AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997
REGISTRATION NO. 333-16055
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
PHONETEL TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
OHIO 4813 34-1462198
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
---------------
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
(216) 241-2555
(Address and Telephone Number of
Principal Executive Offices and
Principal Place of Business)
---------------
TAMMY L. MARTIN, ESQ.
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER,
GENERAL COUNSEL AND SECRETARY
PHONETEL TECHNOLOGIES, INC.
1127 EUCLID AVENUE, SUITE 650
CLEVELAND, OHIO 44115-1601
(216) 241-2555
(Name, Address and Telephone
Number of Agent For Service)
---------------
Copies to:
Stephen M. Banker, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
(212) 735-3000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as
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. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |-|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PROSPECTUS
13,304,263 SHARES
PHONETEL TECHNOLOGIES, INC.
COMMON STOCK
----------------
This Prospectus relates to the offer and sale from time to time of up
to 13,304,263 shares of common stock, par value $.01 per share (the "Common
Stock"), of PhoneTel Technologies, Inc. (the "Company") by the Selling
Shareholders (as defined herein). See "Selling Shareholders." The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders.
The Common Stock is listed on the American Stock Exchange, Inc.
("AMEX") under the trading symbol "PHN." On January 23, 1997, the closing
price of the Common Stock on AMEX was $ 3.50 per share. See "Price Range of
Common Stock."
The Common Stock offered hereby may be sold from time to time
directly by the Selling Shareholders. Alternatively, the Common Stock may
be offered to or through broker-dealers or underwriters who may act solely
as agents, or who may acquire Common Stock as principals. The distribution
of the Common Stock being offered by the Selling Shareholders may be
effected in one or more transactions that may take place on AMEX or on such
other national securities exchange or automated interdealer quotation
system on which the shares of Common Stock are then listed or in the
over-the-counter market, including block trades or ordinary broker's
transactions, through privately negotiated transactions, through an
underwritten public offering or through a combination of any such methods
of sale, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Shareholders may pay usual and customary or specifically negotiated
brokerage fees or commissions in connection with such sales. See "Plan of
Distribution." The Company has agreed to pay all expenses (other than
commissions or discounts of underwriters, broker-dealers or agents,
brokers' fees, state and local transfer taxes and fees and any other
expenses that certain of the registration rights agreements have assigned
to particular Selling Shareholders) in connection with the registration and
sale of the Common Stock being offered by the Selling Shareholders.
To the extent required, the identity of, and certain other
information relating to the Selling Shareholders, the terms of each sale of
Common Stock offered hereby, including the initial public offering price,
the names of any underwriters, broker-dealers or agents, the compensation,
if any, of such underwriters, broker-dealers or agents and the other terms
in connection with the sale of the Common Stock in respect of which this
prospectus is delivered will be set forth in an accompanying Prospectus
Supplement (the "Prospectus Supplement"). The aggregate proceeds to the
Selling Shareholders from the sale of the Common Stock so offered will be
the purchase price of the Common Stock sold less the aggregate agents'
commissions and underwriters' discounts, if any, and other expenses of
issuance and distribution not borne by the Company. For information
concerning indemnification arrangements between the Company and the Selling
Shareholders and indemnification arrangements for underwriters, see "Plan
of Distribution."
The Selling Shareholders and such broker-dealers, underwriters or
agents that participate with the Selling Shareholders in the distribution
of the Common Stock may be deemed to be underwriters under the Securities
Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the Common Stock purchased
by them might be deemed to be underwriting discounts and commissions under
the Securities Act.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
The date of this Prospectus is January 24, 1997.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and
other information filed by the Company with the Commission may be inspected
at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
should also be available for inspection and copying at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048; and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers, such as the Company,
that file electronically with the Commission and the address of such Web
site is http://www.sec.gov. Additionally, the Common Stock is listed on the
American Stock Exchange, Inc. and such reports and other information
concerning the Company are therefore available for inspection at the
offices of the American Stock Exchange, Inc. located at 86 Trinity Place,
New York, NY 10006-1881.
This Prospectus constitutes a part of a Registration Statement on
Form SB-2 filed by the Company with the Commission under the Securities
Act. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Common Stock offered hereby. Any statements
contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to such copy
filed or incorporated by reference as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. The Registration Statement and
the exhibits thereto may be inspected without charge at the office of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., 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 overallotment option for up to
1,012,500 shares of Common Stock granted by the Company to the underwriters
in connection with the Company Equity Offering (as defined herein). Terms
used in this Prospectus but not otherwise defined herein have the meanings
set forth in the Glossary, which begins on page A-1 of this Prospectus.
THE COMPANY
The Company is currently one of the two largest independent public
pay telephone operators and the eleventh largest public pay telephone
operator in the United States. As of September 30, 1996, after giving
effect to the 1997 Acquisitions (as defined herein), the Company would have
owned and operated 38,421 public pay telephones in 42 states, the District
of Columbia and Mexico, of which approximately 96% are located in 21
states. After giving effect to the 1997 Acquisitions, approximately 44% of
the Company's public pay telephones are located in Florida, Texas and
California, which are three of the four most populous states. See
"Business--Acquisition Strategy--The 1997 Acquisitions." 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 approximately 33,600 public pay telephones, through a
series of acquisitions by the Company of eight independent public pay
telephone companies. In addition, the Company maintains an active program
of installing public pay telephones.
The Company owns, operates, services and maintains a system of
microprocessor controlled "smart" public pay telephones. The Company
derives substantially all of its revenues from calls placed from its public
pay telephones through the deposit of coins ("coin calls") and from calling
card, credit card, collect, third party billed and access code calls
(collectively, "non-coin calls"). The Company contracts with location
providers to operate public pay telephones at locations where significant
demand exists for public pay telephone service, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck
stops and bus terminals.
On an actual basis, the Company had revenues and EBITDA (as defined
in footnote 6 on page 11) of $28.3 million and $5.6 million, respectively,
for the nine months ended September 30, 1996. The Company's EBITDA margin
has increased to 19.6% for the nine months ended September 30, 1996 from
2.8% for the nine months ended September 30, 1995. The increase in the
EBITDA margin is primarily due to the significant increase in the number of
installed public pay telephones and the elimination of costs associated
with the closing of certain offices, the elimination of redundant
executives and administrative personnel in billing and other operational
areas and leveraging the Company's existing field technicians.
After giving pro forma effect to the six acquisitions completed from
September 1, 1995 to September 30, 1996, the Company Equity Offering and
the Company Debt Offering (as defined herein), the Company would have
achieved revenues of $59.5 million and $45.4 million for the year ended
December 31, 1995 and the nine months ended September 30, 1996,
respectively, and EBITDA of $10.4 million and $9.8 million for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively. After giving pro forma effect to such six acquisitions, the
1997 Acquisitions (collectively, the "Acquisitions"), the Company Equity
Offering and the Company Debt Offering, the Company would have achieved
revenues of $91.4 million and $70.4 million for the year ended December 31,
1995 and the nine months ended September 30, 1996, respectively, and
EBITDA of $21.2 million and $16.1 million for the year ended
December 31, 1995 and the nine months ended September 30, 1996,
respectively. See "Pro Forma Financial Data." Management believes that as a
result of certain recent regulatory changes implemented by the Federal
Communications Commission ("FCC") relating to compensation for dial-around
calls, the Company will generate significant additional revenues, net of
related expenses and processing fees, commencing November 6, 1996. See
"--Recent Developments--Recent Regulatory Developments."
Public pay telephones are primarily owned or operated by Bell
Operating Companies ("BOCs"), other local exchange carriers ("LECs") and
independent public pay telephone companies. Of the approximately 2.54
million public pay telephones operated in the United States in 1995,
Multimedia Telecommunications Association estimates that approximately 87%
are operated by BOCs and other LECs and approximately 13% (approximately
342,000 public pay telephones) are operated by independent public pay
telephone companies. Management believes that the highly fragmented nature
of the independent public pay telephone industry presents a significant
number of attractive acquisition opportunities for the Company.
In June 1995, Peter Graf was appointed Chairman of the Board of
Directors and in September 1995 was appointed Chief Executive Officer of
the Company. In September 1995, Stuart Hollander, Joseph Abrams, Aron
Katzman and Steven Richman were appointed to the Board of Directors of the
Company, and the majority of the existing board resigned at that time. The
new board and management identified and implemented the business strategy
set forth under "--Business Strategy" below.
The Company was incorporated under the laws of the State of Ohio on
December 24, 1984. The Company's executive offices are located at 1127
Euclid Avenue, Suite 650, Cleveland, Ohio 44115-1601 and its telephone
number is (216) 241-2555.
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale while implementing
cost savings. The Company has implemented the following strategy to meet
its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the public pay telephone industry. Selective acquisitions enable
the Company to expand its geographic presence and further its strategy of
clustering its public pay telephones more rapidly than with new
installations. Because smaller companies typically are not able to achieve
the economies of scale realized by the Company, when acquisitions are
integrated, the Company can operate the public pay telephones at lower
operating costs than the seller. Accordingly, the Company maintains an
active acquisition program to acquire public pay telephones that are in, or
contiguous to, its existing markets or that can form the basis of a new
cluster. Management believes that the Company's experience in completing
acquisitions of companies in the public pay telephone industry is
instrumental in identifying and negotiating additional acquisitions as well
as integrating such acquisitions. In addition, as the Company grows to
become the leading supplier of independent public pay telephone services in
an area, "fill-in" and contiguous acquisitions become less attractive to
other potential acquirors as their ability to create significant clusters
is reduced. Moreover, the Company believes that such growth will further
enhance its ability to negotiate favorable rates with long distance service
providers and operator service providers ("OSPs") as well as suppliers of
pay telephones and other related equipment.
Facilitate internal growth. The Company actively seeks to install new
public pay telephones and intends to enhance its sales and marketing
efforts to obtain additional contracts to own and operate public pay
telephones with new and existing national, regional and local accounts. In
evaluating locations for the installation of public pay telephones, the
Company generally conducts a site survey to examine various factors,
including population density, traffic patterns, historical usage
information and other geographic factors. The installation of public pay
telephones is generally less expensive than acquiring public pay
telephones.
Reduce operating costs through geographically concentrated clusters.
The Company believes that in addition to facilitating fill-in and
contiguous acquisitions, the clustering of public pay telephones creates an
opportunity to generate savings through reduced field service and
collection expenses, the closing of duplicate offices, reduction in staff
and general corporate overhead expenses and reduced line and transmission
expenses associated with interLATA and intraLATA traffic.
Form strong relationships with service providers and suppliers. As
part of its strategy to continue to reduce operating costs, the Company
outsources its long distance and operator services to a number of
subcontractors that are OSPs, principally Intellicall, Inc.
