending Acquisitions as if such transactions had occurred on June 30, 1996.
The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Pro Forma Financial Data" and the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
--------------------------------------
AS OF JUNE 30, 1996
--------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
Total long-term debt (including current installments):
<S> <C> <C> <C>
Credit Agreement, net (1)..................... $26,372,962 -- --
New Credit Agreement (2)...................... -- -- --
__% Senior Notes due 2006..................... -- $75,000,000 $110,000,000
Notes payable (including obligations under
capital leases)............................. 2,391,276 2,552,349 3,113,915
--------- --------- --------------
Total long-term debt (including current
installments)........................... 28,764,238 77,552,349 113,113,915
Redeemable preferred stock:
14% cumulative redeemable convertible
preferred stock: $60 stated value;
200,000 shares authorized; 107,918.19 shares
issued and outstanding; 4,464.48 shares
reserved for issuance upon declaration of
dividends (3)............................... 6,404,228 6,404,228 6,404,228
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity:
Series A special convertible preferred stock:
$0.20 par value; 250,000 shares 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; 5,248,230 shares issued
and outstanding, actual; 7,577,059 shares
issued and outstanding, pro forma;
14,327,059 shares issued and outstanding,
pro forma, as adjusted (4)................... 52,482 143,270 143,270
Additional paid-in capital..................... 35,702,864 63,066,581 63,066,581
Accumulated deficit (5)........................ (25,638,420) (36,984,810) (36,984,810)
------------ ------------ -------------
Total non-mandatorily redeemable preferred
stock, common stock and other share-
holders' equity.......................... 10,116,926 26,225,041 26,225,041
----------- ----------- ----------
Total capitalization.......................... $45,285,392 $110,181,618 $145,743,184
=========== ============ ============
</TABLE>
- ------------
(1) Excludes $5,850,492 constituting the unamortized portion of the debt
discount, which arose from the original allocation of proceeds to
warrants issued to the Lenders in connection with the Credit
Agreement. The total face amount of the Credit Agreement outstanding
as of June 30, 1996 was $32,223,454.
(2) Upon consummation of the Offering and the Concurrent Offering, the
Company does not expect to have any borrowings under the New Credit
Agreement.
(3 The redemption amount of $6,742,980 (plus accrued dividends) is due
on June 30, 2000. If the Offering and the Concurrent Offering are
consummated, the Company may elect, at its option, to redeem
approximately $5.5 million of 14% Preferred.
(4) Does not reflect the issuance of any Common Stock pursuant to
options and warrants outstanding.
(5) Reflects a $2,002,386 reduction (of which $1,227,589 was a non-cash
item) resulting from the redemption of the Company's 10% Cumulative
Redeemable Preferred Stock (the "10% Preferred"), the 8% Cumulative
Redeemable Preferred Stock (the "8% Preferred") and 7% Cumulative
Convertible Redeemable Preferred Stock (the "7% Preferred") on March
15, 1996. See Note 15 to the audited consolidated financial
statements of the Company included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
The following tables present selected historical financial data for
the fiscal years ended December 31, 1993, 1994 and 1995 derived from, and
which should be read in conjunction with, the audited consolidated
financial statements of the Company and related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The following tables
also present selected historical financial data for the six months ended
June 30, 1995 and 1996 derived from, and which should be read in
conjunction with, the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus which, in the opinion of
management, reflect all adjust ments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim period
financial data. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
In addition, the following tables present unaudited pro forma
selected financial and operating data for the Company as of and for the six
months ended June 30, 1996 and the year ended December 31, 1995, as
adjusted to give pro forma effect to (i) in the case of statement of
operations data, (a) the 1995 Acquisitions, the 1996 Acquisitions, the
Concurrent Offering and the Offering as if such transactions had been
consummated at the beginning of the respective period and assuming $35
million is escrowed for 3 months and then utilized to purchase Notes
from the bondholders and (b) the Acquisitions, the Offering
and the Concurrent Offering as if such transactions had been consummated
on at the beginning of the respective period and (ii) in the case of
balance sheet data, (a) the acquisitions of POA and Amtel, the Concurrent
Offering and the Offering as if such transactions had been consummated
on June 30, 1996 and assuming $35 million is escrowed for 3 months and
then utilized to purchase Notes from the bondholders and (b) the
acquisitions of POA and Amtel, the Pending Acquisitions, the Offering
and the Concurrent Offering as if such transactions had been consummated
on June 30, 1996. See "Pro Forma Financial Data." The unaudited pro forma
data give pro forma effect to the acquisitions under the purchase method
of accounting and certain other operating assumptions. See "Pro Forma
Financial Data."
The unaudited pro forma financial data do not purport to represent
what the Company's results of operations or financial condition would have
actually been or operations of the Company in any future period would be if
the transactions that give rise to the pro forma adjustments had occurred
on the dates assumed. The following information is qualified by reference
to and should be read in conjunction with "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
===============================================================================================
YEAR ENDED DECEMBER SIX MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 31, 1995 JUNE 30 JUNE 30, 1996
------------------------ -------------------------- ---------------- -------------------------
PRO FORMA PRO FORMA
FOR 1995 FOR 1996
PRO FORMA AND 1996 PRO FORMA ACQUISTIONS,
FOR 1995 ACQUISITIONS, FOR 1996 PENDING
AND 1996 PENDING ACQUI- ACQUISITIONS,
ACQUISITIONS, ACQUISITIONS, SITIONS, CONCURRENT
CONCURRENT CONCURRENT CONCURRENT OFFERING
OFFERING AND OFFERING OFFERING AND AND
OFFERING AND OFFERING OFFERING OFFERING
1993 1994 1995 (1) (2) 1995 1996 (3) (4)
--------- --------- --------- ----------- ---------- --------- --------- ---------- -----------
(In thousands, except per share
data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.............. $ 11,070 $ 15,866 $ 18,718 $ 59,610 $ 91,496 $ 7,878 $ 16,806 $ 30,240 $ 46,566
Cost and expenses........... 11,683 17,180 24,007 68,892 101,132 9,077 24,497 38,042 56,008
Loss from operations........ (613) (1,314) (5,289) (9,282) (9,636) (1,199) (7,691) (7,802) (9,442)
Interest expense............ 175 388 837 12,253 15,309 220 2,091 5,872 6,922
Loss before extraordinary
items.. (779) (1,695) (6,110) (21,174) (25,326) (1,413) (9,780) (13,210) (16,442)
Net loss.................... (779) (1,695) (6,110) (1,413) (10,047)
Net loss applicable to
common shareholders....... (986) (1,987) (6,419) (21,828) (27,050) (1,568) (12,185) (13,345) (16,577)
Net loss per common
share (5)................. (0.96) (1.35) (3.29) (1.80) (2.14) (0.99) (3.41) (1.04) (1.29)
Weighted average number of
common shares............... 1,031,384 1,470,188 1,950,561 12,115,561 12,115,561 1,586,142 3,576,381 12,871,427 12,871,427
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA (6)................. $283 $922 $1,264 $10,381 $21,244 $233 $2,956 $6,397 $10,177
EBITDA margin (7).......... 2.56% 5.81% 6.75% 17.42% 23.22% 2.96% 17.59% 21.15% 21.86%
Ratio of EBITDA to
interest expense......... 1.62 2.38 1.51 .85 1.38 1.06 1.41 1.09 1.47
Number of public pay
telephones in service.... 2,350 4,891 9,458 24,074 39,274 5,038 14,826 24,813 40,013
Ratio of earnings to
fixed charges (8)
</TABLE>
==========================================
AS OF JUNE 30, 1996
------------------------------------------
PRO FORMA
FOR THE POA
PRO FORMA AND AMTEL
FOR POA AND ACQUISITIONS,
AMTEL THE PENDING
ACQUISITIONS, ACQUISITIONS,
THE OFFERING THE OFFERING
AND CONCURRENT AND CONCURRENT
ACTUAL OFFERING (9) OFFERING (10)
------ -------- --------------
BALANCE SHEET DATA:
Total assets..................... $52,043 $115,571 $151,842
Long-term debt and obligations
under capital leases
(including current
installments) (11)............. 28,764 77,552 113,114
14% Redeemable Preferred Stock... 6,404 6,404 6,404
Non-mandatorily redeemable pre-
ferred stock, common
stock and other
shareholders'equity............ 10,117 26,225 26,225
Working capital (deficit) (12)... (8,984) 34,027 10,928
(1) Gives effect to the acquisitions of International Pay Phones, Inc. of
Tennessee and of International Pay Phones, Inc. of South Carolina
(herein collectively referred to as "IPP"), Paramount Communications
Systems, Inc. ("Paramount"), POA and Amtel (collectively, the "1996
Acquisitions") and the acquisitions of World Communications, Inc.
("World") and Public Telephone Corporation ("Public Telephone")
(together, the "1995 Acquisitions"), the Concurrent Offering and the
Offering, as if such transactions had occurred on January 1, 1995,
and assuming $35 million is escrowed for 3 months and then utilized
to purchase Notes from the bondholders. Such unaudited pro forma
financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, and the
Pending Acquisitions (collectively, the "Acquisitions."), the
Concurrent Offering and the Offering, as if such transactions had
occurred on January 1, 1995. Such unaudited pro forma financial data
is not necessarily indicative of the results of operations that might
have occurred if the transactions had taken place on such date or
which might occur in any future period.
(3) Gives effect to the 1996 Acquisitions, the Concurrent Offering and the
Offering, as if such transactions had occurred on January 1, 1996,
and assuming $35 million is escrowed for 3 months and then utilized to
purchase Notes from the bondholders. Such unaudited pro forma financial
data is not necessarily indicative of the results of operations that
might have occurred if the transactions had taken place on such date or
which might occur in any future period.
(4) Gives effect to the 1996 Acquisitions, the Pending Acquisitions, the
Concurrent Offering and the Offering, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data
is not necessarily indicative of the results of operations that might
have occurred if the transactions had taken place on such date or
which might occur in any future period.
(5) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption
of 10% Preferred (as defined herein), 8% Preferred (as defined
herein) and 7% Preferred (as defined herein) realized in March 1996.
(6) EBITDA represents earnings before interest income, interest expense,
income taxes, depreciation, amortization and other unusual charges
and settlements of employment contracts. EBITDA is not intended to
represent an alternative to operating income (as determined in
accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or as an
alternative to cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) as a
measure of liquidity. The Company believes that EBITDA is a
meaningful measure of performance because it is commonly used in the
public pay telephone industry to analyze comparable public pay
telephone companies on the basis of operating performance, leverage
and liquidity.
(7) EBITDA margin is calculated by dividing (a) EBITDA by (b) total
revenues. EBITDA margin is a measure commonly used in the Company's
industry as an indicator of the efficiency of the Company's
operations.
(8) Earnings of the Company are inadequate to cover fixed charges. The
dollar amount of earnings required to attain a ratio of one-to-one
for the years ended December 31, 1993, 1994, 1995 and the six months
ended June 30, 1996 were $778,875, $1,695,122, $6,109,697 and
$9,780,136, respectively. The dollar amount of earnings required to
attain a ratio of one-to-one for the year ended December 31, 1995 and
the six months ended June 30, 1996 after giving pro forma effect to
the 1995 and 1996 Acquisitions were $3,297,995 and
$1,256,932, respectively. The dollar amount of earnings required
to attain a ratio of one-to-one for the year ended December 31, 1995
and the six months ended June 30, 1996 after giving pro forma effect
to the 1995 and 1996 Acquisitions, Pending Acquisitions, Concurrent
Offering and Offering were $24,200,690 and $16,425,002, respectively.
For purposes of this computation, earnings are defined as income
(loss) before income taxes and fixed charges. Fixed charges are
defined as the sum of (i) interest costs (including capitalized
interest expense) and (ii) amortization of deferred financing costs.
(9) Gives effect to the acquisitions of POA and Amtel, the Offering and
the Concurrent Offering, as if such transactions had occurred on
June 30, 1996 and assuming the $35 million escrowed for 3 months is
then utilized to purchase Notes from the bondholders.
(10) Gives effect to the acquisitions of POA and Amtel and the Pending
Acquisitions, and the Offering and the Concurrent Offering, as
if such transactions had occurred on June 30, 1996.
(11) Excludes $5,850 constituting the unamortized portion of long-term
debt discount, which arose from the original allocation of proceeds
to warrants issued to the Lenders (as defined herein) in connection
with the Credit Agreement.
(12) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined, condensed financial statements
adjust the historical statements of operations data for the year ended
December 31, 1995 and the six months ended June 30, 1996 and adjusts the
historical balance sheet data as of June 30, 1996 to give effect to (i) the
acquisition of World on September 22, 1995, Public Telephone on October 15,
1995, IPP and Paramount on March 15, 1996, Amtel on September 13, 1996, and
POA on September 16, 1996; (ii) the pending acquisitions of Cherokee and
Texas Coin (which are to be funded with the proceeds from the Company's
stock and debt offerings); (iii) the funds borrowed under the Credit
Agreement; (iv) the sale by the Company of $25,000,000 of Common Stock
pursuant to the Concurrent Offering; and (v) the sale by the Company of
$110,000,000 in Senior Notes pursuant to this Offering and the application
of the estimated net proceeds therefrom as set forth under "Use of
Proceeds." All purchase price allocations for the Acquisitions are
preliminary in nature and are subject to change within the next twelve
months of each acquisition based on refinements as actual data becomes
available. The pro forma adjustments are included in the unaudited pro
forma balance sheet as if the transactions had occurred on June 30, 1996
and in the unaudited pro forma statements of operations as if the
transactions had occurred at the beginning of each period presented.
The unaudited pro forma combined condensed financial data should be read
in conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus, and are not necessarily indicative
of the results of operations that might have occurred if the transactions
had taken place on the dates indicated or which might occur in any future
period.
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------
World, Public Pro Forma
Telephone, Adjustments
PhoneTel IPP and for 1995 and 1996
Technologies Paramount Amtel POA Acquisitions
-------------------------------------------------------------------------------------
a
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $12,130,189 $18,246,442 $9,689,179 $3,747,247 ($295,475)
Non-coin 3,776,501 - 5,459,411 4,418,667 (963,882)
Other 2,811,293 242,481 1,910,550 49,221 (1,612,090)
----------------------------------------------------------------------------------
18,717,983 18,488,923 17,059,140 8,215,135 (2,871,447) b
----------------------------------------------------------------------------------
Operating expenses:
Line and transmission charges 5,475,699 6,377,191 6,862,015 3,599,271 (1,694,515) c
Location commissions 3,467,626 2,361,157 3,921,741 1,178,156 (1,067,000) d
Other operating expenses 5,310,262 1,847,352 2,719,090 289,036 (3,027,295) e
Depreciation and amortization 4,383,049 2,059,628 1,621,029 1,218,095 8,686,142 f
Selling, general and administrative 3,200,742 5,229,060 15,103,091 1,911,624 (14,309,744) g
Other unusual charges and
contractual settlements 2,169,503 - - - -
----------------------------------------------------------------------------------
24,006,881 17,874,388 30,226,966 8,196,182 (11,412,412)
----------------------------------------------------------------------------------
Loss from operations (5,288,898) 614,535 (13,167,826) 18,953 8,540,965
Other income (expense)
Interest expense - related parties - - - - (7,198,404) h
Interest expense - others (836,911) (1,109,102) (7,429,502) (971,141) 7,524,624 i
Interest income 16,112 19,671 - 415 -
Reorganization expenses - - (539,942) - 539,942 j
Other - (405,505) (429,967) (68,517) 429,967 j
----------------------------------------------------------------------------------
Total other income (expense) (820,799) (1,494,936) (8,399,411) (1,039,243) 1,296,129
----------------------------------------------------------------------------------
Loss before income taxes
and extraordinary item (6,109,697) (880,401) (21,567,237) (1,020,290) 9,837,094
Income taxes - 38,100 4,000 (277,720) (38,100) k
----------------------------------------------------------------------------------
Loss before extraordinary item ($6,109,697) ($918,501) ($21,571,237) ($742,570) $9,875,194
==================================================================================
Earnings per share calculation:
Preferred dividend requirements (309,668) (343,567) - - -
----------------------------------------------------------------------------------
Loss before extraordinary item ($6,419,365) ($1,262,068) ($21,571,237) ($742,570) $9,875,194
applicable to common shareholders
==================================================================================
Loss per common share before
extraordinary item ($3.29)
===============
Weighted average number of shares 1,950,561 1,086,171 2,162,163 166,666
=================================================================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma for
Adjustments 1995 and 1996
for Concurrent Acquisitions, the Pro Forma
Offering and Concurrent Adjustments
the Offering Offering and the for Pending
Offering Cherokee Texas Coin Acquisitions
------------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls - $43,517,582 $14,036,665 $846,210 -
Non-coin - 12,690,697 15,944,498 553,337 -
Other - 3,401,455 505,581 - -
------------------ ----------------------------------------------------------
- 59,609,734 30,486,744 1,399,547 -
------------------ ----------------------------------------------------------
Operating expenses:
Line and transmission charges - 20,619,661 9,673,772 513,036 -
Location commissions - 9,861,680 4,909,445 135,746 -
Other operating expenses - 7,138,445 2,016,935 280,706 ($128,393) q
Depreciation and amortization - 17,967,943 4,298,090 151,926 5,641,393 r
Selling, general and administrative - 11,134,773 5,520,405 3,357,197 (1,129,896) s
Other unusual charges and
contractual settlements - 2,169,503 - - -
------------------ ----------------------------------------------------------
- 68,892,005 26,418,647 1,438,611 4,383,104
------------------ ----------------------------------------------------------
Loss from operations (9,282,271) 4,068,097 (39,064) (5,360,138)
Other income (expense)
Interest expense - related parties $7,198,404 l - - - -
Interest expense - others (9,430,876) m (12,252,908) (1,631,416) (57,561) 1,688,977 t
Interest income 525,000 n 561,198 57,278 21,563 (21,563) u
Reorganization expenses - - - -
Other - (474,022) 1,125,630 281,501 (281,501) v
------------------ ----------------------------------------------------------
Total other income (expense) (1,707,472) (12,165,723) (448,508) 245,503 1,385,913
------------------ ----------------------------------------------------------
Loss before income taxes
and extraordinary item (1,707,472) (21,448,003) 3,619,589 206,439 (2,977,191)
Income taxes - (273,720) 1,399,140 - -
-------------------------------------------------------------------------------
Loss before extraordinary item $ (1,707,472) $(21,174,283) $2,220,449 $206,439 ($2,997,191)
===============================================================================
Earnings per share calculation:
Preferred dividend requirements - (653,235) - - -
------------------ ----------------------------------------------------------
Loss before extraordinary item ($1,707,472) ($21,827,518) p $2,220,449 $206,439 ($2,997,191)
applicable to common shareholders
================== ==========================================================
Loss per common share before
extraordinary item ($1.80) p
==============
Weighted average number of shares 6,750,000 o 12,115,561
================== ==============
</TABLE>
Pro Forma
for the
1995 and 1996
Acquisitions,
Pending
Acquisitions,
Pro Forma Concurrent
Adjustments Offering
for the and the
Offering Offering
-------------- ------------
Revenues
Coin calls - $58,400,457
Non-coin - 29,188,532
Other - 3,907,036
-------------- ------------
- 91,496,025
-------------- ------------
Operating expenses:
Line and transmission charges - 30,806,469
Location commissions - 14,906,871
Other operating expenses - 9,307,693
Depreciation and amortization - 28,059,352
Selling, general and administrative - 15,882,479
Other unusual charges and
contractual settlements - 2,169,503
-------------- -----------
- 101,132,367
-------------- ------------
Loss from operations - (9,636,342)
Other income (expense)
Interest expense - related parties - -
Interest expense - others (3,150,000) w (15,309,432)
Interest income (525,000) x 93,476
Reorganization expenses - -
Other - 651,608
-------------- -----------
Total other income (expense) (3,675,000) (14,564,348)
-------------- ------------
Loss before income taxes
and extraordinary item - (24,200,690)
Income taxes - 1,125,420
-----------------------------
Loss before extraordinary item ($3,675,000) ($25,326,110)
=============================
Earnings per share calculation:
Preferred dividend requirements - (653,235)
-------------- -----------
Loss before extraordinary item (3,675,000) ($25,979,345)
applicable to common shareholders
============== ===========
Loss per common share before
extraordinary item q ($2.14)
===========
Weighted average number of shares 12,115,561
===========
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations are an integral part of these financial statements
a Footnotes to the Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1995
Represents the operations of World, Public Telephone, IPP and
Paramount for the period from January 1, 1995 through December 31,
1995, or the date of acquisition, as appropriate.
<TABLE>
<CAPTION>
World Public IPP and Combined
January 1, 1995 - Telephone Paramount
September 21, January 1, 1995- January 1, 1995 -
1995 October 14, 1995 December 31, 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Coin calls $6,258,703 $1,757,054 $10,230,685 $18,246,442
Other 58,345 184,136 - 242,481
---------------------------------------------------------------------------
6,317,048 1,941,190 10,230,685 18,488,923
Operating expenses:
Line & transmission charges 2,706,199 535,771 3,135,221 6,377,191
Location commissions 852,944 196,243 1,311,970 2,361,157
Other operating expenses 1,026,000 112,071 709,281 1,847,352
Depreciation & amortization 855,059 268,262 936,307 2,059,628
Selling, general, & administrative 1,276,056 594,588 3,358,416 5,229,060
---------------------------------------------------------------------------
6,716,258 1,706,935 9,451,195 17,874,388
---------------------------------------------------------------------------
Income from operations (399,210) 234,255 779,490 614,535
Other income (expense):
Interest expense (590,980) (304,664) (213,458) (1,109,102)
Interest income 834 3,371 15,466 19,671
Other - (321,923) (83,582) (405,505)
---------------------------------------------------------------------------
(590,146) (623,216) (281,574) (1,494,936)
---------------------------------------------------------------------------
Loss before income taxes (989,356) (388,961) (497,916) (880,401)
Income taxes - - 38,100 38,100
Net loss ($989,356) ($388,961) ($459,816) ($918,501)
===========================================================================
</TABLE>
b Represents the estimated reduction in revenues for assets not
acquired in the acquisition of the following:
1) Amtel $2,859,394
2) POA 12,053
-------------------
$2,871,447
===================
c Represents estimated reduction in line and transmission charges at
Amtel to reflect lower volumes and better rates.
d Represents estimated lower location commission at:
Amtel $800,000
World, Public, IPP and Paramount 267,000
-------------------
$1,067,000
===================
e Represents estimated reduction in ` other operating expenses
primarily resulting from eliminating certain offices, redundant
operating personnel, costs of operations not acquired (principally
Amtel) and elimination of costs associated with the bankruptcy of
Amtel, at:
1) World, Public, IPP and $800,000
Paramount
2) Amtel 2,131,584
3) POA 95,711
-------------------
$3,027,295
===================
f Represents additional depreciation and amortization associated with
the acquired tangible and intangible assets, as follows:
Amount Lives
------ -----
Tangible Intangible
-------- ----------
1) World, Public, IPP and $6,116,925 60 36-60
Paramount
2) Amtel 1,045,167 60 54
3) POA 1,524,050 60 72
---------------
$8,686,142
===============
g Represents estimated reductions in selling, general and
administrative expenses resulting primarily from eliminating
certain offices, executives and administrative personnel, costs of
operations not acquired (principally Amtel), and elimination of
costs associated with the bankruptcy of Amtel, as follows:
1) World, Public, IPP and $2,004,051
Paramount
2) Amtel 11,360,614
3) POA 945,079
-------------------
$14,309,744
===================
h Additional interest expense for
borrowings under the Credit Agreement:
<TABLE>
<CAPTION>
Amount Interest Pro Forma
Borrowed Rate Expenses
-------- -------- ---------
<S> <C> <C> <C>
1) to fund the acquisition of
World, Public Telephone, IPP and
Paramount as if the borrowings
were outstanding from the $31,039,800 13.25% $4,112,776
beginning of 1995 and the
acquisitions had been made at
the beginning of 1995
2) to fund the acquisitions of 8,776,516 13.25% 1,162,892
Amtel and POA and to pay related
expenses and other obligations
3) Accretion of original issue 1,922,736
debt discount
------------------
$7,198,404
==================
</TABLE>
i Reduction in interest expense to reflect elimination of separate
company borrowings.
1) World, Public, IPP and Paramount $650,249
2) Amtel 7,429,502
3) POA (555,125)
-------------------
$7,524,624
===================
j Represents elimination of Amtel reorganization expenses subsequent
to filing of bankruptcy and elimination of non-recurring loss on
disposal of assets at Amtel.
k Represents elimination of income taxes.
l To eliminate interest expense incurred under the Credit Agreement.
m Increase in interest expense as follows:
<TABLE>
<CAPTION>
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt pursuant to the Offering
(during the period funds
are held in escrow) $110,000,000 12% 3 $3,300,000
Debt pursuant to the Offering
assuming escrow amount is
utilized to purchase Notes. 75,000,000 12% 9 6,750,000
In addition, there is additional (619,124)
interest expense on debt
refinanced in the amount of
$650,240, offset by interest
savings on the POA sellers' notes
and repayment of capital leases
in the amount of $1,269,373. 9,430,876
=========
</TABLE>
n Reflects interest income estimated to be earned on the escrow
balance of $35,000,000, assuming the balance is retained in escrow
for 3 months and earns interest income at 6%.
o Represents 6,250,000 shares of Common Stock which may be sold
pursuant to the Concurrent Offering, and, the exercise of warrants
to purchase, in the aggregate, 25,000 shares of Series A Preferred
and the immediate conversion Series A Preferred into 500,000
shares of Common Stock.
p Loss per share excludes an increase of the loss to common
shareholders of (i) $2,002,386 which was realized on redemption of
the 10% Preferred, 8% Preferred, and 7% Preferred; (ii) an
extraordinary loss of $267,281 realized on the restructuring of
the Company's debt on March 15, 1996; and (iii) an estimated
extraordinary loss of $11,346,390 to be realized on the early
repayment of the borrowings under the Credit Agreement.
q Represents the estimated reduction in other operating expenses
primarily resulting from elimination of duplicate facilities and
certain field operations personnel, as follows:
1) Cherokee $40,339
2) Texas Coin 88,054
-------------------
$128,393
===================
r Represents additional depreciation and amortization associated
with the acquired tangible and intangible assets for the pending
acquisitions, as follows:
Lives
Amount Tangible Intangible
------ -------- ----------
1) Cherokee $5,243,005 60 82
2) Texas Coin 398,388 60 72
---------------
$5,641,393
===============
s Represents estimated reductions in selling, general and
administrative expenses to reflect the elimination of certain
offices, executives and administrative personnel.
1) Cherokee $1,000,000
2) Texas Coin 129,896
-------------------
$1,129,896
===================
t Reduction in interest expense to reflect elimination of separate
company borrowings.
1) Cherokee $1,631,416
2) Texas Coin 57,561
-------------------
$1,688,977
===================
u Reduction to reflect elimination of Texas Coin interest income.
v To reflect elimination of Texas Coin other income.
w To reflect additional interest expense assuming consummation of
the pending acquisitions and $110,000,000 is outstanding for full
year (additional $35,000,000 at 12% for 9 months).
x To eliminate interest income on escrow balance assuming
consummation of the pending acquisitions.
PHONE TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Adjustments
Adjustments for the
for Concurrent
PhoneTel IPP and 1996 Offering and
Technologies Paramount a Amtel POA Acquisitions the Offering
------------- ----------- ----- --- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Coin calls $10,411,344 $2,473,567 $4,696,852 $1,516,506 - -
Non-coin 5,292,530 - 2,445,875 1,539,280 - -
Other 1,101,636 15,113 62,095 712,439 ($27,625)b -
----------- ---------- ---------- ---------- --------- -------
16,805,510 2,488,680 7,204,822 3,768,225 (27,625)b -
----------- ---------- ---------- ---------- --------- -------
Operating expenses:
Line and transmission charges 3,866,207 585,463 2,428,704 698,365 - -
Location commissions 2,536,730 367,269 1,639,127 436,681 - -
Other operating expenses 5,047,451 356,816 321,947 1,060,772 (206,786)c -
Depreciation and amortization 5,312,885 183,931 777,823 596,134 2,062,209 d -
Selling, general and administrative 2,398,724 492,244 2,231,970 985,290 (1,481,569)e -
Other unusual charges and
contractual settlements 5,334,514 - - - - -
----------- ---------- ---------- ---------- --------- -------
24,496,511 1,994,723 7,399,571 3,777,242 373,854 -
----------- ---------- ---------- ---------- --------- -------
Loss from operations (7,691,001) 493,957 (194,749) (9,017) (401,479) -
Other income (expense):
Interest expense - related parties (1,816,890) - - - (581,446)f ($2,381,297)j
Interest expense - others (274,221) (30,881) (6,077) (333,230) (387,311)g (4,823,382)k
Interest income 1,976 - 1,606 4,111 - 525,000 l
Reorganization expenses - - (789,888) - 789,888 h -
Other - (12,638) (959,011) (55,475) 959,011 h -
----------- ---------- ---------- ---------- --------- -------
Total other income (expense) (2,089,135) (43,519) (1,753,370) (384,594) 780,142 (1,917,085)
----------- ---------- ---------- ---------- --------- -------
Loss before income taxes
and extraordinary item (9,780,136) 450,438 (1,948,119) (393,611) 378,663 (1,917,085)
Income taxes - - 4,000 - (4,000)i -
----------- --------- ---------- --------- --------- -----------
Loss before extraordinary item ($9,780,136) $450,438 ($1,952,119) ($393,611) $382,663 ($1,917,085)
----------- ---------- ---------- ---------- --------- -----------
Earnings per share calculation:
Preferred divided requirement (134,741) - - - - -
----------- ---------- ---------- ---------- --------- -------
Loss before extraordinary
item applicable to
common shareholders ($9,914,877) $450,438 ($1,952,119) ($393,611) $382,663 ($1,917,085)
----------- ---------- ---------- ---------- -------- -----------
Loss per common share before
extraordinary item ($2.77)
-----------
Weighted average number of shares 3,576,381 216,217 2,162,163 166,666 - 6,750,000 m
----------- ---------- ---------- ---------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
[table continued]
Pro Forma
for 1996
Pro Forma Acquisitions,
for 1996 Pending
Acquisitions, Pro Forma Pro Forma Acquisitions,
the Concurrent Adjustments Adjustments the Concurrent
Offering and the for Pending for the Offering and
Offering Cherokee Texas Coin Acquisitions Offering the Offering
----------- ---------- ---------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Coin calls $19,098,269 $8,249,881 $572,925 - - $27,921,075
Non-coin 9,277,685 6,785,142 289,675 - - 16,352,502
Other 1,863,658 428,537 - - - 2,292,195
----------- ---------- ---------- ---------- --------- ----------
30,239,612 15,463,560 862,600 - - 46,565,772
----------- ---------- ---------- ---------- --------- ----------
Operating expenses:
Line and transmission charges 7,578,739 4,158,130 292,576 - - 12,029,445
Location commissions 4,988,807 2,395,668 96,632 - - 7,481,107
Other operating expenses 6,580,200 3,601,427 171,554 ($116,057)o - 10,237,125
Depreciation and amortization 8,932,982 2,523,591 37,005 2,859,654 p - 14,353,232
Selling, general and administrative 4,626,659 2,322,048 189,031 (564,948) q - 6,572,790
Other unusual charges and
contractual settlements 5,334,514 - - - - 5,334,514
----------- ---------- ---------- ---------- --------- ----------
38,041,901 15,000,864 786,798 2,178,650 - 56,008,213
----------- ---------- ---------- ---------- --------- ----------
Loss from operations (7,802,289) 462,696 75,802 (2,178,650) - (9,442,441)
Other income (expense):
Interest expense - related parties (17,039) - - - - (17,039)
Interest expense - others (5,855,102) (794,626) (28,214) 822,840 r($1,050,000)t(6,905,102)
Interest income 532,693 - - - 525,000 u 7,693
Reorganization expenses - - - - - -
Other 68,113 - 83,073 (83,073)s - (68,113)
----------- ---------- ---------- ---------- --------- ----------
Total other income (expense) (5,407,561) (794,626) 54,859 739,767 (1,575,000) (6,982,561)
----------- ---------- ---------- ---------- --------- ----------
Loss before income taxes
and extraordinary item (13,209,850) (331,930) 130,661 (1,438,883) (1,575,000) (16,425,002)
Income taxes - 16,896 - - - 16,896
----------- ---------- ---------- ---------- --------- ----------
Loss before extraordinary item ($13,209,850) ($348,826) $130,661 ($1,438,883)($1,575,000)($16,441,898)
----------- ---------- ---------- ---------- --------- ----------
Earnings per share calculation:
Preferred divided requirement (134,741) - - - - (134,741)
----------- ---------- ---------- ---------- --------- ----------
Loss before extraordinary
item applicable to
common shareholders ($13,344,591)n($348,826) $130,661 ($1,438,883)($1,575,000)($16,576,639)
------------ ---------- ---------- ---------- --------- ----------
Loss per common share before
extraordinary item ($1.04)n ($1.29)
----------- ----------
Weighted average number of shares 12,871,427 12,871,427
----------- ----------
<FN>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations are an integral part of these financial statements.
Footnotes to the Pro Forma Combined Condensed Statement of Operations for the Six Months Ended June 30, 1996
a Pro forma adjustments for the acquisitions completed on March 15, 1996
The following pro forma schedule combines the operations of IPP and Paramount
for the period from January 1, 1996 through March 14, 1996.
IPP Paramount Combined
------- ---------- ----------
Revenues:
Coin Calls $841,346 $1,632,221 $2,473,567
Other 15,113 - 15,113
------- ---------- ----------
856,459 1,632,221 2,488,680
Operating expenses:
Line & transmission charges 309,582 275,881 585,463
Location commissions 144,412 231,857 376,269
Other operating expenses 90,474 266,342 356,816
Depreciation & amortization 102,013 81,918 183,931
Selling, general, & admin. 296,181 196,063 492,244
------- ---------- ----------
942,662 1,052,061 1,994,723
------- ---------- ----------
Income (loss) from operations (86,203) 580,160 493,957
Other income (expense):
Interest expense (19,511) (11,370) (30,881)
Other - (12,638) (12,638)
------- ---------- ----------
(19,511) (24,008) (43,519)
------- ---------- ----------
Income (loss) before
income taxes (105,714) 556,152 450,438
Income taxes - - -
------- ---------- ----------
Net income (loss) ($105,714) $556,152 $450,438
------- ---------- ----------
b Represents the estimated reduction in revenues for assets not acquired in
the acquisition of POA.
c Represents estimated reduction in other operating expenses primarily
resulting from eliminating certain offices, redundant executives and
administrative personnel, costs of operations not acquired (principally
Amtel), as follows:
1) Amtel $25,000
2) POA 181,786
--------
$206,786
========
d Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets, as follows:
Amount Lives
------ -----
Tangible Intangible
-------- ----------
(months)
1) IPP and Paramount $744,909 60 60
2) Amtel 555,275 60 36
3) POA $762,025 60 72
----------
$2,062,209
==========
e Represents estimated reductions in selling, general and administrative
expenses principally resulting from elimination of pre-petition expenses at
Amtel and redundant personnel, as follows:
1) IPP and Paramount $238,761
2) Amtel 823,408
3) POA 419,400
----------
$1,481,569
==========
f Additional interest expense for borrowings under the Credit Agreement to
fund the acquistions of Amtel and POA, as follows:
Amount Borrowed Interest Rate Pro Forma Expense
--------------- ------------- -----------------
$8,776,546 13.25% $581,446
--------------- ------------- -----------------
g Reduction in interest expense to reflect elimination of separate company
borrowings as all acquisition debt is reflected in f) above, as follows:
1) Amtel $6,077
2) POA 393,388
--------
$387,311
========
h Represents elimination of Amtel reorganization expenses subsequent to filing
of bankruptcy and elimination of non-recurring loss on disposal of assets at
Amtel.
i Represents elimination of income taxes.
j To eliminate interest expense incurred under the Credit Agreement.
k Increase in interest expense as follows:
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
----------- -------- ----------- --------
Debt pursuant to the Offering
(during the period funds are held
in escrow) $110,000,000 12% 3 $3,300,000
Debt pursuant to the Offering
assuming escrow amount is
utilized to purchase Notes 75,000,000 12% 3 2,250,000
This increase in interest is
partially offset by interest
saved on the POA sellers'
note and capital leases
in the amount of $726,618. (726,618)
---------
$4,823,382
==========
l Reflects interest income estimated to be earned on the escrow balance of
$35,000,000, assuming the balance is retained in escrow for 3 months and
earns interest income at 6%.
m Represents 6,250,000 shares of Common Stock (excluding the Underwriters'
over-allotment) sold pursuant to the Concurrent 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, 8%
Preferred, and 7% Preferred; (ii) an extraordinary loss of $267,281 realized
on the restructuring of the Company's debton March 15, 1996; and (iii) an
estimated extraordinary loss of $11,346,390 to be realized on the early
repayment of the borrowings under the Credit Agreement.
o Represents the estimated reduction in other operating expenses to eliminate
redundancies and duplicate operational personnel, as follows:
1) Cherokee $72,029
2) Texas Coin 44,027
--------
$116,056
========
p Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets for the pending acquisitions, as
follows:
Amount Lives
------ -----
Tangible Intangible
-------- ----------
(months)
1) Cherokee $2,621,502 60 82
2) Texas Coin 238,152 60 72
==========
$2,859,654
----------
q Represents estimated reductions in selling, general and administrative
expensesto reflect the elimination of certain offices and executives and
administrative personnel
1) Cherokee $500,000
2) Texas Coin 64,948
--------
$564,948
========
r Reduction in interest expense to reflect elimination of separate company
borrowings, as follows (all acquisition debt is reflected in k.)
1) Cherokee 794,626
2) Texas Coin 28,214
-------
822,840
=======
s Reduction to reflect elimination of Texas Coin other income which relates to
assets not acquired.
t To reflect additional interest assuming consummation of the pending
acquisitions and $110,000,000 is outstanding for full 6 month period
(additional $35,000,000 at 12% for 3 months).
u To eliminate interest income on escrow balance assuming consummation of the
pending acquisitions.
</TABLE>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT JUNE 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Adjustments
Pro Forma for Amtel and
Adjustments POA
Pro Forma for the Acquistions
Adjustments Concurrent Concurrent
Phone Tel for Amtel and Offering and Offering and
Technologies Amtel POA POA the Offering Offering
------------ ----- --- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $1,025,382 $422,566 - ($650,188) a $38,520,886 l $39,318,646
Accounts receivable, net 1,570,576 527,883 372,558 (527,883) b - 1,943,134
Other current assets 302,469 137,553 79,456 (137,553) b - 381,925
---------- ---------- ---------- ---------- ------------ -----------
Total current assets 2,898,427 1,088,002 452,014 (1,315,624) 38,520,886 41,643,705
Property and equipment, net 22,995,039 12,276,039 2,411,423 (5,440,371) c - 32,242,130
Intangible assets, net 24,286,302 - 2,709,697 13,243,660 d 1,104,102 m 41,343,761
Other assets 1,863,716 294,619 - (1,817,425) e - 340,910
---------- ---------- ---------- ---------- ------------ -----------
$52,043,484 $13,658,660 $5,573,134 $4,670,240 $39,624,988 $115,570,506
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related parties $3,548,454 - - $1,494,253 f ($4,717,707) n $325,000
Payable to others 1,502,653 - $ 979,823 (653,534) g - 1,828,942
Current portion capital leases 73,510 - - 656,947 h (656,947) o 73,510
Accounts payable 2,039,122 $ 1,930,980 243,877 (2,932,980) i - 1,280,999
Accrued expenses 3,338,419 767,661 583,217 (1,961,959) i - 2,727,338
Pre-petition liabilities - 80,598,956 (80,598,956) j - -
Deferred revenues 900,000 - - - - 900,000
Other unusual items and
contractual settlements 480,551 - - - - 480,551
---------- ---------- ---------- ---------- ------------ -----------
Total current liabilities 11,882,709 83,297,597 1,806,917 (83,996,229) (5,374,654) 7,616,340
Long-term debt:
payable to related parties 23,149,508 - 568,090 6,714,203 f (30,431,801) n -
payable to others 287,556 - 3,468,898 g 71,365,886 p 75,122,340
Capital leases 202,557 - 4,568,294 2,524,759 h (7,093,053) o 202,557
Deferred taxes - - - - - -
14% preferred mandatorily
redeemable at $6,742,960 6,404,228 - - - - 6,404,228
Other equity:
Preferred stock - - - - - -
Common stock 52,482 50,000 348,756 (375,468) k 67,500 q 143,270
Additional paid in capital 35,702,864 - - 4,926,217 k 22,437,500 q 63,066,581
Accumulated deficit (25,638,420) (69,688,937) (1,718,923) 71,407,860 k (11,346,390) q (36,984,810)
---------- ---------- ---------- ---------- ------------ -----------
Total other equity 10,116,926 (69,638,937) (1,370,167) 75,958,609 11,158,610 26,225,041
---------- ---------- ---------- ---------- ------------ -----------
$52,043,484 $13,658,660 $5,573,134 $4,670,240 $39,624,988 $115,570,506
=========== =========== ========== ========== =========== ============
</TABLE>
[table continued]
<TABLE>
<CAPTION>
Pro Forma for
Amtel and POA
Acquisitions,
Pending
Pro Forma Pro Forma Acquisitions,
Adjustments Adjustments Concurrent
Texas for Pending for the Offering and
Cherokee Coinphone Acquisitions Offering Offering
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash $364,691 $106,812 ($62,127,094) r $35,000,000 y $12,663,055
Accounts receivable, net 3,712,950 167,311 (167,311) s - 5,656,084
Other current assets 210,439 - - - 592,364
---------- ---------- ---------- ---------- ------------
Total current assets 4,288,080 274,123 (62,294,405) 35,000,000 18,911,503
Property and equipment, net 16,354,960 782,098 3,170,582 t - 52,549,770
Intangible assets, net 4,048,701 - 34,315,961 v - 79,708,423
Other assets 665,044 727,884 (1,061,604) s - 672,234
---------- ---------- ---------- ---------- ------------
$25,356,785 $1,784,105 ($25,869,466) $35,000,000 $151,841,930
=========== ========== =========== =========== ============
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related parties - $325,000
Payable to others $ 2,982,325 $ 151,851 $(3,134,176) u - 1,828,942
Current portion capital leases 977,433 (977,433) v - 73,510
Accounts payable 754,048 20,592 (774,640) w - 1,280,999
Accrued expenses 2,979,962 37,115 (2,649,578) w - 3,094,837
Pre-petition liabilities - - - -
Deferred revenues - - - - 900,000
Other unusual items and
contractual settlements - - - - 480,551
---------- ---------- ---------- ---------- ------------
Total current liabilities 7,693,768 209,558 (7,535,827) - 7,983,839
Long-term debt:
payable to related parties - - - - -
payable to others 10,636,237 565,222 (10,639,893) u $35,000,000 y 110,683,906
Capital leases - 46,050 (46,050) v - 202,557
Deferred taxes 342,359 - - - 342,359
14% preferred mandatorily
redeemable at $6,742,960 - - - - 6,404,228
Other equity:
Preferred stock 2,400,000 - (2,400,000) x - -
Common stock 351,903 316,469 (668,372) x - 143,270
Additional paid in capital 1,097,630 - (1,097,630) x - 63,066,581
Accumulated deficit 2,834,888 646,806 (3,481,694) x - (36,984,810)
---------- ---------- ---------- ---------- ------------
Total other equity 6,684,421 963,275 (7,647,696) - 26,225,041
---------- ---------- ---------- ---------- ------------
$25,356,785 $1,784,105 ($25,869,466) $35,000,000 $151,841,930
---------- ---------- ---------- ---------- ------------
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Balance Sheet are an integral part of these financial statements.
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT JUNE 30, 1996
PRO FORMA ADJUSTMENTS FOR AMTEL AND POA
---------------------------------------
a. Adjustments to cash, are comprised of:
Purchase of Amtel, net of deposits previously made $(5,700,000)
Amtel elimination of cash not acquired (422,566)
Tangible sales tax on Amtel purchase (277,622)
Purchase of POA, net of deposit previously made (200,000)
Additional borrowings under the Credit Agreement 8,776,546
Fees associated with additional borrowings (60,000)
Payment of commissions and other payables
pursuant to the Credit Agreement (2,766,546)
-------------
$ (650,188)
=============
b. Adjustment for assets not acquired:
Amtel
Accounts receivable $ 527,883
=============
Other current assets $ 137,553
=============
c. Adjustments to reflect purchase price allocations to
property and equipment, net, are comprised of:
Incremental increase (decrease) in telephones
and other fixed assets:
Amtel $ (8,566,221)
POA 3,125,850
-------------
$ (5,440,371)
=============
d. Adjustments to reflect purchase price allocations
to intangible assets, net, are comprised of:
Value of Amtel's telephone location contracts $ 8,525,949
Value of POA's telephone location contracts 5,185,274
Net increase in the value of non-compete agreements
resulting from the POA acquisition 265,843
Book value of intangibles not acquired from POA (793,406)
Fees relating to additional borrowings under
the Credit Agreement to fund the acquisitions 60,000
------------
$ 13,243,660
============
e. Adjustments to other assets, are comprised of:
Assets not acquired from Amtel $ (217,425)
Reclassification of cash deposits made for
the acquisition of:
Amtel (1,300,000)
POA (300,000)
-------------
$ (1,817,425)
=============
f. Adjustments to current long-term debt and long-term
debt payable to related parties, are comprised of:
Additional borrowings under the Credit Agreement to
complete the Amtel and POA acquisitions and to
pay certain operating expenses of the Company $ 1,494,253
============
Current long-term debt $ 7,282,293
POA elimination of liabilities not assumed (568,090)
------------
$ 6,714,203
============
g. Adjustments to current long-term debt and long-term
debt payable to others, are comprised of:
Elimination of liabilities not assumed from POA $ (979,823)
To reflect additional current debt on POA
acquisition 228,889
Current portion of POA's non-compete agreements 97,400
------------
$ (653,534)
============
Long-term portion of POA's non-compete agreements $ 209,864
POA's seller's debt 3,634,114
Adjustment to seller's debt for assumed liabilities
exceeding current assets relating to the
POA acquisition (375,080)
-----------
$ 3,468,898
============
h. Adjustments to current portion and long-term of
obligations under capital leases, are comprised of:
POA reclassification of current portion of
capital lease obligations assumed $ 656,947
============
Increase in obligations under capital leases $ 2,524,759
=============
i. Adjustments to accounts payable and accrued expenses,
are comprised of:
Accounts payable
Liabilities not assumed from Amtel $ (1,930,980)
Payment of accounts payable from
borrowings under the Credit
Agreement (1,002,000)
-------------
$ (2,932,980)
=============
Accrued expenses
Liabilities not assumed from Amtel $ (767,661)
Acquisitions costs:
Amtel 397,500
POA 172,748
Repayment of certain operating obligations
of the Company pursuant to the Credit
Agreement (1,764,546)
------------
$ (1,961,959)
=============
j. Adjustments to pre-petition liabilities, are
comprised of:
Amtel elimination of liabilities not assumed $(80,598,956)
=============
k. Adjustments to other equity, are comprised of:
Common Stock:
Par value of 2,162,163 shares of Common
Stock issued to the shareholders of Amtel $ 21,621
Par value of 166,666 shares of Common Stock
issued to the shareholders of POA 1,667
Elimination of common stock:
Amtel (50,000)
POA (348,756)
-------------
$ (375,468)
=============
Additional paid-in capital is comprised of:
Value of the unregistered 2,162,163
shares of Common Stock issued to Amtel
valued at the average of the BID and ASK
(as reported by NASDAQ on September 13,
1996, less an unregistered and block
discount of 20.19% as determined by an
independent valuation firm), or $2.15 per
share $ 4,616,218
Value of the unregistered 166,166 shares
of Common Stock issued to POA valued
at the average of the BID and ASK
(as reported by NASDAQ on September 16,
1996, less an unregistered and block
discount of 30.42% as determined
by an independent valuation firm),
or $1.87 per share 309,999
------------
$ 4,926,217
============
To eliminate accumulated deficit of:
Amtel $ 69,688,937
POA 1,718,923
------------
$ 71,407,860
============
Pro Forma Adjustments for Concurrent Offering and the Offering
l. Adjustments to cash are comprised of:
Concurrent Offering proceeds, net of expenses $ 22,500,000
Proceeds from exercising Series A Preferred
warrants 5,000
Offering proceeds, net of expenses 104,150,000
Fees to obtain working capital line of credit (750,000)
Repayment of borrowings under Credit Agreement (41,000,000)
Repayment of POA seller's notes (3,634,114)
Repayment of capital lease obligations (7,750,000)
Escrow of offering proceeds for Cherokee
Acquisition (35,000,000)
-------------
$ 38,520,886
=============
m. Adjustments to the intangible assets are comprised of:
Working capital line of credit fees $ 750,000
Fees and expenses relating to Offering 5,850,000
Write-off unamortized portion of fees pertaining to
the Credit Agreement (5,495,898)
------------
$ 1,104,102
============
n. Adjustments to current long-term debt and long-term payable
to related parties are comprised of:
Repay current portion of borrowings under Credit
Agreement $ (4,717,707)
============
Repay long-term portion of borrowings under
Credit Agreement $(30,431,801)
============
o. Adjustments to current portion of and long-term obligations
under capital leases are comprised of:
Repay obligations under capital leases
Current portion $ (656,947)
=============
Long-term obligations $ 7,093,053
============
p. Adjustments to long-term debt payable to others is
comprised of:
Repayment of POA's seller's debt $ (3,634,114)
Gross proceeds from Offering 110,000,000
Funds placed in escrow for Cherokee Acquisition (35,000,000)
------------
$ 71,365,886
============
q. Adjustments to other equity are comprised of:
Common Stock
Issuance of 6,250,000 shares pursuant to
Concurrent 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
=============
Accumulated deficit
Warrant accretion - extraordinary loss
on repayment of borrowings under the
Credit Agreement $ (5,850,492)
Write-off of unamortized debt costs
relating to the repayment of borrowings
under the Credit Agreement (5,495,898)
-------------
$(11,346,390)
============
Pro Forma Adjustments for Pending Acquisitions
r. Adjustments to cash are comprised of:
Purchase of Cherokee $ (57,995,591)
Cash not acquired in Cherokee Acquisition (364,691)
Purchase of Texas Coinphone (3,660,000)
Texas Coinphone adjustment for assets not acquired (106,812)
-------------
$ (62,127,094)
=============
s. Adjustments to accounts receivable, net and other assets
are comprised of the elimination of assets not
acquired:
Accounts receivable, net - Texas Coinphone $ (167,311)
==============
Other assets
Cherokee $ (336,159)
Texas Coinphone (725,445)
-------------
$ (1,061,604)
==============
t. Adjustments to property and equipment, net and intangibles
are comprised of the effect of purchase price allocations:
Property and equipment
Incremental increase in telephones and
other fixed assets:
Cherokee $ 2,266,478
Texas Coinphone 904,104
------------
$ 3,170,582
Intangibles
Telephone location contracts - Cherokee $ 31,108,036
Non-compete agreements - Cherokee 1,186,567
Telephone location contracts - Texas Coinphone 2,021,358
-------------
$ 34,315,961
============
u. Adjustments to current long-term debt and
long-term debt to others are comprised of:
Current long-term debt
Debt not acquired from Cherokee $ (2,982,325)
Debt not acquired from Texas Coinphone (151,851)
-------------
$ (3,134,176)
=============
Long term-debt not acquired:
Cherokee $(10,636,237)
Texas Coinphone (565,222)
Long-term portion of the non-compete
liability for Cherokee 561,566
-----------
$(10,639,893)
============
v. Adjustments to current portion capital leases
and capital leases are comprised of:
Current portion of capital leases of
Cherokee not acquired $ (977,433)
Capital leases of Texas Coinphone not acquired $ (46,050)
=============
w. Adjustments to accounts payable and accrued expenses
are comprised of:
Accounts payable not assumed
Cherokee $ (754,048)
Texas Coinphone (20,592)
-------------
$ (774,640)
============
Accrued expenses
Cherokee $ (2,979,962)
Texas Coinphone (37,115)
-------------
$ (2,649,578)
x. Adjustments to the other equity are comprised of:
Preferred stock of Cherokee redeemed prior to
acquisition completion date $ (2,400,000)
=============
Common Stock eliminated
Cherokee $ (351,903)
Texas Coinphone (316,469)
-------------
$ (668,372)
Paid-in capital of Cherokee eliminated $ (1,097,630)
=============
Accumulated deficit eliminated
Cherokee $ (2,834,888)
Texas Coinphone (646,806)
-------------
$ (3,481,694)
============
Pro Forma Adjustment for this Offering
y. The adjustments to cash and long-term debt payable
to others represents the release of funds, previously
held in escrow, upon completion of the Cherokee
acquisition $ 35,000,000
=============
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Company and the notes
thereto which appear elsewhere in this Prospectus.
OVERVIEW
The Company derives substantially all of its revenues from coin calls
and non-coin calls placed from its public pay 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 and OSPs based on
the volume of calls made as well as the amount generated per call. Pursuant
to recently promulgated FCC regulations, which regulations are currently
subject to pending petitions at the FCC seeking reconsideration, the
Company is able to derive additional revenues from access it provides
callers to any carrier other than the presubscribed carrier. This practice
is commonly referred to as "dial-around" access. The Company believes that
the rules and regulations recently promulgated by the FCC under Section 276
of the Telecommunications Act will result in additional revenues for the
Company, net of related expenses and processing fees, by (i) providing for
dial-around compensation of $45.85 per telephone per month from November 6,
1996 through October 1, 1997 (as compared with the flat fee of $6.00 per
telephone per month in place prior to November 6, 1996), and for per-call
compensation thereafter, at a rate initially set at $0.35 per call from
October 1, 1997 to October 1, 1998 (as compared with the flat fee of $45.85
per telephone per month) and thereafter, at a per-call rate equal to the
local coin call rate and (ii) requiring states to deregulate the price of a
local phone call, which the Company believes, may result in an increase in
the local coin drop rate thereby generating additional revenues. However,
there can be no assurance as to the ultimate effect that the rules and
policies adopted by the FCC on its own or after any judicial review will
have on the Company's business, results of operations or financial
condition. See "Business -- Governmental Regulations."
The Company's principal operating expenses consist of (i) telephone
line charges, (ii) commissions paid to location providers which are
typically expressed as a percentage of revenues and are fixed for the term
of the agreements with the respective location providers, and (iii) field
service and collection costs which are principally comprised of personnel
costs of collecting coins from and maintaining the Company's public pay
telephones. The Company pays monthly line and usage charges to BOCs and
other LECs for interconnection to the local network for local calls, which
are computed on a flat monthly charge plus either a per message or per
minute usage rate based on the time and duration of the call. The Company
also pays fees to BOCs and other LECs and long distance carriers based on
usage for local or long distance coin calls. The Company believes that the
rules and regulations recently promulgated by the FCC under Section 276 of
the Telecommunications Act may result in lower tariffed rates charged by
BOCs and other LECs, since the FCC rules would restrict certain subsidies
and discriminatory practices now engaged in by BOCs and other LECs in favor
of their own public pay telephone services. However, there can be no
assurance that the rules and policies ultimately adopted by the FCC on its
own or after judicial review will not have a material adverse effect on the
Company's business, results of operations or financial condition.
Notwithstanding the aforementioned anticipated benefits of Section
276 and the implementing regulations, as a result of the provisions
permitting BOCs and other LECs to negotiate with location owners and select
interLATA long distance carriers for their public pay telephones, it is
anticipated that Section 276 and the implementing regulations may also
result in increased competition for public pay telephone locations and an
accompanying increase in the commissions payable to location owners.
Moreover, revenues may be diminished if the FCC prescribes lower benchmark
rates for interstate operator long distance calls. See "Business --
Governmental Regulations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations,
included elsewhere in this Prospectus, expressed as a percentage of total
revenues. Certain of the following 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>
---------------------------------------------------
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------------------
1993 1994 1995 1995 1996
------ ------ ---------- ------ -----
Revenues:
<S> <C> <C> <C> <C> <C>
Coin calls................... 38.3% 53.1% 64.8% 63.4% 62.0%
Non-coin..................... 54.9 33.5 20.2 29.3 31.5
Other ....................... 6.8 13.4 15.0 7.3 6.5
------ ------ ------ ------ ------
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ---- -----
Operating expenses:
Line and transmission charges 25.1 28.1 29.3 26.7 23.0
Location commissions......... 23.4 21.4 18.5 19.2 15.1
Other operating expenses..... 27.2 26.9 28.4 34.0 30.0
Depreciation and amortization 8.1 14.1 23.4 18.2 31.6
Selling, general and
administrative expenses... 21.7 17.9 17.1 17.1 14.3
Other unusual charges and
contractual settlements... - - 11.6 - 31.8
------ ------ ------- ------ ---------
Total operating expenses..... 105.5 108.4 128.3 115.2 145.8
Other expenses................. 1.5 2.4 4.5 2.7 12.4
------ ------ ------ ------ ------
Loss before extraordinary item. (7.0) (10.8) (32.8) (17.9) (58.2)
====== ====== ====== ====== ======
Extraordinary item............. - - - - (1.6)
------ ------ ------ ------ ------
Net loss....................... (7.0) (10.8) (32.8) (17.9) (59.8)
====== ====== ====== ====== ======
EBITDA......................... 2.6 5.8 6.8 3.0 17.6
====== ====== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Revenues increased $8,927,448, or 113.3%, from $7,878,062
for the six months ended June 30, 1995 to $16,805,510 for the six months
ended June 30, 1996. This increase is attributable primarily to an increase
in the number of installed public pay telephones, which increased by 9,788,
or 194.3%, from June 30, 1995 to June 30, 1996, with the majority of the
increase occurring in the fourth quarter of 1995 and the first quarter of
1996 due to the Company's recent acquisitions.
Revenues from coin calls increased $5,416,015 or 108.4%, from
$4,995,329 for the six months ended June 30, 1995 to $10,411,344 for the
six months ended June 30, 1996. Non-coin revenues increased $2,987,035, or
129.6%, from $2,305,495 for the six months ended June 30, 1995 to
$5,292,530 for the six months ended June 30, 1996. The increases were
primarily due to the acquisition and installation of public pay telephones
producing additional revenues and, to a lesser extent, to the increases in
coin calls resulting from the continuation of the 1994 program which
offered customers a three minute long distance call 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 revenues was offset in part
by a reduction in operator assisted calls as a result of aggressive
dial-around advertising by long distance carriers such as AT&T and MCI
Communications Corporation ("MCI").
Other revenues increased $524,398, or 90.8%, from $577,238 for the
six months ended June 30, 1995 to $1,101,636 for the six months ended June
30, 1996. This increase was primarily the result of an increase in the
number of public pay telephones and increased revenues from dial-around
calls.
Operating expenses. Total operating expenses increased $15,419,091,
or 169.9%, from $9,077,420 for the six months ended June 30, 1995 to
$24,496,511 for the six months ended June 30, 1996. Operating expenses
represented 115.2% of total revenues for the six months ended June 30, 1995
and 145.8% of total revenues for the six months ended June 30, 1996. The
percentage increase was due to other unusual charges and contractual
settlements, offset in part by lower ongoing expenses.
Line and transmission charges increased $1,765,780, or 84.1%, from
$2,100,427 for the six months ended June 30, 1995 to $3,866,207 for the six
months ended June 30, 1996. Line charges represented 26.7% of total
revenues for the six months ended June 30, 1995 and 23.0% of total revenues
for the six months ended June 30, 1996, a decrease of 3.7%. The dollar
increase in line charges was, in part, due to additional telephones
acquired from IPP and Paramount, the increases in coin calls resulting from
the $0.75 Long Distance Call Program, as well as increases in certain local
telephone company line charges. The percentage decrease was due to lower
line charges for the acquired companies.
Location commissions increased $1,020,365, or 67.3%, from $1,516,365
for the six months ended June 30, 1995 to $2,536,730 for the six months
ended June 30, 1996. Location commissions represented 19.2% of total
revenues for the six months ended June 30, 1995 and 15.1% of total revenues
for the six months ended June 30, 1996, a decrease of 4.1%. The dollar
increase is due to location agreements from public pay telephones acquired
in the acquisitions of World and Public Telephone, while the percentage
decrease is due to such location agreements having lower commission rates
than those for the Company's existing public pay telephones.
Other operating expenses (consisting of personnel costs, rent,
utilities, repair and maintenance of the phones, operator services
processing fees and property and sales taxes), increased $2,364,741, or
88.1%, from $2,682,710 for the six months ended June 30, 1995 to $5,047,451
for the six months ended June 30, 1996. Other operating expenses
represented 34.0% of total revenues for the six months ended June 30, 1995
and 30.0% of total revenues for the six months ended June 30, 1996, a
decrease of 4.1%. The dollar increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable
to the outsourcing of operator services and to the acquisitions of World
and Public Telephone completed in September and October 1995, respectively,
and to a lesser extent, the acquisitions of IPP and Paramount completed in
March 1996, the increase in the Company's public pay telephone base, and
the additional field personnel to accommodate the increased business. The
percentage decrease reflects the economies of scale resulting from these
acquisitions that the Company has already realized. Such economies of scale
come primarily from the elimination of costs associated with the closing of
certain offices, the 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 acquisitions made in September 1996, resulting
in the further decrease of other operating expenses as a percentage of
total revenues for the full year 1996.
Depreciation and amortization increased $3,880,394, or 270.9%, from
$1,432,491 for the six months ended June 30, 1995 to $5,312,885 for the six
months ended June 30, 1996. Depreciation and amortization represented 18.2%
of total revenues for the six months ended June 30, 1995 and 31.6% of total
revenues for the six months ended June 30, 1996, an increase of 13.4%. The
dollar and percentage increases were primarily due to the Company's
acquisitions and expansion of its public pay telephone base and purchases
of additional computer equipment, service vehicles and software to
accommodate the Company's growth.
Selling, general and administrative (SG&A) expenses increased
$1,053,297, or 78.3%, from $1,345,427 for the six months ended June 30,
1995 to $2,398,724 for the six months ended June 30, 1996. SG&A represented
17.1% of total revenues for the six months ended June 30, 1995 and 14.3% of
total revenues for the six months ended June 30, 1996, a decrease of 2.8%.
The dollar increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount, while the percentage decrease was due
primarily to the additional revenues from these acquisitions and the
resulting economies of scale provided by such acquisitions.
Other unusual charges and contractual settlements consist primarily
of: (i) the settlement of contractual obligations under certain employment
contracts with former officers, $325,000; (ii) the settlement of other
contractual obligations, $210,599; (iii) the write-off of selected assets
in connection with the continued evaluation of the Company's operations and
certain one-time charges for changes to the operations of the Company,
$282,131; (iv) losses recognized on the early pay-off of obligations under
capital leases and other debt concurrent with the debt restructuring
completed on March 15, 1996, $630,645; and (v) the estimated fair market
value of the Nominal Value Warrants charged to operations on March 15,
1996, $3,886,139. In the aggregate, contractual settlements and other
unusual charges were $5,334,514, or 31.8% of total revenues, for the six
months ended June 30, 1996 and $0 for the six months ended June 30, 1995.
Other income (expense). Other income (expense) is comprised of
interest expense incurred on debt with related parties and others and
interest income. Total other expense (net of interest income) increased
$1,875,493, or 877.9%, from $213,642 for the six months ended June 30, 1995
to $2,089,135 for the six months ended June 30, 1996. Other expenses
represented 2.7% of total revenues for the six months ended June 30, 1995
and 12.4% of total revenues for the six months ended June 30, 1996, an
increase of 9.7%. The dollar and percentage increases were due to the
financing obtained for the recent acquisitions. Related party interest
expense was $1,816,890 for the six months ended June 30, 1996, representing
10.8% of total revenues. Included in related party interest expense was
non-cash interest expense of $561,008, or 3.3% of revenues, for the six
months ended June 30, 1996, representing the accretion of the debt under
the Credit Agreement to its maturity amount.
Extraordinary item. The Company recorded an extraordinary loss of
$267,281 representing 1.6% of total revenues for the six months ended June
30, 1996. The extraordinary loss related to one-time costs that were
incurred in connection with the 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 reductions in
earnings available to the common shareholders of $2,002,386.
EBITDA. EBITDA increased $2,723,265 or 1,168.1%, from $233,133 for
the six months ended June 30, 1995 to $2,956,398 for the six months ended
June 30, 1996. For the reasons discussed above, EBITDA represented 3.0% of
total revenues for the six months ended June 30, 1995 and 17.6% for the six
months ended June 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased $2,851,896, or 18.0%, from $15,866,087
for the year ended December 31, 1994 to $18,717,983 for the year ended
December 31, 1995. This increase was attributable primarily to an increase
in the number of installed public pay telephones. The total installed
public pay telephones increased by 4,979 public pay telephones, or 105.0%,
with the majority of the increase occurring late in the third quarter and
in the fourth quarter of fiscal 1995 and attributable to the acquisitions
of World and Public Telephone. In addition, revenues improved as a result
of the continuation of the $0.75 Long Distance Call Program.
Revenues from coin calls increased $3,708,952, or 44.0%, from
$8,421,237 for the year ended December 31, 1994 to $12,130,189 for the year
ended December 31, 1995. The increase was due primarily to the 1995
Acquisitions. Non-coin revenues decreased $1,542,637, or 29.0%, from
$5,319,138 for the year ended December 31, 1994 to $3,776,501 for the year
ended December 31, 1995. The decrease was primarily the result of a
decrease in the number of public pay telephones to which the Company
provided operator services through pre-subscription arrangements and
aggressive dial-around advertising by AT&T, MCI and Sprint Communications
Company ("Sprint"). In December 1995, the Company decided to focus on the
ownership and maintenance of its public pay telephone business and
outsourced its operator service center to Intellicall. A substantial
portion of the transfer of such service center was completed by March 31,
1996. The Company wrote off the fixed assets of its operator service center
in 1995 and recorded a non-cash charge of $298,626.
Other revenues increased $685,581, or 32.3%, from $2,125,712 for the
year ended December 31, 1994 to $2,811,293 for the year ended December 31,
1995. This increase was primarily the result of the 1995 Acquisitions.
Operating expenses. Line charges increased $1,019,190, or 22.9%, from
$4,456,509 for the year ended December 31, 1994 to $5,475,699 for the year
ended December 31, 1995. Line charges represented 28.1% of total revenues
for the year ended December 31, 1994 and 29.3% of total revenues for the
year ended December 31, 1995. The increase resulted, in part, from
increased coin calls resulting from the $0.75 Long Distance Call Program as
well as increases in certain local telephone company line charges. However,
this program reduces billing, collection and operator service costs.
Location commissions increased $76,436, or 2.3%, from $3,391,190 for
the year ended December 31, 1994 to $3,467,626 for the year ended December
31, 1995. Location commissions 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 per centage of
total revenues is due to lower location commissions for those public pay
telephones acquired in the 1995 Acquisitions.
Other operating expenses increased $1,045,590, or 24.5%, from
$4,264,672 for the year ended December 31, 1994 to $5,310,262 for the year
ended December 31, 1995. Other operating expenses represented 26.9% of
total revenues for the year ended December 31, 1994 and 28.4% of total
revenues for the year ended December 31, 1995. The increase was the result
of higher personnel costs, rent, utilities and service related expenses
attributable to the 1995 Acquisitions, the increase in the Company's public
pay telephone base, and the additional personnel to accommodate the
increased business.
Depreciation and amortization increased $2,146,780, or 96.0%, from
$2,236,269 for the year ended December 31, 1994 to $4,383,049 for the year
ended December 31, 1995. Depreciation and amortization represented 14.1% of
total revenues for the year ended December 31, 1994 and 23.4% of total
revenues for the year ended December 31, 1995. The increase was primarily
due to the 1995 Acquisitions and the resultant expansion of its public pay
telephone base which included purchases of additional computer equipment,
service vehicles and software to accommodate the Company's growth.
SG&A expenses increased $368,967, or 13.0%, from $2,831,775 for the
year ended December 31, 1994 to $3,200,742 for the year ended December 31,
1995. The increase was due to increases in advertising, travel and
entertainment, wages and payroll related expenses and general office
expenses as a result of hiring additional personnel to conduct the
Company's expanded selling and marketing program and customer services.
SG&A expenses represented 17.9% of total revenues for the year ended
December 31, 1994 and 17.1% of total revenues for the year ended December
31, 1995. The Company expects that SG&A expenses will continue to decrease
as a percentage of total revenues as total revenues increases.
Other unusual charges and contractual settlements consist primarily
of costs associated with the settlement of contractual obligations to
certain former officers of the Company and related legal fees, the
write-off of selected assets in connection with the outsourcing of the
operator service center and consulting and legal fees incurred for changes
to the operations of the Compa ny. Settlements of employment contracts and
other unusual charges were $2,169,503, and represented 11.6% of total
revenues, for the year ended December 31, 1995. There were no contractual
settlements and other unusual charges for 1994.
Other income (expense). Other income (expense) increased $448,696, or
115.6%, from $388,215 for the year ended December 31, 1994 to $836,911 for
the year ended December 31, 1995. Interest expense, net of interest income,
represented 2.4% of total revenues for the year ended December 31, 1994 and
4.5% of total revenues for the year ended December 31, 1995. The increase
was due to financing obtained for acquisitions, additional service vehicles
and switch operating equipment. In addition, the Company entered into
financing agreements with certain manufacturers throughout the year for the
purchase of phone equipment to accommodate the expansion of its public pay
telephone base.
EBITDA. EBITDA increased $341,713, or 37.1%, from $921,941 for the
year ended December 31, 1994 to $1,263,654 for the year ended December 31,
1995. For the reasons discussed above, EBITDA represented 5.8% of total
revenues for the year ended December 31, 1994 and 6.8% of total revenues
for the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Revenues increased $4,796,570, or 43.3%, from $11,069,517
for the year ended December 31, 1993 to $15,866,087 for the year ended
December 31, 1994. This increase was attributable primarily to an increase
in the number of installed public pay telephones, which increased by 2,559
from 2,185 at December 31, 1993 to 4,744 at December 31, 1994, with the
majority of the increase relating to an acquisition in the first quarter of
1994.
Revenues from coin calls increased $4,183,389, or 98.7%, from
$4,237,848 for the year ended December 31, 1993 to $8,421,237 for the year
ended December 31, 1994. Non-coin revenue decreased $755,266, or 12.4%,
from $6,074,394 for the year ended December 31, 1993 to $5,319,128 for the
year ended December 31, 1994. The decrease was primarily the result of a
reduction in the number of telephones to which the Company provided
operator services through pre-subscription arrangements and aggressive
dial-around advertising by AT&T, Sprint and MCI.
Other revenues increased $1,368,437, or 180.7%, from $757,275 for the
year ended December 31, 1993 to $2,125,712 for the year ended December 31,
1994. This increase was primarily the result of an increase in the number
of installed telephones and dial-around compensation.
Operating expenses. Line charges increased $1,680,061, or 60.5%, from
$2,776,448 for the year ended December 31, 1993 to $4,456,509 for the year
ended December 31, 1994. Line charges represented 25.1% of total revenues
for the year ended December 31, 1993 and 28.1% of total revenues for the
year ended December 31, 1994. The increase in line charges was, in part,
due to increased coin calls resulting from the implementation of the $0.75
Long Distance Call Program, as well as increases in certain local telephone
company line charges.
Location commissions increased $791,860, or 30.5%, from $2,599,330
for the year ended December 31, 1993 to $3,391,190 for the year ended
December 31, 1994. Location commissions represented 23.4% of total revenues
for the year ended December 31, 1993 and 21.4% of total revenues for the
year ended December 31, 1994. The decrease as a percentage of total
revenues resulted from the renegotiation of location agreements acquired in
the acquisition of Alpha Pay Phones - IV L.P. ("Alpha").
Other operating expenses increased $1,256,539, or 41.8%, from
$3,008,133 for the year ended December 31, 1993 to $4,264,672 for the year
ended December 31, 1994. The increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable
to the addition of the Alpha assets, new operations in Texas, the
establishment of Florida and Nevada sales offices, the increase in the
Company's public pay telephone base and the additional field personnel to
accommodate the increased business. Other operating expenses represented
27.2% of total revenues for the year ended December 31, 1993 and 26.9% of
total revenues for the year ended December 31, 1994.
Depreciation and amortization increased $1,340,228, or 149.6%, from
$896,041 for the year ended December 31, 1993 to $2,236,269 for the year
ended December 31, 1994. Depreciation and amortization represented 8.1% of
total revenues for the year ended December 31, 1993 and 14.1% of total
revenues for the year ended December 31, 1994. This increase was primarily
due to the Company's acquisition of the Alpha assets at the end of the
first quarter of 1994 and expansion of the public pay telephone base,
purchases of additional computer equipment, service vehicles and software
to accommodate the Company's growth.
SG&A expenses increased $429,192, or 17.9%, from $2,402,583 for the
year ended December 31, 1993 to $2,831,775 for the year ended December 31,
1994. The increase was primarily the result of the increases in
advertising, travel and entertainment, wages and payroll related expenses
and general office expenses as a result of hiring additional personnel to
conduct the Company's expanded selling and marketing program and customer
services. SG&A represented 21.7% of total revenues for the year ended
December 31, 1993 and 17.9% of total revenues for the year ended December
31, 1994.
Other income (expense). Other income (expense) increased $213,221, or
121.8%, from $174,994 for the year ended December 31, 1993 to $388,215 for
the year ended December 31, 1994. Interest expense, net of interest income,
represented 1.5% of total revenues for the year ended December 31, 1993 and
2.4% of total revenues for the year ended December 31, 1994. The increase
was due to the financing obtained for acquisitions, additional service
vehicles and switch operating equipment. In addition, the Company entered
into financing agreements with certain manufacturers throughout the year
for the purchase of telephone base.
EBITDA. EBITDA increased $638,918, or 225.7%, from $283,023 for the
year ended December 31, 1993 to $921,941 for the year ended December 31,
1994. For the reasons discussed above, EBITDA represented 2.6% of total
revenues for the year ended December 31, 1993 and 5.8% of total revenues
for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating activities
during the fiscal years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996 were $11,208, $2,380,216, ($579,133) and
($397,324), respectively. Net cash used in operating activities consisted
primarily of the funding of operating losses, increases in current assets
(other than cash) and repayment of significant current liabilities. Cash
flows used in operating activities in the six months ended June 30, 1996
decreased by $862,598 over cash provided by operations for the six months
ended June 30, 1995 of $465,274, mostly due to the larger loss in the first
and second quarter of 1996, and the repayment of contractual and other
obligations offset by non-cash charges related to Nominal Value Warrants,
depreciation and amortization, and accretion of debt.
Cash used in investing activities during the fiscal years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1996
were $1,196,761, $3,214,302, $2,354,011 and $16,542,990, respectively. Cash
used in investing activities consisted primarily of payments to acquire
companies and capital expenditures primarily due to expansion of the pay
telephone base.
Cash provided by financing activities during the fiscal years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1996
were $859,846, $1,229,282, $3,167,850 and $17,252,234, respectively, which
consisted primarily of proceeds from the issuance of debt and equity offset
by redemptions and repurchases of preferred and common stock and repayments
of debt.
Credit Agreement. On March 15, 1996, the Company entered into the
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
against the Credit Agreement. The initial borrowings under the Credit
Agreement were used to complete the Paramount and IPP acquisitions, to
repay $8,503,405 of outstanding debt and $3,173,931 of outstanding
obligations under capital leases, to redeem the 10% Preferred, 8%
Preferred, and 7% Preferred, and to pay related transaction fees. The
additional borrowings of $1,692,500 were used for an acquisition deposit of
$1,300,000, classified as a non-current asset, and working capital.
On September 13, 1996, concurrent with the acquisition of Amtel, the
Lenders amended the Credit Agreement to increase the maximum borrowings
available under the Credit Agreement to $41,000,000. The Company then
borrowed an additional $8,776,546 and used $5,950,000 of the proceeds to
complete the Amtel and POA acquisitions and the remainder of the proceeds,
$2,826,546, for working capital and payment of certain related acquisition
expenses. As of September 30, 1996, borrowings of $41,000,000 were
outstanding and there was no additional borrowing 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, although there can be no assurance, the Company expects to
be in compliance with such covenants as of September 30, 1996. The Company
is seeking an amendment to the Credit Agreement to permit the incurrence of
additional borrowings of up to $2.0 million to fund deposits required in
connection with the Pending Acquisitions and for working capital purposes.
The Company intends to use a portion of the net proceeds from the Offering
and the Concurrent Offering to repay the indebtedness under the Credit
Agreement. Concurrently with such repayment, the Company will terminate the
Credit Agreement and enter into the New Credit Agreement, which will
provide for a senior credit facility of $25 to $50 million. Under the New
Credit Agreement, after giving effect to the consummation of the Offering,
the Concurrent Offering and the Pending Acquisitions, the Company would
have had additional borrowing availability of $______ million as of June
30, 1996, subject to meeting the "Limitation on Incurrence of Indebtedness"
covenant described under the caption "Description of the
Notes--Covenants--Limitation on Incurrence of Indebtedness." See
"Description of Certain Indebtedness" for descriptions of the terms of the
Credit Agreement and the New Credit Agreement.
Of the Term Loans outstanding under the Credit Agreement, $29,000,000
can be converted into Series B Preferred at the ratio of 833 shares for
each $100,000 in outstanding debt and accrued interest. Additionally, in
connection with the execution of the original Credit Agreement on March 15,
1996, ING and Cerberus each received 102,412 warrants (204,824 warrants in
total and referred to herein as the "Lenders' Warrants"), which would
collectively allow them to purchase up to 204,824 shares of Series A
Preferred at an exercise price of $0.20 per share. Each share of Series A
Preferred is convertible into 20 shares of the Company's Common Stock. See
"Description of Capital Stock." ING and Cerberus may separately exercise
their warrants without any action of the other party. The Company intends
to repay all of the indebtedness outstanding under the Credit Agreement
with a portion of the net proceeds of the Offering and the Concurrent
Offering.
Other. The redemption price for the 10% Preferred, 8% Preferred and
7% Preferred consisted of cash payments aggregating $1,117,371 and
34,436.33 shares of 14% Preferred. In the aggregate, $6,269,487 of the
Company's outstanding obligations, including portions of the purchase price
for the IPP and Paramount acquisitions, was liquidated by issuing
107,918.19 shares of 14% Preferred. The $2,002,386 excess of the redemption
price of the preferred issues redeemed over their aggregate carrying value
was recorded as a reduction of earnings available to common shareholders on
March 15, 1996. The Company may redeem approximately $5.5 million stated
value of 14% Preferred with a portion of the net proceeds of the Offering
and the Concurrent Offering.
At September 30, 1996, long-term debt, including the current portion
and obligations under capital leases but excluding the amount allocated to
the Lender Warrants, was $55,057,893 and consisted of: (i) related party
debt (payable to the Lenders and an officer of the Company), including the
current portion and excluding the portion allocated to the Lenders
Warrants, of $41,325,000, an increase of $39,267,500 as compared to
$1,732,500 at December 31, 1995; (ii) capital leases of $8,032,032; (iii)
seller notes of $3,634,114; and (iv) other long-term debt, including the
current portion, of $2,066,747, a decrease of $6,184,671 as compared to
$8,596,413 at December 31, 1995. The overall increase is primarily
attributable to debt incurred in connection with the acquisitions of IPP,
Paramount, POA and Amtel.
On March 15, 1996, warrants to purchase 2,018,942 shares of Common
Stock ("Nominal Value Warrants") were issued in 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
to the 14% Preferred. The warrants expire on March 13, 2001. An independent
appraiser has estimated the fair value market value of the Nominal Value
Warrants to be $4,974,673, using the Black-Scholes valuation model, of
which $3,886,139 (the amount attributable to the warrants provided to
related parties in connection with the redemption of the preferred shares
and the conversion of certain debt) was recorded in the caption
"other unusual charges and contractual settlements," in the Company's
statement of operations for the six months ended June 30, 1996.
In 1995, the Company sold, or issued in consideration for services
rendered, 602,003 shares of its Common Stock to officers, directors,
creditors and affiliates of the Company and to others, including a
predecessor of Southcoast Capital Corporation, one of the Underwriters, at
values ranging from $4.20 to $6.01 per share. See "Underwriting."
Additionally, certain warrants and options to purchase 660,506 shares of
the Company's Common Stock at prices ranging from $5.70 to $6.00 were
granted in 1995.
On September 12, 1995, the Company borrowed $1,200,000 (which was
recorded net of the value of warrants issued of $349,000) from third party
investors pursuant to a 19 month credit agreement, bearing interest at 12.5%.
The proceeds were used for 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 15,200 telephones during the first nine months of 1996. The
seasonality of the Company's historical operating results has been affected
by shifts in the geographic concentrations of its telephones resulting from
such 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 $2,770,804, which were financed
through cash flow from operations.
Capital expenditures are principally for the expansion of the
Company's installed pay telephone base, including the purchase of
telephones and related equipment, 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
$3,255,000 during the year ended December 31, 1997.
Management believes, but cannot assure, that the net proceeds to the
Company from the Offering and the Concurrent Offering and cash flow from
operations will be sufficient to meet the Company's cash requirements for
working capital, capital expenditures and debt service over the next
twelve months.
BUSINESS
GENERAL
The Company is currently the third largest independent public pay
telephone operator and the eleventh largest public pay telephone operator
in the United States. Upon consummation of the Pending Acquisitions, the
Company believes that it will be one of the two largest independent public
pay telephone operators in the United States. As of September 30, 1996,
after giving effect to the Pending Acquisitions, the Company would have
owned and operated 38,423 public pay telephones in 43 states, the District
of Columbia and Mexico, of which approximately 96% are located in 21
states. After giving effect to the Pending Acquisitions, approximately 44%
of the Company's public pay telephones will be located in Florida, Texas
and California, which are three of the four most populous states. As of
September 30, 1996, the Company owned and operated 24,732 public pay
telephones, of which approximately 95% are located in 17 states and
approximately 46% are located in Florida, Texas and California. Since
September 1, 1995, the Company has added 19,581 public pay telephones,
primarily through a series of acquisitions by the Company of 6 independent
public pay telephone companies. In addition, the Company maintains an
active program of installing public pay telephones.
The Company owns, operates, services and maintains a system of micro
processor controlled "smart" public pay telephones. The Company derives
substantially all of its revenues from coin and non-coin calls placed from
its public pay telephones. The Company obtains contracts with national,
regional and local accounts to operate public pay telephones at locations
where significant demand exists for public pay telephone services, such as
malls, convenience stores, service stations, grocery stores, restaurants,
truck stops and bus terminals. As of September 30, 1996, the average
remaining life of the Company's contracts with its customers was 40.1
months (excluding the contracts acquired in connection with the acquisition
of POA).
As of September 30, 1996, the Company owned and operated 24,732
public pay telephones in 41 states and the District of Columbia and, on a
pro forma basis after giving effect to the Pending Acquisitions, will own
and operate 38,423 public pay telephones in 43 states, the
District of Columbia and Mexico. The following chart sets forth certain
information with respect to the locations of the Company's pay telephones
as of September 30, 1996 on an actual basis and a pro forma basis giving
effect to the Pending Acquisitions:
========================================================
Actual Pro Forma
---------------------- -------------------------
Public Pay Percentage Public Pay Percentage
Location Telephones of Total Telephones of Total
Florida 5,127 20.7% 5,129 13.4%
California 3,705 15.0 3,705 9.7
Missouri 2,912 11.8 2,912 7.6
Texas 2,533 10.2 8,064 21.1
Ohio 1,633 6.6 1,633 4.3
Illinois 1,329 5.4 1,329 3.5
Montana 1,025 2.7
South Carolina 1,249 5.0 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
Utah 26 2,245 5.9
New Mexico 4 2,409 6.3
Other 3,185 13.0 5,016 10.9
------ ------ ------- ------
Total 24,732 100.0% 38,423 100.0%
====== ====== ======= ======
The public pay telephones to be acquired in the Cherokee Acquisition
are located primarily in Texas, New Mexico, Colorado, Utah and Montana. All
of the public pay telephones to be acquired in the Texas Coinphone
Acquisition are located in Texas.
On an actual basis, the Company had revenues and EBITDA of $16.8
million and $3.0 million, respectively, for the six months ended June 30,
1996. On the same basis, the Company's EBITDA margins have increased to
17.6% for the six months ended June 30, 1996 from 3.0% for the six months
ended June 30, 1995. The increase in EBITDA margin is primarily due to the
elimination of costs associated with the closing of certain offices, the
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
$30.2 million for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively, and EBITDA of $10.4 million and $6.5 million
for the year ended December 31, 1995 and the six months ended June 30,
1996, respectively. After giving pro forma effect to the 1995 Acquisitions,
the 1996 Acquisitions and the Pending Acquisitions, the Company would have
achieved revenues of $91.5 million and $46.6 million for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively, and
EBITDA of $21.2 million and $10.2 million for the year ended December 31,
1995 and the six months ended June 30, 1996, respectively. See "Pro Forma
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 management team identified and implemented the business strategy set
forth below.
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale and cost savings. The
Company has implemented the following strategy to meet its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the public pay telephone industry. Selective acquisitions enable
the Company to expand its geographic presence and further its strategy
of clustering its public pay telephones more rapidly than with new
installations. The Company has been able to make acquisitions at attractive
prices because smaller companies typically are not able to achieve the
economies of scale realized by the Company. As a result, when acquisitions
are integrated, the Company can operate the public pay telephones at
significantly lower operating costs than the seller. 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 acqui-
sitions as well as integrating the Acquisitions. In addition, as the Company
grows to become the leading supplier of independent public pay telephone
services in an area, "fill-in" and 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 and operator services 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 additional
acquisitions, the clustering of public pay telephones creates an
opportunity to generate savings through reduced field service and
collection expenses, the closing of duplicate offices, reduction in staff
and general corporate overhead expenses and reduced expenses associated
with interLATA and intraLATA traffic.
Form strong relationships with service providers and suppliers. As
part of its strategy to continue to reduce 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 lower cost agreements with increasingly favorable terms.
Use of state-of-the-art technology. The Company's public pay
telephones are "smart" telephones and are operated by means of advanced
microprocessor technology that enables the telephones to perform
substantially all of the necessary coin-driven and certain non coin-driven
functions independent of the Company's central office. Unlike "dumb"
telephones used by most BOCs and other LECs, smart telephones, in concert
with the Company's management information systems, enable the Company to
determine each telephone's operability and need for service as well as its
readiness for collection of coin revenues. In addition, rate changes and
other software-dependent functions can also be performed from the central
office without dispatching service technicians to individual public pay
telephones. As a result, the Company can increase the number of public pay
telephones it owns while reducing the costs on a per phone basis of
telephone service and maintenance and coin collection.
Provide superior customer service. The Company strives to maximize
the number of its telephones that are operational at any one time and
thereby retain existing customers and attract new ones. Accordingly, the
Company employs both advanced telecommunications technology and trained
field technicians to ensure superior customer service. This technology also
enables the Company to (i) maintain accurate records of telephone activity
which can be verified by customers and (ii) respond quickly to equipment
malfunctions. The Company's standard of performance is to repair
malfunctions within 24 hours of their occurrence.
Achieve market recognition. With the greater financial resources
available to the Company following the Offering and the Concurrent
Offering, the Company intends to promote actively its brand and customer
service capabilities. The Company seeks to promote and achieve recognition
of its products and services by posting on all of its public pay telephones
the "PhoneTel" label and through advertisements in trade magazines. The
Company believes that achieving market recognition will facilitate its
expansion strategy by enhancing its ability to obtain additional accounts
and encouraging the use of its public pay telephones in locations where
consumers have multiple pay telephone options.
INDUSTRY OVERVIEW
Public pay telephones are primarily owned and operated by BOCs and
other LECs and independent public pay telephone companies. Of the
approximately 2.54 million public pay telephones operated in the United
States in 1996, 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, the Multimedia Telecommunications Association estimates
that there were approximately 342,000 public pay telephones owned by
independent public pay telephone companies in 1995. Today's telecommunications
marketplace was principally shaped by the 1984 court-directed divestiture
of the BOCs by AT&T. The AT&T 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 telecommunications offering or deriving revenues or income
from telecomunications 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 Telecom-
munications Act, depending on the outcome of pending litigation on this
issue, 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. 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, that it has entered into at
least one interconnection agreement, and that it has satisfied the 14-point
"competitive checklist" established by the Telecommunications Act. In
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 Telecommunication Act and the FCC implementing rules
(both of which were recently enacted) will permit independent public pay
telephone providers to generate additional revenues from all of these three
categories, each of which consists of local, intraLATA toll, intrastate
interLATA, interstate interLATA and international call components.
ACQUISITION STRATEGY
The Company believes that the existence of many small independent public
pay telephone providers presents acquisition opportunities for the Company.
The Company believes that acquisitions of other independent public pay
telephone companies and management's experience in identifying and negotiating
potential acquisitions and integrating acquired companies into the Company's
ongoing operations may substantially accelerate its rate of growth, increase
the Company's concentration of public pay telephones through clustering and
thereby increase profitability through economies of scale. The Company intends
to continue this acquisition program upon consummation of this Offering.
In reviewing potential acquisition candidates, the Company considers
various factors, including:
Historical and pro forma financial performance. The Company reviews
the historical revenues, mix between coin and non-coin revenue and cash
flows of the public pay telephone providers to be acquired and analyzes
their prospective profitability based on pro forma considerations, such as
lower service and collection expenses, lower general and administrative
expenses, and the more favorable terms and conditions which the Company may
be able to obtain from OSPs and long distance carriers due to the increased
level of calls on such pro forma basis.
Location and economies of scale. The Company considers the geographic
proximity of the public pay telephones to be acquired to the Company's
existing clusters or markets and the extent to which the acquisition would
provide the Company with economies of scale through more efficient
operation and maintenance of a larger number of public pay telephones
within a geographic region or cluster. In addition, the Company seeks to
acquire independent public pay telephone companies in new markets where the
Company believes it can create a new cluster and achieve internal growth
through increases in the number of public pay telephones as well as through
additional acquisitions. The Company also assesses the resources that would
be necessary to integrate effectively and efficiently the target company
into the Company's existing operations, including the staff required to
service the new public pay telephones. To date, the Company has targeted
companies that operate primarily in the southeastern, midwestern and
western areas of the United States.
Location agreements and condition of equipment. The Company reviews
the standard terms of location agreements including the revenue sharing
terms and commissions, term and transferability of related site location
agreements with location providers, the line charges required to be paid
for the public pay telephones and the type and condition of the proposed
equipment to be acquired. The Company also conducts a physical survey of a
representative sample of the public pay telephones proposed to be acquired.
Regulatory matters. The Company reviews the applicable regulatory
framework, as well as proposed changes in regulatory matters, in states
where the Company is not currently operating and is considering the
acquisition of a significant number of public pay telephones.
The Company believes that it has a competitive advantage over other
potential acquirors because of management's experience in identifying and
negotiating acquisitions and in integrating acquired companies into the
Company's ongoing operations.
The following table summarizes the recent acquisitions completed, or
entered into, by the Company as of October 30, 1996:
<TABLE>
<CAPTION>
Number of
Installed
Public
Pay
Date of Telephones
Expected to be Primary
COMPANY TO BE ACQUIRED Acquisition Acquired Areas Served
- ---------------------- ----------- ---------- ------------
<S> <C> <C> <C>
Cherokee Communications, Inc. (1) January 1997 [13,500] Texas; New Mexico;
Colorado; Utah; Montana
Texas Coinphone (2) January 1997 1,200 Texas
-----
Total installed public pay
telephones to be acquired 14,700
======
===============================================
Number of
Installed
Public
Pay
Date of Telephones Primary
COMPANY ACQUIRED Acquisition Acquired Areas Served
- ---------------- ----------- ---------- ------------
Amtel Communications Services (3) September 13, 6,872 California;
1996 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 March 15, 1996 2,528 Florida
Systems, Inc. (6)
Public Telephone Corporation (7) October 16, 1995 1,200 Illinois; Michigan
World Communications, Inc. (8) September 22, 3,237 Missouri; Illinois;
1995 Florida
Alpha Pay Phones - IV L.P. (9) March 25, 1994 2,155 Texas
------
Total installed public pay
telephones acquired 21,208
======
<FN>
- ----------------
(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 $6.0 million in Common Stock. Such purchase price
also included approximately 1,100 public pay telephones in inventory.
(4) The purchase price paid by the Company for POA consisted of $500,000 in
cash, 166,666 shares of Common Stock, assumption of $7.75 million of
capital lease obligations, $3.6 million in notes payable to the
sellers, the assumption of $0.2 million in liabilities and two
five-year non-competition and consulting agreements with two of the
sellers for an aggregate of $307,264.
(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 repaid by the Company on March 15, 1996. The purchase
price included a five year consulting and non-compete agreement,
valued at $50,000, with one of Paramount's former officers.
(7) The purchase price paid by the Company for Public Telephone con-
sisted 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 owners which require cash payments and the issuance,
in the aggregate, of 80,000 shares of the Company's Common Stock.
(8) The purchase price paid by the Company for World consisted of
402,500 shares of Common Stock, 530,534 shares of 10% Non-Voting
Preferred and the assumption of $6.9 million in liabilities. All
shares of the 10% Non-Voting Preferred were converted into 884,214
shares of the Company's Common Stock on June 28, 1996. In connection
with the acquisition, the Company entered into two year non-compete
and employment agreements with three of World's former officers,
which require, in the aggregate, payment of $625,000 over a two year
period.
(9) The purchase price paid by the Company for Alpha consisted of $2.3
million in cash, a $1.1 million note payable to the sellers and the
assumption of $2.2 million in liabilities. In connection with the
acquisition, the Company entered into five year non-compete
agreements with two of Public's former owners, which require cash
payments and the issuance, in the aggregate, of 80,000 shares of the
Company's Common Stock.
</TABLE>
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 and truck stops, at no cost to the location provider. The
Company then services and collects money from these telephones and pays the
location owner a share of the public pay telephone's revenues. As of
September 30, 1996, the Company owned and operated 24,732 installed public
pay telephones and after giving pro forma effect to the Pending Acquisitions
would have had owned and operated 38,423 installed public pay telephones.
The percentage of revenues paid by the Company to the location
provider is generally fixed for the term of the agreement and generally
ranges from 15% to 40% if based on gross revenues per pay telephone or
from 10% to 40% if based on net revenues per public pay telephone. The
term of a location agreement generally ranges from three to ten years and
provides for the automatic renewal of the contract for the same period
as the original term of the contract if it is not cancelled by the location
provider under the terms of the agreement. The Company can generally terminate
an agreement on 30-days' prior notice to the location provider if the public
pay telephone does not generate sufficient total revenues for two
consecutive months. Under certain of the Company's location agreements, the
failure of the Company to remedy a default within a specified period after
notice may give the location provider the right to terminate such
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 over the next year
as states follow the FCC's mandate and deregulate the price of a local coin
call. See "--Governmental Regulations." The Company charges the same rate
as the BOCs and the other LECs for local calls in substantially all of the
territories in which the Company's public pay telephones are located. In
most territories that charge is $0.25, although in some jurisdictions the
charge is less than $0.25 per local call and in a limited number of other
jurisdictions, which have already deregulated local calls, the charge is
$0.35. Whereas local coin calls have traditionally been provided for an
unlimited call duration, some jurisdictions in which the Company's public
pay telephones are located have begun to allow call timing, which requires
the deposit of an additional amount after a specified period. The Company
pays monthly line and usage charges to LECs for all of its installed public
pay telephones. These charges cover basic telephone service as well as the
transport of local coin calls.
Operator-Assisted Long Distance Services
The Company outsources its long distance and operator service
operations to a number of OSPs, including Intellicall, which is the
Company's primary provider of such services, AT&T, BellSouth, Opticom and
Conquest. The Company receives commissions from these services based on the
volume of calls made as well as on the amount of revenues generated per
call. However, in certain regions the Company may also install an automated
operator system for select pay telephones that allows the 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 (which order is currently subject to pending
petitions at the FCC seeking reconsideration), the FCC implemented new
rules that replace the current $6.00 flat fee per telephone per month with
an interim $45.85 flat fee per telephone per month from November 6, 1996 to
October 1997. In October 1997, the flat fee will be replaced by a per-call
compensation mechanism. See "--Governmental Regulations." Management
believes that both the interim plan and the per-call compensation plan will
generate significant additional revenues, net of related expenses and
processing fees, commencing November 6, 1996 for the Company.
TELEPHONE EQUIPMENT
The Company purchases its pay telephones from two of the three
largest independent manufacturers of public pay telephones, Intellicall and
Protel Inc. The Company has also acquired telephones manufactured by the
third manufacturer of public pay telephones, Elcotel Inc. Although all
three manufacturers use similar technology, the Company seeks to purchase
primarily a single brand of telephone within a geographic area. This
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 expansion 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 9
sales persons who report to the Vice President of Sales and Marketing. The
Company also markets its products and services through advertising in trade
publications, booths at trade shows and referrals from existing accounts.
The Company directs a major portion of its marketing efforts for
public pay telephones to multi-station accounts, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck
stops and bus terminals (stations). These multi-station accounts have the
advantages of greater efficiency in collection and maintenance. The Company
also solicits single station accounts, where there is a demonstrated high
demand for public pay telephone service. In evaluating locations for the
installation of public pay telephones, the Company generally conducts a
site survey to examine various factors, including population density,
traffic patterns, historical usage information and other geographical
factors. The Company generally will not install a public pay telephone
unless it believes based on the site survey that the site will generate a
minimum level of revenues.
CUSTOMERS
The Company's public pay telephone operations are diversified on both
a geographical and customer account basis. Currently, the Company owns and
operates public pay telephones in 41 states and the District of Columbia
through agreements with both multi-station customers such as shopping
malls, convenience stores, service stations and grocery stores as well as
with single station customers. After giving effect to the consummation of
the Pending Acquisitions, the Company will own and operate public pay
telephones in 43 states, the District of Columbia and Mexico (approximately
96% of which public pay telephones are located in 21 states).
The Company owns and operates the public pay telephones for certain
properties owned by Simon DeBartolo. The Company derived approximately 15%
and 8% of its total revenue for the year ended December 31, 1995 and for
the six months ended June 30, 1996, respectively, from the operation of
these public pay telephones. As the Company expands its installed public
pay telephone base through additional acquisitions, it expects that the
percentage of total revenue derived from Simon DeBartolo will continue to
decline. Other than Simon DeBartolo, no single customer generated more than
5% of the Company's total revenue for the year ended December 31, 1995 or
the six months ended June 30, 1996. See "Risk Factors--Dependence on
Significant Customer." On a pro forma basis after giving effect to the
Pending Acquisitions, no single customer would have accounted for more than
5% of the Company's total revenue for the year ended December 31, 1995 or
the six months ended June 30, 1996.
GOVERNMENTAL REGULATIONS
The operations of the public pay telephone industry are regulated
primarily by the public service or utility commission of the various states
and by the FCC. In particular, the Company must obtain approvals to operate
public pay telephones from the public utility commissions of most states in
which the Company operates. In addition, from time to time, legislation is
enacted by Congress or the various state legislatures that affects the
telecommunications industry generally and the public pay telephone industry
specifically. Court decisions may also have a significant effect on the
public pay telephone industry. Changes in existing laws and regulations as
well as the creation of new ones, applicable to the activities of the
Company or other telecommunications businesses (including the extent of
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 own public pay telephones, it may be
necessary to become certificated and have tariffs filed. The procedure and
length of time for the process varies from state to state. Until recently,
in many states only local telephone companies were permitted to process
local and/or intraLATA operator assisted calls. The Company has obtained
the requisite regulatory approvals to provide public pay telephone service
in all states in which it provides such services and complies with
applicable state regulations governing such services.
The recently enacted Section 276 of the Telecommunications Act gives
the FCC authority to adopt rules affecting intrastate telephone services
and to preempt state rules and regulations inconsistent with those adopted
by the FCC. As discussed in more detail under the caption "-- Federal," the
FCC adopted rules on September 20, 1996 (which rules are currently subject
to pending petitions at the FCC seeking reconsideration) that will preempt
certain existing state regulations and will limit the scope of future state
regulation of pricing and other aspects of public pay telephone operation.
In particular, states are required to:
(a) deregulate the price of a local phone call;
(b) eliminate all intrastate subsidies for BOC and LEC pay
phone services;
(c) enact rules governing the provision of "public interest pay
phones;" and
(d) conduct a thorough review of all existing state pay phone
rules to ensure that those rules do not conflict with the
intent of Section 276 and the FCC implementing rules.
Federal. Until recently, the FCC has not actively regulated the
provision of intrastate public pay telephone services by independent public
pay telephone companies. However, the Company believes that the recent
enactment of Section 276 of the 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 owners whose total is
greater than a given percentage above the benchmarks, to disclose the
applicable charges for the call to consumers orally before connecting a
call. Alternatively, the FCC proposed to require all OSP's to disclose
their rates on all 0+ calls. The effect of the rules, if any, ultimately
adopted by the FCC, on the Company's business, results of operations or
financial condition can not be determined at this time.
In September 1996, the FCC adopted rules which implement the public
pay telephone provisions of Section 276 of the Telecommunications Act.
Petitions seeking reconsideration of aspects of these FCC rules were filed
with the FCC in October 1996 and are currently pending. Key elements of the
rulemaking include:
(a) Compensation. Currently independent public pay telephone
providers are not compensated on a per-call basis for toll-free
calls, such as "800" calls and debit card calls, both domestic
and international. The new FCC rules establish a three-phase
compensation plan to ensure that public pay telephone providers
are fairly compensated for all calls originating from public
pay telephones, with the exception of emergency calls and
telecommunications relay service calls for hearing-disabled
individuals. For the period from November 6, 1996 through
October 1, 1997, the $6.00 flat fee per telephone per month
will be replaced by an interim $45.85 flat fee per telephone
per month (which was established by the FCC by multiplying
$0.35 per call times the estimated industry average of 131
access code calls and "800" calls per pay telephone per month).
In October 1997, the flat fee will be replaced by a per-call
compensation mechanism. From October 1997 to October 1998, the
per-call payment shall be $0.35; thereafter, the per-call rate
shall be equal to the local coin call rate for each location.
Obtaining fair compensation for these dial-around calls is
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 their own public pay telephones, the FCC now requires
that any subscriber line charge and tariffed network services
charges apply equally to both LEC and independent public pay
telephones.
(c) Non-structural safeguards. The FCC adopted certain non-
structural safeguards in its Computer III inquiry which were
designed to prevent BOCs from using their incumbent market
power in an anti-competitive manner. These safeguards generally
allow the BOCs to provide certain services on an integrated
basis (i.e., directly rather than through a separate
subsidiary) provided that BOCs (i) allow nondiscriminatory
access to their network features and functionalities; (ii)
restrict use of customer proprietary network information; (iii)
subscribe to certain network information disclosure rules; (iv)
do not discriminate in the provision, installation, and
maintenance of services and reporting and (v) adopt certain
cost accounting safeguards. In its rulemaking, the FCC applied
these safeguards to the provision of public pay telephone
services by the BOCs, and found that further non-structural
safeguards were unnecessary. The FCC also decided to reclassify
BOC public pay telephone service as a "nonregulated 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 (the
ability to presubscribe a carrier other than the BOC or LEC)
has been ordered to become available in eighteen states.
Section 276 provides that all public pay telephone service
providers have the right to "negotiate with the location
provider on the location provider's selecting and contracting
with, and subject to the terms of any agreement with the
location provider, to select and contract with, the carriers
that carry intraLATA calls from their payphones." The FCC's new
rules give all public pay telephone service providers
(including BOCs and independent providers such as the Company)
the right to negotiate with location providers concerning the
intraLATA carrier.
(f) Public interest public pay telephones. Section 276 requires the
FCC to ensure that public pay telephones provided in the
interest of public health, safety, and welfare are maintained
and supported equitably. The new FCC rules adopt a narrow
definition of "public interest payphone," and leave to the
discretion of the states how to fund their respective public
interest public pay telephone programs, so long as the funding
mechanism (i) "fairly and equitably" distributes the costs of
such program, and (ii) does not involve the use of subsidies
prohibited by Section 276(b)(1)(B) of the Telecommunications
Act. Each state's funding review must be completed by October
1998.
The Company believes that Section 276 and the implementing
regulations adopted by the FCC will likely have an overall positive effect
on the public pay telephone industry in general and the Company in
particular. However, the final rules adopted by the FCC and Section 276
have not yet been interpreted by the courts, and there can be no assurance
regarding the effect that the rules and policies ultimately adopted
thereunder will have on the Company.
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 contains five, one year renewal options. As of
September 30, 1996, the Company also maintains service and sales offices in
leased premises in Fort Lauderdale, Orlando, Ocala, and Tampa, Florida; Las
Vegas, Nevada; Farmers Branch, Texas; Springfield, St. Louis, and Kansas
City, Missouri; Chicago, Illinois; Livonia, Michigan; Hilton Head, South
Carolina; Knoxville, Tennessee; San Diego, Hayward and Santa Fe Springs,
California; Kent, Washington; Denver, Colorado; Cicero, Indiana;
Lincolnton, North Carolina; Portland, Oregon; and Newport News, Virginia,
at an aggregate monthly rental of $39,958. The Company believes that it
would be able to replace any leases that are not renewed upon expiration
with leases having comparable terms.
The Company expects that upon consummation of the Pending Acquisitions
it will acquire and maintain service and sales offices in owned or leased
premises in Houston, Lubbock, McAllen, El Paso and Corpus Christi, Texas;
Albuquerque, Farmington and Gallup, New Mexico; Billings and Missoula,
Montana; Salt Lake City and Cedar City, Utah; Bismarck, North Dakota;
Flagstaff, Arizona; and Grand Junction, Colorado.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings as to
which the outcome would have a material adverse effect on the Company's
business, results of operations or financial condition.