("Intellicall"). The Company intends to strengthen its relationships with
Intellicall, together with other OSPs, and the suppliers of its public pay
telephone equipment as its market presence increases. By achieving closer
working relationships with its OSPs and suppliers, the Company believes
that it will be in a position to negotiate more favorable agreements.
Use of state-of-the-art technology. The Company's public pay
telephones are "smart" telephones and are operated by means of advanced
microprocessor technology that enables the telephones to perform
substantially all of the necessary coin-driven and certain non coin-driven
functions independent of the Company's central office. Unlike "dumb"
telephones used by most BOCs and other LECs, smart telephones, in concert
with the Company's management information systems, enable the Company to
determine each telephone's operability and need for service as well as its
readiness for coin collection. In addition, rate changes and other
software-dependent functions can be performed from the central office
without dispatching service technicians to individual public pay telephones
of the Company.
Provide superior customer service. The Company strives to maximize
the number of its public pay telephones that are operational at any one
time and thereby retain existing customers and attract new ones.
Accordingly, the Company employs both advanced telecommunications
technology and trained field technicians as part of its commitment to
provide superior customer service. The technology used by the Company
enables it to (i) maintain accurate records of telephone activity which can
be verified by 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 as a result of the Company Debt Offering and the
Company Equity Offering, the Company intends to promote actively its brand
and customer service capabilities. The Company seeks to promote and achieve
recognition of its products and services by posting on all of its public
pay telephones the "PhoneTel" label and through advertisements in trade
magazines. The Company believes that achieving market recognition will
facilitate its expansion strategy by enhancing its ability to obtain
additional accounts and encouraging the use of its public pay telephones in
locations where consumers have multiple public pay telephone options.
RECENT DEVELOPMENTS
RECENT REGULATORY DEVELOPMENTS
On September 20, 1996, the FCC adopted new rules pursuant to the
Telecommunications Act (as defined herein) which require certain providers
of long distance services to pay to the Company (and all other owners of
public pay telephones) a flat fee of $45.85 per month per telephone as
compensation for dial-around calls from November 6, 1996 to October 6, 1997
(which fee was established by the FCC by multiplying $0.35 per call by the
estimated industry average of 131 access code calls and "800" calls per pay
telephone per month). This replaces the $6.00 flat fee per month per
telephone in place since May 1992. In October 1997, the flat fee will be
replaced by a per-call compensation mechanism, at a rate initially set at
$0.35 per call and for periods after October 6, 1998, at the local coin
drop rate, which the FCC has concluded will be determined by the
marketplace, not by regulation. Management believes that as a result of
these changes, the Company will generate significant additional revenues,
net of related expenses and processing fees, commencing November 6, 1996.
The FCC's new rules include other changes, the effect of which on the
Company's operations cannot be estimated by management of the Company at
this time. See "Business--Products and Services--Operator Assisted Long
Distance Services" and "Business--Governmental Regulations--Federal."
RECENT ACQUISITIONS
In connection with its business strategy of growth through
acquisitions, the Company acquired 6,872 installed public pay telephones
(located primarily in California, Colorado and Washington) from Amtel
Communications Services, Inc. and certain of its affiliates (collectively,
"Amtel") as of September 13, 1996 (the "Amtel Acquisition"). The Company
acquired the public pay telephones in the Amtel Acquisition for a net
purchase price of approximately $12 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
net purchase price of approximately $12 million, in a combination of cash,
Common Stock, the POA Sellers' Notes (as defined herein) and the assumption
of certain liabilities.
On January 3, 1997, the Company acquired (the "Cherokee Acquisition")
14,000 public pay telephones (located primarily in Texas, New Mexico, Utah,
Montana and Colorado), of which approximately 726 were under contract
waiting to be installed, and certain other assets from Cherokee
Communications, Inc. ("Cherokee"). Pursuant to the terms of the Agreement
and Plan of Merger dated as of November 21, 1996, as amended, among the
Company, a wholly owned subsidiary of the Company, Cherokee, and all of the
then shareholders of Cherokee (the "Cherokee Merger Agreement"), the
Company acquired Cherokee for a purchase price of approximately $60 million
in cash and approximately $3.4 million in assumed liabilities, subject to
certain purchase price adjustments, which may include an increase of up to
$6 million payable in two installments in January 1998 and 1999 if certain
new regulatory changes are no-competition agreements and approximately
$1.1 million in fees and expenses related to the Cherokee Acquisition. See
"Business--Acquisition Strategy--The 1997 Acquisitions--The Cherokee
Acquisition."
On January 13, 1997, the Company acquired (the "Texas Coinphone
Acquisition" and, together with the Cherokee Acquisition, the "1997
Acquisitions") 1,250 public pay telephones located in Texas from Texas
Coinphone ("Texas Coinphone"). The Company acquired the public pay
telephones in the Texas Coinphone Acquisition for a purchase price of
approximately $3.7 million, subject to certain purchase price adjustments.
See "Business--Acquisition Strategy--The 1997 Acquisitions--The Texas
Coinphone Acquisition."
THE COMPANY EQUITY OFFERING AND THE COMPANY DEBT OFFERING
On December 18, 1996, the Company closed the following two public
underwritten offerings: (i) the sale of 6,750,000 shares of Common Stock
(the "Company Equity Offering"), at a price to public of $3.00 per share,
for estimated net proceeds to the Company therefrom of approximately $18.0
million and (ii) the sale of $125.0 million aggregate principal amount of
its Senior Notes due 2006 (the "Notes"), which are guaranteed by all of the
Company's subsidiaries (the "Company Debt Offering"), for estimated net
proceeds to the Company therefrom of approximately $118.5 million. In
connection with the Company Equity Offering, the Company also granted the
underwriters a 45-day option to purchase up to 1,012,500 additional shares
of Common Stock, at a net purchase price of $2.79 per share (the price to
public of $3.00 per share less an underwriting discount of $0.21 per share),
solely to cover over-allotments (the "Over-Allotment Option"). The
underwriters have exercised their Over-Allotment Option in full, and the
closing for the sale of such shares is scheduled to occur on January 29,
1997.
The Company used the net proceeds from the Company Equity Offering to
repay approximately $8.0 million of debt outstanding under the Credit
Agreement dated as of March 31, 1996, as amended (the "Credit Agreement"),
with ING (U.S.) Capital Corporation ("ING") and Cerberus Partners, L.P.
("Cerberus" and, together with ING, the "Lenders"), and the balance for
working capital and other general corporate purposes. The Company used a
portion of the net proceeds from the Company Debt Offering to repay all of
the remaining outstanding debt under the Credit Agreement, to repay certain
capital lease obligations and other indebtedness and to finance the 1997
Acquisitions. The Company intends to use the balance of such net proceeds for
working capital and other general corporate purposes, including the possible
redemption of approximately $5.5 million of its mandatorily redeemable 14%
Preferred (as defined herein).
The following table sets forth the estimated sources and uses of the
proceeds received by the Company from the Company Debt Offering and the
Company Equity Offering (determined as of December 31, 1996):
In millions Amount
SOURCES OF FUNDS:
Company Equity Offering .................................. $ 20.3
Company Debt Offering..................................... 125.0
-------
Total sources of funds............................... $ 145.3
=======
USES OF FUNDS:
Cherokee Acquisition (1) ................................. $ 67.2
Texas Coinphone Acquisition............................... 3.7
Repay Credit Agreement.................................... 43.0
Repay capitalized lease obligations....................... 7.8
Repay POA Sellers' Notes.................................. 3.3
Related fees and expenses (2)............................. 8.8
Working capital and general corporate purposes (3)........ 11.5
-------
Total uses of funds.................................. $ 145.3
=======
- -------------------
(1) Represents the purchase price of approximately $60 million in cash
(net of a $520,000 deposit) plus related fees and expenses of
approximately $1.1 million, a $625,000 initial payment for the
non-competition agreements and $6.0 million to be held in escrow
pursuant to the terms of the Cherokee Merger Agreement to fund the
Rate Cap Amounts (as defined herein).
(2) Represents (i) estimated underwriting discount and other expenses of
the Company Equity Offering of $2.3 million and (ii) estimated
underwriting discount and other expenses of the Company Debt Offering
of $6.5 million.
(3) The Company may elect, at its option, to use a portion of the
proceeds to redeem approximately $5.5 million of 14% Preferred in
lieu of using such funds for working capital purposes.
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
----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------------ ----------------------------- --------------------------
PRO FORMA FOR PRO FORMA
PRO FORMA FOR 1995,1996 PRO FORMA FOR 1996
1995 AND 1996 AND 1997 FOR 1996 AND 1997
ACQUISITIONS, ACQUISITIONS, ACQUISITIONS, ACQUISITIONS,
COMPANY COMPANY COMPANY COMPANY
EQUITY EQUITY EQUITY EQUITY
OFFERING AND OFFERING AND OFFERING AND OFFERING AND
COMPANY DEBT COMPANY DEBT COMPANY DEBT COMPANY DEBT
1993 1994 1995 OFFERING(1) OFFERING(2) 1996 OFFERING(3) OFFERING(4)
------- ------ --------- ------------ ----------- --------- ------------- ------------
(In thousands, except per
share data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ............... $ 11,070 $ 15,866 $ 18,718 $ 59,515 $ 91,401 $ 28,315 $ 45,379 $ 70,448
Cost and expenses ............ 11,683 17,180 24,007 68,734 103,344 37,156 54,354 83,069
Loss from operations ......... (613) (1,314) (5,289) (9,129) (11,942) (8,840) (8,975) (12,621)
Interest expense ............. 175 388 837 16,320 16,320 4,140 11,877 11,877
Loss before extraordinary item (779) (1,695) (6,110) (25,604) (28,543) (12,980) (20,922) (24,563)
Net loss ..................... (779) (1,695) (6,110) -- -- (13,247) -- --
Net loss applicable to common
shareholders (5) ............. (986) (1,987) (6,419) (26,257) (29,196) (15,519) (21,192) (24,832)
Net loss per common share (5) (0.96) (1.35) (3.29) (2.17) (2.41) (3.60) (1.58) (1.86)
Weighted average number of
common shares ................ 1,031,384 1,470,188 1,950,561 12,113,084 12,113,084 4,305,130 13,376,413 13,376,413
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA (6) ................... $ 283 $ 922 $ 1,264 $ 10,380 $ 21,243 $ 5,554 $ 9,766 $ 16,055
EBITDA Margin (7) ............ 2.56% 5.81% 6.75% 17.44% 23.24% 19.62% 21.52% 22.79%
Ratio of EBITDA to interest
expense ...................... 1.62 2.38 1.51 .64 1.30 1.34 .82 1.35
Number of public pay
telephones in service ........ 2,350 4,891 9,458 24,074 37,763 24,732 24,732 38,421
-----------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1996
-----------------------------------------------------------------------------
PRO FORMA FOR PRO FORMA FOR 1997
COMPANY DEBT ACQUISITIONS,
OFFERING COMPANY DEBT OFFERING
AND COMPANY AND COMPANY EQUITY
ACTUAL EQUITY OFFERING (8) OFFERING (9)
BALANCE SHEET DATA: ---------------------- ------------------ ------------------------
<S> <C> <C> <C>
Total assets.................. $74,940 $160,842 $164,959
Long-term debt and
obligations under capital
leases (including current
installments)................. 49,146 (10) 127,302 128,274
14% Redeemable Preferred Stock 6,539 6,539 6,539
Non-mandatorily redeemable
preferred stock, common
stock and other
Shareholders' equity.......... 11,645 19,389 19,389
Working capital (deficit)
(11)......................... (11,319) 78,009 17,964
</TABLE>
- -------------------------
(1) Gives effect to the acquisitions of International Pay Phones, Inc. of
Tennessee ("IPP TN") and of International Pay Phones, Inc. of South
Carolina ("IPP SC" and, together with IPP TN, "IPP"), Paramount
Communications Systems, Inc. ("Paramount"), POA and Amtel
(collectively, the "1996 acquisitions") and the acquisitions of World
Communications, Inc. ("World") and Public Telephone Corporation
("Public Telephone") (together, the "1995 Acquisitions"), the
Company Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1995. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period.