MANAGEMENT
The following table sets forth the names and ages (as of September 30,
1996) and positions of each of the directors and executive officers of the
Company.
NAME AGE POSITION
- ---- --- --------
Peter G. Graf 59 Chairman,
Chief Executive Officer
and Director
Tammy L. Martin 32 Executive Vice 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 Kebert 50 Chief Financial Officer
Joseph Abrams 60 Director
George H. Henry 43 Director
Stuart Hollander 66 Director
Aron Katzman 58 Director
Steven Richman 53 Director
PETER G. GRAF has been Chairman and a Director of the Company since
July 1, 1995 and was elected Chief Executive Officer of the Company in
September 1995 and spends a substantial portion of his time fulfilling such
duties. Mr. Graf is licensed as an attorney and as a certified public
accountant and serves as an officer and/or director of various
privately-held companies and the managing partner of an accounting firm.
From 1991 to September 1995, Mr. Graf served as Vice Chairman of USA Mobile
Communications Holdings, Inc.
TAMMY L. MARTIN was elected Executive Vice President and Chief
Administrative Officer of the Company in April 1996 and has been General
Counsel and Secretary of the Company since September 1995. Prior to that,
Ms. Martin served as associate legal counsel for the Company during 1993
and 1994. Prior to joining the Company, Ms. Martin was in private legal
practice from 1992 to 1993 and was self-employed as an accountant from 1990
to 1992.
NICKEY B. MAXEY has served as Chief Operating Officer and a Director
of the Company since April 1996. Mr. Maxey was founder and President of
International Pay Phones, Inc., a Tennessee company and International Pay
Phones, Inc., a South Carolina company, both of which were merged into the
Company in March 1996. Mr. Maxey has also owned and operated Resort
Hospitality Services, Inc., a telecommunications company since 1990.
GARY PACE has been Senior Vice President of the Company since its
merger with World in September 1995. Prior to such merger, Mr. Pace was
President of World since 1989.
RICHARD KEBERT has served as Chief Financial Officer of the Company
since September 1996. Prior to joining the Company, Mr. Kebert was an
independent consultant. From 1994 to 1996, he was Vice President - Finance
and Administration of Accordia of Cleveland, Inc. For 12 years prior
thereto, Mr. Kebert held several senior management positions with Mr.
Coffee, inc., including Vice President - Administration and Secretary. Mr.
Kebert is licensed as a certified public accountant.
JOSEPH ABRAMS has been a Director since September 1995. Mr. Abrams
is also a director of Merisel, Inc. a public company that distributes micro
computer hardware and software, and Spectrum Signal Processing, Inc., a
public company that specializes in digital signal solutions. Mr. Abrams was
a co-founder of and served as the President of AGS Computers from 1967 to
1991. From 1991 to 1996, Mr. Abrams has been a private investor.
GEORGE H. HENRY has been a Director since April 1993. Mr. Henry has
been the managing director of G. Howard Associates, Inc., a private
investment firm, since 1986. Mr. Henry is also on the Board of Directors of
Biovail International Corporation and a trustee of Mitchell College.
STUART HOLLANDER has been a Director since September 1995. Mr.
Hollander was founder, principal owner and Chairman of the Board of World
from 1986 until it was merged into the Company in 1995. Prior to that he
was Executive Vice President of Hollander & Company, Inc., one of the
largest distributors of consumer electronics in the U.S., representing
Zenith Radio Corporation; the founder and an officer of Lesley Acceptance
Corporation; Chairman and a Member of the Board of Jaeger of Canada, Inc.;
and a member of the Board of Pioneer Bank and Trust Company.
ARON KATZMAN has been a Director since September 1995. Mr. Katzman
is President of New Legends, Inc., a country club/residential community in
the St. Louis, Missouri area, and Chairman and Chief Executive Officer of
Decorating Den of 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 Chairman and President of,
Fabric Resources International for more than the past five years. Mr.
Richman was the co-founder and an officer of Cable Systems USA; and an
officer at Cellular Systems USA and a director of USA Mobile Communications
Holdings, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a Compensation Committee
and an Audit Committee. Although neither committee had held any meetings in
1995, both committees are scheduled to meet in the fourth quarter of 1996.
The Audit Committee is expected to meet on a quarterly basis in 1997.
The Compensation Committee has the authority to make 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 $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
services to the Company without receiving any compensation. The Company
does, however, reimburse such officers for their business expenses.
The following table sets forth a summary of all compensation of the
Company's Chief Executive Officer and all other executive officers whose
total compensation exceeded $100,000 per year for any year in the three
year period ended December 31, 1995 (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-------------------------------------------------
NAME AND LONG-TERM COMPENSATION
PRINCIPAL -------------------------------------------
POSITION YEAR ANNUAL COMPENSATION AWARDS PAYOUTS
- -------------- ----- --------------------------- -------------------- --------------------
Long-
Other Term
Annual Restricted Incen- All Other
Compen- Stock Options/ tive Compen-
Salary Bonus sation Award(s) SARs Payouts sation
------ ----- ------- ---------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter G. Graf 1995 -- -- -- -- 47,583 -- --
Chairman, 1994 -- -- -- -- 24,705 -- --
Chief
Executive
Officer,
and Director
Jerry H. Burger 1995 $ 74,293 $13,600 $13,600(1) -- 62,500 -- $212,000(2)
Former Chief 1994 $ 40,000 -- -- -- -- -- --
Executive
Officer 1993 $ 42,000 $75,000 5,917(3) 43,333(4)
Bernard Mandel 1995 $147,544 $ 9,760 $9,760(5) -- 41,666 -- $146,500(6)
Former
President, 1994 $ 88,894 -- 4,154(3) -- -- -- --
Chief
Operating 1993 $ 83,269 $25,000 3,698(3) -- 10,000(7) -- --
Officer and
Secretary
Daniel J. Moos 1995 $ 95,000 $ 1,442 $12,800(8) -- 54,999(9) -- --(10)
Former
Executive
Vice
President,
Chief
Financial
Officer, and
Treasurer
<FN>
- --------------------
(1) Represents the value of 2,833 shares paid to Mr. Burger for services
provided.
(2) On September 15, 1995, the Company and Mr. Burger entered into a
separation agreement which provided for the 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.
(3) Value of non-business use of Company automobile.
(4) 26,000 options expired in 1995.
(5) Represents the value of 2,033 shares paid to Mr. Mandel for services
provided.
(6) On September 15, 1995, the Company and Mr. Mandel entered into a
separation agreement which provided for the 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.
(7) Expired in 1995.
(8) Represents the value of 2,666 shares paid to Mr. Moos for services
provided.
(9) 33,000 options not vested at December 31, 1995.
(1) 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 $10 million.
</TABLE>
The following table sets forth certain information concerning individual
grants of stock options made during the year ended December 31, 1995 to each
of the named executive officers.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
PERCENT OF
TOTAL
NUMBER OF OPTIONS/
SECURITIES WARRANTS/
UNDERLYING SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
NAME AND SARS EMPLOYEES IN PRICE
PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/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. Berger 62,500(1) 9.5% $6.00(2) August 31, 1997
Former Chief
Executive Officer
Bernard Mandel 41,666(3) 6.3% $6.00(2) August 31, 1997
Former 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 $3.72 per share.
(3) Excludes 25,537 additional options issued pursuant to anti-dilution
provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-dilution
provisions.
The following table sets forth certain information about unexercised stock
options held by the named executive officers at December 31, 1995. No stock
options were exercised by such persons during 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
SHARES (#) ($)
NAME AND ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Peter G. Graf -- -- 75,064 $31,316
Chairman, Chief
Executive
Officer, and
Director
Jerry H. Burger -- -- 127,361 $31,840
Former Chief
Executive Officer
Bernard Mandel -- -- 66,666 $91,667
Former President,
Chief Operating
Officer and
Secretary
Daniel J. Moos -- -- 54,999 $13,750
Former Executive
Vice President,
Chief Financial
Officer and
Treasurer
</TABLE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock owned by each Director of the
Company, each person known by the Company to own, beneficially more than 5%
of the outstanding Common Stock, the named executive officers and all
directors and officers as a group as of September 30, 1996. The table does
not give effect to the issuance and sale of shares by the Company or the
sale of shares by certain of the 5% shareholders in the Concurrent
Offering. Unless otherwise indicated, the number of shares of Common Stock
owned by the named shareholders assumes the exercise of the warrants or
options that are exercisable within 60 days, the number of which is
separately referred to in a footnote, and the percentage shown assumes the
exercise of such warrants or options and assumes that no warrants or
options held by others are exercised. This information is based upon
information furnished by such persons and statements filed with the
Securities and Exchange Commission and other information known by the
Company.
-------------------------------------------
NUMBER OF SHARES
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- ------------------- ------------------ -------------
Directors
- ---------
Peter G. Graf(1)(16) 1,029,376 12.89%
Chairman, Chief Executive
Officer and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Nickey B. Maxey(2)(16) 406,184 5.30%
Chief Operating Officer and
Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
George H. Henry(3) 360,376 4.70%
Director
6860 Sunrise Court
Coral Gables, FL 33133
Stuart Hollander(4) 323,559 4.24%
Director
32 Lake Forest
St. Louis, MO 63117
Steven Richman(5)(16) 258,535 3.31%
Director
9 Beech Lane
Kings Point, NY 11024
Aron Katzman (6)(16) 244,664 3.14%
Director
10 Layton Terrace
St. Louis, MO 63124
Joseph Abrams (7)(16) 195,536 2.50%
Director
85 Old Farm Road
Bedminster, NJ 07921
Named Executive Officers
Jerry Burger (8) 239,930 3.06%
Former Chief Executive Officer
27040 Cedar Road
Beachwood, OH 44122
Bernard Mandel (9) 100,824 1.31%
Former President, Chief Operating
Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos (10) 100,707 1.30%
Former Executive Vice President,
Chief Financial Officer & Treasurer
7399 Stow Road
Hudson, OH 44236
Executive Officers and Directors 2,961,473 34.62%
as a group (10 persons)(11)(17)
5% Beneficial Owners
- --------------------
Internationale Nederlanden
(U.S.) Capital Corporation (12)(18) 4,464,907 36.89%
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P. (13)(18) 4,464,907 36.89%
950 Third Avenue, 20th floor
New York, NY 10022
ACI - HDT Supply Company, et al., 2,162,163 28.30%
as Debtors-in-Possession (14)
5452 Oberlin Drive, Suite B
San Diego, CA 92121
J&C Resources (15)(17) 486,860 6.25%
216 Daniel Webster Highway
S. Nashua, NH 03060
Southcoast Capital Corporation (16)(17) 475,108 5.90%
277 Park Avenue
New York, NY 10172
- --------------------
(1) Includes warrants to purchase 75,064 shares of Common Stock through
March 13, 2001 and 14% Preferred which is convertible through June 30,
2000 into 269,454 shares of Common Stock.
(2) Includes 14% Preferred which is convertible through June 30, 2000 into
31,262 shares of Common Stock.
(3) Includes options to purchase 35,000 shares of Common Stock through
October 9, 1998.
(4) Includes 148,864 shares of Common Stock held by his spouse and 6,266
shares of Common Stock held by other family members.
(5) Includes warrants to purchase 126,830 shares of Common Stock through
March 13, 2001, 4,444 shares of Common Stock held by his spouse, and
14% Preferred which is convertible through June 30, 2000 into 44,909
shares of Common Stock.
(6) Includes warrants to purchase 95,128 shares of Common Stock through
March 13, 2001 and 14% Preferred which is convertible through June 30,
2000 into 47,469 shares of Common Stock.
(7) Includes warrants to purchase 125,997 shares of Common Stock through
March 13, 2001 and 14% Preferred which is convertible through June 30,
2000 into 62,873 shares of Common Stock.
(8) Includes options to purchase 210,430 shares of Common Stock through
August 31, 1997. Beneficial owner has anti-dilution rights pursuant to
stock option agreements or other rights which will require adjustments
to the number of shares beneficially owned as a result of certain
transactions which occurred during the period from July 1, 1996 to
September 30, 1996.
(9) Includes options to purchase 97,541 shares of Common Stock through
August 31, 1997 and 1,250 shares of Common Stock held by
his spouse. Beneficial owner has anti-dilution rights pursuant to
stock option agreements or other rights which will require adjustments
to the number of shares beneficially owned as a result of certain
transactions which occurred during the period from July 1, 1996 to
September 30, 1996.
(10) Includes options to purchase 88,708 shares of Common Stock which expire
August 2, 2000. Beneficial owner has anti-dilution rights pursuant to
stock option agreements or other rights which will require adjustments
to the number of shares beneficially owned as a result of certain
transactions which occurred during the period from July 1, 1996 to
September 30, 1996.
(11) Includes beneficial ownership of Common Stock described above with
respect to Messrs. Graf, Maxey, Richman, Abrams, Katzman,
Hollander, Henry, and beneficial ownership of Common Stock of Mr. Pace
and Ms. Martin.
(12) Includes Lenders' Warrants to purchase the Series A Preferred, which
is immediately convertible into 2,048,240 shares of Common Stock and
certain debt under the Credit Agreement which is convertible into
Series B Preferred, which is immediately convertible into 2,416,667
shares of Common Stock. ING may exercise a portion of its Lenders'
Warrants in order to sell shares of Common Stock in the Concurrent
Offering. Assuming ING sells 250,000 shares of Common Stock in the
Concurrent Offering and all of the indebtedness under the Credit
Agreement is repaid with a portion of the net proceeds of the
Offering, ING will beneficially own ___ shares of Common Stock, which
would represent ___% of the Common Stock outstanding after
consummation of the Concurrent Offering. See note (18) below.
(13) Includes Lenders' Warrants to purchase the Series A Preferred, which
is immediately convertible into 2,048,240 shares of Common Stock and
certain debt under the Credit Agreement which is convertible into
Series B Preferred, which is immediately convertible into 2,416,667
shares of Common Stock. Cerberus may exercise a portion of its
Lenders' Warrants in order to sell Shares of Common Stock in the
Concurrent Offering. Assuming Cerberus sells 250,000 shares of Common
Stock in the Concurrent Offering and all of the indebtedness under
the Credit Agreement is repaid with a portion of the net proceeds of
the Offering, Cerberus will beneficially own ___ shares of Common
Stock, which would represent __% of the Common Stock outstanding
after consummation of the Concurrent 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 after a final plan of
reorganization is confirmed by order of the Bankruptcy Court.
(15) Represents 14% Preferred which is convertible through June 30,
2000 into 148,200 shares of Common Stock.
(16) 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.
(17) See "Certain Transactions" for information with respect to the 14%
Preferred and the Nominal Value Warrants.
(18) Cerberus may sell fewer than 250,000 shares of Common Stock in the
Concurrent Offering. In such event, ING will sell additional shares
of Common Stock such that the aggregate number of shares of Common
Stock sold by the Selling Shareholders in the Concurrent Offering
equals 500,000.
CERTAIN TRANSACTIONS
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares
of Common Stock expiring March 13, 2001 were issued in conjunction with the
acquisitions of IPP and Paramount, redemption of the 10% Preferred, 8%
Preferred, and 7% Preferred, and conversion of certain debt of the Company
into the 14% Preferred. See "Description of Capital Stock--Preferred
Stock--14% Preferred" for a description of the terms of the 14% Preferred.
Concurrently with their exchange of debt and preferred stock for the 14%
Preferred, the following directors, executive officers and security holders of
5% or more of the Common Stock received the amount of 14% Preferred and
Nominal Value Warrants shown below. The Company may use a portion of the net
proceeds of the Offering and the Concurrent Offering to redeem all of the 14%
Preferred other than the shares of 14% Preferred beneficially owned by Peter
G. Graf.
VALUE OF
DEBT/PREFERRED
SURRENDERED
AND STATED NUMBER OF
VALUE OF 14% NOMINAL VALUE
NAME OF BENEFICIAL OWNER PREFERRED ISSUED WARRANTS ISSUED
- ------------------------ ---------------- ---------------
Peter G. Graf $1,500,000 539,989
Chairman, Chief Executive
Officer and Director
Joseph Abrams $ 350,000 125,997
Director
Aron Katzman $ 264,250 95,128
Director
Steven Richman $ 250,000 89,998
Director
Nickey B. Maxey $ 174,032 62,650
Chief Operating Officer
and Director
J&C Resources $ 825,000 296,994
5% Owner
Southcoast Capital Corporation $ 600,000 143,994
5% Owner
A predecessor of Southcoast Capital Corporation, which is a 5% or
more stockholder and one of the Underwriters, was paid fees consisting of
(i) $600,000 in cash, (ii) $600,000 of 14% Preferred and (iii) Nominal
Value Warrants to purchase 143,944 shares of Common Stock of the Company
for providing financial advisory services to the Company in connection with
the Credit Agreement. In addition, a predecessor of Southcoast Capital
Corporation received 56,666 shares of Common Stock and warrants to purchase
166,666 shares of the Company's Common Stock at an exercise price of $6.00
per share for services rendered in connection with the acquisition of World
and certain bridge financing.
ING, which is a 5% or more stockholder and one of the Lenders under the
Credit Agreement, received customary fees during 1995 and 1996 pursuant to the
terms of the Credit Agreement.
Southcoast Capital Corporation ("Southeast") will receive approximately
$810,000 in customary fees for providing financial advisory services to the
Company in connection with the Cherokee Acquisition. In addition, Southcoast
will receive customary fees for acting as underwriter in connection with the
Concurrent Offering. See "Underwriting."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $.01 par value per share, and 10,000,000 shares of
Preferred Stock, without par value, except as further designated by the
Board of Directors (the "Preferred Stock"). As of September 30, 1996, there
was outstanding (i) 7,639,709 shares of Common Stock, (ii) 116,316.05
shares of 14% Cumulative Redeemable Convertible Preferred Stock, $60 stated
value per share (the "14% Preferred"), (iii) Lenders' Warrants to purchase
204,824 shares of Series A Preferred, which are then immediately
convertible into 4,096,480 shares of Common Stock, (iv) 983,805 Nominal
Value Warrants, which are exercisable into the same number of shares of
Common Stock, (v) 830,351 additional warrants which are exercisable into
the same number of shares of Common Stock and (vi) 650,746 stock options
for Common Stock, all of which are immediately exercisable. In addition, at
September 30, 1996, $29,000,000 of indebtedness outstanding under the
Credit Agreement was convertible at the Lenders' option into approximately
241,667 shares of Series B Preferred, which are then immediately
convertible into 4,833,333 shares of Common Stock. Upon completion of the
Offering and the Concurrent Offering, there will be outstanding (i) ___
shares of Common Stock, (ii) ___ shares of 14% Preferred, (iii) Lenders'
Warrants to purchase ____ shares of Series A Preferred, (iv) 983,805
Nominal Value Warrants, (v) 830,351 additional warrants and (vi) 650,746
stock options for Common Stock. After the Offering and the Concurrent
Offering and the application of the net proceeds therefrom, there would be
no debt outstanding under the Credit Agreement or the New Credit Agreement
that was convertible into Series B Preferred or Common Stock.
The following summary is qualified in its entirety by the provisions
of the Company's Articles of Incorporation, as amended (the "Articles of
Incorporation"), a copy of which has been incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held
on all matters submitted to a vote of shareholders and they do not have any
cumulative voting rights except as permitted by Ohio law. Accordingly,
holders of a majority of the outstanding shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing
for election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefore, subject to preferential dividend rights
of any outstanding series of Preferred Stock. Upon the liquidation,
dissolution or winding-up of the Company, holders of Common Stock are
entitled to receive ratably the net assets of the Company available for
distribution after the payment of all debts and liabilities of the Company
and the liquidation preferences which may be granted to holders of the
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock
are, and the shares offered hereby will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of the 14% Preferred, the Series A Preferred,
the Series B Preferred and any other series of Preferred Stock that the
Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to issue from time to time up to
an aggregate of 10,000,000 shares of Preferred Stock, in one or more
series, without any further shareholder approval. Each such series of
Preferred Stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights
or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights.
The authority of the Board to create and issue at its discretion any
series of Preferred Stock without shareholder approval could adversely
affect the voting power and other rights of the holders of Common Stock.
The ability of the Board to issue Preferred Stock, while providing
flexibility in connection with financings, acquisitions and other corporate
purposes, could have the effect of discouraging an attempt by another
person or entity to acquire control of the Company through a merger, sale
of the Company's assets or similar transaction, since the issuance of
Preferred Stock could be used to dilute the share ownership of a person or
entity seeking to obtain control of the Company. Additionally, future
issuances of any series of Preferred Stock could result in additional
classes of shares with conversion features and preferences over the Common
Stock with respect to dividends and distributions in liquidation and could
also result in the dilution of net income and book value per share of the
Company.
The Board of Directors has designated the following outstanding
series of Preferred Stock pursuant to its authority under the Articles of
Incorporation:
Series A Preferred
The Company has 250,000 shares of Series A Preferred authorized, none
of which have been issued. Lenders' Warrants for the purchase of 204,824
shares of Series A Preferred at an exercise price of $0.20 per share were
issued by the Company in connection with the Credit Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Series A Preferred shares are pari passu with the Common Stock
with respect to the payment of dividends. If a dividend or other
distribution is declared by the Board of Directors to be paid to holders of
the Common Stock, then simultaneously with the payment of such dividend or
making of such distribution, and as a condition precedent to its right to
do so, the Board of Directors will pay or distribute to the holders of the
Series A Preferred the same dividends or distributions as such holders
would have been entitled to receive if such holders had converted their
shares of Series A Preferred into Common Stock prior to the record date
used by the Board of Directors for determining the holders of Common Stock
entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series A Preferred is
pari passu with the Series B Preferred and senior to the Common Stock and
any other series of Preferred Stock. Accordingly, upon the liquidation,
dissolution or winding up of the Company, holders of the Series A Preferred
will be entitled to receive, on a ratable and pari passu basis with the
holders of the Series B Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any payment to
holders of Common Stock or any other series of Preferred Stock, a
liquidation preference of $0.20 per share plus accrued and unpaid dividends
to the date of payment.
Holders of the Series A Preferred have the right, at any time, to
convert each share of Series A Preferred into 20 shares of fully paid and
nonassessable Common Stock, subject to certain antidilution adjustments and
regulatory restrictions applicable to bank holding companies.
Except as provided by law, the holders of Series A Preferred have no
voting rights.
Series B Preferred
The Company has 250,000 shares of Series B Preferred authorized, none
of which have been issued. Term Loans of $29,000,000 outstanding under the
Credit Agreement, which may be converted into Series B Preferred at the
ratio of approximately 833 shares of Series B Preferred for each $100,000
of outstanding debt and accrued interest, will be repaid with a portion of
the net proceeds from the Offering and the Concurrent Offering. See "Use of
Proceeds."
The Series B Preferred shares are pari passu with the Common Stock
with respect to the payment of dividends. If a dividend or other
distribution is declared by the Board of Directors to be paid to holders of
the Common Stock, then simultaneously with the payment of such dividend or
making of such distribution, and as a condition precedent to its right to
do so, the Board of Directors will pay or distribute to the holders of the
Series B Preferred the same dividends or distributions as such holders
would have been entitled to receive if such holders had converted their
shares of Series B Preferred into Common Stock prior to the record date
used by the Board of Directors for determining the holders of Common Stock
entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series B Preferred is
pari passu with the Series A Preferred and senior to the Common Stock and
any other series of Preferred Stock. Accordingly, upon the liquidation,
dissolution or winding up of the Company, holders of the Series B Preferred
will be entitled to receive, on a ratable and pari passu basis with the
holders of the Series A Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any payment to
holders of Common Stock or any other series of Preferred Stock, a
liquidation preference of $120 per share plus accrued and unpaid dividends
to the date of payment.
Holders of the Series B Preferred have the right, at any time, to
convert each share of Series B Preferred into 20 shares of fully paid and
nonassessable Common Stock, subject to certain antidilution adjustments and
regulatory restrictions applicable to bank holding companies.
Except as provided by law, the holders of Series B Preferred have no
voting rights.
14% Preferred
The Company has 200,000 shares of 14% Preferred authorized of which
116,316.05 shares were issued at September 30, 1996. Holders of the 14%
Preferred are entitled to receive dividends payable in additional shares of
14% Preferred at a quarterly rate of 0.035 shares per share of 14%
Preferred outstanding, on the first business day of each April, July,
October and January, commencing April 1, 1996. Dividends on the outstanding
shares of 14% Preferred accrue, whether or not declared. Unless full
cumulative dividends on all shares of 14% Preferred outstanding have been
paid, no redemption or fund for such redemption may be authorized, no
dividend (other than a dividend payable in Common Stock or any other class
of stock ranking junior to the 14% Preferred as to dividends and upon
liquidation) or other distribution may be declared or paid on any class of
the Company's stock ranking junior to the 14% Preferred as to dividends or
as to liquidation preferences. However, the holders of at least 50% of the
outstanding shares of 14% Preferred may vote to approve a redemption.
With respect to liquidation preferences, the 14% Preferred is junior
to the Series A Preferred and the Series B Preferred and is senior to the
Common Stock and any other series of Preferred Stock. Accordingly, upon the
liquidation, dissolution or winding up of the Company, holders of the 14%
Preferred will be entitled to receive out of the assets of the Company
legally available for distribution to its stockholders after making payment
to the holders of the Series A Preferred and the Series B Preferred and
before making any payment to holders of Common Stock or any other series of
Preferred Stock, a liquidation preference of $60.00 per share.
Holders of the 14% Preferred have the right, at any time, to convert
each share of 14% Preferred, including any accrued and unpaid dividend shares,
into 10 shares of fully paid and nonassessable Common Stock, subject to
certain antidilution adjustments.
The 14% Preferred is mandatorily redeemable by the Company on June
30, 2000, and is redeemable at any time prior thereto at the Company's
option, in each case, at a redemption price of $60 per share plus accrued
and unpaid dividends. Holders of the 14% Preferred have 20 days from
receipt of notice of a redemption by the Company to convert their 14%
Preferred shares into Common Stock. The Company may use a portion of the
net proceeds of the Offering and the Concurrent Offering to redeem shares
of 14% Preferred having a liquidation preference of approximately $5.5
million. See "Use of Proceeds."
Except as provided by law, the holders of the 14% Preferred have no
voting rights.
From time to time, the Board of Directors has designated other series
of Preferred Stock, none of which are currently outstanding.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of September 30, 1996, the Company has reserved 12,551,876 shares
of Common Stock for issuance under the following circumstances: (i)
exercise of warrants to purchase 204,824 shares of Series A Preferred at
$0.20 per share, immediately convertible into 4,096,480 shares of Common
Stock; (ii) conversion of 116,316.05 shares of 14% Preferred into 1,163,161
shares of Common Stock; (iii) exercise of 983,805 Nominal Value Warrants;
(iv) exercise of 830,351 warrants at prices ranging from $5.70 to $15.75
per share; (v) exercise of 650,746 stock options at prices ranging from
$2.63 to $19.50 per share; and (vi) conversion of $29,000,000 of
outstanding debt under the Credit Agreement and accrued interest into
241,667 shares of Series B Preferred that are immediately convertible into
4,833,333 shares of Common Stock.
REGISTRATION RIGHTS
Holders of the 14% Preferred, the Lenders' Warrants, the Nominal
Value Warrants and other warrants and options exercisable for shares of
Common Stock and certain existing holders of Common Stock who in the
aggregate own or have the right to acquire an aggregate of approximately
13,005,110 shares of Common Stock (the "Registrable Securities"), have
entered into registration rights agreements with the Company. These
registration rights agreements provide that when the Company proposes to
register the sale of shares of Common Stock under the Securities Act for
its own account or otherwise, holders of Registrable Securities are
entitled to include their shares in such registration, subject to the right
of any managing underwriter of any such offering to exclude some or all of
the Registrable Securities from such registration and to certain other
conditions. In addition to such incidental registration rights, certain
holders of Registrable Securities have the right to demand registration
under the Securities Act of their Registrable Securities. The Company has
agreed that in the event of any registration of Registrable Securities that
it will bear all registration expenses, other than those which certain
registration rights agreements had assigned to the shareholders, and will
indemnify the holder thereof against certain liabilities incurred in
connection with such registration, including liabilities arising under the
Securities Act.
The Company has obtained waivers of the foregoing registration rights
in connection with the Concurrent Offering from the holders of
approximately 92% of the Registrable Securities having such piggyback
registration rights as a result of the filing of the registration statement
relating to the Concurrent Offering. However, in order to satisfy its
obligations under the registration rights agreements, the Company intends
to file a shelf registration statement to register under the Securities Act
the sale of all of the Registrable Securities.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Stock Transfer Company.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE CREDIT AGREEMENT
The Credit Agreement consists of (i) the Revolving A Loans (as
defined therein) in the aggregate principal amount of $7,250,000, (ii) the
Revolving B Loans (as defined therein) in the aggregate principal amount of
$4,750,000 and (iii) the Term Loans (as defined therein) in the aggregate
principal amount of $29,000,000. The obligations under the Credit Agreement
are secured by a first priority lien on all of the Company's installed
telephones and other assets (other than the telephones acquired in the POA
acquisition).
The Credit Agreement requires monthly interest payments at the ING
Alternate Base Rate (as defined therein) plus 5% (13.25% at September 30,
1996). The Credit Agreement contains certain representations and
warranties, certain negative and affirmative financial covenants and
certain conditions and events of default which are customarily required for
similar financings. Such covenants include, among other things,
restrictions on the Company's ability to pay dividends, incur or permit to
exist debt, liens or lease obligations, make investments and capital
expenditures, dispose of assets and also include restrictions on the
activities of subsidiaries. Such financial covenants also require the
Company to maintain certain financial ratios including, among other things,
minimum net worth, working capital and EBITDA (as defined therein). The
Credit Agreement also contains a subjective acceleration clause which
states that in the event of a material adverse change in the business, as
determined by the Lenders, the Lenders can require prepayment of the debt
at their discretion. The Lenders have agreed to waive their right to
exercise this subjective acceleration clause through December 31, 1997.
Principal payments under the Credit Agreement commence April 1997,
and continue monthly and/or quarterly through June 1999 at which time the
remaining principal balance is due. The amount of the principal payment is
contingent upon numerous factors, including the borrowing base and cash
flow of the Company.
As of September 30, 1996, approximately $41 million of indebtedness
(excluding accrued interest) was outstanding under the Credit Agreement.
The Company expects that up to $43.5 million of indebtedness will be
outstanding under the Credit Agreement as of the date of this Prospectus.
Simultaneously with the closing of the Offering, the Company will retire
all of the outstanding indebtedness under the Credit Agreement and will
enter into the New Credit Agreement.
THE NEW CREDIT AGREEMENT
The Company is negotiating with several lenders to enter into the New
Credit Agreement. However, there can be no assurance that the Company will
be able to enter into the New Credit Agreement on the terms described
herein or at all.
The New Credit Agreement is expected to provide for borrowings of
$25.0 million to $50.0 million in the form of a senior secured credit facility.
Funds available under the New Credit Agreement are expected to be available
to retire indebtedness under the Credit Agreement, to finance certain
acquisitions, to fund the optional redemption of the Notes and for capital
expenditures and working capital needs.
The Company expects that the New Credit Agreement will contain
restrictions on the Company's ability to pay dividends, incur or permit to
exist debt, liens or lease obligations, make investments and capital
expenditures, dispose of assets and 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.
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued under an Indenture (the
"Indenture"), to be dated as of , 1996, by and among
the Company, the Subsidiary Guarantors, and ,
as trustee (the "Trustee"). The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act"), as in effect on the date of the Indenture. The
Notes are subject to all such terms, and holders of Notes are
referred to the Indenture and the Trust Indenture Act for a
statement of those terms.
The following is a summary of the material provisions
of the Notes and the Indenture. This summary does not purport to
be complete and is subject to the detailed provisions of, and is
qualified in its entirety by reference to, the Notes and the
Indenture. A copy of the proposed form of Indenture has been
filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of terms used in the
following summary, if not defined in such summary, are set forth
below under "-- Certain Definitions."
MATURITY AND INTEREST
The Notes will be general unsecured obligations of the
Company limited in aggregate principal amount to $ and
will mature on , 2006. Interest on the Notes will
accrue at the rate of % per annum and will be payable
semi-annually in arrears on and in each
year, commencing on , 1997, to holders of record on the
immediately preceding and , respectively.
Interest on the Notes will accrue from the most recent date on
which interest has been paid or, if no interest has been paid,
from the date of the original issuance of the Notes (the "Issue
Date"). Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the
Notes will be payable at the office or agency of the Company
maintained for such purpose in the City of New York or, at the
option of the Company, payment of interest may be made by check
mailed to the holders of the Notes at their respective addresses
as set forth in the register of holders of Notes. Until
otherwise designated by the Company, the Company's office or
agency in the City of New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in fully
registered form, without coupons, and in denominations of $1,000
and integral multiples thereof.
RANKING
The indebtedness of the Company evidenced by the Notes
will rank senior in right of payment to all indebtedness of the
Company expressly subordinated in right of payment to the Notes
and pari passu in right of payment with all other existing and
future indebtedness of the Company. At the Issue Date, there
will not be any outstanding indebtedness ranking junior in right
of payment to the Notes. The Notes will be effectively
subordinated to all secured indebtedness of the Company to the
extent of the collateral pledged to secure such indebtedness,
including the Credit Facility, which will be secured by all of
the assets of the Company. See "Risk Factors -- Restrictions
Imposed by Terms of the Company's Indebtedness; Impact of Asset
Encumbrances" and "Description of Certain Indebtedness."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will
be guaranteed, jointly and severally and fully and
unconditionally, on a senior basis (the "Subsidiary Guarantees")
by the Subsidiary Guarantors. The obligations of each Subsidiary
Guarantor under its Subsidiary Guarantee will be unconditional
and absolute, irrespective of any invalidity, illegality,
unenforceability of any Note or the Indenture or any extension,
compromise, waiver or release in respect of any obligation of the
Company or any other Subsidiary Guarantor under any Note or the
Indenture, or any modification or amendment of or supplement to
the Indenture.
Upon the sale or disposition (whether by merger, stock
purchase, asset sale or otherwise) of a Subsidiary Guarantor (or
substantially all of its assets) to an entity which is not a
Subsidiary of the Company, which sale or other disposition is
otherwise in compliance with the Indenture, such Subsidiary
Guarantor shall be deemed released from all its obligations under
its Subsidiary Guarantee; provided that any such termination
shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under
all of its pledges of assets or other security interests which
secure, other Indebtedness of the Company shall also terminate
upon such release, sale or transfer.
In addition, each Subsidiary Guarantor may consolidate
with or merge into or sell its assets to the Company or another
Subsidiary Guarantor without limitation. Subject to the
provisions of the immediately preceding paragraph, the Indenture
will further provide that a Subsidiary Guarantor may consolidate
with or merge into or sell its assets to a corporation other than
the Company or another Subsidiary Guarantor (whether or not
affiliated with such Subsidiary Guarantor), provided that (a) if
the surviving person is not the Subsidiary Guarantor, the
surviving person agrees to assume such Subsidiary Guarantor's
obligations under its Subsidiary Guarantee and all its
obligations under the Indenture and (b) such transaction does not
(i) violate any covenants set forth in the Indenture or (ii)
result in a Default or Event of Default under the Indenture
immediately thereafter that is continuing.
SPECIAL OFFER TO PURCHASE
If the Cherokee Acquisition is not consummated prior to
, 1997, the date that is 90 days from the Issue Date
(the "Special Offer Date"), the Company will be obligated to make
an offer to purchase (the "Special Offer") on the Special Offer
Date at a price (the "Special Offer Price") equal to 101% of the
principal amount of the Notes, plus accrued and unpaid interest
to the Special Offer Date, an aggregate principal amount of Notes
equal to $35 million.
Pursuant to the Indenture, if the Cherokee Acquisition
shall not have been consummated on or prior to the Issue Date, on
the Issue Date the Company will deposit with the Trustee $35
million of the net proceeds from the sale of the Notes plus an
additional amount of cash in an amount sufficient to consummate
the Special Offer on the Special Offer Date at the Special Offer
Price. All amounts so deposited with the Trustee (collectively,
the "Trust Funds") will be pledged to and held by the Trustee
pursuant to the Indenture as security for the Notes. The
Indenture will provide that if, prior to the Special Offer Date,
the Company delivers to the Trustee the documentation required
under the Indenture, then the Trustee will release the Trust
Funds to the Company for application to the concurrent
consummation of the Cherokee Acquisition. Upon release of the
Trust Funds, all of the Notes remaining outstanding immediately
thereafter will be unsecured obligations of the Company.
Pending release of the Trust Funds as provided in the
Indenture, the Trust Funds will be invested in cash and Cash
Equivalents and any investment income therefrom remaining will be
available to the Company following release of the Trust Funds.
If an offer to purchase Notes is made on the Special Offer Date,
tendered Notes will be purchased with the Trust Funds and any
portion of the Trust Funds remaining after the consummation of
the offer to purchase will be returned to the Company.
On the Special Offer Date, the Company shall mail to
each holder of Notes at such holder's registered address a notice
stating: (i) that the Cherokee Acquisition has not occurred and
that the Company is offering to purchase up to $35 million
aggregate principal amount of Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase (the "Special
Offer Purchase Date"), which shall be a business day, specified
in such notice, that is not earlier than 30 days or later than 60
days from the date such notice is mailed, (ii) the amount of
accrued and unpaid interest as of the Special Offer Purchase
Date, (iii) that any Note not tendered will continue to accrue
interest, (iv) that, unless the Company defaults in the payment
of the purchase price for the Notes payable pursuant to the
Special Offer, any Notes accepted for payment pursuant to the
Special Offer shall cease to accrue interest on and after the
Special Offer Purchase Date, (v) the procedures, consistent with
the Indenture, to be followed by a holder of Notes in order to
accept a Special Offer or to withdraw such acceptance, and (vi)
such other information as may be required by the Indenture and
applicable laws and regulations.
On the Special Offer Purchase Date, the Company will
(i) accept for payment $35 million aggregate principal amount of
Notes or such lesser amount as is tendered pursuant to the
Special Offer, (ii) deposit with the paying agent the aggregate
purchase price for all such Notes accepted for payment and any
accrued and unpaid interest on such Notes as of the Special Offer
Purchase Date, and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Special Offer. If
less than all Notes tendered pursuant to the Special Offer are
accepted for payment by the Company for any reason consistent
with the Indenture, selection of the Notes to be purchased by the
Company shall be in compliance with the requirements of the
principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro
rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate; provided that Notes accepted for payment in
part shall only be purchased in integral multiples of $1,000.
The paying agent shall promptly mail to each holder of Notes or
portions thereof accepted for payment an amount equal to the
purchase price for such Notes plus any accrued and unpaid
interest thereon, and the Trustee shall promptly authenticate and
mail to such holder of Notes accepted for payment in part a new
Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part
for any reason consistent with the Indenture shall be promptly
returned to the holder of such Note. On and after a Special
Offer Purchase Date, interest will cease to accrue on the Notes
or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The
Company will announce the results of the Special Offer to holders
of the Notes on or as soon as practicable after the Special Offer
Purchase Date.
The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the
Exchange Act, and all other applicable securities laws and
regulations in connection with any Special Offer.
REDEMPTION
Optional Redemption. Except as described below, the
Notes are not redeemable at the Company's option prior to
, 2001. Thereafter, the Notes will be subject to
redemption at the option of the Company, in whole or in part, at
the redemption prices (expressed as percentages of the principal
amount of the Notes) set forth below, plus accrued and unpaid
interest to the date of redemption, if redeemed during the
twelve-month period beginning on of the years
indicated below.
YEAR PERCENTAGE
2001 . . . . . . . . . . . . . %
2002 . . . . . . . . . . . . . %
2003 . . . . . . . . . . . . . %
2004 and thereafter . . . . . . 100.0%
Notwithstanding the foregoing, at any time prior to
, 1999, the Company, at its option, may redeem up to
[ ]% of the aggregate principal amount of the Notes originally
issued, with the net proceeds of one or more Equity Offerings,
other than the Concurrent Offering (including the exercise by the
underwriters of the Concurrent Offering of any over-allotment
option granted by the Company to such underwriters in connection
therewith) at a redemption price equal to % of the principal
amount thereof, together with accrued and unpaid interest to the
date of redemption; provided, however, that at least $75 million
in aggregate principal amount of the Notes remains outstanding
immediately after any such redemption.
Selection and Notice. If less than all of the Notes
are to be redeemed at any time, selection of the Notes to be
redeemed will be made by the Company in compliance with the
requirements of the principal national securities exchange, if
any, on which the Notes are listed or, if the Notes are not
listed on a securities exchange, on a pro rata basis, by lot or
by any other method as the Trustee shall deem fair and
appropriate; provided that a redemption pursuant to the
provisions relating to Equity Offerings will be on a pro rata
basis. Notes redeemed in part shall only be redeemed in integral
multiples of $1,000. Notices of any redemption shall be mailed
by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of Notes to be redeemed at
such holder's registered address. If any Note is to be redeemed
in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be
redeemed, and the Trustee shall authenticate and mail to the
holder of the original Note a new Note in principal amount equal
to the unredeemed portion of the original Note promptly after the
original Note has been cancelled. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof
called for redemption.
CHANGE OF CONTROL
In the event of a Change of Control (as defined
herein), the Company will make an offer to purchase all of the
then outstanding Notes at a purchase price in cash equal to 101%
of the aggregate principal amount thereof, plus accrued and
unpaid interest to the date of purchase, in accordance with the
terms set forth below (a "Change of Control Offer").
Within 30 days following the occurrence of any Change
of Control, the Company shall mail to each holder of Notes at
such holder's registered address a notice stating: (i) that a
Change of Control has occurred and that such holder has the right
to require the Company to purchase all or a portion (equal to
$1,000 or an integral multiple thereof) of such holder's Notes at
a purchase price in cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest to the date of
purchase (the "Change of Control Purchase Date"), which shall be
a business day, specified in such notice, that is not earlier
than 30 days or later than 60 days from the date such notice is
mailed, (ii) the amount of accrued and unpaid interest as of the
Change of Control Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company
defaults in the payment of the purchase price for the Notes
payable pursuant to the Change of Control Offer, any Notes
accepted for payment pursuant to the Change of Control Offer
shall cease to accrue interest on and after the Change of Control
Purchase Date, (v) the procedures, consistent with the Indenture,
to be followed by a holder of Notes in order to accept a Change
of Control Offer or to withdraw such acceptance, and (vi) such
other information as may be required by the Indenture and
applicable laws and regulations.
On the Change of Control Purchase Date, the Company
will (i) accept for payment all Notes or portions thereof
tendered pursuant to the Change of Control Offer, (ii) deposit
with the paying agent the aggregate purchase price of all Notes
or portions thereof accepted for payment and any accrued and
unpaid interest on such Notes as of the Change of Control
Purchase Date, and (iii) deliver or cause to be delivered to the
Trustee all Notes tendered pursuant to the Change of Control
Offer. The paying agent shall promptly mail to each holder of
Notes or portions thereof accepted for payment an amount equal to
the purchase price for such Notes plus any accrued and unpaid
interest thereon, and the Trustee shall promptly authenticate and
mail to such holder of Notes accepted for payment in part a new
Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part
for any reason consistent with the Indenture shall be promptly
returned to the holder of such Note. On and after a Change of
Control Purchase Date, interest will cease to accrue on the Notes
or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The
Company will announce the results of the Change of Control Offer
to holders of the Notes on or as soon as practicable after the
Change of Control Purchase Date.
The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the
Exchange Act, and all other applicable securities laws and
regulations in connection with any Change of Control Offer.
COVENANTS
Limitation on Incurrence of Indebtedness. The
Indenture will provide that the Company will not, and will not
permit any of its Subsidiaries to, issue, create, incur, assume
or directly or indirectly guarantee or in any other manner become
directly or indirectly liable for ("incur") any Indebtedness
(including Acquired Debt), except for Permitted Indebtedness;
provided that the Company may incur additional Indebtedness if,
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) 2.25
to 1.0 if the Indebtedness is incurred prior to __________, 1998
or (y) 2.5 to 1.0 if the Indebtedness is incurred on or after
_____________, 1998.
The foregoing limitations will not apply to the
incurrence of any of the following (collectively, "Permitted
Indebtedness"):
(i) Indebtedness of the Company incurred under
the Credit Facility in an aggregate principal amount at
any time outstanding not to exceed the sum of (1) %
of the net amount of accounts receivable (as determined
under GAAP) of the Company and the Subsidiaries plus
(2) an amount equal to $ 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 (A) the
aggregate amount of all principal payments made in
respect of any term loans thereunder and (B) 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 "-- Limitation on Asset
Sales"; and provided, further, that in no event shall
the aggregate principal amount of Indebtedness
outstanding at any one time under the Credit Facility
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;
(iii) Indebtedness owed by any Subsidiary to the
Company or to a Subsidiary Guarantor, or owed by the
Company to any Subsidiary Guarantor; provided that any
such Indebtedness shall be held by a Person which is
either the Company or a Subsidiary Guarantor and
provided, further, that (A) any such Indebtedness of a
Subsidiary shall not be subordinated to any other
Indebtedness of such Subsidiary and (B) any such
Indebtedness owed to a Subsidiary Guarantor shall be
unsecured and shall be subordinated to the payment when
due of the Notes and, provided, further, that an
incurrence of additional Indebtedness which is not
permitted under this clause (iii) shall be deemed to
have occurred upon either (a) the transfer or other
disposition of any such Indebtedness to a Person other
than the Company or a Subsidiary or (b) the sale,
lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of
any such Subsidiary to a Person other than the Company
or a Subsidiary Guarantor such that such Subsidiary
ceases to be a Subsidiary Guarantor;
(iv) Indebtedness of any Subsidiary Guarantor
consisting of guarantees of any Indebtedness of the
Company which Indebtedness of the Company has been
incurred in accordance with the provisions of the
Indenture;
(v) Indebtedness arising with respect to
Interest Rate Agreement Obligations incurred for the
purpose of fixing or hedging interest rate risk with
respect to any floating rate Indebtedness that is
permitted by the terms of the Indenture to be
outstanding; provided, however, that the notional
principal amount of such Interest Rate Agreement
Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Rate Agreement
Obligation relates; and
(vi) Indebtedness of the Company or a Subsidiary
incurred in connection with or given in exchange for
the renewal, extension, substitution, refunding,
defeasance, refinancing or replacement of any
Indebtedness permitted to be incurred or outstanding
under the Consolidated Fixed Charge Coverage Ratio of
the first paragraph of this covenant or pursuant to
clause (ii) above ("Refinancing Indebtedness");
provided that (a) the principal amount of such
Refinancing Indebtedness shall not exceed the principal
amount of the Indebtedness so renewed, extended,
substituted, refunded, defeased, refinanced or replaced
(plus the premiums or other payments paid in connection
therewith (which shall not exceed the stated amount of
any premium or other payments required to be paid in
connection with such a refinancing pursuant to the
terms of the Indebtedness being renewed, extended,
substituted, refunded, defeased, refinanced or
replaced) and the expenses incurred in connection
therewith); (b) the Refinancing Indebtedness shall have
a Weighted Average Life to Maturity equal to or greater
than the Weighted Average Life to Maturity of the
Indebtedness being renewed, extended, substituted,
refunded, defeased, refinanced or replaced; and (c)
such Refinancing Indebtedness shall not rank senior to,
and shall be at least as subordinated, in right of
payment to the Notes or the Subsidiary Guarantees, as
the case may be, as the Indebtedness being renewed,
extended, substituted, refunded, defeased, refinanced
or replaced.
Limitation on Restricted Payments. The Indenture will
provide that the Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, make any Restricted
Payment, unless at the time of and immediately after giving
effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be determined by
the Board of Directors of the Company in good faith and which
determination shall be conclusive and evidenced by a board
resolution), (i) no Default or Event of Default (and no event
that, after notice or lapse of time, or both, would become an
"event of default" under the terms of any other Indebtedness of
the Company or its Subsidiaries) shall have occurred and be
continuing or would occur as a consequence thereof, (ii) the
Company could incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Fixed Charge Coverage Ratio
contained in the first paragraph under "-- Limitation on
Incurrence of Indebtedness" and (iii) the aggregate amount of all
Restricted Payments made after the Issue Date shall not exceed
the sum of (a) 50% of cumulative Consolidated Net Income of the
Company (or, in the case such cumulative Consolidated Net Income
shall be negative, less 100% of such deficit) since the end of
the fiscal quarter in which the Issue Date occurs through the
last day of the most recent fiscal quarter, plus (b) the
aggregate amount of all net cash proceeds received after the
Issue Date by the Company (but excluding the net cash proceeds
received by the Company from the Concurrent Offering and the
exercise of the over-allotment option related thereto) from the
issuance and sale (other than to a Subsidiary of the Company) of
Capital Stock of the Company (other than Disqualified Stock) and
the principal amount of Indebtedness of the Company or any
Subsidiary Guarantor that had been converted into or exchanged
for Capital Stock of the Company and, in either case, to the
extent that such proceeds are not used to redeem, repurchase,
retire or otherwise acquire Capital Stock or any Indebtedness of
the Company or any Subsidiary of the Company pursuant to clause
(ii) of the next paragraph, plus (c) in the case of the
disposition or repayment of any Investment for cash, which
Investment constituted a Restricted Payment made after the Issue
Date, an amount equal to the lesser of the return of capital with
respect to such Investment and the cost of such Investment, in
either case, reduced (but not below zero) by the excess, if any,
of the cost of the disposition of such Investment over the gain,
if any, realized by the Company or such Subsidiary in respect of
such disposition.
The foregoing provisions will not prohibit, so long as
there is no Default or Event of Default continuing, the following
actions (collectively, "Permitted Payments"):
(i) the payment of any dividend within 60 days after
the date of declaration thereof, if at such declaration date
such payment would have been permitted under the Indenture,
and such payment shall be deemed to have been paid on such
date of declaration for purposes of clause (iii) of the
preceding paragraph;
(ii) the redemption, repurchase, retirement,
defeasance or other acquisition of any Capital Stock or any
Indebtedness of the Company in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than
to a Subsidiary of the Company) of Capital Stock of the
Company (other than any Disqualified Stock);
(iii) the repurchase, redemption or other repayment of
any Subordinated Debt of the Company or a Subsidiary
Guarantor in exchange for, by conversion into or solely out
of the proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of Subordinated Debt of
the Company or such Subsidiary Guarantor with a Weighted
Average Life to Maturity equal to or greater than the then
remaining Weighted Average Life to Maturity of the
Subordinated Debt repurchased, redeemed or repaid;
(iv) the redemption, repurchase, retirement,
defeasance or other acquisition of Capital Stock of the
Company or any options or stock appreciation rights related
to Capital Stock of the Company held by officers or
employees (or their estates or beneficiaries of estates)
upon death, disability, retirement or termination of
employment; provided that the amount of Permitted Payments
made under this clause (iv) shall not exceed $1 million per
annum; and
(v) Restricted Investments received as consideration
in connection with an Asset Sale made in compliance with the
Indenture.
In computing the amount of Restricted Payments for
purposes of clause (iii) of the first paragraph of this covenant,
Restricted Payments made under clauses (iv) and (v) of the
preceding paragraph shall be included and Restricted Payments
made under clauses (i), (ii) and (iii) of the preceding paragraph
shall not be included.
Limitation on Asset Sales. The Indenture will provide
that the Company will not, and will not permit any of its
Subsidiaries to, make any Asset Sale unless (i) the Company or
such Subsidiary, as the case may be, receives consideration at
the time of such Asset Sale at least equal to the fair market
value (determined by the Board of Directors of the Company in
good faith, which determination shall be evidenced by a board
resolution) of the assets or other property sold or disposed of
in the Asset Sale, and (ii) at least 75% of such consideration is
in the form of cash or Cash Equivalents; provided that for
purposes of this covenant "cash" shall include the amount of any
liabilities (other than liabilities that are by their terms
subordinated to the Notes or any Subsidiary Guarantee) of the
Company or such Subsidiary (as shown on the Company's or such
Subsidiary's most recent balance sheet or in the notes thereto)
that are assumed by the transferee of any such assets or other
property in such Asset Sale (and excluding any liabilities that
are incurred in connection with or in anticipation of such Asset
Sale), but only to the extent that such assumption is effected on
a basis under which there is no further recourse to the Company
or any of its Subsidiaries with respect to such liabilities.
Within 270 days after any Asset Sale, the Company may
elect to apply or cause to be applied the Net Proceeds from such
Asset Sale to (a) repay amounts outstanding under the Credit
Facility, and permanently reduce the commitments or amounts
available to be borrowed thereunder by the same amount, (b) repay
amounts outstanding under Other Senior Debt that is secured by
the asset being sold, to the extent repayment is required by the
terms of the agreement governing the same, (c) use no more than
the Other Senior Debt Pro Rata Share of such Net Cash Proceeds to
repay amounts outstanding under Other Senior Debt and/or (d) make
an investment in, or acquire assets directly related to, the
business of the Company and its Subsidiaries existing on the
Issue Date. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce amounts outstanding
under the Credit Facility or temporarily invest such Net Proceeds
in any manner permitted by the Indenture. Any Net Proceeds from
an Asset Sale not applied or invested as provided in the first
sentence of this paragraph within 270 days of such Asset Sale
will be deemed to constitute "Excess Proceeds" on the 271st day
after such Asset Sale.
As soon as practical, but in no event later than 10
business days after any date (an "Asset Sale Offer Trigger Date")
that the aggregate amount of Excess Proceeds exceeds $5,000,000,
the Company shall commence an offer to purchase the maximum
principal amount of Notes that may be purchased out of all such
Excess Proceeds (an "Asset Sale Offer") at a price in cash equal
to 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. The offer to purchase shall
remain open for a minimum of 20 business days or such longer
period as is required by law. To the extent that any Excess
Proceeds remain after completion of an Asset Sale Offer, the
Company may use the remaining amount for general corporate
purposes and such amount shall no longer constitute "Excess
Proceeds".
Within 10 business days following any Asset Sale Offer
Trigger Date, the Company shall mail to each holder of Notes at
such holder's registered address a notice stating: (i) that an
Asset Sale Offer Trigger Date has occurred and that the Company
is offering to purchase the maximum principal amount of Notes
that may be purchased out of the Excess Proceeds, at an offer
price in cash equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase (the "Asset
Sale Offer Purchase Date"), which shall be a business day,
specified in such notice, that is not earlier than 30 days or
later than 60 days from the date such notice is mailed, (ii) the
amount of accrued and unpaid interest as of the Asset Sale Offer
Purchase Date, (iii) that any Note not tendered will continue to
accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to
the Asset Sale Offer, any Notes accepted for payment pursuant to
the Asset Sale Offer shall cease to accrue interest after the
Asset Sale Offer Purchase Date, (v) the procedures, consistent
with the Indenture, to be followed by a holder of Notes in order
to accept an Asset Sale Offer or to withdraw such acceptance, and
(vi) such other information as may be required by the Indenture
and applicable laws and regulations.
On the Asset Sale Offer Purchase Date, the Company will
(i) accept for payment the maximum principal amount of Notes or
portions thereof tendered pursuant to the Asset Sale Offer that
can be purchased out of Excess Proceeds from such Asset Sale,
(ii) deposit with the Paying Agent the aggregate purchase price
of all Notes or portions thereof accepted for payment and any
accrued and unpaid interest on such Notes as of the Asset Sale
Offer Purchase Date, and (iii) deliver or cause to be delivered
to the Trustee all Notes tendered pursuant to the Asset Sale
Offer. If less than all Notes tendered pursuant to the Asset
Sale Offer are accepted for payment by the Company for any reason
consistent with the Indenture, selection of the Notes to be
purchased by the Company shall be in compliance with the
requirements of the principal national securities exchange, if
any, on which the Notes are listed or, if the Notes are not so
listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that Notes
accepted for payment in part shall only be purchased in integral
multiples of $1,000. The paying agent shall promptly mail to
each holder of Notes or portions thereof accepted for payment an
amount equal to the purchase price for such Notes plus any
accrued and unpaid interest thereon, and the Trustee shall
promptly authenticate and mail to such holder of Notes accepted
for payment in part a new Note equal in principal amount to any
unpurchased portion of the Notes, and any Note not accepted for
payment in whole or in part shall be promptly returned to the
holder of such Note. On and after an Asset Sale Offer Purchase
Date, interest will cease to accrue on the Notes or portions
thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will
announce the results of the Asset Sale Offer to holders of the
Notes on or as soon as practicable after the Asset Sale Offer
Purchase Date.
The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the
Exchange Act, and all other applicable securities laws and
regulations in connection with any Asset Sale Offer.
Limitation on Liens. The Indenture will provide that
the Company will not, and will not permit any Subsidiary to,
directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom to secure any
Indebtedness unless simultaneously therewith (a) if the Lien is
created by the Company, the Notes and (b) if the Lien is created
by a Subsidiary, the Subsidiary Guarantees are, in each case,
secured equally and ratably, in the case of Liens securing
Indebtedness that is not Subordinated Debt, and on a senior
priority basis, in the case of Liens securing Subordinated Debt.
Limitation on Dividends and Other Payment Restrictions
Affecting Subsidiaries. The Indenture will provide that the
Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the
ability of any Subsidiary of the Company to (i) pay dividends or
make any other distributions to the Company or any other
Subsidiary of the Company on its Capital Stock or with respect to
any other interest or participation in, or measured by, its
profits, or pay any Indebtedness owed to the Company or any other
Subsidiary of the Company, (ii) make loans or advances to the
Company or any other Subsidiary of the Company, or (iii) transfer
any of its properties or assets to the Company or any other
Subsidiary of the Company (collectively, "Payment Restrictions"),
except for such encumbrances or restrictions existing under or by
reason of (a) the Credit Facility as in effect on the Issue Date,
and any amendments, restatements, renewals, replacements or
refinancings thereof; provided that such amendments,
restatements, renewals, replacements or refinancings are no more
restrictive in the aggregate with respect to such dividend and
other payment restrictions than those contained in the Credit
Facility immediately prior to any such amendment, restatement,
renewal, replacement or refinancing, (b) applicable law, (c) any
instrument governing Indebtedness or Capital Stock of an Acquired
Person acquired by the Company or any of its Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with such acquisition);
provided that such restriction is not applicable to any Person,
or the properties or assets of any Person, other than the
Acquired Person, (d) customary non-assignment provisions in
leases entered into in the ordinary course of business and
consistent with past practices, (e) purchase money Indebtedness
for property acquired in the ordinary course of business that
only impose restrictions on the property so acquired, (f) an
agreement for the sale or disposition of the Capital Stock or
assets of such Subsidiary; provided that such restriction is only
applicable to such Subsidiary or assets, as applicable, and such
sale or disposition otherwise is permitted under the covenant
described under "-- Covenants -- Limitation on Asset Sales"; and
provided, further, that such restriction or encumbrance shall be
effective only for a period from the execution and delivery of
such agreement through a termination date not later than 270 days
after such execution and delivery, and (g) Refinancing
Indebtedness permitted under the Indenture; provided that the
restrictions contained in the agreements governing such
Refinancing Indebtedness are not more restrictive in the
aggregate than those contained in the agreements governing the
Indebtedness being refinanced immediately prior to such
refinancing.
Limitation on Transactions with Interested Persons.
The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets,
property or services) with any Affiliate of the Company or any
beneficial owner of five percent or more of any class of Capital
Stock of the Company or any Subsidiary or any officer or director
of the foregoing (each, an "Interested Person") unless (i) such
transaction or series of transactions is on terms that are no
less favorable to the Company or such Subsidiary, as the case may
be, than would be available in a comparable transaction in
arm's-length dealings with an unrelated third party, and (ii) (a)
with respect to any transaction or series of transactions
involving aggregate payments in excess of $100,000, the Company
delivers an officers certificate to the Trustee certifying that
such transaction or series of related transactions complies with
clause (i) above and such transaction or series of related
transactions has been approved by a majority of the members of
the Board of Directors of the Company (and approved by a majority
of the Independent Directors or, in the event there is only one
Independent Director, by such Independent Director), and (b) with
respect to any transaction or series of transactions involving
aggregate payments in excess of $2,000,000, the Company delivers
to the Trustee an opinion to the effect that such transaction or
series of transactions is fair to the Company or such Subsidiary
from a financial point of view issued by an investment banking
firm of national standing. Notwithstanding the foregoing, this
provision will not apply to (i) employment agreements or
compensation or employee benefit arrangements with any officer,
director or employee of the Company entered into in the ordinary
course of business (including customary benefits thereunder),
(ii) any transaction entered into by or among the Company or any
Subsidiary Guarantor and one or more Subsidiary Guarantors, and
(iii) transactions pursuant to agreements existing on the Issue
Date, including, without limitation, the Credit Facility.
Limitation on Issuance and Sale of Capital 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 Capital Stock of such Subsidiary or any
other Subsidiary (other than to the Company or a Subsidiary
Guarantor) except that the Company and any Subsidiary may, in any
single transaction, sell all, but not less than all, of the
issued and outstanding Capital Stock of any subsidiary to any
Person, subject to complying with the provisions of the Indenture
applicable to such sale and (b) will not permit any Subsidiary of
the Company to issue shares of its Capital Stock, or securities
convertible into, or warrants, rights or options to subscribe for
or purchase shares of, its Capital Stock to any Person other than
to the Company or a Subsidiary Guarantor.
Future Subsidiary Guarantors. The Indenture will
provide that the Company shall cause each Subsidiary of the
Company formed or acquired after the Issue Date to issue a
Subsidiary Guarantee and execute and deliver an indenture
supplemental to the Indenture as a Subsidiary Guarantor.
Provision of Financial Statements. The Indenture will
provide that, whether or not the Company is then subject to
Section 13(a) or 15(d) of the Exchange Act, the Company will file
with the Commission, so long as the Notes are outstanding, the
annual reports, quarterly reports and other periodic reports
which the Company would have been required to file with the
Commission pursuant to such Section 13(a) or 15(d) if the Company
were so subject, and such documents shall be filed with the
Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject. The
Company will also in any event (i) within 15 days of each
Required Filing Date, (a) transmit by mail to all holders of
Notes, as their names and addresses appear in the Note register,
without cost to such holders and (b) file with the Trustee copies
of the annual reports, quarterly reports and other periodic
reports which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) of the Exchange
Act if the Company were subject to such Sections and (ii) if
filing such documents by the Company with the Commission is
prohibited under the Exchange Act, promptly upon written request
and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective holder at the
Company's cost.
Limitation on Lines of Business. The Indenture will
provide that the Company will not, and will not permit any
Subsidiary to, engage in or conduct any business other than the
ownership and operation of pay telephones and the provision of
any services ancillary thereto.
Additional Covenants. The Indenture also contains
covenants with respect to the following matters: (i) payment of
principal, premium and interest; (ii) maintenance of an office or
agency in the City of New York; (iii) maintenance of corporate
existence; (iv) payment of taxes and other claims;
(v) maintenance of properties; and (vi) maintenance of insurance.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture will provide that the Company shall not
consolidate or merge with or into (whether or not the Company is
the Surviving Person), or, directly or indirectly through one or
more Subsidiaries, sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another Person
or Persons unless (i) the Surviving Person is a corporation
organized or existing under the laws of the United States, any
state thereof or the District of Columbia; (ii) the Surviving
Person (if other than the Company) assumes all the obligations of
the Company under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) at the time of and immediately after such
Disposition, no Default or Event of Default shall have occurred
and be continuing; and (iv) the Surviving Person will [(A) have
Consolidated Net Worth (immediately after giving effect to the
Disposition on a pro forma basis) equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the
transaction], and (B) at the time of such Disposition and after
giving pro forma effect thereto, the Surviving Person would be
permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Consolidated Fixed Charge Coverage Ratio
contained in the first paragraph of the covenant described under
"-- Covenants -- Limitation on Incurrence of Indebtedness."
In the event of any transaction (other than a lease)
described in and complying with the conditions listed in the
immediately preceding paragraph in which the Company is not the
Surviving Person and the Surviving Person is to assume all the
obligations of the Company under the Notes and the Indenture
pursuant to a supplemental indenture, such Surviving Person shall
succeed to, and be substituted for, and may exercise every right
and power of, the Company, and the Company would be discharged
from its obligations under the Indenture and the Notes; provided
that solely for the purpose of calculating amounts described in
clause (iii) under "-- Covenants -- Limitation on Restricted
Payments," any such Surviving Person shall only be deemed to have
succeeded to and be substituted for the Company with respect to
the period subsequent to the effective time of such transaction
(and the Company (before giving effect to such transaction) shall
be deemed to be the "Company" for such purposes for all prior
periods).
EVENTS OF DEFAULT
The Indenture will provide that each of the following
constitutes an Event of Default:
(i) a default for 30 days in the payment when due of
interest on any Note (whether or not prohibited by the
subordination provisions of the Indenture);
(ii) a default in the payment when due of principal
on any Note, whether upon maturity, acceleration, optional
or mandatory redemption, required repurchase or otherwise;
(iii) failure to perform or comply with any covenant,
agreement or warranty in the Indenture (other than the
defaults specified in clauses (i) and (ii) above) which
failure continues for 30 days after written notice thereof
has been given to the Company by the Trustee or to the
Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the then outstanding Notes;
(iv) except as permitted by the Indenture, any
Subsidiary Guarantee shall for any reason cease to be, or it
shall be asserted by any Subsidiary Guarantor or the Company
not to be, in full force and effect and enforceable in
accordance with its terms;
(v) the occurrence of one or more defaults under any
agreements, indentures or instruments under which the
Company or any Subsidiary of the Company then has
outstanding Indebtedness in excess of $5 million in the
aggregate and, if not already matured at its final maturity
in accordance with its terms, such Indebtedness shall have
been accelerated;
(vi) one or more judgments, orders or decrees for the
payment of money in excess of $5 million either individually
or in the aggregate shall be entered against the Company or
any Subsidiary of the Company or any of their respective
properties and which judgments, orders or decrees are not
paid, discharged, bonded or stayed for a period of 60 days
after their entry;
(vii) any holder or holders of at least $5 million in
aggregate principal amount of Indebtedness of the Company or
any Subsidiary of the Company after a default under such
Indebtedness (a) shall notify the Company or the Trustee of
the intended sale or disposition of any assets of the
Company or any Subsidiary of the Company with an aggregate
fair market value (as determined in good faith by the
Company's Board of Directors, which determination shall be
evidenced by a board resolution), individually or in the
aggregate, of at least $5 million that have been pledged to
or for the benefit of such holder or holders to secure such
Indebtedness or (b) shall commence proceedings, or take any
action (including by way of set- off), to retain in
satisfaction of such Indebtedness, or to collect on, seize,
dispose of or apply in satisfaction of such Indebtedness,
such assets of the Company or any Subsidiary of the Company
(including funds on deposit or held pursuant to lock-box and
other similar arrangements);
(viii) there shall have been the entry by a court of
competent jurisdiction of (a) a decree or order for relief
in respect of the Company or any Subsidiary of the Company
in an involuntary case or proceeding under any applicable
Bankruptcy Law or (b) a decree or order adjudging the
Company or any Subsidiary of the Company bankrupt or
insolvent, or seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or
any Subsidiary of the Company under any applicable federal
or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Subsidiary of the
Company or of any substantial part of their respective
properties, or ordering the winding up or liquidation of
their affairs, and any such decree or order for relief shall
continue to be in effect, or any such other decree or order
shall be unstayed and in effect, for a period of 60 days; or
(ix) (a) the Company or any Subsidiary of the Company
commences a voluntary case or proceeding under any
applicable Bankruptcy Law or any other case or proceeding to
be adjudicated bankrupt or insolvent, (b) the Company or any
Subsidiary of the Company consents to the entry of a decree
or order for relief in respect of the Company or such
Subsidiary of the Company in an involuntary case or
proceeding under any applicable Bankruptcy Law or to the
commencement of any bankruptcy or insolvency case or
proceeding against it, (c) the Company or any Subsidiary of
the Company files a petition or answer or consent seeking
reorganization or relief under any applicable federal or
state law, (d) the Company or any Subsidiary of the Company
(x) consents to the filing of such petition or the
appointment of or taking possession by, a custodian,
receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or such Subsidiary of
the Company or of any substantial part of their respective
property, (y) makes an assignment for the benefit of
creditors or (z) admits in writing its inability to pay its
debts generally as they become due or (e) the Company or any
Subsidiary of the Company takes any corporate action in
furtherance of any such actions in this paragraph (ix).
If any Event of Default (other than as specified in
clause (viii) or (ix) of the preceding paragraph with respect to
the Company or any Subsidiary) occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal
amount of the then outstanding Notes may, and the Trustee at the
request of such holders shall, declare all the Notes to be due
and payable immediately. In the case of an Event of Default
arising from the events specified in clause (viii) or (ix) of the
preceding paragraph with respect to the Company or any
Subsidiary, the principal of, premium, if any, and any accrued
and unpaid interest on all outstanding Notes shall ipso facto
become immediately due and payable without further action or
notice.
Holders of the Notes may not enforce the Indenture or
the Notes except as provided in the Indenture. The holders of a
majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders
of all the Notes waive any existing Default or Event of Default
and its consequences under the Indenture except (i) a continuing
Default or Event of Default in the payment of the principal of,
or premium, if any, or interest on, the Notes (which may only be
waived with the consent of each holder of Notes affected), or
(ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of
the holder of each Note affected. Subject to certain
limitations, holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the
Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of
principal, premium or interest) if it determines that withholding
notice is in their interest.
The Company is required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and
the Company is required, upon becoming aware of any Default or
Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
DEFEASANCE
The Company may, at its option and at any time, elect
to have the obligations of the Company discharged with respect to
the outstanding Notes and the Subsidiary Guarantees ("legal
defeasance"). Such legal defeasance means that the Company and
the Subsidiary Guarantors shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding
Notes and the Subsidiary Guarantees and to have satisfied all
other obligations under the Notes and the Subsidiary Guarantees
and the Indenture, except for (i) the rights of holders of the
outstanding Notes to receive, solely from the trust fund
described below, payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance
of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties
and immunities of the Trustee under the Indenture and (iv) the
defeasance provisions of the Indenture. In addition, the Company
may, at its option and at any time, elect to have the obligations
of the Company and the Subsidiary Guarantors released with
respect to certain covenants that are described in the Indenture
("covenant defeasance") and any omission to comply with such
obligations shall not constitute a Default or an Event of Default
with respect to the Notes.
In order to exercise either legal defeasance or
covenant defeasance, (i) the Company shall irrevocably deposit
with the Trustee, as trust funds in trust for the benefit of the
holders of the Notes, cash in United States dollars, U.S.
Government Obligations, or a combination thereof, maturing as to
principal and interest in such amounts as will be sufficient,
without consideration of any reinvestment of such interest, in
the opinion of a nationally recognized firm of independent public
accountants or a nationally recognized investment banking firm,
to pay and discharge the principal of, premium, if any, and
interest on the outstanding Notes on the stated maturity of such
principal or installment of principal or interest; (ii) in the
case of legal defeasance, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture,
there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion
of counsel shall confirm that, the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as
a result of such legal defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if such legal defeasance
had not occurred; (iii) in the case of covenant defeasance, the
Company shall have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee
confirming that the holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result
of such covenant defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times
as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit or insofar as
clauses (viii) and (ix) under the first paragraph under "--
Events of Default" are concerned, at any time during the period
ending on the 91st day after the date of deposit; (v) such legal
defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a Default under, the Indenture or any
other material agreement or instrument to which the Company is a
party or by which it is bound; (vi) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that
(A) the trust funds will not be subject to any rights of holders
of other Indebtedness, including, without limitation, those
arising under the Indenture, after the 91st day following the
deposit and (B) after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company shall have
delivered to the Trustee an officers' certificate stating that
the deposit was not made by the Company with the intent of
preferring the holders of the Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; (viii) no event or
condition shall exist that would prevent the Company from making
payments of the principal of, premium, if any, and interest on
the Notes on the date of such deposit or at any time ending on
the 91st day after the date of such deposit; and (ix) the Company
shall have delivered to the Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent
provided for relating to either the legal defeasance or the
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect
(except as to surviving rights of registration, transfer or
exchange of the Notes, as expressly provided for in the
Indenture) as to all outstanding Notes when (i) either (a) all
the Notes theretofore authenticated and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid) have
been delivered to the Trustee for cancellation or (b) all Notes
not theretofore delivered for cancellation have become due and
payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee an amount in United States dollars
sufficient to pay and discharge the entire indebtedness on the
Notes not theretofore delivered to the Trustee for cancellation,
for the principal of, premium, if any, and interest to the date
of payment; (ii) the Company has paid or caused to be paid all
other sums payable under the Indenture by the Company; and
(iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel each stating that all
conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied
with.
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture or the
Notes may be made by the Company, the Subsidiary Guarantors and
the Trustee with the written consent of the holders of not less
than a majority in aggregate principal amount of the then
outstanding Notes; provided, however, that no such modification
or amendment may, without the consent of the holder of each
outstanding Note affected thereby: (i) change the stated maturity
of the principal of, or any installment of interest on, any Note,
or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or
change the coin or currency or the manner in which the principal
of any Note or any premium or the interest thereon is payable, or
impair the right to institute suit for the enforcement of any
such payment after the stated maturity thereof (or, in the case
of redemption, on or after the redemption date); (ii) extend the
time for payment of interest on the Notes; (iii) alter the
redemption provisions in the Notes or the Indenture in a manner
adverse to any holder of the Notes; [(iv) amend, change or modify
the obligation of the Company to make and consummate a Change of
Control Offer in the event of a Change of Control or modify any
of the provisions or definitions with respect thereto]; (v)
reduce the percentage in principal amount of outstanding Notes,
the consent of whose holders is required for any amended or
supplemental indenture or the consent of whose holders is
required for any waiver of compliance with any provision of the
Indenture or any Default thereunder and their consequences
provided for in the Indenture; (vi) modify any of the provisions
of the Indenture relating to any amended or supplemental
indentures requiring the consent of holders or relating to the
waiver of past defaults or relating to the waiver of any
covenant, except to increase the percentage of outstanding Notes
required for such actions or to provide that any other provision
of the Indenture cannot be modified or waived without the consent
of the holder of each Note affected thereby; (vii) except as
otherwise permitted under "-- Merger, Consolidation and Sale of
Assets," consent to the assignment or transfer by the Company of
any of its rights and obligations under the Indenture;
(viii) alter the ranking of the Notes or the Subsidiary
Guarantees in a manner adverse to the holders of the Notes; or
(ix) modify certain provisions of the Indenture with respect to
the redemption of the Notes on the Special Redemption Date or any
of the definitions related thereto in a manner adverse to any
holder or Notes.
Notwithstanding the foregoing, without the consent of
any holder of Notes, the Company, the Subsidiary Guarantors and
the Trustee may amend or supplement the Indenture or the Notes to
(i) cure any ambiguity, defect or inconsistency, (ii) provide for
uncertificated Notes in addition to or in place of certificated
Notes, (iii) provide for the assumption of the Company's
obligations to the holders of the Notes in the event of any
Disposition involving the Company that is permitted under the
provisions of "-- Merger, Consolidation and Sale of Assets" in
which the Company is not the Surviving Person, (iv) make any
change that would provide any additional rights or benefits to
the holders of the Notes or does not adversely affect the
interests of any holder or (v) comply with the requirements of
the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
THE TRUSTEE
In the event that the Trustee becomes a creditor of the
Company, the Indenture contains certain limitations on the rights
of the Trustee to obtain payment of claims in certain cases or to
realize on certain property received in respect of any such claim
as security or otherwise. The Trustee will be permitted to
engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue as
Trustee, or resign.
The holders of a majority in aggregate principal amount
of the then outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any
remedy available to the Trustee, subject to certain exceptions.
The Indenture provides that, in case an Event of Default has
occurred and has not been cured, the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent
man in the conduct of his own affairs. The Trustee will be under
no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such
holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be represented by one or more fully
registered global notes (each a "Global Note"). Each Global Note
will be deposited on the date of the closing of the sale of Notes
offered hereby with, or on behalf of, the Depository Trust
Company ("DTC") and registered in the name of a nominee of DTC.
THE GLOBAL NOTE
Ownership of beneficial interests in a Global Note will
be limited to persons that have accounts with DTC
("participants") or persons that may hold interests through
participants. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of a Global Note, DTC will
credit the accounts of participants designated by the
Underwriters with the respective principal amount of the Global
Note beneficially owned by such participant and (ii) ownership of
the Notes will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC or its
nominee (with respect to interests of participants) and the
records of participants (with respect to interest of persons
holding through participants).
So long as DTC, or its nominee, is the registered owner
or holder of the Notes, DTC or such nominee will be considered
the sole owner or holder of the Notes represented by the Global
Note for all purposes under the Indenture. No beneficial owner
of an interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures,
in addition to those provided for under the Indenture with
respect to the Notes.
Payments of the principal of, premium (if any) and
interest on the Global Note will be made to DTC or its nominee,
as the case may be, as the registered owner thereof. None of the
Company, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership
interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership
interest.
The Company expects that DTC or its nominee, upon
receipt of any payment of the principal of, premium (if any) and
interest on the Global Note, will credit participants' accounts
with payments in amounts proportionate to their respective
beneficial interests in the principal amount of such Global Note
as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial
interests in any such Global Note held through such participants
will be governed by standing instructions and customary practice,
as is now the case with securities held for the accounts of
customers registered to the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected
in the ordinary way in accordance with DTC rules and will be
settled in same day funds. The laws of some states may require
that certain purchasers of securities take physical delivery of
such securities in certificated form. Such laws may impair the
ability to own, transfer or pledge beneficial interests in a
Global Note. If a holder requires physical delivery of a
certificated note for any reason, including to sell Notes to
persons in states which require physical delivery of such
securities or to pledge such securities, such holder must
transfer its interest in the applicable Global Note in accordance
with the normal procedures of DTC and with respect to the Notes,
with the procedures set forth in the Indenture.
DTC has advised the Company that it will take any
action permitted to be taken by a holder of Notes only at the
direction of one or more participants to whose account interests
in the Global Note are credited and only in respect of such
portion of the aggregate principal amount of Notes as to which
such participant or participants has or have given such
direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for certificated
notes representing the Notes, which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a
limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to
the provisions of Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of
securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates.
Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other
organizations.
Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect
participants").
Although DTC has agreed to the foregoing procedures in
order to facilitate transfers of interest in the Global Note
among participants of DTC, it is under no obligation to perform
such procedures, and such procedures may be discontinued at any
time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the
rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue
as a depositary for any Global Note and a successor depositary is
not appointed by the Company within 30 days, certificated notes
will be issued in exchange for Global Notes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the
Indenture. Reference is made to the Indenture for the definition
of all other terms used in the Indenture.
"Acquired Debt" means, with respect to any specified
Person, Indebtedness of any other Person (the "Acquired Person")
existing at the time the Acquired Person merges with or into, or
becomes a Subsidiary of, such specified Person, including
Indebtedness incurred in connection with, or in contemplation of,
the Acquired Person merging with or into, or becoming a
Subsidiary of, such specified Person.
"Affiliate" means, with respect to any specified
Person, any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with
such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms
"controlling," "controlled by" and "under common control with")
of any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting
securities, by agreement or otherwise.
"Asset Sale" means (i) any sale, lease, conveyance or
other disposition by the Company or any Subsidiary of the Company
of any assets (including by way of a sale-and-leaseback) other
than in the ordinary course of business (provided that the sale,
lease, conveyance or other disposition of all or substantially
all of the assets of the Company shall not be an "Asset Sale" but
instead shall be governed by the provisions of the Indenture
described under "-- Merger, Consolidation and Sale of Assets"),
or (ii) the issuance or sale of Capital Stock of any Subsidiary
of the Company, in each case, whether in a single transaction or
a series of related transactions, to any Person (other than to
the Company or a Subsidiary Guarantor); provided that the term
"Asset Sale" shall not include any disposition or dispositions
during any twelve-month period of assets or property having a
fair market value of less than $250,000 in the aggregate.
"Bankruptcy Law" means Title 11, United States
Bankruptcy Code of 1978, as amended, or any similar United States
federal or state law relating to bankruptcy, insolvency,
receivership, winding up, liquidation, reorganization or relief
of debtors, or any amendment to, succession to or change in any
such law.
"Capital Lease Obligations" of any Person means the
obligations to pay rent or other amounts under a lease of (or
other Indebtedness arrangements conveying the right to use) real
or personal property of such Person which are required to be
classified and accounted for as a capital lease or liability on
the face of a balance sheet of such Person in accordance with
GAAP. The amount of such obligations shall be the capitalized
amount thereof in accordance with GAAP and the stated maturity
thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment
of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations
or other equivalents of or interests in (however designated)
corporate stock or other equity participations, including
partnership interests, whether general or limited, of such
Person, including any Preferred Stock.
"Cash Equivalents" means (i) marketable direct
obligations issued or guaranteed by the United States of America,
or any governmental entity or agency or political subdivision
thereof (provided, that the full faith and credit of the United
States of America is pledged in support thereof) maturing within
one year of the date of purchase; (ii) commercial paper issued by
corporations, each of which shall have a consolidated net worth
of at least $500,000,000, maturing within 180 days from the date
of the original issue thereof, and rated "P-1" or better by
Moody's Investors Service or "A-1" or better by Standard & Poor's
Corporation or an equivalent rating or better by any other
nationally recognized securities rating agency; and (iii)
certificates of deposit issued or acceptances accepted by or
guaranteed by any bank or trust company organized under the laws
of the Untied States of America or any state thereof or the
District of Columbia, in each case having capital, surplus and
undivided profits totalling more than $500,000,000, maturing
within one year of the date of purchase.
"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), disregarding
the Permitted Holders, becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person or group shall be deemed to have
beneficial ownership of all shares of Capital Stock that
such person or group has the right to acquire regardless of
when such right is first exercisable), directly or
indirectly, of more than 35% of the total voting power
represented by the outstanding Voting Stock of the Company;
(b) the Company merges with or into another Person or
sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any
Person, or any Person merges with or into the Company, in
any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than
any such transaction where (x) the outstanding Voting Stock
of the Company is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or
transferee corporation and (y) immediately after such
transaction no "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act),
disregarding the Permitted Holders, is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person or group shall be deemed
to have beneficial ownership of all shares of Capital Stock
that such person or group has the right to acquire
regardless of when such right is first exercisable),
directly or indirectly, of more than 35% of the total voting
power represented by the outstanding Voting Stock of the
surviving or transferee corporation;
(c) during any consecutive two-year period,
individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new
directors whose election by the Board of Directors of the
Company or whose nomination for election by the stockholders
of the Company was approved by (x) a vote of at least a
majority of the directors then still in office who were
either directors at the beginning of such period or whose
election or nomination for election was previously so
approved (as described in this clause (x) or in the
following clause (y)) or (y) Permitted Holders that are
"beneficial owners" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act) of a majority of the total voting
power represented by the outstanding Voting Stock of the
Company) cease for any reason to constitute a majority of
the Board then in office; or
(d) the Company is liquidated or dissolved or adopts a
plan of liquidation.
"Consolidated EBITDA" is defined to mean, for any
period, the sum of the amounts for such period of
(i) Consolidated Net Income, (ii) Consolidated Fixed Charges,
(iii) income taxes, to the extent such amount was deducted in
calculating Consolidated Net Income (other than income taxes
(either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets),
(iv) depreciation expense, to the extent such amount was deducted
in calculating Consolidated Net Income, (v) amortization expense,
to the extent such amount was deducted in calculating
Consolidated Net Income, and (vi) all other non-cash items
reducing Consolidated Net Income, less all non-cash items
increasing Consolidated Net Income, all as determined on a
consolidated basis for the Company and its Subsidiaries in
conformity with GAAP; provided that, if any Subsidiary is not a
Wholly-Owned Subsidiary, Consolidated EBITDA shall be reduced (to
the extent not otherwise reduced in 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, Redeemable Stock, or obligations under
leases that were outstanding during such Reference Period or
thereafter but that are not outstanding or are to be repaid on
the Transaction Date, except for Consolidated Interest Expense
accrued (as adjusted pursuant to clause (B) above) during such
Reference Period under a revolving credit or similar arrangement
to the extent of the commitment thereunder (or under any
successor revolving credit or similar arrangement) in effect on
the Transaction Date, (D) pro forma effect shall be given to
Asset Sales and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Sales) that
occur during such Reference Period or thereafter and on or prior
to the Transaction Date as if they had occurred and such proceeds
had been applied on the first day of such Reference Period,
(E) with respect to any such Reference Period commencing prior to
the Issue Date, the issuance of the Notes shall be deemed to have
taken place on the first day of such Reference Period, and
(F) pro forma effect shall be given to asset dispositions and
asset acquisitions (including giving pro forma effect to the
application of proceeds of any asset disposition) that have been
made by any person that has become a Subsidiary or has been
merged with or into the Company or any Subsidiary during such
Reference Period or subsequent to such period and prior to the
Transaction Date and that would have constituted Asset Sales or
Asset Acquisitions had such transactions occurred when such
person was a Subsidiary as if such asset dispositions or asset
acquisitions were Asset Sales or Asset Acquisitions that occurred
on the first day of such Reference Period; provided that to the
extent that clause (D) or (F) of this sentence requires that pro
forma effect be given to an asset acquisition or asset
disposition, such pro forma calculation shall be based upon the
four full fiscal quarters immediately preceding the Transaction
Date of the person, or division or line of business of the
person, or property, that is acquired or disposed of, for which
financial information is available.
"Consolidated Fixed Charges" is defined to mean, for
any period, the sum (without duplication) of (i) Consolidated
Interest Expense for such period, (ii) all but the principal
component of rentals in respect of Capitalized Lease Obligations
paid, accrued, or scheduled to be paid or to be accrued by the
Company and its Subsidiaries during such period, (iii) one-third
of the rental expense during such period, attributable to
operating leases, and (iv) cash dividends declared or paid in
respect of any Preferred Stock of the Company and its
Subsidiaries during such period, in each case as determined on a
consolidated basis in accordance with GAAP consistently applied.
For purposes of this definition, the amount of any cash dividends
declared or paid will be deemed to be equal to the amount of such
dividends multiplied by a fraction, the numerator of which is one
and the denominator of which is one minus the maximum statutory
combined Federal, state, local and foreign income tax rate then
applicable to the Company and its Subsidiaries (expressed as a
decimal between one and zero) on a consolidated basis.
"Consolidated Interest Expense" means, with respect to
any period, the sum of the interest expense of the Company and
its Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP consistently applied, including,
without limitation, (a) amortization of debt discount, (b) the
net payments, if any, under interest rate contracts (including
amortization of discounts), (c) the interest portion of any
deferred payment obligation and (d) accrued interest.
"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 but
not losses, (ii) the portion of net income (or loss) of the
Company and its Subsidiaries allocable to interests in
unconsolidated Persons, except to the extent of the amount of
dividends or distributions actually paid to the Company or its
Subsidiaries by such other Person during such period, (iii) net
income (or loss) of any Person combined with the Company or any
of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination,
(iv) net gain but not losses in respect of Asset Sales, or
(v) the net income of any Subsidiary to the extent that the
declaration of dividends or similar distributions by that
Subsidiary of that income to the Company is not at the time
permitted, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to
that Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any
Person on any date, the equity of the common and preferred
stockholders of such Person and its Subsidiaries as of such date,
determined on a consolidated basis in accordance with GAAP
consistently applied.
"Credit Facility" means the credit agreement, to be
entered into as of , 1996, among the Company and the
lenders named therein and , as Agent, as the same may
be amended, modified, renewed, refunded, replaced or refinanced
from time to time, including (i) any related notes, letters of
credit, guarantees, collateral documents, instruments and
agreements executed in connection therewith, and in each case as
amended, modified, renewed, refunded, replaced or refinanced from
time to time, and (ii) any notes, guarantees, collateral
documents, instruments and agreements executed in connection with
any such amendment, modification, renewal, refunding, replacement
or refinancing.
"Default" means any event that is, or after the giving
of notice or passage of time or both would be, an Event of
Default.
"Disposition" means, with respect to any Person, any
merger, consolidation or other business combination involving
such Person (whether or not such Person is the Surviving Person)
or the sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of such Person's assets.
"Disqualified Stock" means any Capital Stock that, by
its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in
part on or prior to the stated maturity of the Notes.
"Equity Offering" means (i) an underwritten public
offering of Capital Stock (other than Disqualified Stock) of the
Company subsequent to the Issue Date (excluding Capital Stock
which may be issued upon exercise of any over-allotment option
exercisable after the Issue Date and granted in connection with
the Concurrent Offering), pursuant to an effective registration
statement filed under the Securities Act, or (ii) any private
placement of Capital Stock (other than Disqualified Stock) of the
Company subsequent to the Issue Date, in either case the net
proceeds of which to the Company (after deducting any
underwriting discounts and commissions) exceed $25.0 million.
"Exchange Act" means the Securities Exchange Act of
1934, as amended.
"GAAP" means generally accepted accounting principles
set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of
the accounting profession, which are in effect on the Issue Date.
"guarantee" by any Person means any obligation,
contingent or otherwise, of such Person guaranteeing any
Indebtedness of any other Person (the "primary obligor") in any
manner, whether directly or indirectly, and including, without
limitation, any obligation of such Person (i) to purchase or pay
(or advance or supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds for
the purchase of) any security for the payment of such
Indebtedness, (ii) to purchase property, securities or services
for the purpose of assuring the holder of such Indebtedness of
the payment of such Indebtedness, or (iii) to maintain working
capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary
obligor to pay such Indebtedness (and "guaranteed,"
"guaranteeing" and "guarantor" shall have meanings correlative to
the foregoing); provided, however, that the guarantee by any
Person shall not include endorsements by such Person for
collection or deposit, in either case, in the ordinary course of
business.
"Indebtedness" means, with respect to any Person,
without duplication, and whether or not contingent, (i) all
indebtedness of such Person for borrowed money or for the
deferred purchase price of property or services or which is
evidenced by a note, bond, debenture or similar instrument,
(ii) all Capital Lease Obligations of such Person, (iii) all
obligations of such Person in respect of letters of credit or
bankers' acceptances issued or created for the account of such
Person, (iv) all Interest Rate Agreement Obligations of such
Person, (v) all liabilities secured by any Lien on any property
owned by such Person even if such Person has not assumed or
otherwise become liable for the payment thereof to the extent of
the lesser of (x) the amount of the Obligation so secured and (y)
the fair market value of the property subject to such Lien,
(vi) all obligations to purchase, redeem, retire, or otherwise
acquire for value any Capital Stock of such Person, or any
warrants, rights or options to acquire such Capital Stock, now or
hereafter outstanding, (vii) to the extent not included in (vi),
all Disqualified Stock issued by such Person, valued at the
greater of its voluntary or involuntary maximum fixed repurchase
price plus accrued and unpaid dividends thereon, and (viii) to
the extent not otherwise included, any guarantee by such Person
of any other Person's indebtedness or other obligations described
in clauses (i) through (vii) above. "Indebtedness" of the
Company and its Subsidiaries shall not include current trade
payables incurred in the ordinary course of business and payable
in accordance with customary practices, and non-interest bearing
installment obligations and accrued liabilities incurred in the
ordinary course of business which are not more than 90 days past
due. For purposes hereof, the "maximum fixed repurchase price"
of any Disqualified Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were purchased
on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based
upon, or measured by the fair market value of, such Disqualified
Stock, such fair market value is to be determined in good faith
by the board of directors of the issuer of such Disqualified
Stock.
"Independent Director" means a director of the Company
other than a director (i) who (apart from being a director of the
Company or any Subsidiary) is an employee or Affiliate of the
Company or a Subsidiary or has held any such position during the
previous five years, (ii) who is a director, employee or
Affiliate of another party to the transaction in question or
(iii) who has, or who has been appointed to the Board of
Directors by a shareholder who has, a direct or indirect
financial interest in the transaction in question.
"Insolvency or Liquidation Proceeding" means, with
respect to any Person, any liquidation, dissolution or winding up
of such Person, or any bankruptcy, reorganization, insolvency,
receivership or similar proceeding with respect to such Person,
whether voluntary or involuntary.
"Interest Rate Agreement Obligations" means, with
respect to any Person, the Obligations of such Person under
(i) interest rate swap agreements, interest rate cap agreements
and interest rate collar agreements, and (ii) other agreements or
arrangements designed to protect such Person against fluctuations
in interest rates.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates
of such Person) in the form of loans, guarantees, advances or
capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of
business) purchases or other acquisitions for consideration of
Indebtedness, Capital Stock or other securities and all other
items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP. "Investments" shall
exclude extensions of trade credit by the Company and its
Subsidiaries in the ordinary course of business in accordance
with normal trade practices of the Company or such Subsidiary, as
the case may be.
"Lien" means, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or encumbrance of any
kind in respect of such asset, whether or not filed, recorded or
otherwise perfected under applicable law (including any
conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give
a security interest in any asset and any filing of, or agreement
to give, any financing statement under the Uniform Commercial
Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" means, with respect to any Asset Sale by
any Person, the aggregate cash proceeds received by such Person
and/or its Affiliates in respect of such Asset Sale, which amount
is equal to the excess, if any, of (i) the cash received by such
Person and/or its Affiliates (including any cash payments
received by way of deferred payment pursuant to, or monetization
of, a note or installment receivable or otherwise, but only as
and when received) in connection with such Asset Sale, over
(ii) the sum of (a) the amount of any Indebtedness that is
secured by such asset and which is required to be repaid by such
Person in connection with such Asset Sale, plus (b) all fees,
commissions and other expenses incurred by such Person in
connection with such Asset Sale, plus (c) provision for taxes,
including income taxes, attributable to the Asset Sale or
attributable to required prepayments or repayments of
Indebtedness with the proceeds of such Asset Sale, plus (d) a
reasonable reserve for the after-tax cost of any indemnification
payments (fixed or contingent) attributable to seller's
indemnities to purchaser in respect of such Asset Sale undertaken
by the Company or any of its Subsidiaries in connection with such
Asset Sale plus (e) if such Person is a Subsidiary of the
Company, any dividends or distributions payable to holders of
minority interests in such Subsidiary from the proceeds of such
Asset Sale.
"Other Senior Debt" means Indebtedness of the Company
ranking pari passu in right of payment with the Notes and
Indebtedness of a Subsidiary Guarantor ranking pari passu in
right of payment with the Subsidiary Guarantees, in each case,
the terms of which require that Net Cash Proceeds be used to
permanently reduce (and thereby also reduce commitments relating
to) such Indebtedness.
"Other Senior Debt Pro Rata Share" means a fraction,
(i) the numerator of which is the aggregate principal amount of
Other Senior Debt outstanding on the date Net Cash Proceeds are
received and (ii) the denominator of which is the sum of (x) the
aggregate principal amount of Notes outstanding on such date and
(y) the aggregate principal amount of any Other Senior Debt
outstanding on such date.
"Permitted Holders" means (i) Peter G. Graf; (ii) his
spouse and lineal descendants; (iii) in the event of the
incompetence or death of any of the Persons described in
clauses (i) and (ii), such Person's estate, executor,
administrator, committee or other personal representative;
(iv) any trusts created for the benefit of the Persons described
in clause (i) or (ii); (v) International Nederlanden (U.S.)
Capital Corporation and Cerberus Partners, L.P.; or (vi) any
Person controlled by any of the Persons described in clause (i),
(ii), (iv) or (v). For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession,
directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether
through ownership of voting securities or by contract or
otherwise.
"Permitted Investments" means (i) any Investment in the
Company or any Subsidiary Guarantor; (ii) any Investments in Cash
Equivalents; (iii) any Investment in a Person (an "Acquired
Person") if, as a result of such Investment, (a) the Acquired
Person becomes a Subsidiary Guarantor, or (b) the Acquired Person
either (1) is merged, consolidated or amalgamated with or into
the Company or a Subsidiary Guarantor and the Company or such
Subsidiary Guarantor is the Surviving Person, or (2) transfers or
conveys substantially all of its assets to, or is liquidated
into, the Company or a Subsidiary Guarantor; (iv) Investments in
accounts and notes receivable acquired in the ordinary course of
business; and (v) Interest Rate Agreement Obligations permitted
pursuant to the second paragraph under "-- Covenants --
Limitation on Incurrence of Indebtedness".
"Permitted Liens" means (i) Liens on assets or property
of the Company that secure Indebtedness outstanding under the
Credit Facility pursuant to clause (i) of the second paragraph
under "-- Covenants -- Limitation on Incurrence of Indebtedness"
and up to $25 million aggregate principal amount of Additional
Indebtedness outstanding under the Credit Facility pursuant to
the Consolidated Fixed Coverage Ratio contained in the first
paragraph of the covenant described under "-- Covenants --
Limitation on Incurrence of Indebtedness"; (ii) Liens securing
Indebtedness of a Person existing at the time that such Person is
merged into or consolidated with the Company or a Subsidiary of
the Company, provided that such Liens were in existence prior to
the contemplation of such merger or consolidation and do not
extend to any assets other than those of such Person; (iii) Liens
on property acquired by the Company or a Subsidiary, provided
that such Liens were in existence prior to the contemplation of
such acquisition and do not extend to any other property;
(iv) Liens in favor of the Company or any Subsidiary Guarantor of
the Company; (v) Liens incurred, or pledges and deposits in
connection with, workers' compensation, unemployment insurance
and other social security benefits, and leases, appeal bonds and
other obligations of like nature incurred by the Company or any
Subsidiary of the Company in the ordinary course of business;
(vi) Liens imposed by law, including, without limitation,
mechanics', carriers', warehousemen's, materialmen's, suppliers'
and vendors' Liens, incurred by the Company or any Subsidiary of
the Company in the ordinary course of business; (vii) Liens for
ad valorem, income or property taxes or assessments and similar
charges which either are not delinquent or are being contested in
good faith by appropriate proceedings for which the Company has
set aside on its books reserves to the extent required by GAAP;
and (viii) Liens created under the Indenture.
"Person" means any individual, corporation,
partnership, joint venture, association, joint-stock company,
limited liability company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock" as applied to the Capital Stock of
any Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"Restricted Investment" means an Investment other than
a Permitted Investment.
"Restricted Payment" means (i) any dividend or other
distribution declared or paid on any Capital Stock of the Company
or any of its Subsidiaries (other than dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock)
of the Company or such Subsidiary or dividends or distributions
payable to the Company or any Subsidiary Guarantor); (ii) any
payment to purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any Subsidiary of the
Company or other Affiliate of the Company (other than any Capital
Stock owned by the Company or any Subsidiary Guarantor);
(iii) any payment to purchase, redeem, defease or otherwise
acquire or retire for value any Subordinated Indebtedness prior
to the scheduled maturity thereof; or (iv) any Restricted
Investment.
"Subordinated Indebtedness" means any Indebtedness of
the Company or a Subsidiary if the instrument creating or
evidencing such Indebtedness or pursuant to which such
Indebtedness is outstanding expressly provides that such
Indebtedness is subordinated in right of payment to the Notes or
the Subsidiary Guarantee of such Subsidiary Guarantor, as the
case may be.
"Subsidiary" of any Person means (i) any corporation
more than 50% of the outstanding Voting Stock of which is owned
or controlled, directly or indirectly, by such Person or by one
or more other Subsidiaries of such Person, or by such Person and
one or more other Subsidiaries thereof, or (ii) any limited
partnership of which such Person or any Subsidiary of such Person
is a general partner, or (iii) any other Person (other than a
corporation or limited partnership) in which such Person, or one
or more other Subsidiaries of such Person, or such Person and one
or more other Subsidiaries thereof, directly or indirectly, has
more than 50% of the outstanding partnership or similar interests
or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
"Subsidiary Guarantor" means (i) each Subsidiary of the
Company existing on the Issue Date, (ii) each of the Company's
Subsidiaries which becomes a guarantor of the Notes in compliance
with the provisions set forth under "-- Covenants -- Future
Subsidiary Guarantors," and (iii) each of the Company's
Subsidiaries executing a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the Indenture.
"Voting Stock" means, with respect to any Person,
Capital Stock of such Person of the class or classes pursuant to
which the holders thereof have the general voting power under
ordinary circumstances to elect at least a majority of the board
of directors, managers or trustees of such Person (irrespective
of whether or not at the time stock of any other class or classes
shall have or might have voting power by reason of the happening
of any contingency).
"Weighted Average Life to Maturity" means, with respect
to any Indebtedness at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a)
the amount of each then remaining installment, sinking fund,
serial maturity or other required scheduled payment of principal,
including payment as final maturity, in respect thereof, with (b)
the number of years (calculated to the nearest one-twelfth) that
will elapse between such date and the making of such payment, by
(ii) the then outstanding aggregate principal amount of such
Indebtedness.
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated ______, 1996 (the "Underwriting Agreement"),
J.P. Morgan Securities Inc. ("J.P. Morgan"), CIBC Wood Gundy Securities
Corp. ("CIBC"), ING Barings (U.S.) Securities Corporation ("ING Barings")
and Southcoast (collectively, with the "Underwriters") have severally
agreed to purchase from the Company, and the Company has agreed to sell to
them, severally, the principal amount of Notes set forth opposite their
names below. Under the terms and conditions of the Underwriting Agreement,
the Underwriters are obligated to take and pay for the entire principal
amount of the Notes if any Notes are purchased.
----------------
Principal Amount
J.P. Morgan Securities Inc. $
CIBC Wood Gundy Securities Corp.
ING Barings (U.S.) Securities Corporation
Southcoast Capital Corporation -------------
Total $ 110,000,000
=============
The Underwriters propose initially to offer the Notes directly to the
public at the price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of ___% of
the principal amount of the Notes. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of ___% of the principal
amount of the Notes to certain other dealers. After the initial public
offering of the Notes, the offering price and such concession may be
changed.
ING, an affiliate of ING Barings, is the beneficial owner of
approximately 36.9% of the Common Stock of the Company and is a selling
stockholder in the Concurrent Offering, and Southcoast is the beneficial
owner of approximately 5.9% of the Common Stock of the Company. See
"Security Ownership of Certain Beneficial Owners and Management." In
addition, ING serves as a lender and/or agent under the Credit Agreement,
has received customary fees for acting in such capacities, and, as a
lender, is the holder of approximately $20.5 million of senior secured
indebtedness of the Company. ING will receive its proportionate share of
any repayment by the Company of amounts outstanding under the Credit
Agreement from the proceeds of the Offering, which repayment may, in the
aggregate, exceed 10% of the net proceeds of the Offering. See "Use of
Proceeds." Southcoast will also receive customary fees for providing
financial advisory services to the Company in connection with the Cherokee
Acquisition. In addition, a predecessor of Southcoast provided financial
advisory services to the Company from time to time in the past for which it
received customary fees. See "Certain Transactions." Certain of the other
Underwriters, from time to time, also perform investment banking and other
financial services for the Company.
Because ING beneficially owns in excess of 10% of the Common Stock of
the Company and may receive in excess of 10% of the net proceeds of the
Offering, the underwriting arrangements for the Offering must comply with
certain requirements of Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD"). In this regard,
__________ will act as, and assume the responsibilities of, qualified
independent underwriter in connection with pricing the Offering and
conducting due diligence. Further, the Underwriters will not confirm sales
of the Notes to any accounts over which they exercise discretionary
authority without the prior specific written approval of the transaction by
the customer.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
There is currently no trading market for the Notes. The Company does
not intend to list the Notes on any securities exchange. The Company has
been advised by the Underwriters that the Underwriters currently intend to
make a market in the Notes, however, the Underwriters are not obligated to
do so and may discontinue any such market making activities at any time
without notice. No assurance can be given as to the development or
liquidity of any trading market for the Notes.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Tammy L. Martin, Esq., General Counsel of the Company, and by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Cahill Gordon & Reindel (a partnership including a
professional corporation), New York, New York. Skadden, Arps, Slate,
Meagher & Flom LLP and Cahill Gordon & Reindel will rely on the opinion of
Tammy L. Martin, Esq. as to certain matters governed by Ohio law.
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 herein and in the
registration statement of which this Prospectus forms a part have been so
included in reliance on the report of Price Waterhouse LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in auditing and accounting.
The financial statements of Paramount Communications Systems, Inc. as
of December 31, 1994 and for the year then ended included herein and in the
registration statement of which this Prospectus forms a part have been so
included in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in auditing and accounting.
The financial statements of International Pay Phones, Inc. (South
Carolina) as of December 31, 1994 and 1995 and for each of the two years
ended December 31, 1994 and 1995 included in this Prospectus have been so
included in reliance on the report of Miller Sherrill Blake, CPA, PA,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of International 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.
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.
<PAGE> 1
PHONETEL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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<S> <C>
PHONETEL TECHNOLOGIES, INC.