(2) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions and the
1997 Acquisitions (collectively, the "Acquisitions"), the Company
Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1995. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period. Because
Cherokee's fiscal year ends on September 30, the historical and pro
forma information relating to Cherokee is for the nine months ended
June 30, 1996.
(3) Gives effect to the 1996 Acquisitions, the Company Equity Offering
and the Company Debt Offering, as if such transactions had occurred
on January 1, 1996. 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 1997 Acquisitions, the
Company Equity Offering and the Company Debt Offering, as if such
transactions had occurred on January 1, 1996. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken
place on such date or which might occur in any future period. Because
Cherokee's fiscal year ends on September 30, the historical and pro
forma information relating to Cherokee is for the nine months ended
June 30, 1996.
(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) Gives effect to the Company Debt Offering and the Company Equity
Offering, as if such transactions had occurred on September 30, 1996.
(9) Gives effect to the 1997 Acquisitions, the Company Debt Offering and
the Company Equity Offering, as if such transactions had occurred on
September 30, 1996. Because Cherokee's fiscal year ends on September
30, the historical and pro forma information relating to Cherokee is
for the nine months ended June 30, 1996.
(10) Excludes $5,228,956 constituting the unamortized portion of long-term
debt discount, which arose from the original allocation of proceeds
to warrants issued to the Lenders in connection with the Credit
Agreement.
(11) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should carefully consider the following
risk factors in evaluating the Company and its business before purchasing
any of the shares of Common Stock offered hereby.
SUBSTANTIAL LEVERAGE AND EFFECT ON ABILITY TO PAY INDEBTEDNESS
The Company has substantial indebtedness. In addition, earnings were
insufficient to cover fixed charges by approximately $6.1 million and $13.0
million for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. As of September 30, 1996 on a pro forma
basis after giving effect to the 1997 Acquisitions, the Company Debt
Offering and the Company Equity Offering, the Company's total indebtedness
would have been $127.9 million, its total assets would have been $161.8
million and its mandatorily redeemable preferred stock and other equity
would have been $25.9 million. Although the Company used a portion of the
proceeds from the Company Equity Offering and the Company Debt Offering to
repay indebtedness under the Credit Agreement which was then terminated,
the Company is negotiating with lenders to enter into a new $25 to $75
million senior credit facility (the "New Credit Agreement"). There can be
no assurance that the New Credit Agreement will be executed.
The Company's high degree of leverage could have important
consequences for the Company, including: (i) the ability of the Company
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such
financing may not be on terms favorable to the Company; (ii) a
substantial portion of the Company's cash flow will be used to pay the
Company's interest expense, which will reduce the funds that would
otherwise be available to the Company for its operations and future
business opportunities; (iii) a decrease in net operating cash flows or
an increase in expenses of the Company could make it difficult for the
Company to meet its debt service requirements and force it to modify its
operations; (iv) the Company may be more highly leveraged than some of
its competitors which may place it at a competitive disadvantage; and (v)
the Company's high degree of leverage may make it more vulnerable to a
downturn in its business or the economy generally. Any inability of the
Company to service its indebtedness or obtain additional financing as
needed would have a material adverse effect on the Company's business,
results of operations or financial condition. See "--Risks of Growth
Strategy."
The ability of the Company to make cash payments to satisfy its
substantial indebtedness, including the Notes, will depend upon its future
operating performance, which is subject to prevailing economic conditions,
and to financial, business and other factors beyond the Company's control.
Based upon the Company's cash flow from operations and the proceeds to the
Company from the Company Debt Offering and the Company Equity Offering, the
Company believes that it will have the funds necessary to meet the
principal and interest payments on its debt as they become due and to
operate its business, although, there can be no assurance that the Company
will be able to do so. There can be no assurance that the Company will
enter into the New Credit Agreement or that the New Credit Agreement will
be on terms favorable to the Company. 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 by the terms of the Indenture pursuant to which the Notes were
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 Certain Indebtedness--The Notes."
GOVERNMENT REGULATION
The operations of the public pay telephone industry are regulated by
the public service or utility commissions of the various states and by the
FCC. In particular, the Company must obtain approvals to operate public pay
telephones from the public utility commissions of most states in which the
Company operates. In addition, from time to time legislation is enacted by
Congress or the various state legislatures that affects the
telecommunications industry generally and the public pay telephone industry
specifically. Court decisions interpreting laws applicable to the
telecommunications industry may also have a significant effect on the
public pay telephone industry. Changes in existing laws and regulations as
well as the creation of new ones, applicable to the activities of the
Company or other telecommunication businesses (including the extent of
competition, the charges of providers of interexchange and operator
services and the implementation of new technologies), particularly in the
states of Florida, Texas, Missouri and California, may have a material
adverse effect on the Company's business, results of operations or
financial condition.
The recently enacted Section 276 ("Section 276") of the
Telecommunications Act of 1996 (the "Telecommunications Act") and the
implementing regulations adopted by the FCC pursuant to Section 276 are
expected to have a significant effect on the public pay telephone industry.
For a discussion of the potential effects of Section 276 on the public pay
telephone industry and competition within this industry, including the
FCC's regulations to implement Section 276, see "Business--Governmental
Regulations--Federal" and "--Competition." A number of parties have filed
petitions for judicial review of these regulations in federal courts of
appeals. To date, the regulations remain in effect. Since neither Section
276 nor the FCC rules have yet been interpreted by the courts, there can be
no assurance that the rules and policies ultimately adopted thereunder will
not adversely affect the Company.
HISTORY OF LOSSES
The Company was incorporated in 1984 and began providing 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 nine months ended September 30, 1996, the Company has
incurred losses before taxes and extraordinary item of approximately
$6,109,697 and $12,980,078, respectively, and on a pro forma basis after
giving effect to the Acquisitions, the Company Debt Offering and the
Company Equity Offering would have incurred losses before taxes and
extraordinary items of $27,421,752 and $24,581,937, respectively. There can
be no assurance that revenue growth will continue or that the Company will
ever achieve or sustain profitability. See "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and
notes thereto contained elsewhere in this Prospectus.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The terms and conditions of the Indenture impose, and the terms and
conditions of the New Credit Agreement are expected to impose, restrictions
that affect, among other things, the ability of the Company to incur debt,
pay dividends, merge, dispose of assets, create liens and make investments
and capital expenditures. See "Description of Certain Indebtedness." The
New Credit Agreement is expected to be secured and guaranteed by all of the
Company's subsidiaries. The New Credit Agreement is expected to require the
Company to satisfy certain financial covenants on a quarterly basis. The
Company was not in compliance with various financial covenants contained in
the Credit Agreement at June 30, 1996 and subsequently received a waiver of
such non-compliance from the Lenders. The Credit Agreement was amended on
October 8, 1996 to make the covenants less restrictive and the Company was in
compliance with such covenants as of September 30, 1996. The ability of the
Company to comply with any financial covenants contained in the New Credit
Agreement 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
indebtedness under the New Credit Agreement were to be accelerated, there
can be no assurance that the assets of the Company would be sufficient to
repay in full such indebtedness and the other indebtedness of the Company.
RISKS OF GROWTH STRATEGY
The Company's strategy is to grow by acquisitions and internal
growth. The Company is subject to various risks associated with an
acquisition growth strategy, including the risks that the Company will be
unable to integrate and manage successfully the acquired companies or to
identify and acquire suitable companies in the future or to integrate and
manage successfully any additional acquired companies. Since September 1,
1995, the Company has acquired approximately 33,600 public pay telephones,
which represent approximately 87% 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. In addition, the Company's ability to grow internally
by installing additional public pay telephones depends on numerous factors,
including locating satisfactory sites for public pay telephones, hiring
qualified employees to service the sites and raising additional capital or
otherwise financing such expansion. While management believes that pursuing
its growth strategy will improve its overall market position and,
ultimately, its profitability, there can be no assurance that this will
occur. See "Business--Business Strategy."
The Company's growth strategy requires substantial capital
investment. Capital is needed not only for acquisitions, but also for the
effective integration of acquired companies and internal expansion. The
Company may incur additional debt to finance its growth strategy which may
cause an increase in its interest expense and divert cash flow which would
otherwise be available to the Company for its operations and future
business opportunities. The Company may issue shares of Common Stock or
other equity-related securities to finance future acquisitions, which may
result in the dilution of the Company's shareholders. In the event that the
Company chooses to issue Common Stock as acquisition consideration and the
Common Stock does not maintain a sufficient valuation, or potential
acquisition candidates are unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to continue
its acquisition program. There can be no assurance that acceptable
financing for future acquisitions or for the integration and expansion of
existing businesses can be obtained when it is needed or that, if
available, it will be on terms the Company deems acceptable. As a result,
the Company might be unable to implement successfully its growth strategy.