Audited Financial Statements:
Report of Independent Accountants.............................................. F-3
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995...... F-4
Consolidated Statements of Operations for the years ended December 31, 1993,
1994 and 1995.................................................................. F-5
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1993, 1994 and 1995........................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993,
1994 and 1995.................................................................. F-8
Notes to Consolidated Financial Statements..................................... F-10
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996.......... F-26
Consolidated Statements of Operations for the six and three months ended June
30, 1995 and 1996.............................................................. F-27
Consolidated Statements of Cash Flows for the six months ended June 30, 1995
and 1996....................................................................... F-28
Consolidated Statements of Changes in Mandatorily Redeemable Preferred Stock
and Non-Mandatorily Redeemable Preferred Stock, Common Stock and Other
Shareholders' Equity........................................................... F-29
Notes to Consolidated Financial Statements..................................... F-31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Audited Financial Statements -- 1995:
Report of Independent Accountants.............................................. F-37
Balance Sheet as of December 31, 1995.......................................... F-38
Statement of Income for the year ended December 31, 1995....................... F-39
Statement of Cash Flows for the year ended December 31, 1995................... F-40
Statement of Changes in Shareholders' Equity for the year ended December 31,
1995........................................................................... F-41
Notes to Financial Statements.................................................. F-42
Audited Financial Statements -- 1994:
Report of Independent Certified Public Accountants............................. F-45
Balance Sheet as of December 31, 1994.......................................... F-46
Statement of Income for the year ended December 31, 1994....................... F-47
Statement of Shareholders' Equity for the year ended December 31, 1994......... F-48
Statement of Cash Flows for the year ended December 31, 1994................... F-49
Notes to Financial Statements.................................................. F-50
INTERNATIONAL PAY PHONES, INC. (SOUTH CAROLINA)
Audited Financial Statements -- 1995:
Independent Auditors' Report................................................... F-53
Balance Sheet as of December 31, 1995.......................................... F-54
Statement of Income and Retained Earnings for the year ended December 31,
1995........................................................................... F-55
Statement of Cash Flows for the year ended December 31, 1995................... F-56
Notes to Financial Statements.................................................. F-57
Audited Financial Statements -- 1994:
Independent Auditors' Report................................................... F-62
Balance Sheet as of December 31, 1994.......................................... F-63
Statement of Income and Retained Earnings for the year ended December 31,
1994........................................................................... F-64
Statement of Cash Flows for the year ended December 31, 1994................... F-65
Notes to Financial Statements.................................................. F-66
</TABLE>
F-1
<PAGE> 2
<TABLE>
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<S> <C>
(TENNESSEE)Audited Financial Statements:
Independent Auditors' Report.................................................... F-70
Balance Sheets as of December 31, 1995 and 1994................................. F-71
Statements of Earnings and Retained Earnings for the years ended December 31,
1995 and 1994.................................................................. F-72
Statements of Cash Flows for the years ended December 31, 1995 and 1994......... F-73
Notes to Financial Statements................................................... F-74
PAYPHONES OF AMERICA, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-77
Consolidated Balance Sheets as of December 31, 1995 and 1994.................... F-78
Consolidated Statements of Operations for the years ended December 31, 1995 and
1994........................................................................... F-79
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1994..................................................... F-80
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1994........................................................................... F-81
Notes to Financial Statements................................................... F-82
Unaudited Financial Statements:
Independent Accountants' Report................................................. F-89
Consolidated Balance Sheets as of June 30, 1996 and 1995........................ F-90
Consolidated Statements of Operations for the six months ended June 30, 1996 and
1995........................................................................... F-91
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995........................................................................... F-92
Notes to Consolidated Financial Statements...................................... F-93
AMTEL COMMUNICATIONS INC. AND COMBINED COMPANIES (DEBTOR-IN POSSESSION)
Audited Financial Statements:
Independent Auditors' Report.................................................... F-98
Combined Balance Sheets as of June 30, 1996 and December 31, 1995............... F-99
Combined Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-100
Combined Statements of Changes in Stockholder's Deficit for the six months ended
June 30, 1996 and the year ended December 31, 1995............................. F-101
Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
year ended December 31, 1995................................................... F-102
Notes to Financial Statements................................................... F-103
Audited Statement of Revenues and Direct Operating Expenses:
Independent Auditors' Report.................................................... F-107
Combined Statement of Revenues and Direct Operating Expenses for the three
months ended December 31, 1994................................................. F-108
Notes to Combined Statement of Revenues and Direct Operating Expenses........... F-109
CHEROKEE COMMUNICATIONS, INC.
Audited Financial Statements:
Independent Auditors' Report.................................................... F-111
Balance Sheets as of September 30, 1995 and 1994................................ F-112
Statements of Income for the years ended September 30, 1995, 1994 and 1993...... F-113
Statement of Shareholders' Equity for the years ended September 30, 1995, 1994
and 1993....................................................................... F-114
Statements of Cash Flows for the years ended September 30, 1995, 1994 and
1993........................................................................... F-115
Notes to Financial Statements................................................... F-116
Unaudited Financial Statements:
Condensed Balance Sheets as of September 30, 1995 and June 30, 1996............. F-124
Condensed Income Statements for the three and nine months ended June 30, 1996
and 1995....................................................................... F-125
Condensed Statements of Cash Flows for the nine months ended June 30, 1996 and
1995........................................................................... F-126
Notes to Financial Statements................................................... F-127
</TABLE>
F-2
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
March 29, 1996
To the Board of Directors
and Shareholders of
PhoneTel Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of PhoneTel
Technologies, Inc. and its subsidiaries at December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-3
<PAGE> 4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 478,756 $ 713,462
Accounts receivable, net of allowance for doubtful
accounts of $44,000 and $40,000, respectively................. 562,147 901,508
Other current assets............................................. 164,331 185,634
----------- -----------
Total current assets.......................................... 1,205,234 1,800,604
Property and equipment, net........................................ 5,294,839 14,099,111
Intangible assets, net............................................. 3,429,121 11,592,157
Other assets....................................................... 228,707 1,425,384
----------- -----------
$10,157,901 $28,917,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 1,814,760 $ 1,010,412
Current portion of obligation under capital leases............... 94,343 288,972
Accounts payable................................................. 2,514,110 2,772,306
Accrued expenses................................................. 814,656 1,610,100
Obligations relating to contractual settlements and restructuring
charges....................................................... -- 962,338
----------- -----------
Total current liabilities..................................... 5,237,869 6,644,128
Long-term debt..................................................... 2,063,896 9,318,501
Obligations under capital leases................................... 208,269 3,243,965
Commitments and contingencies...................................... -- --
Total shareholders' equity......................................... 2,647,867 9,710,662
----------- -----------
$10,157,901 $28,917,256
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Coin calls......................................... $ 4,237,848 $ 8,421,237 $12,130,189
Operator services.................................. 6,074,394 5,319,138 3,776,501
Commissions........................................ 667,976 1,856,482 2,681,172
Other.............................................. 89,299 269,230 130,121
----------- ----------- -----------
11,069,517 15,866,087 18,717,983
----------- ----------- -----------
COSTS AND EXPENSES:
Line and transmission charges...................... 2,776,448 4,456,509 5,475,699
Location commissions............................... 2,599,330 3,391,190 3,467,626
Other operating expenses........................... 1,891,984 3,238,252 4,452,032
Depreciation and amortization...................... 896,041 2,236,269 4,383,049
Selling, general and administrative................ 2,402,583 2,831,775 3,200,742
Billing and collection............................. 1,116,149 1,026,420 858,230
Other unusual charges and contractual
settlements..................................... -- -- 2,169,503
----------- ----------- -----------
11,682,535 17,180,415 24,006,881
----------- ----------- -----------
Loss from operations............................ (613,018) (1,314,328) (5,288,898)
Interest expense..................................... (174,994) (388,215) (836,911)
Interest income...................................... 9,137 7,421 16,112
----------- ----------- -----------
NET LOSS............................................. $ (778,875) $(1,695,122) $(6,109,697)
=========== =========== ===========
Less: Preferred stock dividend requirement........... (207,623) (291,980) (309,668)
----------- ----------- -----------
Net loss applicable to common shareholders........... $ (986,498) $(1,987,102) $(6,419,365)
=========== =========== ===========
Net loss per common share............................ $ (0.96) $ (1.35) $ (3.29)
=========== =========== ===========
Weighted average number of shares.................... 1,031,384 1,470,188 1,950,561
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- 2,500 $ 200,000 2,500 $ 200,000
Issuance of 7% preferred... 2,500 $ 200,000 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 2,500 $ 200,000 2,500 $ 200,000 2,500 $ 200,000
========= ----------- ========= ------------ ========= ------------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... -- -- 12,200 $ 981,084 12,200 $ 981,084
Issuance of 8% preferred... 12,200 $ 981,084 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 12,200 $ 981,084 12,200 $ 981,084 12,200 $ 981,084
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... 1,496 $ 1 1,496 $ 1 1,496 $ 1
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,496 $ 1 1,496 $ 1 1,496 $ 1
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- -- -- -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 530,534 $ 5,305,340
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- 530,534 $ 5,305,340
========= ----------- ========= ------------ ========= ------------
12% CONVERTIBLE PREFERRED
STOCK
Balance at beginning of
year..................... 6,500 $ 650,000 -- -- -- --
Conversion to Common
Stock.................... (6,500) (650,000) -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- -- --
========= ----------- ========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of
year..................... 724,092 $ 7,241 1,284,449 $ 12,845 1,522,158 $ 15,222
Employee stock grants...... 1,533 15 -- -- -- --
Issuance of stock.......... 25,270 253 8,389 84 91,383 914
Private sales of stock..... -- -- 136,111 1,361 472,056 4,720
Exercise of warrants and
options.................. 331,796 3,318 87,931 879 8,333 83
Zandec interest and
commitment fee
conversion............... 76,164 762 -- -- -- --
Conversion of 12% Preferred
to Common Stock.......... 123,764 1,238 -- -- -- --
Financing costs............ 1,830 18 5,278 53 -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 402,500 4,025
Conversion of debt to
equity................... -- -- -- -- 30,231 303
Acquisition of Public
Telephone Corporation.... -- -- -- -- 304,879 3,049
Acquisition escrow
deposits................. -- -- -- -- 23,810 238
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,284,449 $ 12,845 1,522,158 $ 15,222 2,855,350 $ 28,554
========= ----------- ========= ------------ ========= ------------
</TABLE>
F-6
<PAGE> 7
PHONTEL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of
year..................... $ 3,482,110 $ 6,552,473 $ 8,755,364
Employee stock grants...... 10,335 -- --
Issuance of stock.......... 222,917 276,414 528,532
Private sales of stock..... -- 1,473,638 2,010,067
Exercise of warrants and
options.................. 1,335,876 552,581 34,917
JTMFC settlement........... 537,500 -- --
Zandec interest and
commitment fee
conversion............... 220,195 -- --
Options issued below fair
value.................... 24,785 -- --
Conversion of 12% Preferred
to Common Stock.......... 741,346 -- --
Financing costs............ (22,591) (99,742) (83,212)
Acquisition of World
Communications, Inc...... -- -- 2,712,852
Conversion of debt to
equity................... -- -- 137,375
Acquisition of Public
Telephone Corporation.... -- -- 2,054,902
Acquisition escrow
deposits................. -- -- 149,762
Warrants issued with
debt..................... -- -- 349,000
----------- ------------ ------------
Balance at end of year..... $ 6,552,473 $ 8,755,364 $ 16,649,559
----------- ------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of
year..................... $(4,658,009) $ (5,556,807) $ (7,303,804)
Net loss for the year...... (778,875) (1,695,122) (6,109,697)
Conversion of 12% Preferred
to Common Stock.......... (92,584) -- --
Dividends paid on 12% and
8% Preferred Stock....... (27,339) -- --
Dividends paid on 7% and 8%
Preferred Stock.......... -- (51,875) (40,375)
----------- ------------ ------------
Balance at end of year..... $(5,556,807) $ (7,303,804) $(13,453,876)
----------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY... $ 2,189,596 $ 2,647,867 $ 9,710,662
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net loss........................................... $ (778,875) $(1,695,122) $(6,109,697)
Adjustments to reconcile net loss to net cash flow
from operating activities:
Depreciation and amortization................... 896,041 2,236,269 4,383,049
Stock and stock awards issued................... 10,350 76,498 529,449
Accretion of debt............................... -- -- 55,103
Loss on disposal of assets...................... -- -- 298,626
Changes in assets and liabilities:
Accounts receivable........................... (132,885) 32,355 (64,873)
Other current assets.......................... (71,841) (116,591) (47,121)
Accounts payable.............................. (174,731) 1,975,628 (151,008)
Accrued expenses.............................. 263,149 (128,821) (434,999)
Other unusual charges and contractual
settlements................................ -- -- 962,338
--------- --------- ---------
11,208 2,380,216 (579,133)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Alpha Pay Phones-IV................. -- (2,334,215) --
Acquisition of World Communications................ -- -- (696,006)
Acquisition of Public Telephone.................... -- -- 24,191
Cash acquisition deposits.......................... -- -- (950,000)
Purchases of intangible assets..................... -- (363,853) (427,409)
Purchases of other assets.......................... (288,924) (215,382) (67,559)
Purchases of property and equipment................ (907,837) (300,852) (237,228)
--------- --------- ---------
(1,196,761) (3,214,302) (2,354,011)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances....................... -- 1,400,000 3,132,500
Principal payments on borrowings................... (1,637,957) (2,202,608) (1,890,850)
Proceeds from issuance of preferred and common
stock and other................................. 1,245,000 1,674,999 2,014,787
Dividends paid..................................... (27,339) (21,875) (40,375)
Debt financing costs............................... -- (75,000) --
Equity financing costs............................. (26,552) (99,689) (83,212)
Proceeds from warrant/option exercises............. 1,339,194 553,460 35,000
Proceeds from JTMFC settlement..................... 87,500 -- --
Repayment of advance from shareholder.............. (120,000) -- --
--------- --------- ---------
859,846 1,229,287 3,167,850
--------- --------- ---------
(Decrease) increase in cash.......................... (325,707) 395,201 234,706
Cash at beginning of period.......................... 409,262 83,555 478,756
--------- --------- ---------
Cash at end of period................................ $ 83,555 $ 478,756 $ 713,462
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year...................... $ 174,995 $ 385,311 $ 673,906
========= ========= =========
</TABLE>
F-8
<PAGE> 9
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- ----------
<S> <C> <C> <C>
NON-CASH TRANSACTIONS:
Common stock (402,500 shares) and preferred stock
(530,534 shares) issued for acquisition of World
Communications, Inc............................. -- -- $ 8,022,217
=========== =========== ===========
Common stock (304,879 shares) issued for
acquisition of Public Telephone Corporation..... -- -- $ 2,057,951
=========== =========== ===========
Common stock issued for services (1,830 shares in
1993, 8,389 shares in 1994, and 91,383 shares in
1995)........................................... $ 22,573 $ 76,498 $ 529,446
=========== =========== ===========
Common stock issued in payment of debt and interest
(30,231 shares in 1995)......................... -- -- $ 137,678
----------- ----------- -----------
Common stock issued for acquisition deposit (23,809
shares in 1995)................................. -- -- $ 150,000
=========== =========== ===========
Common stock (5,278 shares) issued for financing
costs in 1994................................... -- $ 99,689 --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 10
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhoneTel Technologies, Inc. and subsidiaries (the "Company") operates in
the telecommunications industry specializing in the business segment that
encompasses the installation of private pay telephones on a revenue sharing
basis, offering operator assisted long distance services, and national and
regional account management. The Company was incorporated on December 24, 1984,
and began its private pay telephone operations in August 1985. In April 1988,
the Company commenced reselling operator assisted long distance services. The
Company's operations are regulated by the Public Service or Ulitity Commissions
of the various States and the Federal Trade Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company capitalizes all
labor and overhead costs related to installing telephones and depreciates those
costs over the life of the telephone or the length of the location contract,
whichever is shorter. Depreciation for financial reporting and tax purposes is
computed using the straight-line method and accelerated methods, respectively,
over the estimated useful lives of the assets commencing when the equipment is
installed or placed in service.
INTANGIBLE ASSETS
Intangible assets include location contracts, non-compete agreements, costs
associated with obtaining operating certification in various states and
capitalized location contract fees. Intangible assets are amortized over the
life of the respective location contract, non-compete and sales commission
agreements, and five years for state operating certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets. A loss relating to an impairment of assets occurs when the aggregate of
the estimated undiscounted future cash inflows, (including any salvage values,
less estimated cash outflows) to be generated by an asset is less than the
asset's carrying value. Impairment is measured based on the difference between
the present value of the discounted expected future cash flows and the asset's
carrying value. No impairment was recorded in 1995 or 1994.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, " Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which establishes criterion for when impairment should be evaluated, how an
asset is determined to be impaired and the method of calculating the impairment
loss. The methods
F-10
<PAGE> 11
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
required by SFAS No. 121 are consistent with the methods currently being used by
the Company to review assets for impairment. Accordingly, the adoption of the
Statement, which is required for the Company in 1996, is not expected to have a
significant impact on the Company.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted long distance
services, and national and regional account management are recognized in the
period in which the customer places the related call.
EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus shares that would be outstanding
assuming exercise of dilutive stock options and warrants. The number of shares
that would be issued from the exercise of stock options and warrants would be
reduced by the number of shares that could have been purchased from the proceeds
at the average market price of the Company's stock.
Fully diluted earnings per share amounts would be determined in the same
manner as primary earnings per share except that the period-end stock price was
used and the number of shares was increased assuming conversion of the 7%
Cumulative Convertible Redeemable Preferred. (The 7% Cumulative Convertible
Redeemable Preferred was redeemed on March 15, 1996.) Due to the Company's net
loss, the impact of the assumed exercise of the stock options and warrants and
the assumed conversion of the 7% Cumulative Convertible Redeemable Preferred was
anti-dilutive and therefore were not included in the determination of the
weighted average shares outstanding.
The weighted average number of common shares outstanding has been adjusted
to reflect the one for six (1:6) reverse stock split which was effective
December 26, 1995.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
INCOME TAXES
The Company utilizes the asset and liability method to account for income
taxes whereby deferred tax assets and liabilities are recognized to reflect the
future tax consequences attributable to temporary differences between the
financial reporting basis of the existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be recovered and settled. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in the period
in which the change is enacted.
OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS
Other unusual charges and contractual settlements consist primarily of
costs associated with the settlement of contractual obligations to certain
former officers of the Company and related legal fees, and the write-off of
selected assets in connection with the outsourcing of the operator service
center, and consulting and legal fees incurred for changes to the operations of
the Company.
F-11
<PAGE> 12
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts relating to 1993 and 1994 have been reclassified to conform
to the current year presentation. The reclassifications have had no impact on
total assets, shareholders' equity or net loss as previously reported.
2. FINANCIAL CONDITION
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility commitment of $37,250,000) from
Internationale Nederlanden (U.S.) Capital Corporation and one other lender
(collectively know as "ING") to meet its anticipated working capital
obligations, consolidate debt, redeem preferred stock, and complete the
acquisitions of two pay phone companies, IPP and Paramount. The Company has
available under the credit facility $6,700,000 to fund future acquisitions and
for general working capital purposes. (See Note 3 and Note 15.)
Management believes, but cannot assure, that cash flow from operations, the
proceeds from the financing discussed above and other financial alternatives
will be sufficient to allow the Company to sustain its operations, meet its
current obligations and maintain some modest sales growth.
3. ACQUISITIONS AND MERGERS
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public") in a transaction accounted for as a purchase. The
Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public and issued 224,879 unregistered shares of the Company's Common Stock
to the shareholders of Public. In connection with the acquisition, the Company
entered into five year non-compete agreements with two of Public's former owners
which require both cash payments and the issuance, in the aggregate, of 80,000
shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock. In connection with the acquisition, the Company
entered into two year non-compete and employment agreements with three of
World's former officers. These non-compete and employment agreements require, in
the aggregate, payment of $625,000 over a two year period.
On March 25, 1994, the Company acquired substantially all of the assets of
Alpha Pay Phones-IV L.P. ("Alpha"). The acquired assets included 2,155 installed
telephones for a cash purchase price of $2,334,215, a note payable to sellers of
$1,100,620 and assumption by the Company of outstanding Alpha liabilities of
$2,164,038.
F-12
<PAGE> 13
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the Public and World acquisitions had occurred at the
beginning of 1994 and 1995 and as though the Alpha acquisition had occurred at
the beginning of 1994.
<TABLE>
<CAPTION>
1994 1995
----------- ------------
<S> <C> <C>
Total revenues.............................................. $27,138,550 $ 26,976,221
Net loss.................................................... (4,771,759) (10,516,464)
Net loss applicable to common shareholders.................. (5,594,273) (11,356,666)
Net loss per common share................................... $ (2.57) $ (5.82)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1994 or 1995, or of future results.
The pro forma statement of operations data includes adjustments related to
amortization of intangible assets, interest expense on borrowings used to
finance the acquisition and the weighted average number of common shares
outstanding after giving effect to the acquisitions.
ACQUISITIONS PENDING AT DECEMBER 31, 1995 AND COMPLETED ON MARCH 15, 1996
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. The Company
acquired 2,101 installed phones for a purchase price of $3,496,487 in cash,
555,589 unregistered shares of the Company's Common Stock, 5,453 shares of 14%
Preferred Stock (immediately convertible into 54,530 shares of Common Stock),
and warrants to purchase 117,785 shares of the Company's Common Stock at a
nominal exercise price per share. Additionally, the Company assumed
approximately $1,757,000 in liabilities, of which $1,551,796 was repaid by the
Company on March 15, 1996. The cash purchase price included three five year
non-compete agreements, with an aggregate value of $60,000, with three of IPP's
former officers. The acquisition will be recorded as a purchase and the
difference between the fair value of the tangible assets acquired and the total
purchase price will be recorded as an increase to intangibles and amortized over
the life of the acquired location contracts which is estimated to be 36 to 60
months.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed phones
for a cash purchase price of $9,618,553, 8,333 shares of 14% Preferred Stock
(immediately convertible into 83,330 shares of Common Stock), warrants to
purchase 179,996 shares of the Company's Common Stock at a nominal exercise
price per share, and the Company assumed outstanding liabilities of
approximately $733,000, of which $693,446 was repaid on March 15, 1996. The
purchase price included a five year consulting and non-compete agreement, valued
at $50,000, with one of Paramount's former officers. The acquisition will be
recorded as a purchase and the difference between the fair value of the tangible
assets acquired and the total purchase price will be recorded as an increase to
intangibles and amortized over the life of the acquired location contracts which
is estimated to be 36 to 60 months.
4. ACCOUNTS RECEIVABLE
The Company has billing, collection and advance payment agreements with
Zero Plus Dialing, Inc. ("ZPDI") which provide for, among other things, the sale
of certain eligible accounts to ZPDI. These receivables result from the Company
reselling operator assisted long distance services. Included in accounts
receivable at December 31, 1994 and 1995 is approximately $160,496 and $78,007,
respectively, due from ZPDI. Approximately $5,300,000 and $3,800,000 of
receivables were sold pursuant to these agreements
F-13
<PAGE> 14
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE (CONTINUED)
during 1994 and 1995, respectively, of which approximately $676,755 and $594,076
have not been collected by ZPDI at December 31, 1994 and 1995, respectively.
5. PROPERTY AND EQUIPMENT
As of December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------------
(IN YEARS) 1994 1995
------------ ----------- -----------
<S> <C> <C> <C>
Telephone boards, enclosures and cases....... 3-7 $ 6,155,690 $16,386,987
Operator service equipment................... 5 1,065,389 --
Furniture, fixtures and other equipment...... 3-5 1,329,155 989,300
Leasehold improvements....................... 2-5 413,177 231,466
---------- ----------
8,963,411 17,607,753
Less -- accumulated depreciation........... (3,668,572) (3,508,642)
---------- ----------
$ 5,294,839 $14,099,111
========== ==========
</TABLE>
Depreciation expense, including amortization of assets under capital
leases, was $668,415, $1,179,137 and $1,846,453 for the years ended December 31,
1993, 1994 and 1995, respectively.
6. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1994 1995
------------- ----------- -----------
<S> <C> <C> <C>
Costs incurred in the acquisition of
installed phones (See Note 3)............ 36-60 months $ 3,026,387 $12,362,884
Non-compete agreements..................... 24-60 months 400,000 1,513,765
State operating certifications............. 60 months 260,113 466,796
Capitalized location contract fees......... 96-120 months 997,574 1,040,242
----------- -----------
4,684,074 15,383,687
Less: accumulated amortization............. (1,254,953) (3,791,530)
----------- -----------
$ 3,429,121 $11,592,157
========== ==========
</TABLE>
Amortization of intangible assets amounted to $227,629, $1,057,132 and
$2,536,596 for the years ended December 31, 1993, 1994 and 1995, respectively.
7. LONG-TERM DEBT
As of December 31, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Note payable to two third party investors repaid on March
15, 1996. The principal due at the contractual maturity
of April 1997 was $1,200,000............................. -- $ 906,105
Notes payable to bank repaid on March 15, 1996............. -- 2,340,000
</TABLE>
F-14
<PAGE> 15
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
7. LONG-TERM DEBT (CONTINUED)
Notes payable due on demand to five former World
stockholders repaid on March 15, 1996.................... -- 625,000
Notes payable to former stockholders of Public due on April
16, 1996 with interest at 9%. On March 15, 1996 $211,285
was repaid............................................... -- 293,226
Non-compete notes payable to two former officers of Public
repaid on March 15, 1996................................. -- 203,480
Two notes payable to a service provider repaid on March 15,
1996..................................................... $ 1,852,628 1,401,872
Term notes payable to a vendor in monthly installments
ranging from $31,107 to $47,330 including interest at
rates varying from 10% to 13.75%. The vendor has a
security interest in the underlying phones. On March 15,
1996, the Company repaid $225,000, refinanced the
remaining balance owed at 15% interest and the vendor
released its security interest in the goods sold......... 694,611 1,066,428
Promissory notes payable to Alpha repaid on March 15,
1996..................................................... 751,848 500,756
Promissory notes payable to a group of five investors
repaid in 1995........................................... 300,000 --
Promissory note payable to a vendor in monthly installments
of $318 through $535 at an interest rate of 8.75%........ -- 120,617
Promissory note payable in monthly installments of $12,500
through January 1996 at an interest rate of 8%........... 147,721 124,614
Notes payable to directors and shareholders at an imputed
interest rate of prime plus 5%, repaid on March 15,
1996..................................................... -- 1,732,500
Notes payable to two investors repaid on March 15, 1996.... -- 200,000
Note payable to a vendor repaid on March 15, 1996.......... -- 201,101
Note payable to a consultant. On March 15, 1996, the
consultant accepted 12,500 shares of the Company's Common
Stock and $50,000 in full settlement of the debt......... -- 125,000
Non-compete obligation to a former owner of World payable
in bi-weekly installments of $6,000 at an imputed
interest at 9%........................................... -- 288,844
Various notes payable to vendors in monthly installments
ranging from $283 to $3,538 with interest rates ranging
from 6.9% to 10.4%....................................... 131,848 199,370
----------- -----------
3,878,656 10,328,913
Less current maturities.................................... (1,814,760) (1,010,412)
----------- -----------
$ 2,063,896 $ 9,318,501
=========== ===========
</TABLE>
F-15
<PAGE> 16
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LONG-TERM DEBT (CONTINUED)
Following are maturities of long-term debt for each of the next five years
based on the terms of the ING credit facility (See Note 15):
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1996.................................................... $ 1,010,412
1997.................................................... 640,913
1998.................................................... 1,001,576
1999.................................................... 7,674,596
2000.................................................... 1,416
-----------
$10,328,913
===========
</TABLE>
On March 15, 1996, $9,214,468 of outstanding debt was repaid.
8. LEASES
OPERATING LEASES
The Company leases its corporate offices and other locations, office
equipment and vehicles under noncancellable operating leases expiring at various
times through 1999.
Future minimum noncancellable payments under operating leases are as
follows:
<TABLE>
<S> <C>
1996...................................................... $329,352
1997...................................................... 303,658
1998...................................................... 96,721
1999...................................................... 54,473
2000...................................................... --
</TABLE>
Rent expense under all operating leases was $264,369, $334,984 and $363,929
for the years ended December 31, 1993, 1994 and 1995, respectively.
CAPITAL LEASES
During 1995, as part of the acquisition of World and Public, the Company
assumed capital leases between various lessors and World and Public. World and
Public leased their installed phones. The allocation of the purchase price
increased the historical book value of the phones to their current fair value.
On March 15, 1996, the Company paid off these leases with the proceeds received
in the refinancing of its debt.
During 1994, the Company entered into lease financing agreements for the
acquisition of computer equipment. Each agreement has a term of 36 months with
interest ranging from 8.6% to 9.7% per year.
Assets recorded under capital leases at December 31 were as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Telephone boards, enclosures and cases...................... $ 111,349 $9,429,049
Operator service equipment.................................. 405,570 --
Office equipment............................................ 110,442 170,058
---------- ----------
627,361 9,599,107
Less accumulated amortization............................... (246,198) (616,778)
---------- ----------
$ 381,163 $8,982,329
========== ==========
</TABLE>
F-16
<PAGE> 17
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. LEASES (CONTINUED)
On March 15, 1996, the Company repaid $3,243,965 of the outstanding
obligations under capital leases. The following are maturities of long-term debt
(which replaced obligations under capital leases) based on the terms of the ING
credit facility (See Note 15):
<TABLE>
<S> <C>
1996................................................ $ 288,972
1997................................................ 112,545
1998................................................ 357,371
1999................................................ 2,774,049
2000................................................ --
----------
$3,532,937
==========
</TABLE>
9. INCOME TAXES
No provisions for income tax were required and no income taxes were paid for the
years ended December 31, 1993, 1994 or 1995 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) at December 31
were as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Federal net operating loss carryforward................... $ 1,863,867 $ 5,342,374
Depreciation and amortization............................. 273,287 1,017,406
Bad debts................................................. 17,160 13,600
Other..................................................... 5,538 --
----------- -----------
Gross deferred tax assets................................. 2,159,852 6,373,380
Accruals.................................................. (117,000) --
Deferred sales commissions................................ (130,217) (125,066)
Valuation allowance on deferred tax assets................ (1,912,635) (6,248,314)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
</TABLE>
A valuation allowance has been provided against the net deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets will be ultimately realized. The net
operating loss carryforwards, if not utilized, will expire between the years
2002-2010. Internal Revenue Code Section 382 provides for the limitation on the
use of net operating loss carryforwards in years subsequent to significant
changes in ownership. As a result of the Company's Initial Public Offering in
1988 and certain other transactions, including acquisitions, changes in
ownership have occurred resulting in significant limitations on the use of net
operating loss carryforwards. The extent of limitations as a result of
significant changes in ownership has not been determined by the Company.
10. SHAREHOLDERS' EQUITY
As of December 31, shareholders' equity consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized;
530,534 shares issued and outstanding at December 31,
1995)................................................. -- $ 5,305,340
</TABLE>
F-17
<PAGE> 18
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
10. SHAREHOLDERS' EQUITY (CONTINUED)
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... $ 1 1
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares
issued and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 981,084 981,084
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 200,000 200,000
Common Stock ($0.01 par value -- 22,500,000 shares
authorized; 1,522,158 and 2,855,350 shares issued and
outstanding at December 31, 1994 and 1995)............ 15,222 28,554
Additional paid-in capital.............................. 8,755,364 16,649,559
Accumulated deficit..................................... (7,303,804) (13,453,876)
------------ ------------
$ 2,647,867 $ 9,710,662
============ ============
</TABLE>
PREFERRED STOCK
The Company's 10% Cumulative Non-Voting Redeemable Preferred Stock ("10%
Non-Voting Preferred") has a liquidation preference of $10 per share. Under the
terms of the 10% Non-Voting Preferred, which was issued in connection with the
acquisition of World Communications, Inc. by the Company, from December 1996
through November 1997 the Company can be required by each holder of the 10% Non-
Voting Preferred to repurchase their shares for $30 per share. At the time of
the World acquisition, the Company entered into a Voting and Proxy Agreement
("the Agreement") with certain common stockholders of the Company ("Holders")
representing, in the aggregate, over 50% of the then outstanding Common Stock of
the Company. The Agreement has also been signed by the holders of the Nominal
Value Warrants and Series A Preferred such that common shareholders representing
over 50% of the Common Stock have signed the Agreement. Under the terms of the
Agreement, the Holders agreed to call a special meeting of the shareholders by
June 1996 at which time the Holders will propose that each share of the 10%
Non-Voting Preferred be made convertible into 1.67 shares of the Company's
Common Stock (a total of 885,992 shares). Such number of shares had a fair value
at the date of acquisition approximately equal to the stated value of the 10%
Non-Voting Preferred. Under the terms of the Agreement, the Holders have agreed
to vote in favor of the proposal. Once the 10% Non-Voting Preferred is
convertible, the Company cannot be required to redeem the 10% Non-Voting
Preferred. No dividends were paid on the 10% Non-Voting Preferred in 1995 and no
dividends are payable or accrue for nine months from date of issuance or if the
stock is converted to Common Stock. In addition, certain holders of the 10%
Non-Voting Preferred and the Company entered into a separate Voting and Proxy
Agreement which provides that such holders shall vote the shares of 10%
Non-Voting Preferred held by them to approve the foregoing grant of conversion
rights.
The Company's 10% Cumulative Redeemable Preferred Stock ("10% Cumulative
Preferred") was issued to a significant customer in 1992 (see Note 12). No
dividends were paid on the 10% Cumulative Preferred in 1993, 1994 or 1995 and
all outstanding shares of the 10% Cumulative Preferred were redeemed on March
15, 1996.
F-18
<PAGE> 19
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
All outstanding shares of the Company's 8% Cumulative Redeemable Preferred
Stock ("8% Preferred") were redeemed on March 15, 1996. Dividends paid on the 8%
Preferred were $24,400, $30,000 and $36,000 in 1993, 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
All outstanding shares of the Company's 7% Cumulative Convertible
Redeemable Preferred Stock ("7% Preferred") were redeemed on March 15, 1996.
Dividends paid on the 7% Preferred were $21,875 and $4,375 in 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
PREFERRED DIVIDENDS
On December 31, 1993, 1994 and 1995, the Company had dividends in arrears
payable to preferred shareholders in the aggregate amount of $305,950, $546,055
and $826,548, respectively. On March 15, 1996, the 10% Cumulative Preferred, 8%
Preferred and the 7% Preferred Stock and dividends in arrears were either paid
or converted to a new class of preferred stock (See Note 15).
SALES AND ISSUANCE OF UNREGISTERED COMMON STOCK
Sales and issuances of the Company's unregistered Common Stock during 1995
were as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE PRICE
SHARES ISSUED PER SHARE
------------- -------------
<S> <C> <C>
Private sales to officers and directors.................... 286,643 $4.77
Private sales to creditors of the Company.................. 133,332 4.50
Private sales to affiliates of the Company................. 38,888 4.63
Issued in connection with acquisitions..................... 731,189 6.74
Issued to third parties for services....................... 69,895 6.01
Issued to directors for services........................... 21,488 5.09
Issued to directors upon conversion of debt and accrued
interest................................................. 26,065 4.51
Issued to third party creditors upon conversion of debt and
accrued interest......................................... 4,166 4.80
Issued for exercising stock options........................ 8,333 4.20
Other issuances............................................ 13,193 5.20
---------
1,333,192
=========
</TABLE>
Sales to directors, creditors and affiliates of the Company were made at
prices per share below the quoted market values (based on prices calculated by
the Company's investment advisor) of the Company's Common Stock on the dates of
the transactions. No expense was recognized by the Company as the Company
believes that the discount associated with these sales reflects the impact on
quoted market value of issuing unregistered shares.
F-19
<PAGE> 20
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANT ACTIVITY
Stock warrant activity during 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
--------- -------------
<S> <C> <C> <C>
Balance, December 31, 1992................................. 350,887 $3.00- $ 6.00
Granted.................................................... 28,519 6.00- 8.70
Exercised.................................................. (310,962) 3.00- 6.00
Cancelled.................................................. (9,411) 4.50- 9.90
---------
Balance, December 31, 1993................................. 59,033 6.00- 9.90
Granted.................................................... 88,236 7.50- 15.75
Exercised.................................................. (35,000) 6.00- 8.70
Cancelled.................................................. --
---------
Balance, December 31, 1994................................. 112,269 7.50- 15.75
Granted:
To the Company's investment advisor...................... 166,666 6.00
To officers of the Company............................... 47,583 5.70- 6.00
To lenders............................................... 277,884 5.70- 6.00
---------
Total Granted.............................................. 492,133 5.70- 6.00
Exercised.................................................. --
Cancelled.................................................. (24,051) 9.90
---------
Balance, December 31, 1995................................. 580,351 $5.70- $15.75
========
</TABLE>
The estimated fair value of the warrants on the date of the grant for the
warrants issued to the investment advisor has been included in the determination
of World's purchase price. The fair value of warrants issued to lenders has been
recorded as an adjustment to interest expense. The difference between the
intrinsic value and the exercise price of the warrants issued to officers of the
Company was not material. All warrants outstanding at each period end are
exercisable.
STOCK OPTION ACTIVITY
Options are granted by the Company at the discretion of the Board of
Directors to key employees, officers and directors, and generally are
exercisable immediately upon issuance, have terms of three to five years and are
issued with exercise prices at or slightly below quoted market value of the
Company's Common Stock on the date of grant. The amount of compensation expense
recorded by the Company during 1994 and 1995 relating to stock option activity
was not material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." The Statement, which is effective for the Company beginning in
1996, encourages companies to record stock options issued to both employees and
nonemployees at the fair value on the date of grant. As an alternative to fair
value recording, the Statement permits companies to continue to use the methods
outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" but requires that options issued to non-employees be
recorded at the fair value on the date of grant and requires pro forma
disclosure of the impact on the company as if the suggested method had been
used. The Company has not yet determined how it will adopt the Statement.
F-20
<PAGE> 21
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
Information relating to stock option activity during 1993, 1994 and 1995
was as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES OPTION PRICE
--------- -------------
<S> <C> <C> <C>
Balance, December 31, 1992................................. 249,637 $3.00- $12.60
Granted.................................................... 187,500 3.00- 15.78
Exercised.................................................. (20,833) 3.18- 3.18
Cancelled.................................................. --
---------
Balance, December 31, 1993................................. 416,304 3.00- 15.78
Granted.................................................... 97,758 4.50- 19.50
Exercised.................................................. (52,930) 4.50- 6.00
Cancelled.................................................. (25,000) 5.22- 9.00
---------
Balance, December 31, 1994................................. 436,132 3.00- 19.50
Granted.................................................... 168,373 6.00- 6.00
Exercised.................................................. (8,333) 3.00- 6.00
Cancelled.................................................. (124,427) 6.00- 18.78
---------
Balance, December 31, 1995................................. 471,745 $3.00- $19.50
========
Exercisable, December 31, 1995............................. 435,243 $3.00- $19.50
========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND SEVERANCE AGREEMENTS
On March 15, 1996, the Company settled the amounts owed under the September
15, 1995 Separation Agreements with two of its former officers. Under the terms
of the Separation Agreements, the Company was obligated to pay the former
officers the remainder of their employment agreements and the Company agreed to
accelerate the vesting of options for 194,027 shares of the Company's Common
Stock at $6.00 per share.
As part of the merger with World, the Company executed employment
agreements with three former employees of World. The former Chairman of World
will remain as an advisor to the Company for 24 months and receive $125,000 in
year one and $135,000 in year two plus certain benefits. The former President of
World has become an officer of the Company and will receive $110,000 for the
first year of his contract and $120,000 in the second year, plus other customary
benefits. The former Vice President and Secretary of World has become an officer
of the Company and will receive a base salary of $65,000 for the first year of
her contract and $70,000 for the second year, plus other customary benefits.
On May 1, 1995, the Company entered into a three year employment agreement
with two one year renewal options with an officer of the Company, whereby he
will receive compensation of $95,000, $105,000 and $120,000 during the terms of
the agreement and $130,000 and $140,000 during the option periods of employment,
plus other customary benefits. This agreement provides for early contract
termination and a "change in control" provision which requires severance pay
equal to 150% of the normal salary which would have been payable over the next
three years.
CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion, any
such outstanding matters, of which the Company has knowledge,
F-21
<PAGE> 22
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
have been reflected in the financial statements and are covered by insurance or
would have no material adverse effect on the Company's financial position,
results of operations or cash flows.
12. MAJOR CUSTOMER
The Edward J. DeBartolo Corporation and its affiliates (collectively
"DeBartolo"), accounted for 25%, 18% and 15% of the Company's total revenues for
the years ended December 31, 1993, 1994 and 1995, respectively. The 10%
Cumulative Preferred, which was issued in connection with the DeBartolo
management agreements, was recorded at $1 based on the Company's determination
that the benefits associated with the agreements should be recorded in the
statement of operations as earned. On March 15, 1996, all of the outstanding
shares of the 10% Cumulative Preferred were redeemed by the Company.
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and effective
January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (collectively "the Statements"). The Statements
establish accounting standards for employers who offer postretirement or
postemployment benefits and require that the estimated cost of these benefits be
accrued over the service lives of the covered employers. The Company does not
offer postretirement or postemployment benefits to its employees and, therefore,
the adoption of the Statements did not have a material impact on the Company's
financial statements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents. The carrying amount reported in the balance
sheet approximates fair value.
Long-term debt. The estimated fair value of long-term debt is determined
using interest rates that could be available to the Company for similar
instruments with similar terms.
Estimated fair values of the Company's financial instruments at December
31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents................. $ 713,462 $ 713,462
Long-term debt............................ 10,328,913 10,803,472
Obligations under capital leases.......... 3,532,937 3,741,869
</TABLE>
15. SUBSEQUENT EVENTS
CHANGES IN STOCKHOLDER'S EQUITY, DEBT REFINANCING AND COMPLETION OF
ACQUISITIONS
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Special Convertible Preferred Stock, $0.20 par value, $0.20
Stated Value, 250,000 authorized shares, with each share immediately convertible
into 20 shares of Common Stock, and non-voting, ("Series A Preferred"); (ii)
Series B Special Convertible Preferred Stock, $0.20 par value, $120 Stated
Value, 250,000 authorized shares, with each share immediately convertible into
20 shares of Common Stock, and non-voting ("Series B Preferred"); and (iii) 14%
Convertible Cumulative Redeemable Preferred Stock, without par value, $60 Stated
Value, non-voting, 200,000 authorized shares, and with each share immediately
convertible into
F-22
<PAGE> 23
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
10 shares of Common Stock ("14% Preferred"). Each share of the 14% Preferred is
entitled to receive a quarterly dividend of 0.035 shares of 14% Preferred.
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as the "Lenders"). The Company has available
under the Credit Facility $6,700,000 to fund future acquisitions and for general
working capital purposes. The Company used the funds to complete the Paramount
and IPP acquisitions, to repay all outstanding long-term debt and capital lease
obligations which had a secured interest in the Company's installed phones, to
redeem the 10% Cumulative Preferred, 7% Preferred and 8% Preferred and to pay
related transaction fees. The Credit Facility requires monthly interest payments
at prime plus 5% and contains various covenants restricting the Company's
ability to pay dividends or incur additional debt, among other conditions, and
also contains financial covenants requiring minimum net worth, working capital
and earnings before interest, depreciation and amortization among other
covenants. The Credit Facility also contains a subjective acceleration clause
which states that in the event of a material adverse change in the business, as
determined by the Lenders, the Lenders can call the debt at its discretion. The
Lenders have waived their right to exercise this subjective acceleration clause
through April 1, 1997, (subsequently amended -- see note 16).
Principal payments related to the original facility were to commence
September 1997 and continue quarterly through June 1999 at which time the
remaining principal balance is due. The amount of principal payments is
contingent upon numerous factors, including the borrowing base and cash flow of
the Company. Based on amounts borrowed at March 15, 1996, the estimated
principal payment in September 1997 would be $534,000, increasing to $884,000
quarterly for 1998. All of the Company's installed phones are pledged as
collateral to the Credit Facility.
The majority of the Credit Facility ($29,000,000) can be converted into
Series B Preferred at the ratio of 833 shares for each $100,000 in outstanding
debt and interest. Additionally, the Lenders received warrants to purchase
204,824 shares of Series A Preferred at an exercise price of $0.20 per share.
Each share of Series A Preferred and Series B Preferred is convertible into 20
shares of Common Stock. The estimated fair value of the warrants on the date of
grant will be recorded as interest expense over the term of the Credit Facility.
The Company has estimated the annual non-cash interest expense to be in excess
of $1,900,000.
On March 15, 1996, concurrent with the consummation of the Credit Facility,
the Company redeemed the 10% Cumulative Preferred, the 8% Preferred, and the 7%
Preferred. The redemption price was $1,117,371 and 34,434 shares of 14%
Preferred. In the aggregate, $6,475,011 of the Company's outstanding
obligations, including portions of the purchase price for the pending
acquisitions, was liquidated by issuing 107,918 shares of 14% Preferred. The
approximately $2,000,000 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value will be recorded as a reduction of
earnings available to common shareholders during the first quarter of 1996.
On March 15, 1996, warrants to purchase 2,018,946 shares of Common Stock at
a nominal exercise price per share ("Nominal Value Warrants") were issued in
conjunction with the IPP and Paramount acquisitions, redemption of the 10%
Cumulative Preferred, 8% Preferred, and the 7% Preferred, and conversion of
certain debt of the Company to the 14% Preferred. The warrants expire on March
13, 2001. The Company has utilized an independent appraiser who has estimated
the fair value of the Nominal Value Warrants to be $4,974,673, using the
Black-Scholes valuation method, of which $3,886,139 (the amount attributable to
the warrants provided to related parties in connection with the redemption of
the 10% Cumulative Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
F-23
<PAGE> 24
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
As of March 15, 1996, the Company has reserved 14,366,022 shares of Common
Stock for issuance under the following scenarios: (1) conversion of $29,000,000
of the debt under the Credit Facility into 241,667 shares of Series B Preferred
Stock which is then immediately convertible into 4,833,333 shares of Common
Stock; (2) exercise of warrants to purchase 204,824 shares of Series A Preferred
Stock at $0.20 per share, immediately convertible into 4,096,480 shares of
Common Stock; (3) conversion of 107,918 shares of 14% Preferred into 1,079,179
shares of Common Stock; (4) conversion, upon Shareholder approval, of 530,534
shares of 10% Non-Voting Preferred into 885,992 shares of Common Stock; (5)
exercise of 2,018,942 Nominal Value Warrants; (6) exercise of 980,351 warrants
at prices ranging from $5.70 to $15.75 per share; and (7) exercise of 471,745
stock options at prices ranging from $3.00 to $19.50 per share.
16. SUBSEQUENT EVENTS -- UNAUDITED
PENDING ACQUISITIONS AND CHANGES TO SHAREHOLDERS' EQUITY
During the April and May 1996, warrants representing 972,487 shares of
Common Stock were exercised, and total proceeds to the Company were $9,725. Of
the total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are considered revenue producing telephones, for a
purchase price consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of
the Company's Common Stock, valued at the average of the BID and ASK (as
reported by The NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an
unregistered and block discount of 20.19% as determined by Key Trust Company of
Ohio, N.A. ("Key Trust")) $4,637,840, or $2.15 per share; and (iii)
approximately $675,122 in related acquisition expenses. The Amtel acquisition
closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired approximately
3,115 installed pay telephones for a purchase price, consisting of: (i) $500,000
in cash; (ii) 166,666 unregistered shares of the Company's Common Stock, valued
at the average of the BID and ASK (as reported by NASDAQ on September 16, 1996,
less an unregistered and block discount of 30.42% as determined by Key Trust)
$311,665, or $1.87 per share; (iii) assumption of capital lease obligations of
$7,750,000; (iv) notes payable to the selling shareholders of POA, $3,634,114;
(v) assumption of other debt, $234,890; (vi) two five year non-competition and
consulting agreements with two of the selling shareholders, $307,264; and (vii)
approximately $166,748 in related acquisition expenses.
F-24
<PAGE> 25
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16. SUBSEQUENT EVENTS -- UNAUDITED (CONTINUED)
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA contracts).
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds of $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
Based on amounts borrowed under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter till December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, and September 30, 1996 the Company did not
meet certain financial loan covenants. The Lenders have amended the credit
agreement to enable compliance with these loan covenants and have waived their
right to exercise the subjective acceleration clause through December 31, 1997.
PENDING ACQUISITIONS -- COMPLETION CONTINGENT ON OBTAINING FINANCING
On October 16, 1996, the Company executed a Letter of Intent with Cherokee
Communications, Inc. ("Cherokee") for the acquisition of 14,000 public pay
telephones for a purchase price consisting of (i) $54,000,000 in cash; (ii)
three five year non-compete and consulting agreements with the selling
shareholders, $1,250,000, of which $625,000 is payable at closing; (iii) three
two year employment agreements with the selling shareholders and former officers
of Cherokee requiring 24 monthly payments aggregating $739,640; (iv) additional
consideration of $6,000,000 in cash or Common Stock payable in two equal
installments due January 10, 1998 and 1999 only if the Federal Communications
Commission fails to implement Rate Caps, Rate Guidelines, and/or Billed Party
Preferences during the calendar years of 1997 and 1998; (v) $3,103,933 for
$3,655,761 in current receivables net of assumed income tax liabilities of
$551,828; and (vi) approximately $317,500 in related acquisition expenses.
On October 9, 1996, the Company executed a Letter of Intent with Texas
Coinphone for the acquisition of 1,200 installed pay telephones for a purchase
price of $3,660,000 and $50,000 in related acquisition expenses. Both of these
transactions are subject to financing.