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the
contributions of its executive officers and other key personnel. The loss
of services of one or more of its executive officers or key personnel could
have a material adverse effect on the Company's business, results of
operations or financial condition. The Company's success also will depend
in part on its ability to attract and retain other qualified and skilled
employees. There can be no assurance that the Company will be able to
identify, hire or retain such employees. The Company's inability to
identify, hire or retain qualified personnel could have a material adverse
effect on the Company's business, results of operations or financial
condition. See "Management" and "Business--Employees."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURE
The Company outsources its long distance service and operator service
operations to a number of subcontractors, including Intellicall, the
Company's primary provider of such services, American Telephone & Telegraph
Company ("AT&T"), Bell South Telecommunications, Inc. ("Bell South"),
Opticom, a division of One Call Communications, Inc. ("Opticom"), and
Conquest Telecommunications Service Company ("Conquest"). Such operations
require that the switching equipment and the equipment of its long distance
service and operator providers be operational 24 hours per day, 365 days
per year. The Company's long distance service providers and OSPs may
experience temporary service interruptions or equipment failure which may
result from causes beyond the Company's control. In addition, the Company's
public pay telephones may experience line interruptions in their
connections to the LECs due to weather conditions or other natural
occurrences such as earthquakes or floods which are beyond the Company's
control. Any such event could have a material adverse effect on the
Company.
DEPENDENCE UPON THIRD-PARTY PROVIDERS
The Company's ability to complete operator service and direct dial
long distance calls is dependent upon third party carriers for the
transmission of calls, provision of operator support, validation of credit
card and calling card billing information and billing and collection
services. While the Company believes that it has access to several
providers of these services at competitive rates and expects to continue to
have such access in the foreseeable future, the continuing availability of
these resources cannot be assured.
COMPETITION
The public pay telephone industry is, and can be expected to remain,
highly competitive. While the Company's principal competition comes from
BOCs and other LECs, the Company also competes for locations with other
independent public pay telephone companies, some of which may have greater
financial resources than the Company. Competition from these sources could
prevent the Company from obtaining or maintaining desirable locations for
its public pay telephones, could cause the Company to pay higher
commissions on the revenues generated by its public pay telephones or could
affect the Company's ability to complete future acquisitions at attractive
prices or at all, thereby reducing the Company's profits. The Company also
competes with long distance companies that provide operator service to
owners of property on which LEC-owned public pay telephones are located and
to hotels, motels and similar locations. In addition, the Company competes
with providers of cellular communications services and personal
communications services (wireless), which provide an alternative to the use
of public pay telephones.
Furthermore, pursuant to the recently enacted Section 271 of the
Telecommunications Act and the FCC's implementing regulations, BOCs may now
seek FCC approval to offer interLATA long distance service to their
customers, including interLATA service originating from public pay
telephones. The FCC may grant such approval on a state-by-state basis once
a BOC has met the requirements of the Telecommunications Act's fourteen
point competitive checklist, which includes, among other things, that the
BOC has entered into an approved interconnection agreement with at least
one unaffiliated, facilities-based competitor in some portion of the state
pursuant to which such competitor provides local telecommunications service
(or that by a certain date no such competitors have "requested"
interconnection as defined in the Telecommunications Act). Certain BOCs may
receive permission from the FCC to offer interLATA long distance service as
early as 1997, although the timing of the FCC's approval depends in part on
the outcome of pending federal appeals court litigation concerning related
FCC regulations. Once it has received FCC approval for a particular state,
a BOC will be able to generate revenues from this new interLATA long
distance service. In addition, the BOC may be better able to compete with
independent public pay telephone providers for locations to install its
public pay telephones because it will be able to offer location providers
higher commissions for long distance calls than those currently offered by
independent public pay telephone providers. This potential competition for
locations may have a material adverse effect on the Company's business,
results of operations or financial condition.
TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving
industry standards. The Company believes that its future success will
depend on its ability to anticipate and respond to such changes on a timely
basis. There can be no assurance that the Company will have sufficient
resources to make the investments necessary to acquire new technology or to
introduce new services that would satisfy an expanded range of customer
needs.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation could,
together or separately, discourage potential acquisition proposals, delay
or prevent a change in control of the Company and limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions include the authority of the Board
of Directors to issue shares of preferred stock with rights and privileges
which could be senior to the Common Stock, without obtaining shareholder
approval. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate transactions,
could have the effect of making it more difficult for a third party to
acquire, or discourage a third party from acquiring, a significant
percentage of the outstanding voting stock of the Company. Although the
Company has the ability to use such provisions as anti-takeover measures,
the Company currently has no intention to issue such preferred stock in the
future. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES
The Company can make no prediction as to the effect, if any, that
sales of additional shares of Common Stock or the availability of shares
for future sale will have on the market price of the Common Stock. Sales in
the public market of substantial amounts of the Common Stock (including
shares issued upon the exercise of outstanding options or warrants), or the
perception that such sales could occur, could depress prevailing market
prices for the Common Stock. Such sales also may make it more difficult for
the Company to sell equity securities or equity-related securities in the
future at a time and price that the Company deems appropriate.
The Company had 14,613,575 shares of Common Stock outstanding as of
December 31, 1996 (15,626,075 shares after giving effect to the sale of
shares pursuant to the Over-Allotment Option). In addition, at December
31, 1996, an aggregate of 7,914,770 shares of Common Stock have been
reserved for issuance pursuant to (i) the exercise of options and warrants
to purchase 2,614,419 shares of Common Stock, all of which were immediately
exercisable, and (ii) the conversion of shares of the Company's Series A
Preferred (as defined herein) and 14% Preferred (as defined herein). All of
the 13,304,263 shares of Common Stock, when sold hereby, together with
approximately 11,147,000 shares (consisting of (i) shares sold in the
Company Equity Offering (including pursuant to the Over-Allotment Option),
(ii) shares of Common Stock issued by the Company in connection with the
purchase of assets from Amtel after such shares are distributed by the
debtor-in-possession pursuant to the terms of its final plan of
reorganization and either the exemption from registration under the
Securities Act provided by Section 1145 of the United States Bankruptcy
Code of 1978, as amended (the "Bankruptcy Code"), is available or the
Company has registered such shares pursuant to the terms of the Asset
Purchase Agreement dated June 26, 1996 between Amtel, as debtor-in-
possession, and the Company (the "Amtel Asset Purchase Agreement") and
(iii) shares of Common Stock sold pursuant to Rule 144 as described below)
will be freely transferable without restriction under the Securities Act,
unless held by an affiliate of the Company. The remaining outstanding
shares of Common Stock held by existing stockholders are "restricted
securities" of the Company within the meaning of Rule 144 under the
Securities Act and may not be sold unless they are registered under the
Securities Act or sold pursuant to an exemption from registration
thereunder, including the exemption contained in Rule 144, which contains
certain volume and other resale limitations. Pursuant to Rule 144(k),
however, a person (or persons whose shares are aggregated) who is not
deemed to have been an affiliate of the Company at the time of sale and has
not been an affiliate during the three months immediately preceding the
sale may sell such shares without regard to such volume and other resale
limitations of Rule 144 provided that a period of at least three years has
elapsed since the later of the date the securities were acquired from the
issuer or from an affiliate of the issuer.
In connection with the Company Equity Offering, ING and Cerberus,
who are both Selling Shareholders and in the aggregate beneficially own
4,096,480 shares of the Common Stock being registered hereby, have agreed
not to transfer, sell or otherwise dispose of shares of Common Stock
(except for 250,000 shares which may be sold by each of ING and Cerberus
at any time on or after January 27, 1997) on or prior to December 7, 1997
without the consent of Southcoast Capital Corporation, which acted as the
representative of the underwriters in the Company Equity Offering, except
as follows: (i) up to 900,000 shares in the aggregate may be transferred,
sold or otherwise disposed of by each of ING and Cerberus during the
period commencing on June 11, 1997 and ending on September 8, 1997 and
(ii) up to 1,150,000 shares in the aggregate (including any shares sold
pursuant to clause (i)) may be transferred, sold or otherwise disposed of
by each of ING and Cerberus during the period commencing on September 9,
1997 and ending on December 7, 1997. In addition, other Selling
Shareholders who beneficially own approximately 6,105,000 shares of the
Common Stock being registered hereby have agreed not to transfer, sell or
otherwise dispose of such shares on or prior to June 16, 1997 without the
consent of Southcoast Capital Corporation.
In connection with the Company Equity Offering, the Company and its
executive officers and directors have agreed pursuant to lock-up agreements
that they will not offer or sell any shares of Common Stock of the Company
beneficially owned by them on or prior to June 10, 1997 (the "Lock-up
Period") without the prior written consent of Southcoast Capital
Corporation, except that the Company may issue shares of Common Stock upon
the exercise of options or in connection with acquisitions. After the
Lock-up Period, all such shares may be sold in accordance with Rule 144
under the Securities Act.
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for the
Company's Common Stock. Quarterly operating results of the Company, changes
in general conditions in the economy, the financial markets of the
telecommunications industry or other developments affecting the Company or
its competitors, could cause the market price of the Company's Common Stock
to fluctuate substantially. In addition, in recent years, the stock market
and, in particular, the telecommunications industry segment, has
experienced significant price and volume fluctuations. This volatility has
affected the market prices of securities issued by many companies for
reasons unrelated to their operating performance.
SEASONALITY
The Company's revenues have fluctuated seasonally on a historical
basis. The Company's public pay telephones in the northern and western
states, some of which are located outdoors, typically experience reduced
revenues in the first quarter due to weather conditions, which may have a
material adverse effect on the Company's operating performance. Revenues
are typically highest in the fourth quarter because of the increased volume
of calls made during the holiday season.
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 42 states, the District of Columbia and Mexico
(approximately 96% of which public pay telephones are located in 21 states)
through agreements with both multi-station customers such as shopping
centers, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals as well as with single station
customers.
The Company owns and operates the public pay telephones for certain
properties owned by Simon DeBartolo Group, Inc. ("Simon DeBartolo"). The
Company derived approximately 15% and 7% of its total revenue for the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively, from the operation of these public pay telephones. As the
Company expands its installed public pay telephone base through additional
acquisitions and internal growth, it expects that the percentage of total
revenue derived from Simon DeBartolo will continue to decline. There can be
no assurance that the agreements covering these phones will be renewed upon
expiration. Other than Simon DeBartolo, no single customer generated more
than 5% of the Company's total revenue for the year ended December 31, 1995
or the nine months ended September 30, 1996. On a pro forma basis after
giving effect to the 1997 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 nine months ended September 30, 1996.
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Common
Stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The Indenture restricts, and the
New Credit Agreement is expected to restrict, the Company's ability to
pay dividends. In addition, the Company cannot pay dividends on the
Common Stock unless dividends are also paid on the Series A Preferred.
See "Dividend Policy."
POSSIBLE CHANGE IN CONTROL
In connection with the Credit Agreement, ING and Cerberus received
warrants to purchase a total of 204,824 shares of Series A Special
Convertible Preferred Stock ("Series A Preferred") which, in turn, are
convertible into 4,096,480 shares of Common Stock. Upon exercise of such
warrants, ING and Cerberus would own in the aggregate approximately 26% of
the Company's Common Stock (based on the amount outstanding as of December
31, 1996 after giving effect to the sale of shares pursuant to the
Over-Allotment Option).