F-25
<PAGE> 26
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER (UNAUDITED)
31, JUNE 30,
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................. $ 713,462 $ 1,025,382
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $100,961, respectively......................... 901,508 1,570,576
Other current assets............................................. 185,634 302,469
----------- -----------
Total current assets.......................................... 1,800,604 2,898,427
Property and equipment, net........................................ 14,099,111 22,995,039
Intangible assets, net............................................. 11,592,157 24,286,302
Other assets....................................................... 1,425,384 1,863,716
----------- -----------
$28,917,256 $52,043,484
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt -- related parties............. -- $ 3,548,454
Current portion of long-term debt -- others...................... $ 1,010,412 1,502,653
Current portion of obligations under capital leases.............. 288,972 73,510
Accounts payable................................................. 2,772,306 2,039,122
Accrued expenses................................................. 1,610,100 3,338,419
Deferred revenues................................................ -- 900,000
Other unusual charges and contractual settlements................ 962,338 480,551
----------- -----------
Total current liabilities..................................... 6,644,128 11,882,709
Long-term debt -- related parties (amounts due at
maturity $1,732,500 and $29,000,000, respectively)............... 1,732,500 23,149,508
Long-term debt -- others........................................... 7,586,001 287,556
Obligations under capital leases................................... 3,243,965 202,557
14% cumulative preferred stock mandatorily redeemable
(redemption amount $6,742,960, due June 30, 2000)................ -- 6,404,228
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity...................... 9,710,662 10,116,926
----------- -----------
$28,917,256 $52,043,484
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 27
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE
SIX MONTHS ENDED JUNE 30, 30,
-------------------------- ------------------------
1995 1996 1995 1996
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls.............................. $ 4,995,329 $ 10,411,344 $2,664,224 $ 5,959,549
Non-coin................................ 2,305,495 5,292,530 1,004,207 3,383,648
Other................................... 577,238 1,101,636 436,316 855,709
----------- ------------ --------- -----------
7,878,062 16,805,510 4,104,747 10,198,906
----------- ------------ --------- -----------
OPERATING EXPENSES:
Line and transmission charges........... 2,100,427 3,866,207 1,287,084 2,260,838
Location commissions.................... 1,516,365 2,536,730 886,665 1,377,263
Other operating expenses................ 2,682,710 5,047,451 1,132,493 2,906,855
Depreciation and amortization........... 1,432,491 5,312,885 731,591 3,227,617
Selling, general & administrative....... 1,345,427 2,398,724 767,934 1,295,041
Other unusual charges and contractual
settlements.......................... -- 5,334,514 -- 531,149
----------- ------------ --------- -----------
9,077,420 24,496,511 4,805,767 11,598,763
----------- ------------ --------- -----------
Loss from operations...................... (1,199,358) (7,691,001) (701,020) (1,399,857)
OTHER INCOME (EXPENSE):
Interest expense -- related parties..... -- (1,816,890) -- (1,537,174)
Interest expense -- others.............. (220,230) (274,221) (116,939) (50,266)
Interest income......................... 6,588 1,976 6,038 2,142
----------- ------------ --------- -----------
(213,642) (2,089,135) (110,901) (1,585,298)
----------- ------------ --------- -----------
Loss before extraordinary item............ (1,413,000) (9,780,136) (811,921) (2,985,155)
Extraordinary item:
Loss on debt restructuring.............. -- (267,281) -- (90,571)
----------- ------------ --------- -----------
NET LOSS.................................. $(1,413,000) $(10,047,417) $ (811,921) $(3,075,726)
=========== ============ ========= ===========
Earnings per share calculation:
Preferred dividend payable in cash...... (154,834) -- (77,417) --
Preferred dividend payable in kind...... -- (110,622) -- (83,372)
Accretion of 14% Preferred to its
redemption value..................... -- (24,119) -- (24,119)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred......................... -- (2,002,386) -- --
----------- ------------ --------- -----------
Net loss applicable to
common shareholders..................... $(1,567,834) $(12,184,544) $ (889,338) $(3,183,217)
=========== ============ ========= ===========
Net loss per common share before
extraordinary item...................... $ (0.99) $ (3.33) $ (0.54) $ (0.74)
=========== ============ ========= ===========
Net loss per common share................. $ (0.99) $ (3.41) $ (0.54) $ (0.76)
=========== ============ ========= ===========
Weighted average number of shares......... 1,586,142 3,576,381 1,648,058 4,196,868
=========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 28
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
1995 1996
----------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $(1,413,000) $(10,047,417)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Depreciation and amortization............................... 1,432,491 5,312,885
Issuance of Nominal Value Warrants.......................... -- 3,886,140
Stock issued in lieu of cash, payments...................... 61,160 20,620
Accretion of related parties' debt.......................... -- 561,008
Accretion of other debt..................................... 45,921
Loss on debt restructuring.................................. -- 338,546
Increase in allowance for doubtful accounts................. -- 60,961
Amortization of deferred revenues........................... -- (300,000)
Changes in assets and liabilities:
Accounts receivable....................................... (233,352) (584,429)
Other current assets...................................... 94,429 (116,835)
Accounts payable.......................................... 575,257 (703,756)
Accrued expenses.......................................... (51,711) 1,610,819
Other unusual charges and contractual settlements......... -- (481,787)
----------- ------------
465,274 (397,324)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc................... -- (4,826,335)
Acquisition of Paramount Communications Systems................ -- (9,780,644)
Deferred charges on pending acquisitions....................... -- (44,747)
Deferred revenues.............................................. -- 1,200,000
Purchases of intangible assets................................. (185,087) (662,436)
Change in other assets......................................... (79,209) 236,668
Acquisition deposits........................................... -- (1,600,000)
Purchases of property and equipment............................ (220,626) (1,065,496)
----------- ------------
(484,922) (16,542,990)
----------- ------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances................................... 200,000 --
Proceeds from related party debt............................... -- 32,223,454
Proceeds from shareholder debt................................. -- 575,000
Principal payments on borrowings............................... (918,141) (10,272,477)
Proceeds from issuance of preferred and common stock and
other....................................................... 690,000 --
Dividends paid................................................. (40,375) --
Debt financing costs........................................... -- (4,166,097)
Redemption of 10% Preferred and 8% Preferred................... -- (1,117,371)
Equity financing costs......................................... (52,935) --
Proceeds from warrant and option exercises..................... 20,000 9,725
----------- ------------
(101,451) 17,252,234
----------- ------------
(Decrease) increase in cash...................................... (121,099) 311,920
Cash at beginning of period...................................... 478,756 713,462
----------- ------------
Cash at end of period............................................ $ 357,657 $ 1,025,382
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 29
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 1995 30, 1996
-------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MANDATORILY REDEEMABLE PREFERRED STOCK
14% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
Redemption of 7% Preferred................... -- -- 3,625.00 $ 217,500
Redemption of 8% Preferred................... -- -- 14,143.33 848,600
Redemption of 10% Preferred.................. -- -- 16,668.00 1,000,000
Conversion of debt........................... -- -- 59,695.39 3,581,723
Acquisition of Paramount Communications...... -- -- 8,333.33 375,768
Acquisition of International Payphones....... -- -- 5,453.14 245,896
Dividends payable-in-kind.................... -- -- 4,464.48 110,622
Accretion of carrying value to amount
payable at redemption, June 30, 2000...... -- -- -- 24,119
------- ---------- ---------- -----------
TOTAL MANDATORILY REDEEMABLE
PREFERRED STOCK.............................. -- -- 112,382.67 $ 6,404,228
======= ========== ========== ===========
NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. 2,500 $ 200,000 2,500 $ 200,000
Redemption of 7% Preferred................... -- -- (2,500) (200,000)
------- ---------- ---------- -----------
Balance at end of period..................... 2,500 $ 200,000 --
======= ---------- ========== -----------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 12,200 $ 981,084 12,200 $ 981,084
Redemption of 8% Preferred................... -- -- (12,200) (981,084)
------- ---------- ---------- -----------
Balance at end of period..................... 12,200 $ 981,084 -- --
======= ---------- ========== -----------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 1,496 $ 1 1,496 $ 1
Redemption of 10% Preferred.................. -- -- (1,496) (1)
------- ---------- ---------- -----------
Balance at end of period..................... 1,496 $ 1 -- --
======= ---------- ========== -----------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. -- -- 530,534 $ 5,305,340
Acquisition of World Communications, Inc..... 530,534 $5,305,340 -- --
Redemption of 10% Preferred.................. -- -- (530,534) (5,305,340)
------- ---------- ---------- -----------
Balance at end of period..................... 530,534 $5,305,340 -- --
======= ========== ========== ===========
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
------- ---------- ---------- -----------
Balance at end of period..................... -- -- -- --
======= ---------- ========== -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 30
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY -- CONTINUED
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, 1995 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
SERIES B SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year.............. -- -- -- --
--------- ------------ --------- ------------
Balance at end of period.................. -- -- -- --
========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of year.............. 1,522,158 $ 15,222 2,855,350 $ 28,554
Issuance of stock for services............ 91,383 914 4,400 44
Private sales of stock.................... 472,056 4,720 -- --
Exercise of warrants and options.......... 8,333 83 972,487 9,725
Acquisition of World Communications,
Inc.................................... 402,500 4,025 -- --
Conversion of debt to equity.............. 30,231 303 -- --
Acquisition of Public Telephone
Corporation............................ 304,879 3,049 -- --
Acquisition escrow deposits............... 23,810 238 (23,810) (238)
Acquisition of International Payphones.... -- -- 555,589 5,555
Redemption of 10% Non-Voting Preferred.... -- -- 884,214 8,842
--------- ------------ --------- ------------
Balance at end of period.................. 2,855,350 $ 28,554 5,248,230 $ 52,482
========= ------------ ========= ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............. $ 8,755,364 $ 16,649,559
Issuance of stock for services............ 528,532 20,576
Private sales of stock.................... 2,010,067 --
Exercise of warrants and options.......... 34,917 --
Acquisition of World Communications,
Inc.................................... 2,712,852 --
Conversion of debt to equity.............. 137,375 --
Acquisition of Public Telephone
Corporation............................ 2,054,902 --
Acquisition escrow deposits............... 149,762 (149,762)
Financing costs........................... (83,212) --
Acquisition of International Payphones.... -- 2,790,042
Acquisition of Paramount Communications... -- 443,510
Warrants issued with debt................. 349,000 6,411,500
Issuance of Nominal Value Warrants........ -- 4,240,941
Redemption of 10% Non-voting Preferred.... -- 5,296,498
------------ ------------
Balance at end of period.................. $ 16,649,559 $ 35,702,864
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year.............. $ (7,303,804) $(13,453,876)
Net loss for the period................... (6,109,697) (10,047,417)
Dividends paid on 7% and 8% Preferred..... (40,375) --
14% Preferred dividend payable-in-kind.... -- (110,622)
Accretion of 14% Preferred carrying
value.................................. -- (24,119)
Redemption of 7% Preferred................ -- (17,500)
Redemption of 8% Preferred................ -- (293,516)
Redemption of 10% Preferred............... -- (1,691,370)
------------ ------------
Balance at end of period.................. $(13,453,876) $(25,638,420)
------------ ------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY................ $ 9,710,662 $ 10,116,926
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 31
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB and subsequently amended on Form 10-KSB(A)-1 for the year
ended December 31, 1995.
Certain amounts relating to the three and six months ended June 30, 1995
have been reclassified to conform to the current quarter presentation. The
reclassifications have no impact on total assets, shareholders' equity or net
loss as previously reported.
2. ACQUISITIONS AND MERGERS
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. In connection with
the acquisition of IPP, the Company acquired 2,101 installed telephones for a
purchase price consisting of: (i) $3,496,487 in cash; (ii) 555,589 unregistered
shares of the Company's Common Stock, par value $.01, ("Common Stock"); (iii)
5,453.14 unregistered shares of 14% Convertible Cumulative Redeemable Preferred
Stock ("14% Preferred"); and (iv) warrants to purchase 117,785 shares of the
Company's Common Stock at a nominal exercise price per share ("Nominal Value
Warrants"). Additionally, the Company assumed approximately $1,757,000 in
liabilities, of which $1,551,796 was repaid by the Company on March 15, 1996.
The cash purchase price included three five year non-compete agreements, with an
aggregate value of $60,000, with three of IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed
telephones for a purchase price consisting of: (i) $9,618,553 in cash; (ii)
8,333.33 shares of 14% Preferred; and (iii) Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock.
In addition, the Company assumed outstanding liabilities of approximately
$733,000, of which $697,947 was repaid on March 15, 1996. The purchase price
included a five year consulting and non-compete agreement, valued at $50,000,
with one of Paramount's former officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,531,404, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 60 months.
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public Telephone") in a transaction accounted for as a purchase.
The Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public Telephone and issued 224,879 unregistered shares of the Company's
Common Stock to the shareholders of Public Telephone. In connection with the
acquisition, the Company entered into five year non-compete agreements with two
of Public
F-31
<PAGE> 32
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Telephone's former owners which require both cash payments and the issuance, in
the aggregate, of 80,000 unregistered shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
and 3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock, which was subsequently converted to 884,214
unregistered shares of Common Stock on June 28, 1996.
The Public Telephone and World acquisitions were recorded as purchases and
the differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,305,168, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 36 months.
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public, IPP and Paramount acquisitions had
occurred at the beginning of 1995 and as though the IPP and Paramount
acquisitions had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
PRO FORMA SELECTED RESULTS OF OPERATIONS DATA
------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues....................... $ 18,386,972 $ 19,294,190 $ 9,602,762 $ 10,198,906
Net loss before extraordinary item... (7,072,374) (9,835,846) (3,468,918) (2,985,155)
Net loss applicable to common
shareholders....................... (7,492,475) (10,210,618) (3,678,969) (3,183,217)
Net loss per common share............ $(2.63) $(2.69) $(1.26) $(0.76)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995 or 1996, or of future results.
The pro forma statement of operations data includes adjustments related to the
amortization of intangible assets, reductions in certain selling, general, and
administrative expenses, interest expense on borrowings used to finance the
acquisitions and the weighted average number of common shares outstanding after
giving effect to the acquisitions.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are installed telephones, for a purchase price
consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of the Company's
Common Stock, valued at the average of the BID and ASK (as reported by The
NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an unregistered and
block discount of 20.19% as determined by an independent valuation firm),
$4,637,840, or $2.15 per share; and (iii) approximately $675,122 in related
acquisition expenses. The Amtel acquisition closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired approximately
3,115 installed pay telephones for a purchase price, consisting of: (i) $500,000
in cash; (ii) 166,666 unregistered shares of the Company's
F-32
<PAGE> 33
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Common Stock, valued at the average of the BID and ASK (as reported by NASDAQ on
September 16, 1996, less an unregistered and block discount of 30.42% as
determined by an independent valuation firm), $311,665, or $1.87 per share;
(iii) assumption of capital lease obligations of $7,750,000; (iv) notes payable
to the selling shareholders of POA, $3,634,114; (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, $307,264; and (vii) approximately $166,748 in
related acquisition expenses.
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA's contracts).
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and June 30, 1996, property and equipment consisted
of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, JUNE 30,
(IN YEARS) 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Telephones, boards, enclosures and cases...... 3-7 $ 16,386,987 $27,228,267
Furniture, fixtures and other equipment....... 3-5 989,300 1,312,548
Leasehold improvements........................ 2-5 231,466 235,422
------------ -----------
17,607,753 28,776,237
Less -- accumulated depreciation............ (3,508,642) (5,781,198)
------------ -----------
$ 14,099,111 $22,995,039
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
As of December 31, 1995 and June 30, 1996, intangible assets consisted of the
following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD DECEMBER 31, JUNE 30,
(IN MONTHS) 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Costs incurred in the acquisition and
installation
of telephones................................ 36-120 $ 13,403,126 $23,459,098
Debt restructuring costs....................... 40 -- 5,495,898
Non-compete agreements......................... 24-60 1,513,765 1,623,765
State operating certifications................. 60 466,796 466,796
------------ -----------
15,383,687 31,045,557
Less: Accumulated amortization................. (3,791,530) (6,759,255)
------------ -----------
$ 11,592,157 $24,286,302
========== ==========
</TABLE>
5. LONG-TERM DEBT -- RELATED PARTIES
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as "Lenders"). Subsequent to March 15, 1996,
F-33
<PAGE> 34
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
5. LONG-TERM DEBT -- RELATED PARTIES (CONTINUED)
the Company borrowed an additional $1,692,500 against the Credit Facility. As of
June 30, 1996, $5,026,546 was available to the Company under the Credit Facility
to fund acquisitions and for general working capital purposes, subject to
certain conditions (including availability of additional collateral). However,
at June 30, 1996, due to the unavailability of additional collateral, no
additional funds could be borrowed by the Company. The initial borrowings under
the Credit Facility were used to complete the Paramount and IPP acquisitions, to
repay $8,503,405 of outstanding debt and $3,173,931 of outstanding obligations
under capital leases, to redeem the 10% Cumulative Redeemable Preferred Stock
("10% Preferred"), 8% Cumulative Redeemable Preferred Stock ("8% Preferred"),
and 7% Cumulative Convertible Redeemable Preferred Stock ("7% Preferred"), and
to pay related transactions fees. The additional borrowings of $1,692,500 were
used for an acquisition deposit ($1,300,000) classified as a non-current asset
and working capital.
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds, $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
There were no available amounts under the credit facility at September 13, 1996.
The Credit Facility requires monthly interest payments at the Alternate
Base Rate (as defined therein) plus 5% and contains various covenants
restricting the Company's ability to pay dividends or incur additional debt,
among other conditions, and also contains financial covenants requiring minimum
net worth, working capital and earnings before interest, depreciation and
amortization among other covenants. The Credit Facility also contains a
subjective acceleration clause which states that in the event of a material
adverse change in the business, as determined by the Lenders, the Lenders can
call the debt at their discretion. The Lenders have waived their right to
exercise this subjective acceleration clause through December 31, 1997. Pursuant
to the Credit Facility amendments dated September 13, 1996, principal payments
commence in April 1997, and continue monthly and/or quarterly through June 1999
at which time the remaining principal balance is due. The amount of the
principal payment is contingent upon numerous factors, including the borrowing
base and cash flow of the Company.
Based on amounts borrowings under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter until December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, the Company did not meet certain financial
loan covenants. The Lenders have amended the credit agreement to enable
compliance with these loan covenants.
The majority of the Credit Facility (currently $29,000,000) can be
converted into Series B Special Convertible Preferred Stock ("Series B
Preferred"), at the ratio of 833 shares for each $100,000 in outstanding debt
and accrued interest. Additionally, the Lenders received warrants to purchase
204,824 shares of Series A Special Convertible Preferred Stock ("Series A
Preferred"), at an exercise price of $0.20 per share for the initial borrowings
under the Credit Facility. Pursuant to the loan agreement, the Lenders will
receive additional warrants to purchase Series A Preferred for providing the
$1,300,000 acquisition deposit. Each share of Series A Preferred and Series B
Preferred is convertible into 20 shares of Common Stock. The debt under the
Credit Facility was initially recorded net of an allocation of the fair value of
the warrants. Such fair value was determined using the Black-Scholes valuation
model. The Company recorded non-cash interest expense (accretion of debt) of
$480,864 for the three months ended June 30, 1996 and $561,008 for the six
months ended June 30, 1996.
F-34
<PAGE> 35
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and June 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock
($60 stated value -- 200,000 shares authorized;
107,918.19 shares issued and outstanding at June 30,
1996; cumulative dividends issuable of 4,464.48 shares,
valued at $110,622; mandatory redemption amount of
$6,742,960 due June 30, 2000)............................ -- $6,404,228
</TABLE>
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the six and three months ended June 30, 1996, the
carrying value of the 14% Preferred was increased by $24,119 through accretions.
Each share of 14% Preferred is entitled to receive a quarterly dividend of 0.035
shares of 14% Preferred. Each share of 14% Preferred is convertible into 10
shares of Common Stock.
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
As of December 31, 1995 and June 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized; 530,534
shares issued and outstanding at December 31, 1995,
converted to Common Stock pursuant to its terms on June
28, 1996).............................................. $ 5,305,340 --
Series A Special Convertible Preferred Stock ($0.20 par
value, $0.20 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
Series B Special Convertible Preferred Stock ($0.20 par
value, $120 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 1 --
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 981,084 --
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 200,000 --
</TABLE>
F-35
<PAGE> 36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Common Stock
($0.01 par value -- 50,000,000 shares authorized;
2,855,350 and 5,248,230 shares issued and outstanding
at December 31, 1995 and June 30, 1996)................ 28,554 52,482
Additional paid-in capital............................... 16,649,559 35,702,864
Accumulated deficit...................................... (13,453,876) (25,638,420)
------------ ------------
$ 9,710,662 $ 10,116,926
=========== ===========
</TABLE>
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14% Preferred.
On March 15, 1996, concurrent with the Credit Facility, the Company
redeemed the 10% Preferred, 8% Preferred, and 7% Preferred. The redemption price
was cash payments aggregating $1,117,371 and 34,436.33 shares of 14% Preferred.
In the aggregate, $6,269,487 of the Company's outstanding obligations, including
portions of the purchase price for the IPP and Paramount acquisitions, was
liquidated by issuing 107,918.19 shares of 14% Preferred.
The $2,002,386 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value was recorded as a reduction of
earnings available to common shareholders as of March 31, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of
Common Stock were issued in conjunction with the IPP and Paramount acquisitions,
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, and conversion
of certain related party debt of the Company to the 14% Preferred. Certain
holders of the 14% Preferred are deemed related parties pursuant to the rules
and regulations of the Securities and Exchange Commission. The warrants expire
on March 13, 2001. The Company has utilized an independent appraiser who has
estimated the fair market value of the Nominal Value Warrants to be $4,974,673,
using the Black-Scholes valuation method, of which $3,886,139 (the amount
attributable to the warrants provided to related parties in connection with the
redemption of the 10% Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
During April and May 1996, warrants representing 972,487 shares of Common
Stock were exercised, and total proceeds to the Company were $9,725. Of the
total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
F-36
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
May 17, 1996
The Board of Directors of
Paramount Communications Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1995 and the results of its operations, its
changes in shareholders' equity and its cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 6, on March 15, 1996, the Company's net assets were sold to
an unrelated party.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-37
<PAGE> 38
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 479,984
Receivables:
Trade....................................................................... 237,455
Shareholder................................................................. 38,168
----------
Total current assets................................................... 755,607
Property and equipment, net...................................................... 788,582
Intangible assets, net........................................................... 146,029
Other assets..................................................................... 15,098
----------
$1,705,316
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 373,866
Location commissions payable................................................... 65,958
Shareholder distributions payable.............................................. 155,532
Notes payable to affiliates.................................................... 483,246
----------
Total current liabilities.............................................. 1,078,602
----------
Commitments and contingencies.................................................... --
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 606,714
----------
Total shareholders' equity.................................................. 626,714
----------
$1,705,316
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 39
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Coin calls..................................................................... $3,751,744
Non-coin calls................................................................. 1,923,724
----------
Total revenues.............................................................. 5,675,468
----------
Operating costs and expenses:
Telephone charges.............................................................. 1,543,956
Commissions.................................................................... 696,443
Selling, general and administrative............................................ 2,407,479
Depreciation and amortization.................................................. 393,204
----------
Total operating costs and expenses.......................................... 5,041,082
----------
Operating income............................................................ 634,386
----------
Other income (expenses):
Interest and other income...................................................... 14,800
Interest expense............................................................... (64,210)
Other.......................................................................... (85,231)
----------
Total other expenses........................................................ (134,641)
----------
Net income.................................................................. $ 499,745
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 40
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 499,745
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 393,204
Changes in assets and liabilities:
Decrease in receivables................................................... 2,392
Decrease in other current assets.......................................... 11,190
Decrease in other assets.................................................. 9,632
Increase in other accounts payable and accrued expenses................... 179,706
Increase in location commissions payable.................................. 10,915
----------
Net cash provided by operating activities.............................. 1,106,784
----------
Cash flows from investing activities:
Purchases of equipment......................................................... (356,791)
----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party....................... 200,000
Distributions to shareholders.................................................. (229,088)
Repayments of notes payable to related parties................................. (439,470)
----------
Net cash used in financing activities.................................. (468,558)
----------
Net increase in cash and cash equivalents.............................. 281,435
Cash and cash equivalents, beginning of year..................................... 198,549
----------
Cash and cash equivalents, end of year........................................... $ 479,984
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................... $ 64,210
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 41
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1994............................... 100 $100 $ 19,900 $106,969 $126,969
Net income........................................ -- -- -- 499,745 499,745
Distributions..................................... -- -- -- -- --
---- ---- ------- -------- --------
Balance
December 31, 1995............................... 100 $100 $ 19,900 $606,714 $626,714
==== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 42
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March 1987 as a result of the deregulation of the
telephone industry. The Company is in the business of installing, maintaining
and operating pay telephones throughout South Florida.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over five years, the estimated useful lives of the respective assets.
Maintenance, repairs and minor replacements of these items are charged to
expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July 1998. Also, in connection
with certain equipment acquisitions, the Company entered into location contracts
for two and one-half years terms. These contracts expired in June 1995.
REVENUE RECOGNITION
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida.
SHAREHOLDERS DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", which requires the disclosure of fair value of financial
instruments. The Company's financial instruments consist of cash and cash
equivalents, trade receivables and notes payable to affiliates. The carrying
amount of these instruments at December 31, 1995 approximates their fair value.
F-42
<PAGE> 43
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Installed pay telephones and related equipment.............. $ 3,259,133
Furniture, fixtures and office equipment.................... 40,125
Automobiles................................................. 31,943
Leasehold improvements...................................... 4,025
Warehouse equipment......................................... 1,772
-----------
3,336,998
Accumulated depreciation.................................... (2,548,416)
-----------
Property and equipment, net................................. $ 788,582
===========
</TABLE>
Depreciation expense amounted to $282,902 for the year ended December 31,
1995.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Non-compete agreements...................................... $ 533,135
Location contracts.......................................... 194,240
-----------
727,375
Accumulated amortization.................................... (581,346)
-----------
Intangible assets, net...................................... $ 146,029
===========
</TABLE>
Amortization expense related to intangible assets amounted to $110,302 for
the year ended December 31, 1995.
4. RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Company has notes payable to related parties, with principal and
interest payable monthly at an annual rate of 10% and due in 1996. These notes
are collateralized by installed pay telephones and related equipment. The notes
were assumed and subsequently paid-off by the acquiring company (Note 6).
Interest expense paid to related parties relating on these notes amounted
to $64,210 in 1995.
F-43
<PAGE> 44
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. RELATED PARTY TRANSACTIONS (CONTINUED)
PAYROLL ALLOCATION
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
OPERATING LEASE
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the facility on a month-to-month basis. The lease provides that the Company pay
its proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1995 amounted to $22,812.
VEHICLE LEASES
The Company leases various vehicles from a related party. Total lease
payments made in connection with these leases amounted to $46,866 during 1995.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's financial
position or results of operations.
6. SUBSEQUENT EVENTS
ACQUISITION
On March 15, 1996, the Company completed an Asset Purchase Agreement with
an unrelated party. Under the terms of the Agreement, the Company sold its
assets, including 2,528 installed telephones and related equipment, for a cash
price of approximately $9.6 million, warrants to purchase shares of stock of the
acquiring company, and the assumption, by the acquiring company, of
approximately $733,000 of outstanding Company liabilities. The purchase price
also included a five year consulting agreement with one of the Company's former
officers valued at $50,000.
TELECOMMUNICATIONS REFORM
On February 8, 1996, the President of the United States signed into law the
Telecommunications Act of 1996 (the "Act"). The Act changes many provisions of
the Communications Act of 1934 and requires the Federal Communications
Commission (the "FCC") to change its existing rules and adopt new rules in
several areas affecting broadcasting. This Act is one of the most significant
changes to the Communications Act since its adoption in 1934. Since the Act
recently was passed and became law, the FCC has only begun the proceedings that
the Act requires and it remains to be seen how the FCC will interpret certain of
its provisions. Congress and the FCC currently have under consideration and may
in the future adopt new laws and regulations and policies regarding a wide
variety of matters which could, directly or indirectly, adversely affect the
operation of the Company as well as its business strategies.
F-44
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheet of Paramount Communications
Systems, Inc. as of December 31, 1994, and the related statement of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-45
<PAGE> 46
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 198,549
Accounts receivable............................................................ 258,931
Other current assets........................................................... 30,274
----------
Total current assets................................................... 487,754
Property and equipment, net (note 2)............................................. 714,693
Intangible assets, less accumulated amortization of $471,044..................... 256,331
Other assets..................................................................... 15,188
----------
$1,473,966
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 177,908
Location commissions payable................................................... 55,043
Accrued interest payable....................................................... --
Sales tax payable.............................................................. 16,252
Shareholder distributions payable.............................................. 384,620
Current maturities of notes payable -- related parties (note 3)................ 436,619
----------
Total current liabilities.............................................. 1,070,442
Long-term portion of notes payable -- related parties (note 3)................... 276,555
----------
Total liabilities...................................................... 1,346,997
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 106,969
----------
Total shareholders' equity............................................. 126,969
Commitments and contingencies (note 4)...........................................
----------
$1,473,966
==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 47
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Revenues:
Coin calls.................................................................... $3,685,295
Non-coin calls................................................................ 2,030,194
----------
Total revenues........................................................ 5,715,489
----------
Operating costs and expenses:
Telephone charges............................................................. 1,748,270
Commissions................................................................... 676,304
Selling, general and administrative........................................... 2,099,203
Depreciation and amortization................................................. 770,429
----------
Total operating costs and expenses.................................... 5,294,206
----------
Operating income...................................................... 421,283
----------
Other expense:
Interest and other expense.................................................... (4,686)
Interest expense.............................................................. (72,902)
----------
Total other expenses.................................................. (77,588)
----------
Net income............................................................ $ 343,695
==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 48
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993......... 100 100 $ 19,900 $ 397,894 $ 417,894
Net income............................ -- -- -- 343,695 343,695
Distributions......................... -- -- -- (634,620) (634,620)
--- ---- -------- --------- ---------
Balances at December 31, 1994......... 100 $100 $ 19,900 $ 106,969 $ 126,969
=== ==== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 49
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 343,695
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of plant and equipment....................... 582,753
Amortization of intangible assets.......................................... 129,726
Amortization of deferred asset............................................. 57,950
Loss on write-off of property and equipment................................ 14,980
Changes in assets and liabilities:
Decrease in accounts receivable.......................................... 6,814
Increase in other current assets......................................... (5,841)
Increase in other assets................................................. (270)
Decrease in other current liabilities.................................... (5,131)
-----------
Net cash provided by operating activities............................. 1,124,676
-----------
Cash flows from investing activities:
Purchases of equipment........................................................ (59,625)
Proceeds from sale of equipment............................................... 3,578
Purchase of investments....................................................... (11,715)
Purchase of intangible assets................................................. --
-----------
Net cash used in investing activities................................. (67,762)
-----------
Cash flows from financing activities:
Increase in notes payable -- related party.................................... 200,000
Distributions to shareholders................................................. (626,989)
Repayments of notes payable -- related parties................................ (591,366)
-----------
Net cash used in financing activities................................. (1,018,355)
-----------
Net increase in cash and cash equivalents............................. 38,559
Cash and cash equivalents at beginning of year.................................. 159,990
-----------
Cash and cash equivalents at end of year........................................ $ 198,549
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................................ $ 74,570
===========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 50
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March, 1987 as a result of the deregulation of the
telephone industry. The Company is a Subchapter S corporation in the business of
installing, maintaining and operating pay telephones throughout South Florida.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment are calculated on a straight-line basis over five years,
the estimated useful lives of the assets.
(d) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July, 1998. The location
contracts are amortized over two and one-half years and expire through June,
1995.
(e) RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
(f) INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
(g) CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida. No single customer
accounted for more than 5% of the Company's sales.
(h) DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
F-50
<PAGE> 51
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Installed pay telephones and related equipment............... $2,845,325
Furniture, fixtures and office equipment..................... 35,525
Automobiles.................................................. 26,328
Leasehold improvements....................................... 4,025
Warehouse equipment.......................................... 1,772
----------
2,912,975
Less accumulated depreciation and amortization............... 2,198,282
----------
$ 714,693
==========
</TABLE>
Depreciation and amortization of property and equipment was $582,753.
(3) RELATED PARTY TRANSACTIONS
(a) NOTES PAYABLE -- RELATED PARTIES
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Notes payable to various related parties, principal and
interest payable monthly at rates ranging from 8% to 10%,
due from March, 1993 to April, 1997, collateralized by
installed pay telephones and related equipment............. $ 713,174
Less current maturities of notes payable -- related
parties.................................................... 436,619
----------
Long-term portion of notes payable -- related
parties.......................................... $ 276,555
==========
</TABLE>
Interest expense paid to related parties relating to the above amounted to
$72,902.
Aggregate maturities of notes payable -- related parties subsequent to
December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995 $436,619
1996 276,555
--------
$713,174
========
</TABLE>
(b) PAYROLL ALLOCATION -- RELATED PARTY
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
(c) COMMISSION REVENUE -- RELATED PARTY
Operator assisted service commissions received from a company under common
ownership which are included in non-coin call revenue amounted to $-0- in 1994.
(4) OPERATING LEASE -- RELATED PARTY
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the
F-51
<PAGE> 52
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(4) OPERATING LEASE -- RELATED PARTY (CONTINUED)
facility on a month-to-month basis. The lease provides that the Company pay its
proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1994 was $23,373.
F-52
<PAGE> 53
May 21, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones, Inc.
(a South Carolina corporation) as of December 31, 1995, and the related
statement of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Pay Phones, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ Miller Sherrill Blake CPA
Lincolnton, North Carolina
F-53
<PAGE> 54
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and Cash Equivalents..................................................... $ 11,336
Accounts Receivable........................................................... 142,801
-----------
Total Current Assets....................................................... 154,137
-----------
Property and Equipment
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 28,441
Vehicles...................................................................... 236,393
Telephone Equipment........................................................... 2,304,632
Accumulated Depreciation...................................................... (1,563,039)
-----------
Total Property and Equipment............................................... 1,022,427
-----------
Other Assets
Covenants Not to Compete -- Net of Amortization............................... 105,528
Goodwill -- Net of Amortization............................................... 21,282
-----------
Total Other Assets......................................................... 126,810
-----------
Total Assets.................................................................... $ 1,303,374
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses......................................... $ 151,539
Notes Payable................................................................. 107,125
Notes Payable -- Related Party................................................ 25,000
Current Portion of Long-Term Debt............................................. 343,763
-----------
Total Current Liabilities.................................................. 627,427
-----------
Long-Term Liabilities
Notes Payable -- Less Current Portion......................................... 643,935
Obligations under Capital Leases -- Less Current Portion...................... 95,895
-----------
Total Long-Term Liabilities................................................ 739,830
-----------
Total Liabilities..................................................... 1,367,257
-----------
Stockholders' Equity
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (131,107)
-----------
Total Stockholders' Equity................................................. (63,883)
-----------
Total Liabilities And Stockholders' Equity...................................... $ 1,303,374
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-54
<PAGE> 55
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales............................................................................ $3,360,596
Cost of Goods Sold............................................................... 2,308,012
----------
Gross Profit........................................................... 1,052,584
OPERATING EXPENSES
General And Administrative Expenses............................................ 517,868
Depreciation Expense........................................................... 413,144
Interest Expense............................................................... 149,248
----------
Total Operating Expenses............................................... 1,080,260
----------
Income From Operations........................................................... (27,676)
OTHER (INCOME) EXPENSE
(Gain) Loss on Sale of Assets.................................................. (733)
----------
Total Other (Income) Expense........................................... (733)
Income Before Corporate Taxes.......................................... (26,943)
Deferred Tax Expense............................................................. 35,800
----------
Net Income............................................................. (62,743)
Beginning Retained Earnings...................................................... (68,364)
----------
Ending Retained Earnings......................................................... $ (131,107)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-55
<PAGE> 56
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES:
Net Income..................................................................... $ (62,743)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and Amortization............................................... 451,929
Net (increase) decrease in receivables...................................... (61,817)
Net increase (decrease) in accounts payable and accrued expenses............ 40,406
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... (733)
---------
Net Cash Provided (Used) by Operating Activities................................. 402,842
---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment.......................................................... (66,943)
---------
Net Cash Provided (Used) by Investing Activities................................. (66,943)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to settle short-term debt............................................. (148,738)
Payments to settle long-term debt.............................................. (187,055)
Proceeds from short-term debt.................................................. 52,315
Proceeds from long-term debt................................................... 50,000
Payments under capital lease obligations....................................... (105,024)
---------
Net Cash Provided (Used) by Financing Activities................................. (338,502)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (2,603)
Cash and Cash Equivalents at beginning of year................................. 13,939
---------
Cash and Cash Equivalents at end of year......................................... $ 11,336
=========
SUPPLEMENTAL DISCLOSURES
Interest Paid.................................................................. $ 149,248
=========
Income Taxes Paid.............................................................. $ 0
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-56
<PAGE> 57
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1995:
<TABLE>
<S> <C>
Amounts payable to shareholders due on demand............................. $25,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 14,800
-------
$39,800
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $19,508 for the year ended December
31, 1995.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employees deferred
salary up to a maximum to 2% of compensation. The contribution was $3,115 for
the year ended December 31, 1995.
NOTE D -- NOTES PAYABLE
Short-term notes payable consist of the following at December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Lincoln Bank....... $ 50,000 10.25% Personal Guarantees
Olen Beal.......... 50,000 12.00% Personal Guarantees
Conquest........... 7,125 10.00% Personal Guarantees
--------
$107,125
========
</TABLE>
See Independent Auditor's Report.
F-57
<PAGE> 58
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following notes:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Note Payable -- NationsBank...................................................... $ 10,261
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- NationsBank...................................................... 10,264
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 9,616
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle.
Note Payable -- Ford Motor Credit................................................ 13,576
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 12,285
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle.
Note Payable -- GMAC............................................................. 16,105
Due in monthly installments of $362.68 which includes interest calculated at
10.0%. Matures in August of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 21,478
Due in monthly installments of $485.00 which includes interest calculated at
8.99%. Matures in June of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 29,398
Due in monthly installments of $550.46 which includes interest calculated at
9.99%. Matures in December of 2001. Secured by vehicle.
Note Payable -- First Union National............................................. 32,958
Due in monthly installments of $694.24 which includes interest calculated at
9.06%. Matures in December of 2000. Secured by vehicle.
Note Payable -- Olen Beal........................................................ 41,627
Due in monthly installments of $1,660.72 which includes interest calculated at
12.0%. Matures in April of 1998. Guaranteed by officers.
Note Payable -- First National Bank.............................................. 437,098
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance.
</TABLE>
See Independent Auditor's Report.
F-58
<PAGE> 59
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995
---------
NOTE E -- LONG-TERM DEBT (CONTINUED)
<S> <C>
Note Payable -- Karl Baker....................................................... 191,741
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment.
Note Payable -- First Union National Bank........................................ 2,000
Due in monthly installments of $666.67 principle plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company.
Note Payable -- Elcotel.......................................................... 11,300
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and
guaranteed by officers.
---------
857,361
Less: Current Maturities....................................................... (213,426)
---------
Total Long-Term Debt................................................... $ 643,935
=========
</TABLE>
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1996 $213,426
1997 221,139
1998 228,947
1999 169,611
2000 24,238
--------
$857,361
========
</TABLE>
NOTE F -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carryforward........................................ $ 38,350
Valuation Allowance.................................................... (38,350)
--------
Net deferred tax asset................................................... $ 0
========
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was
approximately $250,000 at December 31, 1995 and will expire in the year 2010.
NOTE G -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1998. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included
See Independent Auditor's Report.
F-59
<PAGE> 60
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- LEASES (CONTINUED)
in depreciation expense for the year ended December 31, 1995. The following is a
summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment........ $ 416,160
Accumulated Depreciation... (113,159)
---------
$ 303,001
=========
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1995
for each of the next five years are as follows:
<TABLE>
<S> <C>
1996............. $130,337
1997............. 84,811
1998............. 11,084
1999............. 0
2000............. 0
--------
$226,232
========
</TABLE>
NOTE H -- RENTALS UNDER OPERATING LEASES
The Company leased various vehicles under operating leases. Several of
those leases were terminated during the year ended December 31, 1995. The
remaining operating leases will expire in 1998.
Future minimum rental payments required under operating leases that have
remaining terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............. $ 5,016
1997.............. 5,016
1998.............. 2,508
-------
$12,540
=======
</TABLE>
Rental expense was approximately $19,577.
NOTE I -- CONTINGENCIES
The Company is a party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period, the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE J -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. have negotiated to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
was finalized on March 15, 1996. Also, an additional loan was secured from
NationsBank on January 3, 1996 in the amount of $50,000. Interest is calculated
at 10%, and the note matures March 3, 1996.
See Independent Auditor's Report.
F-60
<PAGE> 61
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE L -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
outstanding at December 31, 1995.
See Independent Auditor's Report.
F-61
<PAGE> 62
January 17, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones,
Inc. (a South Carolina corporation) as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Pay Phones,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ TERRI A. BLAKE, CPA
- ------------------------------------------------------
For the Firm
F-62
<PAGE> 63
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents..................................................... $ 13,939
Accounts Receivable........................................................... 80,984
-----------
TOTAL CURRENT ASSETS.................................................. 94,923
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 27,441
Vehicles...................................................................... 146,295
Telephone Equipment........................................................... 2,134,307
Accumulated Depreciation...................................................... (1,155,533)
-----------
TOTAL PROPERTY AND EQUIPMENT.......................................... 1,168,510
-----------
OTHER ASSETS
Covenants Not to Compete -- Net of Amortization............................... 143,695
Goodwill -- Net of Amortization............................................... 21,900
Deferred Tax Asset............................................................ 35,800
-----------
TOTAL OTHER ASSETS.................................................... 201,395
-----------
TOTAL ASSETS.................................................................... $ 1,464,828
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses......................................... $ 93,151
Bank Overdraft................................................................ 17,982
Notes Payable................................................................. 166,645
Notes Payable -- Related Party................................................ 61,903
Current Portion of Long-Term Debt............................................. 264,089
-----------
TOTAL CURRENT LIABILITIES............................................. 603,770
-----------
LONG-TERM LIABILITIES
Notes Payable -- Less Current Portion......................................... 724,379
Obligations under Capital Leases -- Less Current Portion...................... 137,819
-----------
TOTAL LONG-TERM LIABILITIES........................................... 862,198
-----------
TOTAL LIABILITIES................................................... 1,465,968
-----------
STOCKHOLDERS' EQUITY
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (68,364)
-----------
TOTAL STOCKHOLDERS' EQUITY............................................ (1,140)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 1,464,828
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-63
<PAGE> 64
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Sales............................................................................ $2,631,627
Cost of Goods Sold............................................................... 1,950,062
----------
GROSS PROFIT................................................................... 681,565
OPERATING EXPENSES
General And Administrative Expenses............................................ 435,365
Depreciation Expense........................................................... 389,201
Interest Expense............................................................... 103,697
----------
TOTAL OPERATING EXPENSES............................................... 928,263
----------
INCOME FROM OPERATIONS............................................ (246,698)
OTHER (INCOME) EXPENSE
Miscellaneous Income........................................................... (2,076)
(Gain) Loss on Sale of Assets.................................................. 28,571
----------
Total Other (Income) Expense........................................... 26,495
Income Before Corporate Taxes.......................................... (273,193)
Deferred Tax Benefit Provision................................................... (35,800)
----------
NET INCOME........................................................ (237,393)
BEGINNING RETAINED EARNINGS...................................................... 169,029
----------
ENDING RETAINED EARNINGS............................................... $ (68,364)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-64
<PAGE> 65
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net Cash Flow From Operating Activities:
Net Income..................................................................... $(237,393)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation................................................................ 389,201
Net (increase) decrease in receivables...................................... (24,429)
Net increase (decrease) in accounts payable and accrued expenses............ 50,764
Net increase (decrease) in accrued taxes.................................... (3,791)
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... 28,571
---------
Net Cash Provided (Used) by Operating Activities................................. 238,723
---------
Cash Flow From Investing Activities:
Purchase of equipment....................................................... (186,716)
---------
Net Cash Provided (Used) by Investing Activities................................. (186,716)
---------
Cash Flow From Financing Activities:
Payments to settle short-term debt.......................................... (133,405)
Payments to settle long-term debt........................................... (352,114)
Proceeds from short-term debt............................................... 206,903
Proceeds from long-term debt................................................ 260,736
Payments under capital lease obligations.................................... (43,290)
---------
Net Cash Provided (Used) by Financing Activities................................. (61,170)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (9,163)
Cash and Cash Equivalents at beginning of year................................. 23,102
---------
Cash and Cash Equivalents at end of year......................................... $ 13,939
=========
Supplemental Disclosures
Interest Paid.................................................................. $ 103,697
=========
Income Taxes Paid.............................................................. $ 3,587
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-65
<PAGE> 66
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1994:
<TABLE>
<S> <C>
Amounts payable to officers due on demand................................. $ 5,000
Amounts payable to shareholders due on demand............................. 50,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 6,903
-------
$61,903
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $14,934 for the year ended December
31, 1994.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employee's deferred
salary up to a maximum of 2% of compensation. The contribution was $5,847 for
1994.
See Independent Auditors' Report
F-66
<PAGE> 67
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt consists of the following notes:
Note Payable -- NationsBank....................................................... $ 13,293
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- NationsBank....................................................... 13,295
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 12,702
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,539
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle
Note Payable -- First Union National Bank......................................... 15,486
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,802
Due in monthly installments of $401.09 which includes interest calculated at
7.75%. Matures in January of 1999. Secured by vehicle
Note Payable -- First National Bank............................................... 528,493
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance
Note Payable -- Karl Baker........................................................ 231,643
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment
Note Payable -- First Union National Bank......................................... 9,998
Due in monthly installments of $666.67 principal plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company
Note Payable -- Elcotel........................................................... 24,411
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and guarantees
of officers..................................................................... 906,016
--------
Less: Current Maturities.......................................................... (181,637)
--------
Total Long-Term Debt.................................................... $724,379
========
</TABLE>
See Independent Auditors' Report
F-67
<PAGE> 68
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $181,637
1996........................................ 193,141
1997........................................ 194,620
1998........................................ 209,562
1999........................................ 127,056
--------
$906,016
========
</TABLE>
NOTE E -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carry forward........................................ $34,300
Temporary differences -- Principally depreciation methods............... 1,500
-------
Total deferred tax asset.................................................. $35,800
=======
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was $228,776
at December 31, 1994 and will expire in the year 2009.
NOTE F -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense
for the year ended December 31, 1994.
The following is a summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment...................................................... $292,845
Accumulated Depreciation................................................. (35,686)
--------
$257,159
========
</TABLE>
See Independent Auditors' Report
F-68
<PAGE> 69
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE F -- LEASES (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1994
for each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $ 82,452
1996........................................ 94,760
1997........................................ 43,059
1998........................................ 0
1999........................................ 0
--------
$220,271
========
</TABLE>
NOTE G -- CONTINGENCIES
The Company is party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE H -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. are negotiating to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
has not been finalized as of the date this statement was issued.
NOTE I -- LINE OF CREDIT
The Company has a line of credit for $150,000 that expires in March of
1995. At December 31, 1994 the company has outstanding $100,000 on the line of
credit. Interest is calculated at 10.50%. Loan is guaranteed by officers and
their spouses.
NOTE J -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
shares outstanding at December 31, 1994.
See Independent Auditors' Report
F-69
<PAGE> 70
INDEPENDENT AUDITOR'S REPORT
To The Stockholders
International Payphones, Inc.
Hilton Head Island, South Carolina
We have audited the accompanying Balance Sheets of International Payphones, Inc.
(a Tennessee corporation) as of December 31, 1995 and December 31, 1994, and the
related Statements of Earnings and Retained Earnings and Cash Flows for years
then ended. These financial statements are the responsibility of the management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Payphones, Inc.
and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ ERNEST M. SEWELL, CPA
April 24, 1996
F-70
<PAGE> 71
INTERNATIONAL PAYPHONES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash.......................................................... $ 17,321.08 $ 25,530.67
Accounts receivable - trade................................... 48,996.42 35,913.21
Other amounts receivable (Note D)............................. 5,600.00 25,574.54
Parts and supplies inventory.................................. 9,420.00 11,625.00
------------ ------------
Total Current Assets.......................................... 81,337.50 98,643.42
Property and Equipment
Property and equipment (Note B and F)......................... 816,148.89 720,142.61
Accumulated depreciation...................................... (539,338.28) (455,592.94)
------------ ------------
Net Property and Equipment.................................... 276,810.61 264,549.67
------------ ------------
TOTAL ASSETS.......................................... $ 358,148.11 $ 363,193.09
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note F).................... $ 73,978.08 $ 48,761.05
Accounts payable - trade...................................... 2,717.23 7,822.66
Accrued payroll and payroll taxes............................. -- 10,265.07
Other accrued liabilities (Note E)............................ 18,391.81 24,220.91
Deferred income taxes (Note C)................................ 6,000.00 5,100.00
------------ ------------
Total Current Liabilities..................................... 101,087.12 96,169.69
Long-term debt - net of current portion (Note F)................ 118,654.10 81,515.83
------------ ------------
TOTAL LIABILITIES..................................... 219,741.22 177,685.52
Shareholders' Equity
Common stock.................................................. 3,321.00 3,321.00
Additional paid-in capital.................................... 106,000.00 106,000.00
Retained earnings............................................. 29,085.89 76,186.57
------------ ------------
Total Shareholders' Equity.................................... 138,406.89 185,507.57
------------ ------------
TOTAL LIABILITIES AND EQUITY.......................... $ 358,148.11 $ 363,193.09
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-71
<PAGE> 72
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Revenue.......................................................... $1,194,620.91 $1,135,734.73
Direct costs..................................................... 608,061.14 553,336.70
------------- -------------
Gross Profit................................................... 586,559.77 582,398.03
General and Administrative Expenses.............................. 563,028.15 546,365.04
------------- -------------
Earnings from operations....................................... 23,531.62 36,032.99
Other income (expense):
Interest income................................................ (665.84) --
Gain (loss) on asset sale...................................... 916.16 (2,731.45)
------------- -------------
Earnings before taxes.......................................... 25,113.62 33,301.54
Provision for income tax expense (Note C)........................ 2,300.00 2,535.00
------------- -------------
Net earnings........................................... 22,813.62 30,766.54
BEGINNING RETAINED EARNINGS............................ 76,186.57 88,677.65
------------- -------------
99,000.19 119,444.19
Less dividend distributions...................................... (69,914.30) (43,257.62)
------------- -------------
ENDING RETAINED EARNINGS............................... $ 29,085.89 $ 76,186.57
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-72
<PAGE> 73
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................. $ 22,813.62 $ 30,766.54
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Depreciation................................................ 91,174.16 96,689.77
(Gain) loss on disposal of property......................... (916.16) 2,731.45
(Increase) decrease in accounts receivable.................. (13,083.21) (4,610.68)
(Increase) decrease in inventories.......................... 2,205.00 32,152.00
Increase (decrease) in accounts payable..................... (5,105.43) (16,981.09)
Increase (decrease) in income taxes payable................. 3,000.00 (5,280.00)
Increase (decrease) in other accrued expenses............... (5,829.10) 3,112.86
Increase (decrease) in payroll taxes........................ (10,265.07) 9,691.53
----------- ------------
Total adjustments........................................... 61,180.19 117,505.84
----------- ------------
Net Cash Provided (Used) by Operating Activities............... 83,993.81 148,272.38
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property............................. 18,250.06 5,312.20
Purchases of fixed assets...................................... (71,329.00) (18,225.16)
Leasehold improvements......................................... -- (10,274.42)
----------- ------------
Net Cash Provided (Used) by Investing Activities............... (53,078.94) (23,187.38)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................................... 96,329.00 30,893.30
Decrease in other accounts receivable.......................... 19,974.54 29,012.38
Repayment of long-term debt.................................... (49,068.19) (52,552.75)
Repayment of capital lease obligations......................... (34,345.51) (59,869.12)
Repayment of stockholder loans................................. -- (22,575.20)
Dividends paid................................................. (72,014.30) (43,257.62)
----------- ------------
Net Cash Provided (Used) by Financing Activities............... (39,124.46) (118,349.01)
----------- ------------
NET INCREASE (DECREASE) IN CASH............................. (8,209.59) 6,735.99
CASH AT BEGINNING OF YEAR................................... 25,530.67 18,794.68
----------- ------------
CASH AT END OF YEAR......................................... $ 17,321.08 $ 25,530.67
=========== ============
SUPPLEMENTAL DISCLOSURES
Noncash Investing and Financing Activities:
Assets acquired through capital lease.......................... $(49,440.00) $ (66,598.00)
Capital lease used to acquire assets........................... 49,440.00 66,598.00
Cash Paid During the Year for:
Interest....................................................... $ 13,489.00 $ 20,919.00
Income taxes................................................... 2,300.00 2,535.00
</TABLE>
The accompanying notes are an integral part of this statement.
F-73
<PAGE> 74
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE A -- GENERAL
International Payphones, Inc. is a Tennessee corporation formed in 1985 to
sell, install, lease and maintain pay telephone equipment. The majority of the
Company's operations are in the eastern region of the the state of Tennessee
where it owns approximately 500 telephones and receives pay telephone coin
income and long distance commissions. Under agreements with pay phone site
location owners the Company collects the pay phone coin revenue and the long,
terms run distance commission income and pays a percentage of this revenue to
the site location owner each month. These agreements cover periods ranging from
five to twenty years.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over useful lives ranging from 5 to 7 years for equipment
and vehicles and 31.5 years for leasehold improvements. Repairs and maintenance
are charged to expense when incurred and improvements which substantially
prolong the useful lives of the assets involved are capitalized and depreciated.
The cost of assets classified by major categories is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Furniture & fixtures.................................... $ 58,120.58 $ 58,120.58
Office equipment........................................ 35,998.97 35,998.97
Telephone equipment..................................... 515,563.78 466,123.78
Leasehold improvements.................................. 74,802.66 74,802.66
Vehicles................................................ 131,662.90 85,096.62
----------- -----------
Total cost.................................... $816,148.89 $720,142.61
=========== ===========
</TABLE>
NOTE C -- INCOME TAXES
The Company is an S corporation for Federal income tax purposes. As a
result, no provision for Federal income taxes is made by the Company because the
individual shareholders' report and pay Federal income tax on their allocated
percentage of the corporation's net earnings. The Company does pay Tennessee
state excise tax on its net earnings at a 6% tax rate. There are timing
differences in how items of income and expense are reported on the tax return
and in the financial statements. These differences involve trade receivables for
long distance commission income which is reported as income when earned in the
financial statements but is reported as received for tax purposes. In addition,
depreciation expense is claimed under IRS Code Section 179 and using accelerated
writeoff methods for tax purposes while the straight-line writeoff method is
used for financial reporting. State excise tax is provided for in the financial
statements as the items of income and deduction are recognized therein
regardless of when they are reported on the income tax return. As a result of
these timing differences, deferred tax liabilities of $ 6,000 and $ 3,000,
respectively, have been accrued at December 31, 1995 and December 31, 1994.
NOTE D -- OTHER AMOUNTS RECEIVABLE:
The Company is affiliated through common stock ownership and control with
other companies involved in the telecommunications industry. Loans to these
affiliates on open account totaled $19,886 at December 31, 1994. Loans to
employees at December 31, 1994 totaled $7,937.
F-74
<PAGE> 75
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- OTHER ACCRUED LIABILITIES:
Other accrued liabilities include the Company's estimate of accrued site
commissions due as of December 31, 1995 and December 31, 1994. Under the terms
of the Company's royalty agreements with its customers, site commissions are
payable after the end of the month in which the net coin and long distance
revenue is received. As of December 31, 1995 and December 31, 1994, the Company
has accrued approximately two months, respectively, of unpaid site commissions.
NOTE F -- LONG-TERM DEBT:
Long-term debt at December 31, 1995 and December 31, 1994 includes the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Note payable to First National Bank of Gatlinburg dated November
2, 1994 in the face amount of $17,000 payable in 18 monthly
installments of $1,000 including interest at prime plus 1.5%........ $ 4,377.89 $ 15,269.36
Note payable to Conquest Communications dated in December, 1993 in
the face amount of $25,000 payable in monthly installments with
interest............................................................ -- 5,117.01
Note payable to First Union Bank of Georgia dated October 11, 1993
in the face amount of $24,763 payable in 60 monthly installments of
$487 including interest at 6.75%. This note is collateralized by a
1994 Ford Explorer.................................................. -- 19,773.54
Notes payable (two) to First Union Bank of South Carolina dated
September 17, 1993 in the face amounts of $15,022 each, both payable
in 60 monthly installments of $292 including interest at 6.25%.
These notes are collateralized by two 1993 Ford cargo vans.......... 18,219.80 23,457.12
Note payable to First Tennessee Bank dated January 31, 1994 in the
face amount of $13,893 payable in 60 monthly installments of $289
including interest at 9.00%. This note is collateralized by a 1994
Toyota Corolla...................................................... 9,422.68 11,681.97
Note payable to Nationsbank of South Carolina dated December 14,
1993 in the face amount of $15,596 payable in 60 monthly
installments of $309 including interest at 7.00%. This note is
collateralized by a 1994 Ford Econoline............................. 10,187.33 12,867.48
Note payable to First National Bank of Gatlinburg dated August 28,
1995 in the face amount of $25,000 payable in 23 monthly
installments of $1,000 including interest at prime plus 2.362%. This
note is collateralized by pay phones and royalty contracts.......... 21,890.59 --
Capitalized lease purchase agreement dated January 26, 1994 in the
original sum of $66,370, due in monthly installments of $2,139
through December, 1996, decreasing to $1,123 through March, 1997,
including sales tax and finance charges at 14%...................... 21,412.70 42,110.40
Capitalized lease purchase agreement dated May 5, 1995 in the
original sum of $49,440, due in monthly installments of $1,842
through March, 1998, including sales tax and finance charges at
19%................................................................. 36,981.01 --
Note payable to Nationsbank of South Carolina dated November 4,
1995 in the face amount of $71,329 payable in 60 monthly
installments of $1,484 including interest at 8.95%. This note is
collateralized by a 1995 Mercedes................................... 70,140.18 --
----------- -----------
192,632.18 130,276.88
Less current portion................................................ (73,978.08) (48,761.05)
----------- -----------
$118,654.10 $ 81,515.83
=========== ===========
</TABLE>
F-75
<PAGE> 76
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- OPERATING LEASES
The Company leases its office space from one of the stockholders under an
oral agreement at a monthly rate of $1,000 plus utilities, taxes, repairs,
maintenance and leasehold improvements. The Company also leases three vehicles
under separate noncancelable operating lease agreements dated March 25, 1993,
January 22, 1994 and April 21, 1995. These agreements call for monthly lease
payments of $509, $1,006, and $444, respectively, including sales tax. Each
agreement allows for additional charges for excess milage upon expiration of the
lease. Future minimum annual lease payments under the vehicle leases are as
follows:
<TABLE>
<S> <C>
Year ended December 31, 1995..................................................... $22,183.00
Year ended December 31, 1996..................................................... 18,936.00
Year ended December 31, 1997..................................................... 11,371.00
Year ended December 31, 1998..................................................... 1,333.00
----------
$53,823.00
</TABLE>
NOTE H -- EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Effective March 15, 1996 the Company entered into a merger agreement with
PhoneTel Technologies, Inc. under which 100% of the Company stock was acquired
by Phonetel and the Company ceased to exist as a separate entity.
F-76
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
Board of Directors
Payphones of America, Inc.
We have audited the accompanying Consolidated balance sheets of Payphones
of America, Inc. (a Tennessee corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Payphones of
America, Inc. and subsidiary as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in Note
B, the Company has suffered recurring losses from operations and has limited
liquidity which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KERBER, ECK & BRECKELL LLP
St. Louis, Missouri
January 30, 1996 (except for Note L, as
to which the date is February 7, 1996)
F-77
<PAGE> 78
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 3,852 $ 147,910
Accounts receivable................................................. 377,325 367,973
Prepaid expenses.................................................... 25,754 14,315
---------- ----------
Total current assets......................................... 406,931 530,198
PROPERTY AND EQUIPMENT
Telephone equipment................................................. 3,891,230 3,831,941
Furniture and fixtures.............................................. 59,497 47,396
Trucks and autos.................................................... 201,555 154,956
---------- ----------
4,152,282 4,034,293
Less accumulated depreciation and amortization................. 1,422,621 820,509
---------- ----------
2,729,661 3,213,784
Uninstalled pay telephone equipment................................. 89,145 104,074
Building not used in operations, net of accumulated depreciation of
$5,375 for 1995 and $3,763 for 1994............................... 59,125 60,738
---------- ----------
2,877,931 3,378,596
OTHER ASSETS
Site location contracts, less accumulated amortization of $1,000,928
for 1995 and $406,776 for 1994.................................... 1,980,822 2,530,488
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $70,377 for 1995 and $50,889 for
1994.............................................................. 709,125 728,613
Covenants not to compete, less accumulated amortization of $545,417
for 1995 and $380,417 for 1994.................................... 279,584 444,584
Other intangibles, less accumulated amortization of $59,099 for 1995
and $43,589 for 1994.............................................. 102,558 117,767
Other............................................................... 24,332 21,510
---------- ----------
3,096,421 3,842,962
---------- ----------
$6,381,283 $7,751,756
========= =========
LIABILITIES
CURRENT LIABILITIES
Notes payable to bank............................................... $ 243,750 $ 262,750
Current maturities of long-term obligations......................... 1,330,954 1,241,818
Accounts payable.................................................... 882,723 699,385
Accrued expenses.................................................... 146,063 18,656
---------- ----------
Total current liabilities.................................... 2,603,490 2,222,609
LONG-TERM OBLIGATIONS, less current maturities...................... 4,753,853 5,355,740
DEFERRED INCOME TAXES............................................... -- 284,000
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock -- authorized but unissued, 10,000,000
shares............................................................ -- --
Common stock -- authorized, 10,000,000 shares without par value;
issued and outstanding, 2,567,324 shares in 1995 and 1,033,990
shares in 1994.................................................... 348,756 339,423
Additional contributed capital...................................... -- 132,230
Accumulated deficit................................................. (1,324,816) (582,246)
---------- ----------
(976,060) (110,593)
---------- ----------
$6,381,283 $7,751,756
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 79
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales
Coin calls........................................................ $ 3,747,247 $2,153,974
Non-coin calls.................................................... 4,418,667 3,692,117
Other............................................................. 49,221 22,053
----------- ----------
Total net Sales................................................ 8,215,135 5,868,144
Cost of sales
Telephone charges................................................. 3,599,271 2,676,604
Commissions....................................................... 1,178,156 722,746
Service, maintenance and network expense.......................... 289,036 214,636
Depreciation and amortization..................................... 1,218,095 723,516
----------- ----------
6,284,558 4,337,502
----------- ----------
Gross profit................................................... 1,930,577 1,530,642
Selling, general and administrative expenses
Salaries, wages and benefits...................................... 823,430 488,913
Depreciation and amortization..................................... 200,095 198,398
Dues and subscriptions............................................ 53,905 50,960
Outside services.................................................. 40,521 63,736
Phone maintenance................................................. 118,824 --
Professional services............................................. 171,303 85,920
Taxes
Personal property.............................................. 75,785 4,295
Sales.......................................................... 63,948 37,907
Telephone......................................................... 69,137 24,696
Rent.............................................................. 71,511 31,389
Other............................................................. 223,165 120,105
----------- ----------
1,911,624 1,106,319
----------- ----------
Earnings from operations....................................... 18,953 424,323
Other income (expense)
Interest income................................................... 415 14,741
Interest expense.................................................. (971,141) (600,624)
Gain (loss) on sale of assets..................................... (80,652) 98,904
Other income...................................................... 12,135 9,366
----------- ----------
(1,039,243) (477,613)
----------- ----------
Loss before income taxes....................................... (1,020,290) (53,290)
Income taxes
Current........................................................... (6,280) (8,856)
Deferred.......................................................... 284,000 (128,000)
----------- ----------
277,720 (136,856)
----------- ----------
NET LOSS....................................................... $ (742,570) $ (190,146)
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 80
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD INDICATED BELOW
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON CONTRIBUTED EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994
As originally reported...................... $339,423 $210,219 $ (153,727) $ 395,915
Prior period adjustment..................... -- 55,192 (238,373) (183,181)
-------- ---------- ----------- ---------
As restated................................. 339,423 265,411 (392,100) 212,734
Net loss for the year ended
December 31, 1994........................... -- -- (190,146) (190,146)
Cash dividends................................ -- (133,181) -- (133,181)
-------- ---------- ----------- ---------
Balance at December 3l, 1994.................. 339,423 132,230 (582,246) (110,593)
Net loss for the year ended
December 31, 1995........................... -- -- (742,570) (742,570)
Stock warrants exercised...................... 9,333 -- -- 9,333
Cash dividends................................ -- (132,230) -- (132,230)
-------- ---------- ----------- ---------
Balance at December 31, 1995.................. $348,756 $ -- $(1,324,816) $(976,060)
======== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-80
<PAGE> 81
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net loss......................................................... $ (742,570) $ (190,146)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization............................... 1,418,191 921,914
(Gain) loss on sale of assets............................... 80,652 (98,904)
Changes in assets and liabilities
(Increase) decrease in accounts receivable............... (9,352) 9,040
(Increase) decrease in prepaid expenses.................. (11,439) 72
Increase in other asset.................................. (2,822) --
Increase in accounts payable............................. 183,338 244,517
Increase in accrued expenses............................. 127,407 18,554
Increase (decrease) in deferred income taxes............. (284,000) 128,000
----------- -----------
Total adjustments................................... 1,501,975 1,223,193
----------- -----------
Net cash provided by operating activities........... 759,405 1,033,047
Cash flows from investing activities
Capital expenditures............................................. (203,112) (229,613)
Proceeds from sale of assets..................................... 54,297 195,714
----------- -----------
Net cash used in investing activities............... (148,815) (33,899)
Cash flows from financing activities
Proceeds from long-term obligations.............................. 507,239 123,355
Payments on notes payable to bank................................ (19,000) (11,900)
Payments on long-term obligations................................ (1,119,990) (696,191)
Stock warrants exercised......................................... 9,333 --
Dividends paid................................................... (132,230) (133,181)
----------- -----------
Net cash used in financing activities............... (754,648) (717,917)
----------- -----------
Net increase (decrease) in cash.................................... (144,058) 281,231
Cash (overdraft) at beginning of period............................ 147,910 (133,321)
----------- -----------
Cash at end of period.............................................. $ 3,852 $ 147,910
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 82
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. THE COMPANY
Payphones of America, Inc. operates, services and maintains a system of
approximately 2,800 pay telephones in the Southeastern and Midwestern United
States.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. INTANGIBLE ASSETS
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. CONCENTRATIONS OF CREDIT RISK
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of 1995 revenues
were generated by the Company's pay telephones located in the states of Missouri
(36%) and Virginia (33%). No other area has a disproportionate credit risk.
F-82
<PAGE> 83
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- GOING CONCERN
The Company has experienced recurring losses and has accumulated losses
since inception of $1,324,816. As of December 31, 1995, the Company's current
liabilities exceed its current assets by $2,196,559. These factors raise doubt
about the Company's ability to continue as a going concern. The Company's
continued existence as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its debt and lease obligations and to obtain additional financing
or refinancing as may be required. Historically, the Company has generated
sufficient cash flow to meet its obligations and to pay its debt and lease
obligations, and, although it cannot be assured that the Company will be able to
continue as a going concern in view of its present financial condition,
management believes that continued strategic business acquisitions and
improvements in planning and budgeting should enable the Company to meet its
obligations and sustain its operations.
NOTE C -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.50% at December 31, 1995). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on February 10, 1996.
F-83
<PAGE> 84
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1995
--------------------------------------
CURRENT LONG-TERM 1994
PORTION PORTION TOTAL TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes payable to stockholders................ $ 248,333 $ 184,276 $ 432,609 $ 149,000
Note payable to Mark Twain Bank.............. 1,594 26,988 28,582 29,683
Notes payable to Ford Motor Credit Company... 36,098 36,389 72,487 63,582
Notes payable to Ronald L. Coleman........... 14,069 299,868 313,937 426,517
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom...................... 105,454 185,273 290,727 397,818
Note payable to Communications
Finance Corporation........................ 87,466 320,034 407,500 482,853
Note payable to R. Greg Kintz and
Paul Wm. Schindler......................... 103,350 45,750 149,100 236,550
Capital lease obligations
Berthel, Fisher & Company Leasing, Inc..... 717,554 3,655,275 4,372,829 4,749,921
Intellicall, Inc............................. 17,036 -- 17,036 59,466
Copying Concepts Office Systems.............. -- -- -- 2,168
---------- ---------- ---------- ----------
$1,330,954 $4,753,853 $6,084,807 $6,597,558
========= ========= ========= =========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
F-84
<PAGE> 85
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS (CONTINUED)
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment..................................... $ 3,871,519
Site location contracts................................. 2,980,749
-----------
6,852,268
Less accumulated depreciation and amortization........ (2,256,701)
-----------
$ 4,595,567
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following December 31, 1995:
<TABLE>
<S> <C>
1996.................................................... $ 1,330,954
1997.................................................... 1,087,032
1998.................................................... 1,024,518
1999.................................................... 998,138
2000.................................................... 771,115
2001 and thereafter..................................... 873,050
-----------
$ 6,084,807
==========
</TABLE>
NOTE E -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
The provision for income taxes consists of the following for the year ended
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current...................................... $ (6,280) $ (8,856)
Deferred..................................... 284,000 (128,000)
--------- ---------
$ 277,720 $(136,856)
========= =========
</TABLE>
F-85
<PAGE> 86
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are attributable to the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation................................ $(472,000) $(365,000)
Accumulated amortization................................ 262,000 81,000
Tax benefit of net operating loss carryforward.......... 460,000 --
--------- ---------
250,000 (284,000)
Less valuation allowance..................................... (250,000) --
--------- ---------
Net deferred tax asset (liability).................... $ -- $(284,000)
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards for Federal income tax
purposes which are available to offset future Federal taxable income. These
carryforwards expire as follows:
<TABLE>
<S> <C>
2008..................................................... $ 9,194
2009..................................................... 332,849
2010..................................................... 836,510
----------
$1,178,553
=========
</TABLE>
NOTE F -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended December 31:
<TABLE>
<S> <C>
1996...................................................... $ 95,091
1997...................................................... 93,246
1998...................................................... 60,550
1999...................................................... 59,000
2000...................................................... 64,400
2001 and thereafter....................................... 310,500
--------
Total minimum lease payments.............................. $682,787
========
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1995
and 1994, was $71,512 and $31,389, respectively.
NOTE G -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
------- --------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
F-86
<PAGE> 87
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- STOCK WARRANTS (CONTINUED)
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE H -- STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the year
ended December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Interest....................................... $852,612 $597,956
Income taxes................................... 6,280 16,388
</TABLE>
During 1995 and 1994, the Company entered into capital lease obligations
totalling $100,000 and $4,000,000, respectively, which represent noncash
financing activities.
NOTE I -- PRIOR PERIOD ADJUSTMENT
Retained earnings at December 31, 1994, were restated following completion
of the Company's first audit to reflect the correction of the following account
balances:
<TABLE>
<S> <C>
Accounts receivable...................................... $ (14,061)
Property and equipment................................... 15,307
Other assets............................................. 20,521
Accumulated depreciation and amortization................ 21,219
Accounts payable......................................... (94,965)
Income taxes payable..................................... (20,639)
Notes payable............................................ 49,112
Deferred income taxes.................................... (156,000)
Additional contributed capital........................... (55,192)
Other.................................................... (3,675)
---------
$ 238,373
=========
</TABLE>
NOTE J -- ACQUISITION
On September 23, 1994, the Company purchased certain assets of Eastern
Telecom Corporation, operators of pay telephones in the Southeastern region of
the United States. The acquisition was accounted for using the purchase method.
The purchase price of $4,000,000 was allocated as follows:
<TABLE>
<S> <C>
Fair market value of assets acquired
Inventories............................................ $ 2,000
Equipment.............................................. 1,721,839
Site contracts......................................... 2,276,161
----------
Purchase price........................................... $4,000,000
=========
</TABLE>
In connection with the asset purchase, the Company entered into a purchase
commitment with the seller for services of $500,000. In 1995, the commitment
decreased to approximately $192,000 based on actual revenues generated by the
assets acquired. The Company's annual obligation under this agreement is $32,000
through 2001.
F-87
<PAGE> 88
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.
NOTE L -- SUBSEQUENT EVENT
On February 7, 1996, the Telecommunications Act of 1996 was signed into
law. The Act recognizes that independent public payphone providers are entitled
to fair rules to compete with the Regional Bell Operating Companies and other
local exchange companies. For instance, the Act prohibits Bell operating
companies from subsidizing payphone service directly or indirectly with revenues
generated from their exchange or access services. Bell companies are also
prohibited from discriminating in favor of their payphone services. The
legislation directs the Federal Communications Commission to develop fair rules
in implementing the payphone provision within nine months. The potential impact
of this Act on the financial position of the Company is unknown at this time.
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the short-term
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at December 31, 1995, based on
market rates and conditions.
F-88
<PAGE> 89
INDEPENDENT ACCOUNTANTS' REPORT
Payphones of America, Inc. and Subsidiary
Stockholders and Board of Directors
We have reviewed the accompanying consolidated balance sheets, income
statements and cash flow statements of Payphones of America, Inc. and Subsidiary
as of June 30, 1996 and 1995, and for the six month periods then ended. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
October 16, 1996
F-89
<PAGE> 90
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Current assets
Accounts receivable....................................... $ 372,557.99 $ 339,498.44
Prepaid expenses.......................................... 39,245.11 26,097.67
Other..................................................... 40,210.91 91,139.99
-------------- --------------
Total current assets.............................. 452,014.01 456,736.10
-------------- --------------
Operating equipment
Telecommunications equipment.............................. 3,924,343.66 3,848,670.36
Telephone equipment held for installation................. 20,684.45 20,684.45
-------------- --------------
3,945,028.11 3,869,354.81
Less accumulated depreciation and amortization............ (1,533,605.18) (991,873.18)
-------------- --------------
Net operating equipment..................................... 2,411,422.93 2,877,481.63
-------------- --------------
Leasehold improvements, equipment, furniture and fixtures
net of accumulated depreciation and amortization of
$180,991.76 and $118,347.19 respectively.................. 30,706.63 167,422.68
Intangible assets
Site contracts, net....................................... 1,688,500.68 2,234,952.07
Non compete agreements, net............................... 197,083.33 362,083.35
Other..................................................... 793,406.35 831,335.75
-------------- --------------
2,678,990.36 3,428,371.17
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
LIABILITIES
Current liabilities
Book overdraft of cash.................................... $ 170,709.08 $ 169,071.69
Notes payable to bank..................................... 243,750.00 249,750.00
Accounts payable.......................................... 73,168.23 53,245.60
Accrued expenses.......................................... 583,216.66 773,202.58
Current maturities of long term debt...................... 736,073.00 63,003.28
-------------- --------------
Total current liabilities......................... 1,806,916.97 1,308,273.15
-------------- --------------
Long-term debt, less current maturities
Notes payable and obligations under capital leases........ 4,568,293.81 5,891,563.57
Notes payable to stockholders............................. 568,090.19 262,894.81
Deferred income taxes....................................... -- 284,000.00
-------------- --------------
Total liabilities................................. 6,943,300.97 7,746,731.53
-------------- --------------
Stockholders' equity
Common stock.............................................. 348,756.03 348,756.03
Additional paid-in-capital................................ -- (46,133.09)
Accumulated deficit....................................... (1,718,923.07) (1,119,342.89)
-------------- --------------
Total stockholders' equity........................ (1,370,167.04) (816,719.95)
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
</TABLE>
F-90
<PAGE> 91
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues
Coin calls................................................... $1,516,505.67 $1,649,738.77
Non coin calls............................................... 1,539,280.30 1,937,053.41
Other........................................................ 712,438.98 13,786.67
------------- -------------
Total revenues....................................... 3,768,224.95 3,600,578.85
------------- -------------
Cost of revenues
Line access charges.......................................... 698,365.13 866,025.91
Commissions.................................................. 436,680.69 556,942.49
Service and collections...................................... 1,060,772.30 777,406.11
Depreciation and amortization................................ 596,134.05 572,783.12
------------- -------------
Total cost of revenues............................... 2,791,952.17 2,773,157.63
------------- -------------
Gross profit................................................... 976,272.78 827,421.22
Selling, general and admin. expenses........................... 985,289.98 943,668.15
------------- -------------
Operating loss................................................. (9,017.20) (116,246.93)
Other income(expense)
Interest expense............................................. (333,229.92) (479,226.62)
Gain(loss)on sale of assets.................................. (55,474.76) 6,273.67
Other income................................................. 4,110.74 4,192.64
------------- -------------
Total other income(expense).......................... (384,593.94) (468,760.31)
------------- -------------
Loss before taxes on income.................................... (393,611.14) (585,007.24)
Taxes on income................................................ -- --
------------- -------------
Net loss............................................. $ (393,611.14) $ (585,007.24)
============= =============
</TABLE>
F-91
<PAGE> 92
PAYPHONES OF AMERICA, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Increase(decrease) in cash
Operating activities
Net loss................................................... $(393,611.14) $(585,007.24)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 698,211.55 679,329.58
(Gain) loss on sale of property and equipment.............. 55,474.76 (6,273.67)
Changes in assets and liabilities:
Decrease in accounts receivable.......................... 4,767.01 28,474.56
Increase in prepaid expenses............................. (13,491.11) (11,782.67)
(Decrease)increase in accounts payable and accrued
expenses.............................................. (372,401.11) 108,407.18
------------ ------------
Total adjustments..................................... 372,561.10 798,154.98
------------ ------------
Net cash provided by operating activities............. (21,050.04) 213,147.74
Investing activities
Purchase of fixed assets...................................... (54,350.00) (40,442.55)
Proceeds from sale of assets.................................. 20,000.00 6,273.67
------------ ------------
Net cash used in investing activities................. (34,350.00) (34,168.88)
------------ ------------
Financing activities
Proceeds from notes and capital leases........................ 489,928.35 210,816.45
Principal payments on debt.................................... (609,089.39) (601,496.75)
Stock warrants exercised...................................... -- 9,333.34
Dividends paid................................................ -- (114,613.68)
------------ ------------
Net cash used in financing activities........................... (119,161.04) (495,960.64)
------------ ------------
Net increase(decrease) in cash.................................. (174,561.08) (316,981.78)
Cash beginning of period........................................ 3,852.00 147,910.09
------------ ------------
Cash overdraft at end of period................................. $(170,709.08) $(169,071.69)
============ ============
</TABLE>
F-92
<PAGE> 93
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. The Company
Payphones of America, Inc. operates, services and a system of approximately
2,800 pay telephones in the Southeastern and Midwestern United States.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. Intangible Assets
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. Concentrations of Credit Risk
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of revenues were
generated by the Company's pay telephones located in the states of Missouri and
Virginia. No other area has a disproportionate credit risk.
F-93
<PAGE> 94
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.25% at June 30, 1996). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on October 10, 1996.
NOTE C -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
PORTION PORTION TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
Notes payable to stockholders................. $ 76,100 $ 568,090 $ 644,190
Notes payable to Ford Motor Credit Company.... 14,070 36,389 50,459
Notes payable to Ronald L. Coleman............ 7,232 299,868 307,100
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom....................... 23,909 185,273 209,182
Note payable to Communications Finance
Corporation................................. 66,806 320,034 386,840
Note payable to R. Greg Kintz and Paul Wm.
Schindler................................... 47,700 45,750 93,450
Capital lease obligations Berthel, Fisher &
Company Leasing, Inc........................ 492,910 3,680,980 4,173,890
Intellicall, Inc............................ 7,346 -- 7,346
-------- ---------- ----------
$736,073 $5,136,384 $5,872,457
======== ========== ==========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
F-94
<PAGE> 95
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment...................... $3,871,519
Site location contracts.................. 2,980,749
----------
6,852,268
Less accumulated depreciation and
amortization........................ 2,934,631
----------
$3,917,637
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following June 30, 1996:
<TABLE>
<S> <C>
1997..................................... $1,208,993
1998..................................... 1,055,775
1999..................................... 1,011,328
2000..................................... 884,627
2001..................................... 822,083
2002 and thereafter...................... 436,524
----------
$5,419,330
==========
</TABLE>
NOTE D -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
There was no provision for income taxes for the periods ended June 30, 1996
and 1995.
F-95
<PAGE> 96
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
Deferred tax assets and liabilities are attributable to the following at
June 30,:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation........................ $(472,000) $(365,000)
Accumulated amortization........................ 262,000 81,000
Tax benefit of net operating loss
carryforward.................................. 460,000 284,000
--------- ---------
250,000 --
Less valuation allowance........................... (250,000) --
--------- ---------
Net deferred tax asset (liability)......... $ -- $ --
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards (based on filed tax
returns through December 31, 1995) for Federal income tax purposes which are
available to offset future Federal taxable income. These carryforwards expire as
follows:
<TABLE>
<S> <C>
2008..................................... $ 9,194
2009..................................... 332,849
2010..................................... 836,510
----------
$1,178,553
==========
</TABLE>
NOTE E -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended June 30,:
<TABLE>
<S> <C>
1997................................... $ 94,169
1998................................... 76,898
1999................................... 59,775
2000................................... 61,700
2001................................... 64,400
2002 and thereafter.................... 278,300
-----------
Total minimum lease payments........... $ 635,242
===========
</TABLE>
Rent expense for all operating leases for the periods ended June 30, 1996
and 1995, was $47,545 and $35,756, respectively.
F-96
<PAGE> 97
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE F -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
------- ---------- -------- -----------------
<S> <C> <C> <C>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE G -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the shortterm
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at June 30, 1996, based on market
rates and conditions.
F-97
<PAGE> 98
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined balance sheets of Amtel
Communications, Inc., and Combined Companies (Note B) as of June 30, 1996 and
December 31, 1995, and the related combined statements of operations,
stockholder's deficit, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amtel Communications, Inc., and
combined Companies (Note B) as of June 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, on August
3, 1995, the Company filed voluntary petitions for relief under Chapter 11 of
Title II of the United States Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-98
<PAGE> 99
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN POSSESSION)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31, 1995
------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash..................................................... $ 422,566 $ 616,974
Accounts receivable...................................... 527,883 791,238
Inventory................................................ 2,001,072 1,874,290
Other.................................................... 137,553 180,280
------------ -----------------
TOTAL CURRENT ASSETS..................................... 3,089,074 3,462,782
------------ -----------------
FIXED ASSETS (Note C)
Property and equipment, net.............................. 462,813 1,060,119
Deferred site costs, net................................. 9,812,154 10,359,692
------------ -----------------
TOTAL FIXED ASSETS.................................... 10,274,967 11,419,811
------------ -----------------
OTHER ASSETS............................................... 294,619 289,216
------------ -----------------
TOTAL ASSETS.......................................... $13,658,660 $15,171,809
=========== =================
POST-PETITION LIABILITIES
Accounts payable - trade................................. $ 677,425 $ 1,010,211
Accounts payable - bankruptcy............................ 1,253,555 539,942
Accrued expenses......................................... 767,661 709,518
------------ -----------------
TOTAL POST-PETITION LIABILITIES.......................... 2,698,641 2,259,671
PRE-PETITION LIABILITIES
SUBJECT TO COMPROMISE (Note D)
Accounts payable - trade................................. 6,123,480 6,123,480
Accrued sales tax........................................ 1,615,671 1,615,671
Notes payable............................................ 7,774,805 7,774,805
Lessor liabilities....................................... 65,085,000 65,085,000
------------ -----------------
TOTAL PRE-PETITION LIABILITIES........................... 80,598,956 80,598,956
------------ -----------------
STOCKHOLDER'S DEFICIT
Common stock, 1,000,000 shares authorized, $0.01 par
value, 400,000 shares authorized, no par value, 50,000
shares issued and outstanding......................... 50,000 50,000
Retained deficit......................................... (69,688,937 ) (67,736,818)
------------ -----------------
TOTAL STOCKHOLDER'S DEFICIT.............................. (69,638,937 ) (67,686,818)
------------ -----------------
TOTAL LIABILITIES & DEFICIT.............................. $13,658,660 $15,171,809
=========== =================
</TABLE>
See accompanying notes to the financial statements.
F-99
<PAGE> 100
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
REVENUE
Coin.................................................... $ 4,696,852 $ 9,689,179
LD Commissions.......................................... 1,406,593 2,848,753
Interstate.............................................. 578,681 761,181
Intralata............................................... 460,601 1,849,477
Other................................................... 62,095 1,910,550
------------- -----------------
TOTAL REVENUE........................................... 7,204,822 17,059,140
------------- -----------------
COSTS AND EXPENSES
Line charges............................................ 2,428,704 6,862,015
Location commissions.................................... 1,639,127 3,921,741
Other operating expenses................................ 321,947 2,651,734
Selling, general and administrative..................... 2,231,970 15,103,091
Depreciation and amortization........................... 777,823 1,621,029
Other................................................... -- 67,356
------------- -----------------
LOSS FROM OPERATIONS BEFORE OTHER
EXPENSES AND REORGANIZATION ITEMS....................... (194,749) (13,167,826)
------------- -----------------
OTHER
Interest income......................................... (1,606) --
Interest expense........................................ 6,077 7,429,502
Loss on asset disposal.................................. 453,898 429,967
Other expenses.......................................... 505,113 --
------------- -----------------
LOSS BEFORE REORGANIZATION ITEMS........................ (1,158,231) (21,027,295)
REORGANIZATION ITEMS (Note E)
Professional fees....................................... 721,277 539,942
Other................................................... 68,611 --
------------- -----------------
LOSS BEFORE INCOME TAXES.................................. (1,948,119) (21,567,237)
INCOME TAXES (Note F)..................................... 4,000 4,000
------------- -----------------
NET LOSS.................................................. $(1,952,119) $ (21,571,237)
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-100
<PAGE> 101
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994............................. 50,000 $50,000 $(46,165,581) $(46,115,581)
Net loss.................................... -- -- (21,571,237) (21,571,237)
------ ------- ------------ ------------
DECEMBER 31, 1995............................. 50,000 50,000 (67,736,818) (67,686,818)
Net loss.................................... -- -- (1,952,119) (1,952,119)
------ ------- ------------ ------------
JUNE 30, 1996................................. 50,000 $50,000 $(69,688,937) $(69,638,937)
====== ======= =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-101
<PAGE> 102
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(1,952,119) $ (21,571,237)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 777,823 1,621,029
Loss on disposal of property......................... 453,898 429,966
Non-cash reorganization items........................ 713,613 539,942
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................ 263,355 50,449
Inventory.......................................... (126,782) (16,077)
Deposits........................................... (5,401) (140,157)
Other assets....................................... 42,726 (175,612)
Increase (decrease) in:
Accounts payable................................... (332,786) 2,426,573
Accrued expenses................................... 58,143 2,325,189
Notes payable...................................... -- 4,556,207
------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES..................... (107,530) (9,953,728)
------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (103,518) (64,151)
Proceeds from sale of property.......................... 147,635 --
Expenditures for deferred site costs.................... (130,995) (2,866,920)
------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES..................... (86,878) (2,931,071)
------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................... -- (76,148)
Proceeds from lessor liabilities........................ -- 13,209,000
------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. -- 13,132,852
NET INCREASE (DECREASE) IN CASH........................... (194,408) 248,053
CASH, BEGINNING OF PERIOD................................. 616,974 368,921
------------- -----------------
CASH, END OF PERIOD....................................... $ 422,566 $ 616,974
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-102
<PAGE> 103
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-All. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates continuity of operations
and the realization of assets and the satisfaction of liabilities in the normal
course of business. The Chapter 11 filings, the Company's leveraged financial
structure, and recurring net losses resulting in a deficit in stockholder's
equity, raise substantial doubt about its ability to continue as a going
concern. A plan of reorganization may materially change the amounts reported in
the consolidated financial statements (which do not give effect to adjustments
to the carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of these actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in these combined financial statements.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined financial statements include the accounts of Amtel
Communications, Inc., Amtel Communications Payphones, Inc., Amtel Communications
Services, Inc., Amtel Communications Correctional Facilities, Inc. and ACI-HDT
Supply Company. The five entities are all owned 100% by the same individual.
Collectively, the five entities will be referred to as "the Company". Material
intercompany transactions and balances have been eliminated.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
and money market funds to be cash equivalents.
F-103
<PAGE> 104
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORY
Inventory consists primarily of pay telephones, pedestals, and enclosures
to be installed in the Company's business locations. Inventory is stated at the
lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over estimated useful lives of 3-5 years.
DEFERRED SITE COSTS
Deferred site costs consist of pay telephones and related components and
installation costs necessary to make the pay phone ready for operation. Costs
are being amortized on the straight-line method over estimated useful lives of 8
years.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
INCOME TAXES
The Company provides for federal and state income taxes currently payable
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes and income and expenses for
tax purposes.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. FIXED ASSETS:
Included in fixed assets are property and equipment (furniture, fixtures,
and computers) and deferred site costs (pay phones, housing and installation
costs) both of which are carried at cost.
Property and equipment and deferred site costs are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Property and equipment............... $ 989,108 $ 1,898,564
Accumulated depreciation............. (526,295) (838,446)
----------- -----------
Net........................... $ 462,813 $ 1,060,118
=========== ===========
Deferred site costs.................. $13,284,000 $13,153,005
Accumulated amortization............. (3,471,849) (2,793,313)
----------- -----------
Net........................... $ 9,812,151 $10,359,692
=========== ===========
</TABLE>
F-104
<PAGE> 105
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
D. PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS:
Pre-petition liabilities consist of secured and unsecured debt, all of
which are subject to compromise under the proposed plan of reorganization.
Certain inventory was returned to the parties claiming a secured interest in the
asset at or around the petition filing date. The claimed secured claims are
classified as subject to compromise as the value of the collateral is less than
the corresponding obligation.
Pre-petition liabilities at June 30, 1996 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accounts payable................................. $ 6,123,480 $ 6,123,480
Accrued state sales tax.......................... 1,615,671 1,615,671
Secured notes payable............................ 7,774,805 7,774,805
Lessor liabilities............................... 65,085,000 65,085,000
----------- -----------
$80,598,956 $80,598,956
========== ==========
</TABLE>
A plan of reorganization may materially change the amount and terms of
these pre-petition liabilities.
Lessor liability consists of funds borrowed from independent third parties,
under which the Company agreed to sell, lease-back, install and maintain, a pay
telephone for an initial investment of $3,000 -- $3,600 per pay telephone. The
Company agreed to pay $51 per month per phone, for a five year period and then
return the initial investment to the investors. Investors had the right to have
their investment returned at any time within the five year period for a nominal
surrender fee. These transactions have been accounted for as financing
transactions and payments made by the Company have been recorded as interest
expense in the statement of operations.
Payments to investors for the six months ended June 30, 1996 and the year
ended December 31, 1995 were approximately $0 and $6,762,000, respectively.
As of the petition date, in accordance with current accounting
pronouncements, the Company discontinued accruing interest on its pre-petition
debt obligations. If such interest had continued to be accrued, interest expense
for the first six months of 1996 and the last five months of 1995 would have
been $457,628 and $379,351, respectively. Interest expense associated with the
lessor liability is not reflected in these accruals as the obligations are not
represented by formal notes.
In conjunction with the Chapter 11 case, there are differences between
claims filed by potential creditors and amounts recorded by the Company. These
differences will be resolved by negotiated agreement between the Company and the
claimant or by the Court. Additional claims may arise in conjunction with the
termination of contractual obligations related to executory contracts and
leases. As a result, recorded amounts may be adjusted but the Company believes
that any such adjustments will not be material.
E. REORGANIZATION ITEMS:
Reorganization items represent expenses resulting from the reorganization
and restructuring of the business. Since these expenses do not relate to the
Company's normal operations they are reported separately on the statement of
operations.
F. INCOME TAXES:
As discussed in Note B, the Company adopted SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires the use of the balance sheet method of
accounting for income taxes. Under this method, a deferred
F-105
<PAGE> 106
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
F. INCOME TAXES (CONTINUED):
tax asset or liability represents the tax effect of temporary differences
between financial statement and tax bases of assets and liabilities and is
measured using the latest enacted tax rates.
The provision for income taxes for the six months ended June 30, 1996 and
the year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current provision.................... $4,000 $4,000
====== ======
</TABLE>
The Company realized substantial net operating losses for the six months
ended June 30, 1996 and the year ended December 31, 1995 as well as in prior
periods. Calculation of the temporary differences between financial statement
and tax bases of assets and liabilities is complicated by the fact the Company
has not filed tax returns since 1993. A valuation reserve has been established
equal to the potential tax benefit that could result from the use of the net
operating losses for these periods since there is reasonable doubt the Company
can generate income to utilize these losses.
G. COMMITMENTS:
The Company leases building space for its six branches, including warehouse
facilities in Seattle, Washington; Denver, Colorado; Portland, Oregon; Hayward,
California; Los Angeles, California; and its corporate headquarters in San
Diego, California. The leases have expiration dates ranging from September, 1996
to October, 1998. The agreements call for a cumulative annual base rent of
$246,336.
Net future minimum rental payments required under this lease as of June 30,
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
-----------
<S> <C>
1997................................. $209,461
1998................................. 113,040
1999................................. 33,600
2000................................. --
2001................................. --
--------
$356,101
========
</TABLE>
Total rent expense charged to operations for the six months ended June 30,
1996 and the year ended December 31, 1995 was $204,227 and $544,193,
respectively.
H. PROPOSED PLAN OF REORGANIZATION:
During the six months ended June 30, 1996, the Company evaluated its
long-term market strategies with the goal of reducing expenses and improving
overall operating results. As a result, the Company entered into an asset
purchase agreement with PhoneTel Technologies, Inc. (an Ohio Corporation)
("PhoneTel") dated June 26, 1996 wherein the Company will sell substantially all
of its pay phone operating assets for cash and stock of PhoneTel totaling
$13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel stock). In July, 1996
PhoneTel made a non refundable deposit of $1,300,000 to open escrow for the
purchase of these assets.
F-106
<PAGE> 107
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined statement of revenues and direct
operating expenses of Amtel Communications, Inc., and combined Companies (Note
B) for the three months ended December 31, 1994. This combined statement of
revenues and direct operating expenses is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and direct operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the revenues and direct
operating expenses for the three months ended December 31, 1994, pursuant to the
Securities and Exchange Commission's communication dated July 25, 1996 described
in Note C, and is not intended to be a complete presentation of the Company's
operations.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenue and direct operating expenses of Amtel Communications, Inc., and
combined Companies (Note B) for the three months ended December 31, 1994 in
conformity with generally accepted accounting principles.
The accompanying combined statement of revenues and direct operating
expenses has been prepared assuming that the Company will continue as a going
concern. As described in Note A, on August 3, 1995, the Company filed voluntary
petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The combined statement of revenues and
direct operating expenses does not include any adjustment that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-107
<PAGE> 108
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
REVENUE
Coin.......................................................... $ 2,603,577
LD Commissions................................................ 593,370
Interstate.................................................... 68,155
Intralata..................................................... 593,842
Other......................................................... 1,509,861
-----------
TOTAL REVENUE................................................. 5,368,805
-----------
COSTS AND EXPENSES
Line charges.................................................. 1,342,855
Location commissions.......................................... 890,903
Other operating expenses...................................... 1,481,073
Selling, general and administrative........................... 4,115,854
Depreciation and amortization................................. 480,702
-----------
LOSS FROM OPERATIONS BEFORE OTHER INCOME AND EXPENSES......... (2,942,582)
-----------
OTHER
Interest income............................................... (105)
Interest expense.............................................. 2,295,382
-----------
NET LOSS...................................................... $(5,237,859)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-108
<PAGE> 109
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-A11. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined statement of revenues and direct operating expenses has been
prepared assuming the Company will continue as a going concern, which
contemplates continuity of operations and the realization of assets and the
satisfaction of liabilities in the normal course of business. The Chapter 11
filings, the Company's leveraged financial structure, and recurring net losses
resulting in a deficit in stockholder's equity, raise substantial doubt about
its ability to continue as a going concern. A plan of reorganization may
materially change the amounts reported in the combined statement of revenues and
direct operating expenses (which do not give effect to adjustments to the
carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of this actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in this combined statement of revenues and direct operating expenses.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined statement of revenues and direct operating expenses includes
the accounts of Amtel Communications, Inc., Amtel Communications Payphones,
Inc., Amtel Communications Services, Inc., Amtel Communications Correctional
Facilities, Inc. and ACI-HDT Supply Company. The five entities are all owned
100% by the same individual. Collectively, the five entities will be referred to
as "the Company". Material intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
F-109
<PAGE> 110
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
ESTIMATES
The preparation of a combined statement of revenues and direct operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the combined statement of revenues and direct operating expenses and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. INCOMPLETE PRESENTATION:
By letter dated July 25, 1996 to PhoneTel Technologies, Inc., the
Securities and Exchange Commission (SEC) granted a waiver of Item 310(c) of
Regulation S-B which requires submission of two years of audited statements of
operations. Instead, the SEC has accepted audited statements of operations for a
twenty-one month period. This combined statement of revenues and direct
operating expenses together with the combined statement of operations from the
audited financial statements for the six months ended June 30, 1996 and for the
year ended December 31, 1996 comprise the twenty-one month period.
D. SUBSEQUENT EVENT -- PROPOSED PLAN OF REORGANIZATION:
In 1996, the Company evaluated its long-term market strategies with the
goal of reducing expenses and improving overall operating results. As a result,
the Company entered into an asset purchase agreement with PhoneTel Technologies,
Inc. (an Ohio Corporation) ("PhoneTel") dated June 26, 1996 wherein the Company
will sell substantially all of its pay phone operating assets for cash and stock
of PhoneTel totaling $13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel
stock). In July, 1996 PhoneTel made a non refundable deposit of $1,300,000 to
open escrow for the purchase of these assets.
F-110
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Cherokee Communications, Inc.:
We have audited the accompanying balance sheets of Cherokee Communications,
Inc. (the Company) as of September 30, 1995 and 1994, and the related statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1995 and 1994,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
November 17, 1995
F-111
<PAGE> 112
CHEROKEE COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 668,778 $ 780,962
Short-term cash investments..................................... 150,000
Trade accounts receivable, less allowance for doubtful accounts
of $264,803 and $255,965, respectively (Notes 6 and 10)...... 4,453,192 4,251,894
Inventories (Note 6)............................................ 137,036 78,792
Prepaid expenses and other current assets (Note 10)............. 303,273 213,863
Deferred income tax benefits (Note 9)........................... 108,717 112,718
----------- -----------
Total current assets.................................... 5,670,996 5,588,229
Property and equipment -- net (Notes 2, 3 and 6).................. 12,935,453 11,334,863
Site licenses -- net (Note 1)..................................... 1,941,467 2,221,780
Investment in and advances to affiliates (Note 5)................. 164,549 30,188
Deferred income tax benefits (Note 9)............................. 93,704
Other assets -- net (Note 4)...................................... 681,754 890,856
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing (Note 6)................... $ 659,604 $ 1,705,174
Current portion of other notes payable (Note 6)................. 1,491,767 1,395,338
Current portion of capital lease obligations (Note 7)........... 1,094,381 1,616,814
Accounts payable................................................ 310,358 267,755
Accrued telecommunication and other expenses.................... 2,971,935 2,575,808
Income taxes payable............................................ 256,140 368,143
----------- -----------
Total current liabilities............................... 6,784,185 7,929,032
Long-term liabilities:
Notes payable, less current portion (Note 6).................... 6,605,835 5,295,294
Capital lease obligations, less current portion (Note 7)........ 780,593 2,139,216
Deferred income tax liability (Note 9).......................... 342,359
----------- -----------
Total long-term liabilities............................. 7,728,787 7,434,510
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 8):
Convertible redeemable preferred stock.......................... 2,400,000 2,400,000
Common stock warrants, with mandatory redemption requirements... 1,087,000 1,087,000
Common stock, no par value; 15,000,000 shares authorized,
5,320,467 and 5,312,467 shares issued and outstanding,
respectively................................................. 351,903 343,183
Additional paid-in capital...................................... 10,630 10,630
Retained earnings............................................... 3,031,714 955,265
----------- -----------
Total shareholders' equity.............................. 6,881,247 4,796,078
----------- -----------
TOTAL.............................................. $21,394,219 $20,159,620
=========== ===========
</TABLE>
See notes to financial statements.
F-112
<PAGE> 113
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Telecommunications revenues:
Pay phone coin calls................................ $14,036,665 $10,797,869 $ 7,258,037
Automated operator, routed calls.................... 17,049,394 16,425,708 13,543,072
Other (Note 5)...................................... 505,581 641,899 825,694
----------- ----------- -----------
Total....................................... 31,591,640 27,865,476 21,626,803
Operating costs and expenses:
Telephone charges................................... 7,851,842 7,257,272 4,956,950
Commissions......................................... 4,909,445 4,341,260 3,258,932
Telecommunication fees and validation............... 1,821,930 1,834,389 1,843,614
Depreciation and amortization (Note 2).............. 4,298,090 4,284,734 3,218,450
Field operations personnel.......................... 2,016,935 1,610,952 1,191,829
Chargebacks and doubtful accounts................... 1,104,896 784,636 1,046,353
Selling, general and administrative (Note 10)....... 5,520,405 4,634,890 3,714,601
----------- ----------- -----------
Total....................................... 27,523,543 24,748,133 19,230,729
----------- ----------- -----------
Operating income...................................... 4,068,097 3,117,343 2,396,074
Other income (expense):
Interest expense.................................... (1,450,249) (1,682,465) (1,345,065)
Amortization of debt discount....................... (181,167) (181,167) (75,486)
Interest income..................................... 57,278 20,329 20,731
Equity in earnings (losses) of affiliates (Note
5)............................................... (34,608) (226,625) (6,948)
Gain on equipment sales and other (Note 3).......... 1,160,238 67,917 84,325
----------- ----------- -----------
Total....................................... (448,508) (2,002,011) (1,322,443)
----------- ----------- -----------
Income before income taxes............................ 3,619,589 1,115,332 1,073,631
Provision for income taxes (Note 9)................... 1,399,140 512,402 418,508
----------- ----------- -----------
Net income.................................. $ 2,220,449 $ 602,930 $ 655,123
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-113
<PAGE> 114
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON COMMON STOCK ADDITIONAL RETAINED
-------------------- STOCK -------------------- PAID-IN EARNINGS
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL (DEFICIT)
------- ---------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1992....... -- $ -- $ -- 5,000,000 $ 5,000 $ 10,630 $ (50,788)
Issuance of preferred
stock...................... 240,000 2,400,000
Cash dividends on preferred
stock...................... (108,000)
Issuance of common stock..... 312,467 338,183
Issuance of common stock
warrant (Note 8)........... 1,087,000
Net income................... 655,123
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1993.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 496,335
Cash dividends on preferred
stock...................... (144,000)
Net income................... 602,930
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1994.... 240,000 2,400,000 1,087,000 5,312,467 343,183 10,630 955,265
Cash dividends on preferred
stock...................... (144,000)
Proceeds from exercise of
common stock options....... 8,000 8,720
Net income................... 2,220,449
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1995.... 240,000 $2,400,000 $1,087,000 5,320,467 $351,903 $ 10,630 $3,031,714
======= ========== ========== ========= ======== ======= ==========
</TABLE>
See notes to financial statements.
F-114
<PAGE> 115
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 2,220,449 $ 602,930 $ 655,123
Noncash items in net income:
Depreciation and amortization............................. 4,298,090 4,284,734 3,218,450
Amortization of debt discount............................. 181,167 181,167 75,486
Equity in earnings (losses) of affiliates................. 34,608 226,625 6,948
Deferred income taxes..................................... 440,064 88,456 (35,731)
Gain on sale of property and equipment.................... (1,136,894) (51,854) (59,491)
Cash from (used for) changes in operating working capital:
Trade accounts receivable................................. (201,298) (946,867) (1,933,366)
Inventories............................................... (58,244) 58,875 (137,667)
Prepaid expenses and other current assets................. (89,410) (56,234) (70,710)
Accounts payable and accrued liabilities.................. 438,730 619,244 424,157
Income taxes payable...................................... (112,003) 335,672 (91,743)
----------- ----------- -----------
Net cash from operating activities...................... 6,015,259 5,342,748 2,051,456
----------- ----------- -----------
Investing Activities:
Additions to property and equipment......................... (5,794,108) (4,059,111) (5,224,466)
Increase in site licenses................................... (440,220) (433,746) (753,966)
Increase in other assets.................................... (79,353) (644,428)
Proceeds from sale of property and equipment................ 2,041,310 96,905 108,700
Investments in and advances to affiliates................... (218,767) (40,591) (333,329)
Distributions from affiliates............................... 49,798 60,427 55,765
Sale (purchase) of short-term cash investments.............. 150,000 (150,000)
----------- ----------- -----------
Net cash used for investing activities.................. (4,291,340) (4,526,116) (6,791,724)
----------- ----------- -----------
Financing Activities:
Issuance of (payments on) note payable -- receivable
financing................................................. (1,045,570) 161,812 1,543,362
Issuance of other notes payable............................. 4,048,753 2,122,523 9,333,355
Payments on notes payable and capital lease obligations..... (4,704,006) (2,948,227) (7,950,674)
Issuance of common stock.................................... 8,720
Issuance of preferred stock................................. 2,400,000
Cash dividends on preferred stock........................... (144,000) (144,000) (108,000)
----------- ----------- -----------
Net cash from (used for) financing activities........... (1,836,103) (807,892) 5,218,043
Increase (decrease) in cash and cash equivalents.............. (112,184) 8,740 477,775
Cash and cash equivalents:
Beginning of year........................................... 780,962 772,222 294,447
----------- ----------- -----------
End of year................................................. $ 668,778 $ 780,962 $ 772,222
=========== =========== ===========
Supplemental information:
Interest paid............................................... $ 1,462,519 $ 1,635,052 $ 1,230,562
=========== =========== ===========
Income taxes paid........................................... $ 1,091,368 $ 23,000 $ 568,861
=========== =========== ===========
Noncash investing and financing activities:
Equipment and other assets acquired under capital lease
obligations and debt.................................... $ -- $ 367,500 $ 2,718,189
=========== =========== ===========
Common stock issued for financing costs................... $ -- $ -- $ 338,183
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-115
<PAGE> 116
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Cherokee Communications, Inc. (the Company) owns, operates and
maintains pay telephone systems connected to the network of regulated telephone
companies throughout the United States at various third-party property owner
locations. In connection with the telephone systems, the Company also derives
revenue from routing calls to operator service companies and through its own
automated operator system (AOS) installed in its telephones. A summary of owned
and managed phones at September 30 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Owned............................................... 9,333 8,182 6,320
Managed............................................. 276 233 235
----- ----- -----
Total..................................... 9,609 8,415 6,555
===== ===== =====
</TABLE>
REVENUES from coin and noncoin calls are recognized at the time the calls
are made and are dependent on service provided by the long-distance carriers.
Accounts receivable primarily includes revenues generated from calls completed
through the Company's AOS and from commissions to be received from operator
service companies. An allowance for doubtful accounts is provided at the time of
revenue recognition for the estimated settlement ("true-up") for actual
chargebacks made by the telephone companies, based on historical experience. The
"true-up" for actual chargebacks is typically made within six months. Also, the
related telecommunication expenses are accrued for the costs for validating,
transmitting, and billing and collecting calls completed through the AOS, as
well as for commissions to be paid to third-party property owners.
CASH EQUIVALENTS represent highly liquid investments with initial or
remaining maturities at the date of purchase of three months or less. Short-term
cash investments consist of certificates of deposit with maturities greater than
three months.
INVENTORIES, which primarily consist of telephone booth enclosures and
related parts, are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY AND EQUIPMENT are stated at cost less accumulated depreciation and
amortization. Cost of telecommunications equipment includes the initial line
hook-up charges, sales commissions, labor and other charges incurred for
installing pay phones. Depreciation and amortization are provided primarily
using the double declining balance method, later switching to the straight-line
method over the following estimated useful lives of the related assets:
buildings, 20 years; leasehold improvement, 25 years; telecommunications
equipment, seven years and ten years; telecommunications software licenses, four
years; vehicles, computer equipment and software, five years; and furniture and
office equipment, five to seven years. Beginning October 1, 1993, the Company
began depreciating newly acquired telecommunications equipment over a ten-year
period using the straight-line method (see Note 2). Refurbishment, repairs and
maintenance costs are expensed as incurred.
SITE LICENSES are stated at the cost of site licenses acquired in asset
acquisitions, less accumulated amortization of $2,690,403 and $2,224,277 at
September 30, 1995 and 1994, respectively. Amortization is provided using the
straight-line method over the terms of the related site license agreements,
generally two to seven years.
OTHER ASSETS are amortized using the straight-line method over the
following periods: deferred financing costs over the life of the respective
financing agreement; and noncompete agreements and patents, five years.
F-116
<PAGE> 117
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DEFERRED FEDERAL INCOME TAXES are provided under the asset and liability
method for temporary differences in the recognition of income and expense for
tax and financial reporting purposes and for the expected benefit of tax credit
carryforwards.
2. CHANGE IN DEPRECIABLE LIFE
Effective October 1, 1993, the Company increased the estimated useful life
of its telecommunications equipment acquired after that date from seven to ten
years. This was to more appropriately reflect the anticipated useful service
period for newly acquired equipment. The effect of this change in accounting
method reduced depreciation expense by approximately $293,000 and increased net
income during the 1994 period by approximately $193,000.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Telecommunications equipment:
Owned................................................... $12,577,986 $ 9,312,536
Under capital leases.................................... 5,725,587 6,328,695
Telecommunications software licenses...................... 2,214,455 1,880,832
Vehicles.................................................. 2,184,227 1,630,211
Furniture and office equipment............................ 686,820 491,401
Machinery................................................. 30,005 30,005
Land and buildings........................................ 75,747 73,787
----------- -----------
Total........................................... 23,494,827 19,747,467
Less accumulated depreciation and amortization............ 10,559,374 8,412,604
----------- -----------
Property and equipment -- net............................. $12,935,453 $11,334,863
=========== ===========
</TABLE>
In October 1994, the Company sold approximately 760 telephones, certain
other assets and related site agreements for approximately $1.7 million, which
resulted in a gain on the sale of assets of approximately $1 million.