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus that reflect projections or
expectations of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations,
including, without limitation, those relating to the Company's services and
ability to generate additional revenues, are "forward looking" statements,
within the meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act. Such statements include, but are not limited to, the
anticipated effects of Section 276 of the Telecommunications Act and the
FCC's implementing regulations, the achievement of cost savings from the
acquisitions described herein and the availability of capital resources.
No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated
in any such forward looking statements. Important factors that could result
in such differences, in addition to the risk factors identified above,
include: general economic conditions in the Company's markets, including
recession, interest rates and other economic factors, disruption of
operations, and other factors that generally affect businesses.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of
Common Stock offered by the Selling Shareholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 (i) on an actual basis, (ii) on a pro forma basis to
give effect to the Company Equity Offering and the Company Debt Offering as
if such transactions had occurred on September 30, 1996 and (iii) on a pro
forma basis as set forth in the preceding clause (ii) and as adjusted to
reflect the 1997 Acquisitions, as if such transactions had occurred on
September 30, 1996. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Financial Data" and the financial statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------------------
PRO FORMA
PRO FORMA FOR 1997
FOR ACQUISITIONS,
COMPANY COMPANY
DEBT DEBT
OFFERING OFFERING
AND AND
COMPANY COMPANY
EQUITY EQUITY
ACTUAL OFFERING OFFERING
---------- ---------- -----------
Total long-term debt (including current
installments):
<S> <C> <C> <C>
Credit Agreement, net (1)................. $35,771,044 -- --
New Credit Agreement (2).................. -- -- --
12% Senior Notes due 2006............... -- $125,000,000 $125,000,000
Notes payable (including obligations
under capital leases).................. 13,374,758 2,302,337 3,273,662
---------- ----------- -----------
Total long-term debt (including
current installments).............. 49,145,802 127,302,337 128,273,662
Mandatorily 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)............. 6,539,053 66,539,053 6,539,053
Non-mandatorily redeemable preferred stock,
common
stock and other shareholders' equity:
Series A special convertible preferred
stock: $0.20 par value; 250,000
shares authorized; no shares
issued................................... -- -- --
Series B special convertible preferred stock:
$0.20 par value; 250,000 shares authorized;
no shares issued.......................... -- -- --
Common stock: $.01 par value; 50,000,000
shares authorized; 7,639,709 shares issued
and outstanding, actual; 14,389,709 shares
issued and outstanding, pro forma (4).... 76,397 143,897 143,897
Additional paid-in capital................ 40,541,544 58,454,044 58,454,044
Accumulated deficit (5)................... (28,973,186) (39,208,467) (39,208,467)
Total non-mandatorily redeemable
preferred stock, common stock and
other shareholders' equity.............. 11,644,755 19,389,474 19,389,474
---------- ---------- ----------
Total capitalization........................ $67,329,610 $153,230,864 $154,202,189
=========== ============ ============
</TABLE>
- ------------
(1) Excludes $5,228,956 constituting the unamortized portion of the debt
discount, which arose from the original allocation of proceeds to
warrants issued to the Lenders in connection with the Credit
Agreement. The total face amount of the Credit Agreement outstanding
as of September 30, 1996 was $41,000,000, which amount increased to
$43,000,000 as of December 18, 1996 prior to being repaid from a
portion of the proceeds of the Company Equity Offering and the
Company Debt Offering.
(2) The Company expects to enter into the New Credit Agreement in the
first quarter of 1997.
(3) The redemption amount of $6,978,963 (plus accrued dividends) is due
on June 30, 2000. The Company may elect, at its option, to redeem
approximately $5,500,000 of 14% Preferred with a portion of the
proceeds from the Company Debt Offering.
(4) Does not reflect the issuance of any Common Stock pursuant to options
and warrants outstanding.
(5) Reflects a $2,002,386 reduction (of which $1,227,589 was a non-cash
item) resulting from the redemption of the Company's 10% Cumulative
Redeemable Preferred Stock (the "10% Preferred"), the 8% Cumulative
Redeemable Preferred Stock (the "8% Preferred") and the 7% Cumulative
Convertible Redeemable Preferred Stock (the "7% Preferred") on
March 15, 1996. See Note 15 to the audited consolidated financial
statements of the Company included elsewhere in this Prospectus.
PRICE RANGE OF COMMON STOCK
Effective November 14, 1996, the Common Stock was listed on the
American Stock Exchange under the symbol "PHN." The Common Stock was
formerly quoted on the Nasdaq SmallCap Market under the symbol "PNTL." The
following table sets forth on a per share basis, for the periods indicated,
the high and low sales prices of the Common Stock as reported by Nasdaq or
the American Stock Exchange, as applicable.
PRICE RANGE
-----------------------
HIGH LOW
---------- ---------
FISCAL 1997:
First Quarter (through January 23, 1997)............ $3 5/8 $3
FISCAL 1996:
First Quarter....................................... $7 7/8 $5
Second Quarter...................................... 6 1/2 2 3/4
Third Quarter....................................... 5 2
Fourth Quarter...................................... 5 2 1/4
FISCAL 1995:
First Quarter....................................... $7 1/8 $4 7/8
Second Quarter...................................... 8 1/4 4 7/8
Third Quarter....................................... 8 1/4 5 7/16
Fourth Quarter...................................... 8 5/8 5 1/4
On January 23, 1997, the closing price on the American Stock Exchange
was $3.50 per share.
As of December 31, 1996, there were approximately 313 shareholders of
record of the Company's Common Stock. The number of record holders does not
take into account shares held in nominee or "street" name for the account
of beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The payment of dividends by the
Company is restricted by the Indenture and is expected to be restricted by
the New Credit Agreement. In addition, the Company cannot pay any dividends
on its Common Stock unless dividends are paid to the holders of the Series
A Preferred in an amount equal to that which such holders would have been
entitled to receive if such holders had converted their shares of Series A
Preferred into Common Stock prior to the record date used by the Board of
Directors for determining the holders of Common Stock entitled to receive
such dividends. Any future declaration of dividends will be subject to the
discretion of the Board of Directors of the Company. The timing, amount and
form of dividends (other than with respect to the holders of the 14%
Preferred which are only entitled to receive dividends payable in
additional shares of the 14% Preferred), if any, will depend, among other
things, on the Company's financial condition, capital requirements, cash
flow, profitability, plans for expansion, business outlook and other
factors deemed relevant by the Board of Directors of the Company.
SELECTED FINANCIAL DATA
The following tables present selected historical financial data for
the fiscal years ended December 31, 1993, 1994 and 1995 derived from, and
which should be read in conjunction with, the audited consolidated
financial statements of the Company and related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The following tables
also present selected historical financial data for the nine months ended
September 30, 1995 and 1996 derived from, and which should be read in
conjunction with, the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim period
financial data. The results for the nine months ended September 30, 1996
are not necessarily indicative of the results to be expected for the full
year.
In addition, the following tables present unaudited pro forma
selected financial and operating data for the Company as of and for the
year ended December 31, 1995 and the nine months ended September 30, 1996,
as adjusted to give pro forma effect to (i) in the case of statement of
operations data, (a) the 1995 Acquisitions, the 1996 Acquisitions, the
Company Equity Offering and the Company Debt Offering as if such
transactions had been consummated at the beginning of the respective period
and (b) the Acquisitions, the Company Debt Offering and the Company Equity
Offering as if such transactions had been consummated at the beginning of
the respective period and (ii) in the case of balance sheet data, (a) the
Company Equity Offering and the Company Debt Offering as if such
transactions had been consummated on September 30, 1996 and (b) the 1997
Acquisitions, the Company Debt Offering and the Company Equity Offering
as if such transactions had been consummated on September 30, 1996. See
"Pro Forma Financial Data." The unaudited pro forma data give pro forma
effect to the acquisitions under the purchase method of accounting and
certain other operating assumptions. See "Pro Forma Financial Data."
The unaudited pro forma financial data do not purport to represent
what the Company's results of operations or financial condition would have
actually been or operations of the Company in any future period would be if
the transactions that give rise to the pro forma adjustments had occurred
on the dates assumed. The following information is qualified by reference
to and should be read in conjunction with "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OPERATING DATA
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER NINE MONTHS ENDED NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, 31, 1995 SEPTEMBER 30, SEPTEMBER 30, 1996
----------------------------- --------------------- --------------------- ------------------------
PRO FORMA PRO FORMA PRO FORMA
FOR 1995 FOR 1995, PRO FORMA FOR 1996
AND 1996 1996 AND FOR 1996 AND 1997
ACQUISITIONS,1997 ACQUISITIONS, ACQUISI-
COMPANY ACQUISITIONS, COMPANY EQUITY TIONS,
EQUITY COMPANY OFFERING AND COMPANY
OFFERING EQUITY COMPANY DEBT EQUITY
AND COMPANY OFFERING OFFERING(3) OFFERING AND
DEBT AND COMPANY COMPANY
OFFERING(1) DEBT DEBT
1993 1994 1995 OFFERING(2) 1995 1996 OFFERING(4)
________ ________ ________ ____________ __________ __________ _________ _____________ ____________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share data)
STATEMENT OF
OPERATIONS DATA:
Total revenues......... $11,070 $15,866 $18,718 $59,515 $91,401 $11,957 $28,315 $45,379 $70,448
Cost and expenses...... 11,683 17,180 24,007 68,734 103,344 15,203 37,156 54,354 83,069
Loss from operations... (613) (1,314) (5,289) (9,219) (11,942) (3,246) (8,840) (8,975) (12,621)
Interest expense....... 175 388 837 16,320 (16,320) 304 4,140 11,877 11,877
Loss before
extraordinary item.... (779) (1,695) (6,110) (25,604) (28,543) (3,538) (12,980) (20,922) (24,563)
Net loss............... (779) (1,695) (6,110) -- -- (3,538) (13,247) -- --
Net loss applicable to
common shareholders(5). (986) (1,987) (6,419) (26,257) (29,196) (3,770) (15,519) (21,192) (24,832)
Net loss per common
share(5)............... (0.96) (1.35) (3.29) (2.17) (2.41) (2.22) (3.60) (1.58) (1.86)
Weighted average number
of common shares...... 1,031,384 1,470,188 1,950,561 12,113,084 12,113,084 1,695,280 4,305,130 13,376,413 13,376,413
FINANCIAL RATIOS AND
OPERATING DATA:
EBITDA(6)............. $283 $922 $1,264 $10,380 $21,243 $337 $5,554 $9,776 $16,055
EBITDA margin(7)...... 2.56% 5.81% 6.75% 17.44% 23.24% 2.82% 19.62% 21.52% 22.79%
Ratio of EBITDA to
interest expense...... 1.62 2.38 1.51 .64 1.30 1.11 1.34 .82 1.35
Number of public pay
telephones in service. 2,350 4,891 9,458 24,074 37,763 8,344 24,732 24,732 38,421
</TABLE>
--------------------------------------------------------
AS OF SEPTEMBER 30, 1996
--------------------------------------------------------
PRO FORMA
PRO FORMA FOR 1997
FOR ACQUISITIONS,
COMPANY COMPANY
DEBT DEBT
OFFERING OFFERING
AND AND
COMPANY COMPANY
EQUITY EQUITY
OFFERING OFFERING
ACTUAL (8) (9)
BALANCE SHEET DATA: ---------- ----------- -----------
Total assets....... $74,940 $160,842 $164,959
Long-term debt and
obligations under
capital leases
(including current
installments)........ 49,146(10) 127,302 128,274
14% Redeemable
Preferred Stock...... 6,539 6,539 6,539
Non-mandatorily
redeemable preferred
stock, common stock and
other shareholders'
equity............... 11,645 19,389 19,389
Working capital
(deficit)(11)........ (11,319) 78,009 17,964
- ------------------
(1) Gives effect to the 1995 Acquisitions, the 1996 Acquisitions, the Company
Equity Offering and the Company Debt Offering, as if such transactions had
occurred on January 1, 1995. 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 Acquisitions, the Company Equity Offering and the
Company Debt Offering, as if such transactions had occurred on January 1,
1995. Such unaudited pro forma financial data is not necessarily
indicative of the results of operations that might have occurred if the
transactions had taken place on such date or which might occur in any
future period. Because Cherokee's fiscal year ends on September 30,
the historical and pro forma information relating to Cherokee is for
the nine months ended June 30, 1996.
(3) Gives effect to the 1996 Acquisitions, the Company Equity Offering and
the Company Debt Offering, as if such transactions had occurred on
January 1, 1996. 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 1997 Acquisitions, the Company
Equity Offering and the Company Debt Offering, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period. Because Cherokee's fiscal year ends on
September 30, the historical and pro forma information relating to Cherokee
is for the nine months ended June 30, 1996.
(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) Gives effect to the Company Debt Offering and the Company Equity
Offering, as if such transactions had occurred on September 30, 1996.
(9) Gives effect to the 1997 Acquisitions, the Company Debt Offering and the
Company Equity Offering, as if such transactions had occurred on June 30,
1996. Because Cherokee's fiscal year ends on September 30, the historical
and pro forma information relating to Cherokee is for the nine months ended
June 30, 1996.
(10) Excludes $5,228,956 constituting the unamortized portion of long-term debt
discount, which arose from the original allocation of proceeds to warrants
issued to the Lenders in connection with the Credit Agreement.
(11) 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 nine months ended September 30, 1996 to
give effect to (i) the acquisition of World on September 22, 1995, Public
Telephone on October 15, 1995, IPP and Paramount on March 15, 1996, POA
effective August 1, 1996 and Amtel on September 13, 1996; (ii) the 1997
Acquisitions; (iii) the funds borrowed under the Credit Agreement; (iv) the
sale by the Company of $20 million of Common Stock pursuant to the Company
Equity Offering and the application of the estimated net proceeds therefrom
as set forth under "Prospectus Summary -- The Company Equity Offering and
the Company Debt Offering;" and (v) the sale by the Company of $125 million
of Notes pursuant to the Company Debt Offering and the application of the
estimated net proceeds therefrom as set forth under "Prospectus Summary --
The Company Equity Offering and the Company Debt Offering." The following
unaudited pro forma combined condensed balance sheet as of September 30,
1996 adjusts the historical balance sheet to give effect to (i) the 1997
Acquisitions; (ii) the sale by the Company of $20 million of Common Stock
pursuant to the Company Equity Offering; and (iii) the sale by the Company
of $125 million of Notes pursuant to the Company Debt Offering and the
application of the estimated net proceeds therefrom as set forth under
"Prospectus Summary -- The Company Equity Offering and the Company Debt
Offering." Because Cherokee's fiscal year ends on September 30, the
historical and pro forma information relating to Cherokee is for the nine
month period ended June 30, 1996 and as of June 30, 1996. All purchase
price allocations for the Acquisitions are preliminary in nature and are
subject to change within the twelve months following each acquisition based
on refinements as actual data becomes available. The pro forma adjustments
are included in the unaudited pro forma balance sheet as if the
transactions had occurred on September 30, 1996 and in the unaudited pro
forma statements of operations as if the transactions had occurred at the
beginning of each period presented. The unaudited pro forma combined
condensed financial data should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this
Prospectus, and are not necessarily indicative of the results of operations
that might have occurred if the transactions had taken place on the dates
indicated or which might occur in any future period.
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
World, Pro Forma
Public Adjustments
PhoneTel Telephone, for 1995
Technolo- IPP and and 1996
gies Paramount a Amtel POA Acquisitions
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Coin calls $12,130,189 $12,474,844 $9,689,179 $3,747,247 $(295,000)
Non-coin 3,776,501 5,771,598 5,459,411 4,418,667 (964,000)
Other 2,811,293 147,259 1,910,550 49,221 (1,612,000)
-----------------------------------------------------------------------------
18,717,983 18,393,701 17,059,140 8,215,135 (2,871,000) b
-----------------------------------------------------------------------------
Operating expenses:
Line and transmission charges 5,475,699 6,377,191 6,862,015 3,599,271 (1,695,000) c
Location commissions 3,467,626 2,361,157 3,921,741 1,178,156 (1,067,000) d
Field Operations 5,310,262 1,847,352 2,719,090 289,036 (3,027,000) e
Depreciation and amortization 4,383,049 2,059,628 1,621,029 1,218,095 8,529,000 f
Selling, general and administrative 3,200,742 5,229,060 15,103,091 1,911,624 (14,310,000) g
Other unusual charges and
contractual settlement 2,169,503 - - - -
-----------------------------------------------------------------------------
24,006,881 17,874,388 30,226,966 8,196,182 (11,570,000)
-----------------------------------------------------------------------------
Loss from operations (5,288,898) 519,313 (13,167,826) 18,953 8,699,000
Other income (expense)
Interest expense - related parties - - - - (7,009,000) h
Interest expense - others (836,911) (1,109,102) (7,429,502) (971,141) 7,525,000 i
Interest income 16,112 21,320 - 415 -
Reorganization expenses - - (539,942) - 539,942 j
Other - (311,932) (429,967) (68,517) 429,967 j
-----------------------------------------------------------------------------
Total other income (expense) (820,799) (1,399,714) (8,399,411) (1,039,243) 1,485,909
-----------------------------------------------------------------------------
Loss before income taxes
and extraordinary item (6,109,697) (880,401) (21,567,237) (1,020,290) 10,184,909
Income taxes - 38,100 4,000 (277,720) (42,100) k
-----------------------------------------------------------------------------
Loss before extraordinary item $(6,109,697) $(918,501) $(21,571,237) $(742,570) $10,227,009
=============================================================================
Earnings per share calculation:
Preferred dividend requirements (309,668) (343,567) - - -
-----------------------------------------------------------------------------
Loss before extraordinary item
applicable to common sharehold-
ers $(6,419,365) $(1,262,068) $(21,571,237) $(742,570) $10,227,009
=============================================================================
Loss per common share $(3.29)
===============
Number of shares 1,950,561 1,083,694 2,162,163 166,666
===============================================================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma for 1995
Adjustments for and 1996 Acquisi-
Company Equity tions, Company
Offering Equity Offering and
and Company Company Debt
Debt Offering Offering
----------------------------------------------
<S> <C> <C>
Revenues
Coin calls - $37,746,459
Non-coin - 18,462,177
Other - 3,306,323
-------------- ----------------------
- 59,514,959
-------------- ----------------------
Operating expenses:
Line and transmission charges - 20,619,176
Location commissions - 9,861,680
Field Operations - 7,138,740
Depreciation and amortization - 17,810,801
Selling, general and administrative - 11,134,517
Other unusual charges and
contractual settlement - 2,169,503
-------------- ----------------------
- 68,734,417
-------------- ----------------------
Loss from operations - (9,219,458)
Other income (expense)
Interest expense - related parties $7,009,000 l -
Interest expense - others (13,498,000) m (16,319,656)
Interest income - 37,847
Reorganization expenses - -
Other - (380,449)
-------------- ----------------------
Total other income (expense) 6,489,000 (16,662,258)
-------------- ----------------------
Loss before income taxes
and extraordinary item 6,489,000 (25,881,716)
Income taxes - (277,720)
-------------- ----------------------
Loss before extraordinary item $6,489,000 $(25,603,996)
============== ======================
Earnings per share:
Preferred dividend - (653,235)
-------------- ----------------------
Loss before extraordinary item
applicable to common sharehold-
ers $6,489,000 $(26,257,231) o
============== ======================
Loss per common share ($2.17) o
======================
Number of shares 6,750,000 n 12,113,084
============== ======================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
for 1995, 1996
and 1997
Acquisitions,
Company
Pro Forma Equity Offering
Adjustments for and
Texas 1997 Company
Cherokee Coinphone Acquisitions Debt Offering
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Coin calls $14,036,665 $846,210 - $52,629,334
Non-coin 17,049,394 553,337 $(1,105,000) p 34,959,908
Other 505,581 - - 3,811,904
----------------------------------------------- ------------------
31,591,640 1,399,547 (1,105,000) 91,401,146
----------------------------------------------- ------------------
Operating expenses:
Line and transmission charges 9,673,772 513,036 - 30,805,984
Location commissions 4,909,445 135,746 - 14,906,871
Field Operations 3,121,831 280,706 $(1,233,000) p 9,308,277
Depreciation and amortization 4,298,090 151,926 8,010,000 q 30,270,817
Selling, general and administrative 5,520,405 357,197 (1,130,000) r 15,882,119
Other unusual charges and
contractual settlement - - - 2,169,503
----------------------------------------------- ------------------
27,523,543 1,438,611 5,647,000 103,343,571
----------------------------------------------- ------------------
Loss from operations 4,068,097 (39,064) (6,752,000) (11,942,425)
Other income (expense)
Interest expense - related parties - - - -
Interest expense - others (1,631,416) (57,561) 1,689,000 s (16,319,633)
Interest income 57,278 21,563 (21,563) t 95,125
Reorganization expenses - - - -
Other 1,125,630 281,501 (281,501) u 745,181
----------------------------------------------- ------------------
Total other income (expense) (448,508) 245,503 1,385,936 (15,479,327)
----------------------------------------------- ------------------
Loss before income taxes
and extraordinary item 3,619,589 206,439 (5,366,064) (27,421,752)
Income taxes 1,399,140 - - 1,121,420
----------------------------------------------- ------------------
Loss before extraordinary item $2,220,449 $206,439 $(5,366,064) $(28,543,172)
=============================================== ==================
Earnings per share:
Preferred dividend - - - (653,235)
----------------------------------------------- ------------------
Loss before extraordinary item
applicable to common sharehold-
ers $2,220,449 $206,439 $(5,366,064) $(29,196,407)
=============================================== ==================
Loss per common share $(2.41)
==================
Number of shares 12,113,084
==================
</TABLE>
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations are an integral part of these financial statements
Footnotes to the Unaudited Pro Forma Combined Condensed
Statement of Operations for the Year Ended December 31, 1995
------------------------------------------------------------
a Represents the operations of World, Public Telephone, Paramount,
IPP SC and IPP TN for the period from January 1, 1995 through
the date indicated.