4. OTHER ASSETS
Other assets at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred financing costs.................................... $1,113,451 $1,034,098
Patents..................................................... 46,009 46,009
Noncompete agreements....................................... 252,500 252,500
---------- ----------
Total............................................. 1,411,960 1,332,607
Less accumulated amortization............................... 730,206 441,751
---------- ----------
Other assets -- net......................................... $ 681,754 $ 890,856
========== ==========
</TABLE>
In connection with the subordinated debt financing in May 1993, the Company
paid certain investment banking fees of $365,992 in cash and $338,183 in common
stock of 312,467 shares (at $1.08 per share). These amounts were accounted for
as deferred financing costs.
F-117
<PAGE> 118
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has a 50% investment in a partnership, Cherokee Public Phones
(CPP), which owns pay phones. The Company provides certain management and
recordkeeping services to CPP.
During 1993, the Company invested $80,000 for a 49% investment in a
corporate joint venture in Mexico, Corporaciones Interamericana De Desarrollo
Comunicaciones, S.A. de C.V. (CID), which owns and operates pay phones primarily
in Monterrey, Mexico. During the year ended September 30, 1994, the Company made
additional cash advances of $69,839. Total advances at September 30, 1994, of
$323,168 were converted to the investment in CID. In July 1994, an outside
investor invested $250,000 in CID, which reduced the Company's ownership
interest in CID to 33% as of September 30, 1994.
In March 1995, the Company invested $25,000 to acquire an additional 17%
interest in CID, increasing its ownership percentage to 50% as of September 30,
1995. Additional cash advances of $193,767 made to CID during the year are
included in the investment.
The Company has the following balances with these affiliates at September
30:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
CID -- Investment, at equity................................... $179,020 $ 44,659
CPP -- Equity interest in (net advances from) the
partnership.................................................. (14,471) (14,471)
-------- -------
Total................................................ $164,549 $ 30,188
======== =======
</TABLE>
Equity in earnings (losses) of affiliates consist of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
CID............................................... $(84,406) $(287,052) $(62,713)
CPP............................................... 49,798 60,427 55,765
--------- ---------- ---------
Total................................... $(34,608) $(226,625) $ (6,948)
========= ========== =========
</TABLE>
Transactions in the Company's financial statements arising from the above
arrangement with CPP are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Other revenue -- management fees.................. $ 47,637 $ 50,525 $ 39,559
Distributions from affiliates..................... 49,798 60,427 55,765
</TABLE>
6. NOTES PAYABLE
Notes payable to Zero Plus Dialing Inc. (ZPDI) of $659,604 and $1,705,174
at September 30, 1995 and 1994, respectively, are due on demand and bear
interest at prime plus 3% (11.75% at September 30, 1995). These notes represent
advances on trade accounts receivable being collected by ZPDI on behalf of the
Company, under an agreement which expires July 1, 1996, and are collateralized
by accounts receivable of $3,651,571 at September 30, 1995.
F-118
<PAGE> 119
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Long-term notes payable at September 30 consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Equipment notes:
Notes payable, Comerica Bank:
Revolving capital expenditure facility.................... $906,200... $ --
Revolving acquisition facility............................ 1,636,582
Note payable, Paycom, Inc. -- due in monthly installments
through July 1997 of $39,015, including interest at 15.0%,
collateralized by equipment, paid in 1995................. 1,038,157
Note payable, G.E. Capital -- due in monthly installments
through July 1995 of $58,141, including interest at 12.0%,
collateralized by equipment............................... 550,673
Notes payable, Tri Con Capital Corp. due in monthly
installments through May 1995, collateralized by
equipment................................................. 13,363
Other equipment notes payable............................... 131,327
---------- ----------
Total equipment notes............................. 2,674,109 1,602,193
Vehicle notes:
Notes payable, FMCC -- due in monthly installments of
$18,104, including interest ranging from 2.9% to 16.75%,
maturing through November 1998, collateralized by
automobiles............................................... $ 902,726 $ 743,407
Notes payable, GMAC -- due in monthly installments of
$1,210, including interest ranging from 7.0% to 9.0%,
maturing through October 1997, collateralized by
automobiles............................................... 22,630 32,070
Note payable, Lone Oak Bank -- due in monthly installments
through July 1996 of $475, including interest at 10.0%,
collateralized by an automobile........................... 9,521
---------- ----------
Total vehicle notes......................................... 925,356 784,998
Subordinated and other notes:
Subordinated note payable, Banc One Capital Partners
Corporation -- bearing interest at 12% payable quarterly
beginning July 1993, with principal due at maturity in May
1999, net of $649,181 and $830,347, respectively, of
unamortized debt discount assigned to common stock warrant
(see Note 8). Borrowings under this $5 million financing
commitment are unsecured and subject to certain financial
covenants and ratios...................................... 4,350,819 4,169,653
Notes payable insurance companies -- due in monthly
installments through June 1996, including interest,
unsecured................................................. 147,318... 133,788
---------- ----------
Total subordinated and other notes payable.................. 4,498,137 4,303,441
---------- ----------
Total............................................. 8,097,602 6,690,632
Less current portion........................................ 1,491,767 1,395,338
---------- ----------
Long-term notes payable, less current portion............... $6,605,835 $5,295,294
========== ==========
</TABLE>
Notes payable to Comerica Bank consist of revolving credit loans under
which the Company may borrow up to $5 million under each credit facility ($10
million under the acquisition facility effective November 1, 1995 -- see Note
12), or the collateral base amount, which is equal to $1,200 per telephone. The
notes are collateralized by substantially all assets, subject to the preferences
of other notes payable, and the personal guaranty of the Company's majority
shareholder for $1 million. Outstanding principal on the capital expenditure
facility is payable in 48 equal monthly payments of $19,700 beginning August 1,
1995. Borrowings under the acquisition facility are payable in 36 and 48 equal
monthly payments beginning the month after
F-119
<PAGE> 120
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
advances are made. Interest is payable monthly at the prime rate plus 1% to 3%.
The interest rate margin is adjustable monthly based on a certain financial
ratio under the terms of the agreement. Interest rates on these notes were 9.75%
at September 30, 1995. Borrowings under the acquisition facility may occur
through January 24, 1997.
Maturities of long-term notes payable at September 30, 1995 (before
reduction for the $649,181 unamortized debt discount), are as follows:
<TABLE>
<S> <C>
1996............................................................. $1,491,767
1997............................................................. 1,171,235
1998............................................................. 760,757
1999............................................................. 5,323,024
----------
Total.................................................. $8,746,783
==========
</TABLE>
7. LEASE COMMITMENTS
The Company is leasing telecommunications equipment under capital leases,
and all of its operating facilities through operating leases. The Company leases
its primary office facility under an operating lease with a related party, as
discussed in Note 10. Rental expense for all operating leases was $174,808,
$116,009 and $111,890 for the years ended September 30, 1995, 1994 and 1993,
respectively. Future minimum rental payments required under these noncancelable
leases at September 30, 1995, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ---------
<S> <C> <C>
Year ending September 30:
1996............................................... $1,305,115 $ 135,361
1997............................................... 841,827 64,172
1998............................................... 0 35,696
1999............................................... 0 4,180
---------- --------
2,146,942 $ 239,409
========
Amount representing interest......................... 271,968
----------
Present value of minimum lease payments.............. 1,874,974
Less current portion................................. 1,094,381
----------
Capital lease obligations, less current portion...... $ 780,593
==========
</TABLE>
8. CAPITAL STOCK
DIVIDEND RESTRICTIONS -- Certain note payable agreements and preferred
stock instruments restrict the Company's ability to pay cash dividends on its
common stock.
CONVERTIBLE REDEEMABLE PREFERRED STOCK -- The Company has authorized and
issued 240,000 shares of nonvoting, cumulative convertible redeemable preferred
stock ($1.00 par value) for $2,400,000. Each share of preferred stock is
convertible into approximately 9.24 shares of common stock, subject to
adjustments in certain events, prior to December 31, 2000. The preferred stock
will be automatically converted in the event of an initial public offering.
Holders of the preferred stock are entitled to receive cumulative cash
dividends payable quarterly, at an annual rate of $.60 per share commencing
March 31, 1993, through January 1, 2003, and at an annual rate of $1.10 per
share commencing April 1, 2003. In liquidation, the preferred stock is entitled
to $10 per share.
F-120
<PAGE> 121
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Beginning on December 30, 2000, or at any time thereafter, the Company may,
at its option, redeem any number of outstanding shares of preferred stock at $10
per share, plus all accrued and unpaid dividends. At any time after December 31,
2002, and prior to December 31, 2010, holders of the preferred stock have the
option to sell, and the Company has the obligation to purchase, any number of
outstanding shares at the then-determined fair market value.
COMMON STOCK WARRANTS -- In connection with the subordinated debt financing
in May 1993, the Company issued warrants exercisable for 1,562,338 shares of
common stock at $1.08206 per share through May 1999. Upon certain occurrences or
after May 1998, the warrant holder may require the Company to redeem the
warrants at a specified price, which generally is a multiple of defined cash
flow. A fair value of $1,087,000 was assigned to the warrants when issued and is
accounted for as debt issue discount (see Note 6).
STOCK OPTIONS -- The stock option plan provides for granting incentive
stock options to key employees. Incentive stock options must have an exercise
price of at least the fair market value on the date of grant. Options may be
exercised in whole or in installments over ten years after the grant. All
options would become exercisable upon a public offering. The total aggregate
number of the Company's common stock that may be granted under this plan cannot
exceed 12.7% of the common stock, determined on a fully diluted basis, not to
exceed 1,471,000 shares. The Company has granted the following options which
vest over three years:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
<S> <C> <C>
Granted:
December 1992............................................. 376,344 $ 1.09
March 1994................................................ 108,333 $ 1.09
Forfeited:
February 1994............................................. (26,882) $ 1.09
Exercised:
December 1994............................................. (8,000) $ 1.09
-------
Total options outstanding at September 30, 1995............. 449,795
=======
Options exercisable at September 30, 1995................... 261,087 $ 1.09
=======
</TABLE>
A summary of the Company's common shares reserved for future conversions or
issuances is as follows:
<TABLE>
<S> <C>
Convertible preferred stock............................................... 2,218,000
Common stock warrants..................................................... 1,562,338
Common stock options granted.............................................. 449,795
---------
Total shares contingently issuable........................................ 4,230,133
Common stock options available for future grants.......................... 986,323
---------
Total common shares reserved.................................... 5,216,456
=========
</TABLE>
F-121
<PAGE> 122
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
Deferred income taxes under SFAS No. 109 represent the net tax effects of
(a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
and (b) tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred tax benefits (liability) as of September
30, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts, not currently deductible.... $ 90,033 $ 86,868
Accrued expenses, not currently deductible................... 18,684 17,108
All other.................................................... 8,742
--------- ---------
Total current asset.......................................... 108,717 112,718
Accelerated depreciation and amortization for tax purposes... (348,391) (253,457)
Alternative minimum tax (AMT) credit carryforwards........... 6,032 340,135
Other........................................................ 7,026
--------- ---------
Total noncurrent asset (liability)........................... (342,359) 93,704
--------- ---------
Net deferred tax asset (liability)................. $(233,642) $ 206,422
========= =========
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Current........................................... $ 959,076 $423,946 $454,239
Deferred.......................................... 440,064 88,456 (35,731)
---------- -------- --------
$1,399,140 $512,402 $418,508
========== ======== ========
</TABLE>
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Income taxes computed at federal statutory rate... $1,230,661 $379,213 $365,034
State income taxes................................ 103,210 34,000 33,911
Expenses not deductible for tax purposes.......... 13,585 5,578 5,920
Nondeductible loss of foreign affiliate........... 28,590 67,642
Other............................................. 23,094 25,969 13,643
---------- -------- --------
Total................................... $1,399,140 $512,402 $418,508
========== ======== ========
</TABLE>
10. RELATED PARTY TRANSACTIONS
The Company leases its primary office facilities from a shareholder on a
monthly basis. The Company also conducts certain other transactions with this
shareholder and affiliated corporations which are 100%
F-122
<PAGE> 123
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
owned by the shareholder. Transactions and balances in the Company's financial
statements arising from the above arrangements are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
During the period:
Rent expense........................................ $49,200 $43,200 $43,200
Airplane charter expense............................ 96,470
Management and consulting fees expense.............. 3,750
Other operating expenses............................ 32,483 37,717
Note receivable from an employee at September 30, due
on demand (included in other current assets)........ 2,193 4,944
Accounts receivable from employees.................... 12,428 18,039 23,558
</TABLE>
Trade accounts receivable include $385,146 at September 30, 1995, due from
an operator service company, which is a co-owner in the Mexican joint venture
(Note 5) and is a significant lender to the Company's majority shareholder, who
has pledged approximately 20% of his common stock as collateral on the related
debt.
11. CONTINGENCIES
The Company is a defendant in various legal proceedings arising in the
ordinary course of business. Although the results of these matters cannot be
predicted with certainty, management believes the outcome will not have a
material adverse effect on the Company's financial position.
12. SUBSEQUENT TELEPHONE PURCHASE AND FINANCING
On November 1, 1995, the Company purchased approximately 1,600 telephones
and related assets and agreements for approximately $3.5 million. The purchase
was financed through the Company's revolving acquisition facility, which was
increased from $5 million to $10 million effective November 1, 1995.
* * * * * *
F-123
<PAGE> 124
CHEROKEE COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, (UNAUDITED)
1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 668,778 $ 364,691
Trade accounts receivable, less allowance for doubtful accounts
of $264,803 and $200,692, respectively....................... 4,453,192 3,712,950
Inventories..................................................... 137,036 168,200
Prepaid expenses and other current assets....................... 303,273 64,998
Deferred income tax benefits.................................... 108,717 145,441
----------- -----------
Total current assets.................................... 5,670,996 4,456,280
Property and equipment -- net..................................... 12,935,453 16,186,760
Site licenses -- net.............................................. 1,941,467 4,048,701
Investment in and advances to affiliates.......................... 164,549 152,989
Other assets...................................................... 681,754 512,055
----------- -----------
Total................................................... $ 21,394,219 $ 25,356,785
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing............................ $ 659,604 $ 0
Current portion of other notes payable.......................... 1,491,767 2,982,325
Current portion of capital lease obligations.................... 1,094,381 977,433
Accounts payable................................................ 310,358 754,048
Accrued telecommunications and other expenses................... 2,971,935 2,977,635
Income taxes payable............................................ 256,140 2,327
----------- -----------
Total current liabilities............................... 6,784,185 7,693,768
Long term liabilities
Note payable, less current portion.............................. 6,605,835 10,636,237
Capital lease obligations, less current portion................. 780,593 0
Deferred income tax liability................................... 342,359 342,359
----------- -----------
Total long-term liabilities............................. 7,728,787 10,978,596
Shareholders' equity
Convertible redeemable preferred stock.......................... 2,400,000 2,400,000
Common stock warrants, with mandatory redemption requirements... 1,087,000 1,087,000
Common stock.................................................... 351,903 351,903
Additional paid-in capital...................................... 10,630 10,630
Retained earnings............................................... 3,031,714 2,834,888
----------- -----------
Total shareholders' equity...................................... 6,881,247 6,684,421
----------- -----------
Total................................................... $ 21,394,219 $ 25,356,785
=========== ===========
</TABLE>
See notes to financial statements.
F-124
<PAGE> 125
CHEROKEE COMMUNICATIONS, INC.
CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE
NINE MONTHS ENDED JUNE 30 30
--------------------------- -------------------------
1995 1996 1995 1996
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Telecommunications revenues:
Payphone coin calls................. $ 9,942,304 $12,571,961 $3,511,706 $4,322,079
Automated operator, routed calls.... 11,540,935 11,061,973 4,587,250 4,098,481
Other............................... 363,273 817,273 113,941 368,005
---------- ---------- ---------- ----------
Total....................... 21,846,512 24,451,207 8,212,897 8,788,565
Operating costs and expenses:
Telephone charges................... 5,675,136 6,451,165 2,034,337 2,276,146
Commissions......................... 3,429,761 3,885,956 1,299,886 1,413,149
Telecommunications fees and
validation....................... 1,273,673 1,179,606 541,814 460,227
Depreciation and amortization....... 3,248,748 3,831,645 1,088,844 1,363,637
Field operations personnel.......... 1,370,974 2,191,875 447,289 740,659
Chargebacks and doubtful accounts... 578,823 736,374 232,171 329,914
Selling, general and
administrative................... 4,180,403 4,909,963 1,392,213 1,472,583
---------- ---------- ---------- ----------
Total....................... 19,757,518 23,186,584 7,036,554 8,056,315
Operating income...................... 2,088,994 1,264,623 1,176,343 732,250
Other income (expense)
Interest expense.................... (1,125,584) (1,223,042) (382,827) (427,100)
Amortization of debt discount....... (138,303) (135,875) (47,721) (45,292)
Interest income..................... 38,303 3,645 16,954 780
Equity in earnings (losses) of
affiliates....................... 8,936 (46,671) (4,113) (39,759)
Gain on equipment sales and other... 1,150,521 29,306 15,664 3,116
---------- ---------- ---------- ----------
Total....................... (66,127) (1,372,637) (402,043) (508,255)
---------- ---------- ---------- ----------
Income before income taxes............ 2,022,867 (108,014) 774,300 223,995
Provision (benefit) for income
taxes............................... 692,882 (19,188) 291,159 76,158
---------- ---------- ---------- ----------
Net income (loss)..................... $ 1,329,985 $ (88,826) $ 483,141 $ 147,837
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-125
<PAGE> 126
CHEROKEE COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Operating activities:
Net income...................................................... $ 1,329,985 $ (88,826)
Noncash items in net income:
Depreciation and amortization................................ 3,248,748 3,831,645
Amortization of debt discount................................ 138,303 135,875
Equity in earnings (losses) of affiliates.................... 8,936 (46,671)
Gain on sale of property and equipment....................... (1,123,268) (11,672)
Cash from (used for) changes in operating working capital:
Trade accounts receivable.................................... 444,819 740,242
Other current assets......................................... (95,746) 67,888
Prepaid expenses............................................. (96,014) 238,275
Accounts payable and accrued liabilities..................... 782,566 449,390
Income taxes payable......................................... (16,616) (253,813)
---------- ---------
Net cash from operating activities...................... 4,621,713 5,062,333
Investing activities:
Additions to property and equipment............................. (4,771,952) (6,007,499)
Increase in site licenses....................................... (418,274) (3,052,918)
Increase in other assets........................................ (79,353) 0
Proceeds from sale property and equipment....................... 1,979,406 50,668
Increase in investments in affiliates........................... (18,946) (34,177)
---------- ---------
Net cash used for investing activities.................. (3,309,119) (9,043,926)
Financing activities
Issuance of (payments on) note payable-receivable financing..... (461,277) (659,604)
Issuance of other notes payable................................. 4,123,985 7,750,005
Payments on notes payable and capital lease obligations......... (4,409,580) (3,304,895)
Issuance of common stock........................................ 8,720 0
Cash dividends on preferred stock............................... (108,000) (108,000)
---------- ---------
Net cash from financing activities...................... (846,152) 3,677,506
---------- ---------
Increase (decrease) in cash and cash equivalents.................. 466,442 (304,087)
Cash and cash equivalents
Beginning of period............................................. 780,962 668,778
---------- ---------
End of period................................................... $ 1,247,404 $ 364,691
========== =========
</TABLE>
See notes to financial statements.
F-126
<PAGE> 127
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ended September 30, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS AND MERGERS
On November 1, 1995, the Company completed the acquisition of the assets of
Teltrust, Inc. (a Utah corporation). In connection with the acquisition of
Teltrust, Inc., the Company acquired 1,488 installed payphones and 81 jail
phones for a purchase price of $3,523,568 in cash.
The Teltrust, Inc. acquisition was recorded as a purchase and the
difference between the fair value of the tangible assets acquired and the total
purchase price of $3,523,568, was recorded as site licenses and are being
amortized over the average life of the acquired location contracts which have
been estimated to be 60 months.
3. PROPERTY AND EQUIPMENT
As of September 30, 1995 and June 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES SEPTEMBER 30 JUNE 30
(IN YEARS) 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Telephones, boards, and enclosures......... 7-10 $ 18,303,573 $ 23,093,015
Telecommunications software licenses....... 4-5 2,214,455 2,512,242
Vehicles................................... 5 2,184,227 2,732,601
Other equipment............................ 5-7 716,825 845,783
Land and buildings......................... 20-25 75,747 75,747
------------ ------------
$ 23,494,827 $ 29,259,388
Less: accumulated depreciation........... (10,559,374) (13,072,628)
------------ ------------
$ 12,935,453 $ 16,186,760
</TABLE>
F-127
<PAGE> 128
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1996
4. OTHER ASSETS
As of September 30, 1995 and June 30, 1996, other assets consisted of the
following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD SEPTEMBER 30 JUNE 30
(IN YEARS) 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Deferred financing costs...................... 3-6 $1,113,451 $1,113,451
Patents....................................... 5 46,009 46,009
Noncompete agreements......................... 5 252,500 252,500
------------ ------------
$1,411,960 $1,411,960
Less: accumulated amortization.............. (730,206) (899,905)
------------ ------------
$ 681,754 $ 512,055
</TABLE>
F-128
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) PhoneTel Technologies, Inc. and Payphones of America, Inc.
Each of PhoneTel Technologies, Inc. (the "Company") and Payphones of
America, Inc. is an Ohio corporation. Article Sixth of the Articles of
Incorporation of the Company provides for indemnification, to the fullest
extent permitted or required under law, of any director or officer of the
Company or any person serving at the request of the Company as a director,
trustee or officer of another entity, in connection with any action, suit
or proceeding, criminal, civil or administrative, to which such person, is
or may be a party by reason of their status as such.
Pursuant to section 1701.13(E) of the Ohio Revised Code, a director,
officer or employee is entitled to indemnification only if a determination
is made (i) by the directors of the Company acting at a meeting at which a
quorum consisting of directors who neither were nor are parties to or
threatened with any such action, suit or proceeding is present or (ii) by
the shareholders of the Company at a meeting held for such purpose by the
affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Company on such proposal or without a
meeting by the written consent of the holders of share entitling them to
exercise two-thirds of the voting power on such proposal, that such
director, officer or employee (a) was not, and has not been adjudicated to
have been, negligent or guilty of misconduct in the performance of his duty
to the Company, (b) acted in good faith and in a manner he reasonably
believed to be in the best interest of the Company and (c) in any matter
the subject of a criminal action, suit or proceeding, had no reasonable
cause to believe that his conduct was unlawful.
Additionally, section 1701.13(E)(5)(a) of the Ohio Revised Code
provides that, unless prohibited by specific reference in a corporation's
articles of incorporation or code of regulations, a corporation shall pay a
director's expenses, including attorneys' fees, incurred in defending an
action, suit or proceeding brought against a director in such capacity,
whether such action, suit or proceeding is brought by a third party or by
or in the right of the corporation, provided the director delivers to the
corporation an undertaking to (a) repay such amount if it is proved in a
court of competent jurisdiction that his action or failure to act was
undertaken with deliberate intent to injure the corporation or with
reckless disregard for the best interests of the corporation and (b)
reasonably cooperate with the corporation in such action, suit or
proceeding.
Section 1701.13(E)(7) of the Ohio Revised Code provides that a
corporation may purchase insurance or furnish similar protection for any
director, officer or employee against any liability asserted against him in
any such capacity, whether or not the corporation would have power to
indemnify him under Ohio law. Such insurance may be purchased from or
maintained with a person in which the corporation has a financial interest.
The Company has purchased such insurance for the benefit of its directors
and officers.
Reference is made to the form of Underwriting Agreement, filed as
Exhibit 1.1 to this Registration Statement, which provides for
indemnification of the directors and officers signing this Registration
Statement and certain controlling persons of the Company against certain
liabilities, including those arising under the Securities Act of 1933, as
amended (the "Securities Act"), in certain instances by the Underwriters.
(b) Public Telephone Corporation
Public Telephone Corporation ("Public") is an Indiana corporation.
Chapter 37 of the Indiana Corporation Law, as amended (the "ICL") grants to
each Indiana corporation broad powers to indemnify directors, officers,
employees or agents against expenses incurred in certain proceedings if the
conduct in question was found to be in good faith and was reasonably
believed to be in the corporation's best interests. The ICL provides,
however, that this indemnification should not be deemed exclusive of any
other indemnification rights provided by the articles of incorporation,
by-laws, resolution or other authorization adopted by a majority vote of
the voting shares then issued and outstanding. Article XI of Public's
By-laws provide for indemnification to the fullest extent permitted by law,
of any director, officer, employee or agent of Public or any person serving
at the request of Public as a director, officer, employee or agent of
another corpo ration, partnership, joint venture, trust or other
enterprise.
(c) World Communications, Inc.
World Communications, Inc. is a Missouri corporation ("World").
Article X of the Bylaws of World provides that World shall indemnify its
officers and directors and any person serving at the request of World as an
officer or director of any corporation or enterprise to the fullest extent
permitted by law. Such right of indemnification shall inure to the benefit
of the heirs, executors, administrators and personal representatives of
such persons.
Section 351.355(1) of the Revised Statutes of Missouri provides that
a corporation may indemnify a director, officer, employee or agent of the
corporation in any action, suit or proceeding other than an action by or in
the right of the corporation, against expenses (including attorneys' fees),
judgments, fines and settlement amounts actually and reasonably incurred by
him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action,
had no reasonable cause to believe his conduct was unlawful. Section
351.355(2) provides that the corporation may indemnify any such person in
any action or suit by or in the right of the corporation against expenses
(including attorney's fees and settlement amounts actually and reasonably
incurred by him in connection with the defense or settlement of the action
or suit if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, except that
he may not be indemnified in respect of any matter in which he has been
adjudged liable for negligence or misconduct in the performance of his duty
to the corporation, unless authorized by the court. Section 351.355(3)
provides that a corporation shall indemnify any such person against
expenses (including attorney's fees) actually and reasonably incurred by
him in connection with the action, suit or proceeding if he has been
successful in defense of such action, suit or proceeding and if such
action, suit or proceeding is one for which the corporation may indemnify
him under Section 351.355(1) or (2). Section 351.355(7) provides that a
corporation shall have the power to give any further indemnity to any such
person, in addition to the indemnity otherwise authorized under Section
351.355, provided such further indemnity is either (i) authorized, directed
or provided for in the articles of incorporation of the corporation or any
duly adopted amendment thereof or (ii) if authorized, directed or provided
for in any by-law or agreement of the corporation which has been adopted by
a vote of the shareholders of the corporation, provided that no such
indemnity shall indemnify any person from or on account of such person's
conduct which was finally adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct
(d) Paramount Communications Systems, Inc. and Northern Florida
Telephone Corporation
Each of Paramount Communications Systems, Inc. ("Paramount") and
Northern Florida Telephone Corporation ("Northern") is a Florida
corporation. Article XII of Northern's Articles of Incorporation and
Article X of Northern's By-laws provide that Northern shall indemnify its
officers and directors to the fullest extent permitted by law. Such
indemnification shall inure to the benefit of the heirs, executors and
administrators of such persons. Article 13 of Paramount's Articles of
Incorporation provides that Paramount shall indemnify its officers and
directors to the fullest extent permitted by law.
Section 607.0850 of the Florida Business Corporation Act (the "FBCA")
permits a Florida corporation to indemnify its directors and officers to
the extent provided for in such statute. Such indemnification provisions,
however, do not eliminate the duty of care of a director, and in
appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Florida law. In
addition, each director will continue to be subject to liability for a (a)
violation of criminal law, unless the director had reasonable cause to
believe his conduct was lawful or had no reasonable cause to believe his
conduct was unlawful, (b) transaction from which the director derived an
improper benefit, (c) voting for or assenting to an unlawful distribution
and (d) willful misconduct or a conscious disregard for the best interests
of the corporation in a proceeding by or in the right of the corporation to
procure a judgment in its favor in a proceeding by or in the right of a
shareholder.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
Except for the Securities and Exchange Commission registration fee,
all fees and expenses are estimated and will be paid by the Company.
Securities and Exchange Commission Registration Fee $33,334
NASD Filing Fee................................. 11,500
Nasdaq listing fees............................. *
Blue Sky Fees and Expenses (including counsel).. *
Printing Expenses............................... *
Accounting Fees and Expenses.................... *
Legal Fees and Expenses......................... *
Trustee's Fees and Expenses..................... *
Rating Agency Expenses.......................... *
Miscellaneous................................... *
-------
Total...................................... $ *
=======
- ------------------
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During 1993 the Company issued 20,833 shares of Common Stock to
Zandec, Ltd. in connection with the exercise of certain options resulting
in proceeds to the Company in the amount of $66,250. In addition, the
Company issued 310,962 shares of Common Stock to various individuals in
connection with the exercise of Series B, C, D and E Warrants resulting in
proceeds to the Company totaling $1,272,945. The aforementioned shares were
issued pursuant to the exemption from registration provided under Section
4(2) of the Act.
On February 13, 1993 the Company issued 8,333 shares of Common Stock
to The Cafaro Company ("Cafaro") at a value of $56,250 in consideration for
entering into a ten-year agreement with the Company to provide Cafaro with
telecommunications services. On June 30, 1993 a director was issued 1,830
shares of Common Stock as reimbursement for certain fees which were valued
at $22,573. Both issuances were exempt from registration pursuant to the
exemption provided under Section 4(2) of the Act.
On June 30, 1993 the Company issued 6,667 shares of Common Stock to a
director and 1,686 shares to Susan Etter in a private sale resulting in
proceeds to the Company in the aggregate of $63,916. On the same day, the
Company issued 16,164 shares of Common Stock to Zandec, Ltd. representing
the conversion of $220,957 of debt and interest into equity. In addition,
shares of 12% Preferred Stock valued at $742,584 were converted into
123,764 shares of Common Stock of the Company. On June 30, 1993 the Company
issued 12,000 and 200 shares of 8% Preferred, respectively, to J&C
Resources, Inc. and Susan Etter with proceeds totaling $981,084. All of the
aforementioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
On July 12, 1993 an employee was issued 1,533 shares of Common Stock
as compensation in the amount of $10,350. On December 31, 1993 Standard
Phone Company was issued 8,582 shares of Common Stock in connection with
the acquisition of certain public pay telephones, enclosures and the
associated location contracts. The value of said shares issued was
$103,004. All of the aforementioned shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the Act.
During 1993, the Company issued 2,500 shares of 7% Preferred Stock to
Joseph Abrams with proceeds totaling $200,000. The shares were issued
pursuant to the exemption from registration provided under Section 4(2) of
the Act.
During the first quarter of 1994 a total of 87,927 shares of Common
Stock were issued in consideration of the exercise of certain warrants and
options. Proceeds from the exercise of said warrants and options totalled
$553,964. Said shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
In four private sales during March and May 1994, the Company sold
136,109 shares of its Common Stock for an aggregate of $1,478,165. Said
shares were issued pursuant to the exemption from registration provided
under Regulation S of the Act. In addition, 5,276 shares of Common Stock
were issued to Montmelion Investments pursuant the exemption provided under
Section 4(2) of the Act to pay for a portion of the financing costs, valued
at $99,690, associated with the aforementioned private placement.
On March 1, 1994 the Company issued 1,282 shares of Common Stock
valued at $11,128 to two directors as compensation for their service on the
Board of Directors. On the same day the Company issued 500 shares to a
consultant for services rendered in the amount of $4,340. On November 28,
1994 the Company issued 1,480 shares of Common Stock to two directors as
compensation valued at $12,846 for their service on the Board of Directors.
On the same day, the Company issued 2,091 shares to a director for
reimbursement of certain fees and expenses valued at $18,150 and 3,033
shares to a contractor for services rendered which were valued at $26,363.
All of the aforementioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
On March 8, 1995 and July 14, 1995 the Company issued 3,333 and 5,000
shares of Common Stock in consideration of the exercise of options with
proceeds to the Company totalling $35,000. The shares were issued pursuant
to the exemption from registration provided under Section 4(2) of the Act.
In May 1995 the Company issued 162,498 shares of Common Stock in a
private placement to five individuals with proceeds totalling $640,000. On
May 8, 1995 the Company issued a total of 7,532 shares of Common Stock to
three former executives of the Company as compensation totalling $36,160.
On July 26, 1995 the Company issued 66,666 shares of Common Stock in a
private placement to three individuals with proceeds totalling $300,000. On
August 18, 1995 the Company issued 65,091 shares of Common Stock two
private placements with proceeds totalling $277,913 and issued 1,111 shares
of Common Stock valued at $5,000 to a director as consideration for his
service on the Board of Directors. On August 30, 1995 the Company issued an
aggregate of 116,666 shares to Ariel Fund Limited and Gabriel Capital, L.P.
in a private placement with proceeds totalling $525,000. On September 6,
1995 the Company issued an aggregate of 26,666 shares of Common Stock to
two individuals in a private placement with proceeds totalling $119,999. On
October 26, 1995 the Company issued 6,832 shares of Common Stock in a
private placement to two employees and Sanford J. Spitzer with proceeds
totalling $30,750. On November 6, 1995 the Company issued 16,666 shares of
Common Stock in a private placement to Ariel Fund Limited and Gabriel
Capital, L.P. with proceeds totalling $75,000. On November 15, 1995 the
Company issued 5,555 shares of Common Stock to an employee in a private
placement with proceeds totalling 25,000. In November and December 1995 the
Company issued 3,750 and 1,666 shares, respectively, to Moira MB Neidt and
John and Patricia McCadden with proceeds totalling $33,625. All of the
aforementioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
On February 7, 1995 the Company issued 833 shares of Common Stock
valued at $5,000 to an employee as compensation for services rendered. In
May and June 1995 the Company issued 30,231 shares of Common Stock to five
lenders in connection with the conversion of $137,678 of debt into equity.
In July 1995 the Company issued 1,271 shares of Common Stock to a director
as reimbursement of Company related expenses totalling $5,726. In August
1995 the Company issued 3,128 shares of Common Stock to two directors as
reimbursement of Company related expenses totalling $14,083. In September
1995 the Company issued 1,018 shares of Common Stock to a director as
reimbursement of Company related expenses totalling $4,585. In October 1995
the Company issued 971 shares of Common Stock to a director for
reimbursement of Company related expenses totalling $5,127. In November
1995 the Company issued 1,719 shares of Common Stock to a director for
reimbursement of Company related expenses totalling $13,084. In December
1995 the Company issued 25,682 shares of Common Stock to two directors for
reimbursement of Company related expenses totalling $24,282. On December
20, 1995 the Company issued 12,500 shares of Common Stock to M&M Financial
Services, Inc. in consideration of services rendered in the amount of
$75,000 in connection with the World acquisition. All of the aforementioned
shares were issued pursuant to the exemption from registration provided
under Section 4(2) of the Act.
On December 26, 1995 the Company issued 56,666 shares of Common Stock
to Brenner Securities Corporation, a predecessor of Southcoast Capital
Corporation, for financial services in the amount of $340,000 rendered in
connection with the World acquisition. All of the aforementioned shares
were issued pursuant to the exemption from registration provided under
Section 4(2) of the Act.
On September 21, 1995 the Company issued 402,500 shares of Common
Stock to the former shareholders of World in connection with the
acquisition. The value of the stock issued in connection with said
acquisition was $2,716,876. The aforementioned shares were issued pursuant
to the exemption from registration provided under Section 4(2) of the Act.
On September 21, 1995 the Company also issued 530,534 shares of 10%
Preferred Stock to the former shareholders of World in connection with the
acquisition. Such shares were issued pursuant the exemption from
registration provided under Section 4(2) of the Act.
On October 16, 1995 the Company issued 224,881 shares of Common Stock
to the former shareholders of Public Telephone in connection with the
acquisition at a value of $1,517,951. In addition, the Company issued
45,833 and 34,166 shares of Common Stock to Thomas Martin and James Martin,
respectively, as consideration for the execution of non-compete agreements
valued at $540,000. The aforementioned shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the Act.
On November 24, 1995 the Company issued 23,809 shares of Common Stock
at a value of $150,000 in connection with the IPP acquisition. The shares
were issued pursuant to the exemption from registration provided under
Section 4(2) of the Act.
During January 1996 the Company issued 528 shares of Common Stock to
a director for reimbursement of Company related expenses totalling $3,168.
The shares were issued pursuant to the exemption from registration provided
under Section 4(2) of the Act.
On March 15, 1996 the Company issued 555,589 shares of Common Stock
valued at $1,106,506 and 5,453.14 shares of 14% Preferred valued at
$245,897 and Nominal Value Warrants to purchase 117,785 shares of the
Company's Common Stock to the former shareholders of IPP in connection with
the IPP acquisition. In addition, the Company also issued 8,333.33 shares
of 14% Preferred valued at $375,769 and Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock to the former shareholders of
Paramount in connection with the Paramount acquisition. On March 15, 1996
the Company also issued 204,824 shares of Series A Preferred to the Lenders
under the Credit Agreement. The Company also issued 3,871 shares of Common
Stock to Applied Telecommunications Technologies, Inc. representing
conversion of $30,000 of debt into equity. The aforementioned securities
were issued pursuant to the exemption from registration provided under
Section 4(2) of the Act.
On March 15, 1996, concurrent with the Company entering into the
Credit Agreement, the Company redeemed the 10% Preferred, 8% Preferred and
7% Preferred. In connection with the redemption of said classes of stock,
the Company issued 34,436.33 shares of 14% Preferred and Nominal Value
Warrants to purchase 503,770 shares of Common Stock. The Company also
issued 59,695.39 shares of 14% Preferred and Nominal Value Warrants to
purchase 1,217,391 shares of Common Stock in connection with the conversion
of $3,581,723 of debt owed to related parties. All of the securities were
issued pursuant to the exemption from registration provided under Section
4(2) of the Act.
During April 1996 the Company issued 432,498 shares of Common Stock,
in the aggregate, to J&C Resources, Inc., Jeffrey Huffman, Alton Huffman,
Thomas Martin and James Martin in consideration of the exercise of certain
warrants resulting in proceeds totalling $4,325. On May 2, 1996 the Company
issued 539,989 shares of Common Stock to a director in consideration of the
exercise of certain warrants resulting in proceeds totalling $5,400. On
July 22, 1996 the Company issued 62,650 shares of Common Stock to a
director in consideration of the exercise of certain warrants resulting in
proceeds to the Company totalling $627. The aforementioned securities were
issued pursuant to the exemption from registration provided under Section
4(2) of the Act.
On September 13, 1996 the Company issued 2,162,163 shares of Common
Stock valued at $4,637,840 to Amtel, as debtor-in-possession pursuant to a
Chapter 11 bankruptcy proceeding, as partial consideration for the Amtel
acquisitions. On September 16, 1996 the Company issued 166,666 shares of
Common Stock valued at $311,665 to the former shareholders of POA, as
partial consideration for the POA acquisition. Said shares were issued
pursuant to the exemption from registration provided under Section 4(2) of
the Act.
On June 27, 1996 the Company issued 884,214 shares of Common Stock
valued at $5,305,284 to the former shareholders of World in connection with
the conversion of the convertible 10% Preferred. Said shares were issued
pursuant to the exemption from registration provided under Section 4(2) of
the Act.
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation dated August 30,
1989. (2)
3.3 Amendment and Restated Code of Governmental Regulations. (5)
3.5 Amendment to Articles of Incorporation dated January 3, 1992.
(5)
3.6 Amendment to Articles of Incorporation dated January 20, 1992.
(5)
3.7 Amendment to Articles of Incorporation dated April 9, 1992. (8)
3.8 Amendment to Articles of Incorporation dated June 18, 1993. (8)
3.9 Amendment to Articles of Incorporation dated June 30, 1993. (8)
3.10 Amendment to Articles of Incorporation dated September 22,
1995. (13)
3.11 Amendment to Articles of Incorporation dated December 15, 1995.
(13)
3.12 Amendment to Articles of Incorporation dated February 28, 1996.
(13)
3.13 Articles of Incorporation of Public Telephone Corporation, as
amended.*
3.14 By-laws of Public Telephone Corporation, as amended.*
3.15 Articles of Incorporation of World Communications, Inc., as
amended.*
3.16 By-laws of World Communications, Inc., as amended.*
3.17 Articles of Incorporation of Paramount Communications Systems,
Inc., as
amended.*
3.18 By-laws of Paramount Communications Systems, Inc., as amended.*
3.19 Articles of Incorporation of Northern Florida Telephone
Corporation, as
amended.*
3.20 By-laws of Northern Florida Telephone Corporation, as amended.*
3.21 Articles of Incorporation of Payphones of America, Inc., as
amended.*
3.22 By-laws of Payphones of America, Inc., as amended.*
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 14% Convertible Preferred Stock. (13)
4.3 Form of Indenture relating to the Notes offered hereby
(including the form of Note).*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the
Notes registered hereby.*
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
validity of the Notes offered hereby.*
10.1 Stock Option Agreement between William Tymoszczuk and PhoneTel
Technologies, Inc., dated March 1, 1987. (3)
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)
10.3 Amended and Restated Stock Option Agreement between PhoneTel
Technologies, Inc. and Jerry H. Burger dated July 1, 1993. (8)
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel
Technologies, Inc. and Bernard Mandel. (8)
10.5 Form of Stock Option Agreement between PhoneTel Technologies,
Inc. and DeBartolo, Inc. (4)
10.6 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corporation. (8)
10.7 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Jerry Burger, together with amendments
thereto. (13)
10.8 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (13)
10.9 Lease Agreement between PhoneTel Technologies, Inc. and Bankers
Leasing Association, Inc. dated February 12, 1992. (5)
10.10 Registration Rights Agreement dated April 10, 1992 among
PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff
and Charles Stuart. (5)
10.11 Registration Rights Agreement among PhoneTel Technologies, Inc.
J & C Resources, Inc. and Allen Moskowitz. (5)
10.12 Form of Stock Option Agreement and Registration Rights
Agreement between PhoneTel Technologies, Inc. and The Edward J.
DeBartolo Corporation. (5)
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 Technol-
ogies, 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 pur chase Common Stock of PhoneTel Technologies,
Inc. (9)
10.30 Stock Option Agreement dated March 3, 1994 between PhoneTel
Technologies, Inc. and George H. Henry relative to a grant of
an option to purchase 39,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)
10.31 Stock Option Agreements dated in January 1994 between PhoneTel
Technologies, Inc. and George H. Henry granting options to
purchase, in the aggregate, a total of 106,551 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.32 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.33 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994.
(9)
10.34 Stock Option Agreement with Donald Vella with respect to 20,000
shares of Common Stock of PhoneTel Technologies, Inc. dated
on or about November 15, 1994. (9)
10.35 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Richard Thatcher dated March 1995, and related Warrant
Agreements thereto, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 49,412 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.36 Warrant Agreements with Richard Thatcher dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 7,500 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.37 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Gerald Waldshutz dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 41,177
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.38 Warrant Agreements with Gerald Waldshutz dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.39 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Steve Richman dated March 1995, and related Warrant
Agreements thereto, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.40 Warrant Agreements with Steven Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.41 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Janice Fuelhart dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 49,412
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.42 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
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 Technolo gies, Inc. and the Estate of William D.
Moses, and subsequent assignment there of 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 Communica tions, Inc. (10)
10.50 Agreement and Plan of Merger dated October 16, 1995,
together with Exhibits attached thereto, by and among
PhoneTel Technologies, Inc., PhoneTel II, Inc., and Public
Telephone Corporation. (11)
10.51 Agreement and Plan of Merger dated November 22, 1995,
between PhoneTel Technologies, Inc. and International Pay
Phones, Inc., South Carolina corpora tion, and all amendments
thereto. (12)
10.52 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto. (12)
10.53 Share Purchase Agreement dated as of November 16, 1995, between
PhoneTel Technologies, Inc. and 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.*
10.66 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert.*
10.67 First Amendment to Credit Agreement dated as of April 11, 1996.*
10.68 Second Amendment to Credit Agreement dated as of June 1996. (14)
10.69 Third Amendment to Credit Agreement dated as of 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.*
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 Communica tions Correctional
Facilities, a California corporation, Amtel Communication,
Inc., a California corporation, Amtel Communications, Inc., a
California corporation, and Amtel Communications Payphones,
Inc., a California corpora tion, as Seller, dated June 26,
1996, and all amendments thereto. (14)
10.74 Amended and Restated Share Purchase Agreement among PhoneTel
III, Inc., Payphones of America, Inc. and All of the
Shareholders of Payphones of America, Inc., dated as of
August 1, 1996, and all amendments thereto. (14)
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).*
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included
in Exhibit 5.2 hereto).*
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility and Qualification on Form T-1 of
, as trustee under the Indenture relating
to the Notes.*
-----------------
* To be filed by amendment.
(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 State ment on Form S-1, Registration No. 33-30428, filed
September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-18 (Registration No. 33-16962C),
filed with the Securities and Exchange Commission on October 30,
1987.
(4) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated March 25,
1994.
(8) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated September
22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated October 16,
1995.
(12) Incorporated by reference from the Company's Form 8-K dated March 15,
1996.
(13) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated September
13, 1996.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission that
such indemnification is against public policy as expressed in the Act and
is therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business
issuer of expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel that
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the small business issuer
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act as part of this Registration Statement as of that time the
Commission declared it effective.
(2) For determining any liability under the Securities Act of
1933, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered
in the Registration Statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
---------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ----------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Nickey B. Maxey Chief Operating Officer and October 30, 1996
- ------------------- Director
Nickey B. Maxey
/s/ Stuart Hollander Director October 30, 1996
- --------------------
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- -------------------- and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
/s/ Joseph Abrams Director October 30, 1996
- --------------------
Joseph Abrams
/s/ George Henry Director October 30, 1996
- --------------------
George Henry
/s/ Aron Katzman Director October 30, 1996
- --------------------
Aron Katzman
/s/ Steven Richman Director October 30, 1996
- --------------------
Steven Richman
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
PUBLIC TELEPHONE CORPORATION
By: /s/ Peter G. Graf
-------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Tammy L. Martin Director October 30, 1996
- ------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- ------------------ and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
WORLD COMMUNICATIONS, INC.
By: /s/ Peter G. Graf
------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ------------------ Chief Executive Officer,
Peter G. Graf and Director
/s/ Tammy L. Martin Director October 30, 1996
- ------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- ------------------ and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
By: /s/ Peter G. Graf
---------------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Tammy L. Martin Director October 30, 1996
- -------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- ------------------ and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
NORTHERN FLORIDA TELEPHONE
CORPORATION
By: /s/ Peter G. Graf
-------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Tammy L. Martin Director October 30, 1996
- -------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- ------------------- and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on
October 30, 1996.
PAYPHONES OF AMERICA, INC.
By: /s/ Peter G. Graf
------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL
ADDITIONAL REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF
SECURITIES AS THIS REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE
462(B) UNDER THE SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT
AND AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM
EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO
ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR
EITHER OF THEM, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 30, 1996
- ------------------ Chief Executive Officer,
Peter G. Graf and Director
/s/ Charles Miller Director October 30, 1996
- -----------------
Charles Miller
/s/ Tammy L. Martin Director October 30, 1996
- ------------------
Tammy L. Martin
/s/ Richard Kebert Chief Financial Officer October 30, 1996
- ------------------ and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation
dated August 30, 1989. (2)
3.3 Amendment and Restated Code of Governmental
Regulations. (5)
3.5 Amendment to Articles of Incorporation
dated January 3, 1992. (5)
3.6 Amendment to Articles of Incorporation
dated January 20, 1992. 5)
3.7 Amendment to Articles of Incorporation
dated April 9, 1992. (8)
3.8 Amendment to Articles of Incorporation
dated June 18, 1993. (8)
3.9 Amendment to Articles of Incorporation
dated June 30, 1993. (8)
3.10 Amendment to Articles of Incorporation
dated September 22, 1995. (13)
3.11 Amendment to Articles of Incorporation
dated December 15, 1995. (13)
3.12 Amendment to Articles of Incorporation
dated February 28, 1996.(13)
3.13 Articles of Incorporation of Public
Telephone Corporation, as amended.*
3.14 By-laws of Public Telephone Corporation,
as amended.*
3.15 Articles of Incorporation of World
Communications, Inc., as amended.*
3.16 By-laws of World Communications, Inc.,
as amended.*
3.17 Articles of Incorporation of Paramount
Communications Systems, Inc., as amended.*
3.18 By-laws of Paramount Communications
Systems, Inc., as amended.*
3.19 Articles of Incorporation of Northern
Florida Telephone Corporation, as amended.*
3.20 By-laws of Northern Florida Telephone
Corporation, as amended.*
3.21 Articles of Incorporation of Payphones
of America, Inc., as amended.*
3.22 By-laws of Payphones of America, Inc.,
as amended.*
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 14% Convertible Preferred
Stock. (13)
4.3 Form of Indenture relating to the Notes
offered hereby (including the form of
Note).*
5.1 Opinion of Tammy L. Martin, Esq.
regarding validity of the Notes registered
hereby.*
5.2 Opinion of Skadden, Arps, Slate, Meagher
& Flom LLP regarding validity of the
Notes offered hereby.*
10.1 Stock Option Agreement between William
Tymoszczuk and PhoneTel Technolo-
gies, 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 Techno-
logies, 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 Regis-
tration 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 pur chase 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
Technolo gies, Inc. and George H. Henry granting options to
purchase, in the aggregate, a total of 106,551 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.32 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.33 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994. (9)
10.34 Stock Option Agreement with Donald Vella with respect to 20,000
shares of Common Stock of PhoneTel Technologies, Inc. dated
on or about November 15, 1994. (9)
10.35 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Richard Thatcher dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 49,412
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.36 Warrant Agreements with Richard Thatcher dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 7,500 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.37 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Gerald Waldshutz dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 41,177
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.38 Warrant Agreements with Gerald Waldshutz dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.39 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Steve Richman dated March 1995, and related Warrant
Agreements thereto, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 41,177 shares of
PhoneTel Technologies, Inc. Common Stock. (9)
10.40 Warrant Agreements with Steven Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
10.41 Amendments to Warrant Agreements between PhoneTel Technologies,
Inc. and Janice Fuelhart dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter
Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 49,412
shares of PhoneTel Technologies, Inc. Common Stock. (9)
10.42 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)
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 Technolo gies, Inc. and the Estate of William D.
Moses, and subsequent assignment there of 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 Communica tions, Inc. (10)
10.50 Agreement and Plan of Merger dated October 16, 1995, together
with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone
Corporation. (11)
10.51 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corpora tion, and all amendments
thereto. (12)
10.52 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto. (12)
10.53 Share Purchase Agreement dated as of November 16, 1995, between
PhoneTel Technologies, Inc. and 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.*
10.66 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert.*
10.67 First Amendment to Credit Agreement dated as of April 11, 1996.*
10.68 Second Amendment to Credit Agreement dated as of June 1996. (14)
10.69 Third Amendment to Credit Agreement dated as of 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.*
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 Communica tions Correctional
Facilities, a California corporation, Amtel Communication,
Inc., a California corporation, Amtel Communications, Inc., a
California corporation, and Amtel Communications Payphones,
Inc., a California corpora tion, as Seller, dated June 26,
1996, and all amendments thereto. (14)
10.74 Amended and Restated Share Purchase Agreement among PhoneTel
III, Inc., Payphones of America, Inc. and All of the
Shareholders of Payphones of America, Inc., dated as of
August 1, 1996, and all amendments thereto. (14)
21.1 Subsidiaries of PhoneTel Technologies, Inc. (13)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).*
23.10 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included
in Exhibit 5.2 hereto).*
24.1 Powers of Attorney (included on signature pages hereof).
25.1 Statement of Eligibility and Qualification on Form T-1 of
, as trustee under the Indenture
relating to the Notes.*
-----------------
* To be filed by amendment.
(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 State ment 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.
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
October 30, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our report dated
May 17, 1996 relating to the financial statements of Paramount
Communication Systems, Inc., which appears in such Prospectus.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Cleveland, Ohio
October 30, 1996
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
August 23, 1996 relating to the financial statements of Amtel
Communications, Inc. and Combined Companies, which appears in
such Prospectus. We also consent to the references to us under
the headings "Experts" in such Prospectus.
/s/ HARLAN & BOETTGER
San Diego, California
October 30, 1996
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
October 30, 1996
October 28, 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
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
October 29, 1996
CONSENT AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
We hereby consent to the use in this Registration Statement of
our report dated January 30, 1996 (except as it relates to Note L
to the financial statements, as to which the date is February 7,
1996), relating to the consolidated financial statements of
Payphones of America, Inc. and subsidiary as of and for the year
ended December 31, 1995, and to the reference to our Firm under
the caption "Experts" in the Prospectus.
/s/ KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
October 29, 1996
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of PhoneTel
Technologies, Inc. on Form SB-2 of our report dated November 17,
1995, relating to the financial statements of Cherokee
Communications, Inc. appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 26, 1996