<TABLE>
<CAPTION>
Public
World Telephone Paramount IPP SC IPP TN
January 1, January 1, January 1, January 1, January 1,
1995 - 1995 - 1995 - 1995 - 1995 -
September October December December December
21, 1995 14, 1995 31, 1995 31, 1995 31, 1995 Combined
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Coin calls $2,791,016 $1,376,867 $ 3,751,744 $3,360,596 $1,194,621 $12,474,844
Non-coin 3,467,687 380,187 1,923,724 - - 5,771,598
Other 58,345 88,914 - - - 147,259
----------------------------------------------------------------------------
6,317,048 1,845,968 5,675,468 3,360,596 1,194,621 18,393,701
----------------------------------------------------------------------------
Operating expenses:
Line & transmission charges 2,706,199 535,771 1,543,956 983,204 608,061 6,377,191
Location commissions 852,944 196,243 696,443 615,527 - 2,361,157
Field operating expenses 1,026,000 112,071 - 709,281 - 1,847,352
Depreciation & amortization 855,059 268,262 393,204 451,929 91,174 2,059,628
Selling, general, & administrative 1,276,056 594,588 2,407,479 479,083 471,854 5,229,060
----------------------------------------------------------------------------
6,716,258 1,706,935 5,041,082 3,239,024 1,171,089 17,874,388
----------------------------------------------------------------------------
Income (loss) from operations (399,210) 139,033 634,386 121,572 23,532 519,313
Other income (expense): ----------------------------------------------------------------------------
Interest expense (590,980) (304,664) (64,210) (149,248) - (1,109,102)
Interest income 834 3,371 14,800 733 1,582 21,320
Other - (226,701) (85,231) - - (311,932)
----------------------------------------------------------------------------
Total other income (expense) (590,146) (527,994) (134,641) (148,515) 1,582 (1,399,714)
Income (loss) before income taxes (989,356) (388,961) 499,745 (26,943) 25,114 (880,401)
Income taxes - - - 35,800 2,300 38,100
----------------------------------------------------------------------------
Net income (loss) $(989,356) $(388,961) $499,745 $(62,743) $22,814 $(918,501)
============================================================================
</TABLE>
b Represents the estimated reduction in revenues for assets not
acquired.
Amtel $2,859,000
POA 12,000
---------------
$2,871,000
===============
c Represents estimated reduction in line and transmission charges
at Amtel to reflect lower volumes at Amtel due to assets not
acquired and better aggregate rates due to overall increase in
traffic in the Amtel regions.
d Represents estimated lower location commission due to
assets not acquired.
Amtel $800,000
Public Telephone 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.
World, Public Telephone,
IPP and Paramount $800,000
Amtel 2,132,000
POA 95,000
---------------
$3,027,000
===============
f Represents additional depreciation and amortization associated
with the acquired tangible and intangible assets.
<TABLE>
<CAPTION>
Lives
-----
Amount Tangible Intangible
------ -------- ----------
(months)
<S> <C> <C> <C> <C>
World, Public Telephone,
IPP and Paramount $6,117,000 60 24-60
Amtel 1,008,000 60 54
POA 1,404,000 60 60-72
--------------
$8,529,000
==============
</TABLE>
g Represents estimated reductions in selling, general and
administrative expenses resulting primarily from
eliminating certain offices, executives and administrative
personnel, costs associated with operations not acquired
(principally Amtel), and elimination of costs associated
with the bankruptcy of Amtel.
World, Public Telephone,
IPP and Paramount $2,004,000
Amtel 11,361,000
POA 945,000
-------------
$14,310,000
=============
h Represents additional interest expense for borrowings under the
Credit Agreement.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amount Interest Pro Forma
Borrowed Rate Expenses
------- -------- ---------
To fund the acquisitions of World, Public
Telephone, IPP and Paramount $32,223,484 13.25% $4,270,000
To fund the acquisitions of Amtel and
POA and to pay related expenses and other
obligations 8,776,516 13.25% 1,163,000
Accretion of original issue debt discount 1,576,000
---------
$7,009,000
==========
</TABLE>
i Represents reduction in interest expense to reflect elimination
of separate Company borrowings offset by interest expense on the
POA Sellers' Notes.
World, Public Telephone,
IPP and Paramount $650,000
Amtel 7,430,000
POA (555,000)
--------------
$7,525,000
==============
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 tax expense.
l Represents elimination of interest expense incurred under
the Credit Agreement.
m Represents increase in interest expense.
<TABLE>
<CAPTION>
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
---------------------------------------------------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt Offering $125,000,000 12% 12 $15,000,000
Interest savings on the POA Seller's Notes
and repayment of capital leases (1,502,000)
------------
$13,498,000
===========
</TABLE>
n Represents 6,750,000 shares of Common Stock sold pursuant
to the Company Equity Offering at $3.00 per share.
o Loss per share excludes an increase of the loss to common
shareholders of (i) $2,002,386 which was realized on
redemption of the 10% Preferred, 8% Preferred and 7%
Preferred; (ii) an extraordinary loss of $267,281 realized
on the restructuring of the Company's debt on March 15,
1996; and (iii) an estimated extraordinary loss of
$9,805,281 to be realized on the early retirement of
borrowings under the Credit Agreement.
p Represents the estimated reduction in other operating expenses
primarily to eliminate redundant operations and operations
personnel and the reclassification of chargebacks to non-coin
revenue for Cherokee to conform to PhoneTel's presentation.
Cherokee $40,000
Texas Coinphone 88,000
------------
$128,000
Reclassification of
chargebacks 1,105,000
------------
$1,233,000
============
q Represents additional depreciation and amortization associated
with the acquired tangible and intangible assets for the 1997
Acquisitions.
Lives
-----------------------
Amount Tangible Intangible
------ -------- ----------
(months)
Cherokee $7,481,000 60 60-82
Texas Coinphone 529,000 60 72
---------------
$8,010,000
===============
r Represents estimated reductions in selling, general and
administrative expenses to reflect the elimination of certain
offices, executives and administrative personnel.
Cherokee $1,000,000
Texas Coinphone 130,000
---------------
$1,130,000
===============
s Represents the estimated reduction in interest expense to
reflect elimination of separate company borrowings.
Cherokee $1,631,000
Texas Coinphone 58,000
---------------
$1,689,000
===============
t Represents elimination of Texas Coinphone interest income.
u Represents elimination of Texas Coinphone other income
which relates to assets not acquired.
<TABLE>
<CAPTION>
PHONE TEL TECHNOLOGIES, INC. AND SUBSIDIARIES
Unaudited Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended September 30, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
PhoneTel Technologies, Inc. and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations
for the Nine Months Ended September 30, 1996
Pro Forma
Adjustments
PhoneTel IPP and for 1996
Technologies Paramount(a) Amtel(b) POA(c) Acquisitions
Revenues
<S> <C> <C> <C> <C> <C>
Coin calls $16,988,697 $1,883,110 $6,653,874 $1,769,257 --
Non-coin 9,308,538 590,457 3,464,990 1,795,827 --
Other 2,018,191 15,113 87,968 831,179 $(28,000)(d)
----------- ---------- ---------- ---------- ---------
28,315,426 2,488,680 10,206,832 4,396,263 (28,000)
----------- ---------- ---------- ---------- ---------
Operating expenses:
Line and transmission charges 6,800,782 585,463 3,440,664 814,759 --
Location commissions 4,101,195 367,269 2,322,097 509,461 --
Field operations 8,102,314 356,816 456,092 1,237,567 (247,000)(e)
Depreciation and amortization 8,876,238 183,931 1,101,916 695,490 2,442,000 (f)
Selling, general and administrative 3,757,559 492,244 3,161,957 1,149,506 (1,881,000)(g)
Other unusual charges and contractual
settlements 5,517,753 -- -- -- --
----------- --------- ---------- --------- -------------
37,155,841 1,994,723 10,482,726 4,406,783 314,000
----------- --------- ---------- --------- -------------
Income (loss) from operations (8,840,415) 493,957 (275,894) (10,520) (342,000)
Other income (expense):
Interest expense - related parties (3,588,420) -- -- -- (815,000)(h)
Interest expense - others (551,243) (30,881) (8,508) (388,768) (453,000)(i)
Interest income -- -- 2,248 4,111 --
Reorganization expenses -- -- (1,105,843) -- 1,105,843 (j)
Other -- (12,638) (1,342,615) (64,036) 1,342,615 (j)
----------- -------- ----------- --------- ---------
Total other income (expense) (4,139,663) (43,519) (2,454,718) (448,693) 1,180,458
----------- -------- ----------- --------- ---------
Income (loss) before income taxes
and extraordinary item (12,980,078) 450,438 (2,730,612) (459,213) 838,458
Income taxes -- -- 5,667 -- (5,667)(k)
------------ --------- ------------ ---------- ---------
Income (loss) before extraordinary
item $(12,980,078) $450,438 $(2,736,279) $(459,213) $844,125
============ ========= ============ ========== =========
Earnings per share:
Preferred divided (269,565) -- -- -- --
------------- -------- ------------ ---------- --------
Income (loss) before extraordinary
item applicable to
common shareholders $(13,249,643) $450,438 $(2,736,279) $(459,213) $844,125
============= ======== ============ ========== =========
Loss per common share $(3.08)
============
Number of shares 4,305,130 154,330 2,037,324 129,629 --
============ ======= =========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
PhoneTel Technologies, Inc. and Subsidiaries (continued)
Unaudited Pro Forma Combined Condensed Statement of Operations
for the Nine Months Ended September 30, 1996
Pro Forma Pro Forma for
Adjustments for 1996 Acquisitions,
Company Company
Equity Offering Equity Offering
and Company and Company
Debt Offering Debt Offering Cherokee
Revenues
<S> <C> <C> <C>
Coin calls -- $27,294,938 $12,571,961
Non-coin -- 15,159,812 11,061,973
Other -- 2,924,451 817,273
----------- ----------- -----------
-- 45,379,201 24,451,207
----------- ----------- -----------
Operating expenses:
Line and transmission charges -- 11,641,668 6,451,165
Location commissions -- 7,309,022 3,885,956
Field operations -- 9,905,789 4,107,855
Depreciation and amortization -- 13,299,575 3,831,645
Selling, general and administrative -- 6,680,266 4,909,963
Other unusual charges and contractual
settlements -- 5,517,753 --
---------- ----------- -----------
-- 54,354,073 23,186,584
---------- ----------- -----------
Income (loss) from operations -- (8,974,872) 1,264,623
Other income (expense):
Interest expense - related parties $4,375,000 (l) (28,420) --
Interest expense - others (10,416,000) (m) (11,848,400) (1,358,917)
Interest income -- 6,359 3,645
Reorganization expenses -- -- --
Other -- (76,674) (17,365)
---------- ------------ ----------
Total other income (expense) (6,041,000) (11,947,135) (1,372,637)
---------- ------------ ----------
Income (loss) before incomes taxes
and extraordinary item (6,041,000) (20,922,007) (108,014)
Income taxes -- -- (19,188)
-------- ------------ ---------
Income (loss) before extraordinary
item $(6,041,000) $(20,922,007) $(88,826)
========== ============ =========
Earnings per share:
Preferred divided -- (269,565) --
---------- ------------ ----------
Income (loss) before extraordinary
item applicable to
common shareholders $(6,041,000) $(21,191,572)(o) $(88,826)
=========== ============= ==========
Loss per common share $(1.58)(o)
=============
Number of shares 6,750,000 (n) 13,376,413
=========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
for 1996 and 1997
Acquisitions,
Pro Forma Company Equity
Adjustments Offering and
Texas for 1997 Company
Coinphone Acquisitions Debt Offering
Revenues
<S> <C> <C> <C>
Coin calls $910,263 -- $40,777,162
Non-coin 403,573 $(736,000)(p) 25,889,358
Other 39,485 -- 3,781,209
--------- --------- -----------
1,353,321 (736,000) 70,447,729
--------- --------- -----------
Operating expenses:
Line and transmission charges 459,477 -- 18,552,310
Location commissions 153,801 -- 11,348,779
Field operations 85,843 $(878,000)(p) 13,221,487
Depreciation and amortization 56,398 6,065,000 (q) 23,252,618
Selling, general and administrative 432,635 (847,000)(r) 11,175,864
Other unusual charges and contractual
settlements -- -- 5,517,753
--------- ---------- -----------
1,188,154 4,340,000 83,068,811
--------- ---------- -----------
Income (loss) from operations 165,167 (5,076,000) (12,621,082)
Other income (expense):
Interest expense - related parties -- -- (28,420)
Interest expense - others (51,325) 1,410,242 (s) (11,848,400)
Interest income -- -- 10,004
Reorganization expenses -- -- --
Other 123,236 (123,236)(t) (94,039)
-------- ----------- ------------
Total other income (expense) 71,911 1,287,006 (11,960,855)
-------- ----------- ------------
Revenues
Income (loss) before incomes taxes
and extraordinary item 237,078 (3,788,994) (24,581,937)
Income taxes -- -- (19,188)
Income (loss) before extraordinary
item $237,078 $(3,788,994) (24,562,749)
======== ============ ============
Earnings per share:
Preferred divided -- -- (269,565)
---------- ----------- ------------
Income (loss) before extra-
ordinary item applicable to
common shareholders $237,078 $(3,788,994) $(24,832,314)
========== =========== ============
Loss per common share before
extraordinary item $(1.86)
=======
Number of shares 13,376,413
======== ============ ============
The accompanying Footnotes to the Unaudited Pro Forma Combined Condensed Statement
of Operations are an integral part of these financial statements.
</TABLE>
Footnotes to the Unaudited Pro Forma Combined Condensed Statement
of Operations for the Nine Months Ended September 30, 1996
(a) Represents the operations of IPP SC, IPP TN and
Paramount for the period from January 1, 1996
through March 15, 1996.
<TABLE>
<CAPTION>
IPP SC IPP TN Paramount Combined
------ ------ --------- --------
Revenues:
<S> <C> <C> <C> <C>
Coin calls $ 648,143 $193,203 $1,041,764 $1,883,110
Non-coin -- -- 590,457 590,457
Other 1,199 13,914 -- 15,113
--------- -------- --------- ----------
649,342 207,117 1,632,221 2,488,680
========= ======== ========= ==========
Operating expenses:
Line and transmission charges 234,659 74,923 275,881 585,463
Location commissions 115,660 28,752 231,857 376,269
Field operating expenses 68,844 21,630 266,342 356,816
Depreciation and amortization 82,614 19,399 81,918 183,931
Selling, general and administrative 195,643 100,538 196,063 492,244
------- -------- --------- ---------
697,420 245,242 1,052,061 1,994,723
------- -------- --------- ---------
Income (loss) from operations (48,078) (38,125) 580,160 493,957
------- -------- --------- ---------
Other income (expense):
Interest expense (18,088) ( 1,423) (11,370) (30,881)
Other -- -- (12,638) (12,638)
------- -------- ---------- ---------
Total other income (expense) (18,088) ( 1,423) (24,008) (43,519)
------- -------- ---------- ----------
Income (loss) before income taxes (66,166) (39,548) 556,152 450,438
Income taxes -- -- -- --
-------- -------- --------- ---------
Net income (loss) $ (66,166) $(39,548) $ 556,152 $ 450,438
========= ========4 ========== ==========
</TABLE>
(b) Represents the operations of Amtel for the period January 1, 1996
through September 12, 1996.
(c) Represents the operations of POA for the period January 1, 1996 through
July 31, 1996.
(d) Represents the estimated reduction in revenues previously generated
from assets not acquired in the acquisition of POA.
(e) Represents the estimated reduction in other operating expenses primarily
resulting from eliminating certain offices, redundant personnel and
costs of operations not acquired (principally Amtel).
Amtel $ 35,000
POA 212,000
--------
$247,000
========
(f) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets.
Lives
--------------------
Amount Tangible Intangible
------ -------- ----------
(months)
IPP and Paramount $ 745,000 60 60
Amtel 761,000 60 54
POA 936,000 60 60-72
----------
$2,442,000
==========
(g) Represents estimated reductions in selling, general and administrative
expenses principally resulting from elimination of prepetition
expenses at Amtel and redundant personnel.
IPP and Paramount $ 239,000
Amtel 1,153,000
POA 489,000
----------
$1,881,000
==========
(h) Represents additional interest expense for borrowings under the Credit
Agreement to fund the acquisitions of Amtel and POA, net of $57,000
recorded by the Company from the dates of acquisition through September
30, 1996.
Amount Interest Pro Forma
Borrowed Rate Expense
-------- -------- ---------
$8,776,546 13.25% $ 815,000
========== ======== ==========
(i) Represents reduction in interest expense to reflect elimination of
separate company borrowings, offset by interest expense on the POA
Sellers' Notes.
Amtel $ 9,000
POA (462,000)
---------
$(453,000)
=========
(j) Represents elimination of Amtel reorganization expenses subsequent to
Amtel's filing of bankruptcy and elimination of non-recurring loss on
disposal of assets at Amtel.
(k) Represents elimination of income tax expense.
(l) Represents elimination of interest expense incurred under the Credit
Agreement.
(m) Represents increase in interest expense.
<TABLE>
<CAPTION>
Amount Interest Months Interest
Outstanding Rate Outstanding Expense
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Debt pursuant to the Company Debt Offering $125,000,000 12% 9 $11,250,000
Interest savings on the POA Sellers' Notes
and capital leases (834,000)
-----------
$10,416,000
===========
</TABLE>
(n) Represents 6,750,000 shares of Common Stock sold pursuant to the Company
Equity Offering at $3.00 per share.
(o) Loss per share excludes an increase of the loss to common shareholders
of (i) $2,002,386 which was realized on redemption of the 10%
Preferred, 8% Preferred, and 7% Preferred; (ii) an extraordinary loss
of $267,281 realized on the restructuring of the Company's debt on
March 15, 1996; and (iii) an estimated extraordinary loss of
$9,805,281 to be realized on the early retirement of the borrowings
under the Credit Agreement.
(p) Represents the estimated reduction in other operating expenses to
eliminate redundant operations and operational personnel and the
reclassifiication of chargebacks to non-coin revenue for Cherokee
to conform to Phonetel's presentation.
Cherokee $ 76,000
Texas Coinphone 66,000
Reclassification of chargebacks 736,000
----------
$ 878,000
==========
(q) Represents additional depreciation and amortization associated with the
acquired tangible and intangible assets for the 1997 Acquisitions.
Lives
--------------------
Amount Tangible Intangible
------ -------- ----------
(months)
Cherokee $5,611,000 60 60-82
Texas Coinphone 454,000 60 72
----------
$6,065,000
==========
(r) Represents estimated reductions in selling, general and administrative
expenses to reflect the elimination of certain offices, executives and
administrative personnel.
Cherokee $750,000
Texas Coinphone 97,000
--------
$847,000
========
(s) Represents reduction in interest expense to reflect
elimination of separate company borrowings.
Cherokee $1,358,917
Texas Coinphone 51,325
----------
$1,410,242
==========
(t) Represents elimination of Texas Coinphone other income which relates to
assets not acquired.
<TABLE>
<CAPTION>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT SEPTEMBER 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
PhoneTel Technologies, Inc, and Subsidiaries
Unaudited Pro Forma Combined Condensed Balance Sheet at September 30, 1996
Pro Forma
Adjustments for Pro Forma
Company Equity for Company
Offering Equity Offering
PhoneTel and Company and Company
Technologies Debt Offering Debt Offering Cherokee
------------ --------------- --------------- --------
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash $ 655,734 $ 83,952,579 (a) $ 84,608,313 $ 364,691
Accounts receivable,
net 2,423,060 - 2,423,060 3,712,950
Other current assets 247,426 - 247,426 210,439
----------- ------------ ------------ -------------
Total current assets 3,326,220 83,952,789 87,278,799 4,288,080
Property and equipment,
net 31,682,061 - 31,682,061 16,354,960
Intangible assets, net 39,226,619 1,948,675 (b) 41,175,294 4,048,701
Other assets 705,473 705,473 665,044
----------- ------------ ------------ -------------
$ 74,940,373 $ 85,901,254 160,841,627 $25,356,785
=========== ============ ============ =============
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related
parties $ 5,234,953 $ (4,717,707)(c) $ 517,246 -
Payable to others 995,673 - 995,673 $2,982,325
Current portion capital
leases 803,336 (656,947)(d) 146,389 977,433
Accounts payable 2,969,681 - 2,969,681 754,048
Accrued expenses 3,524,690 - 3,524,690 2,979,962
Deferred revenues 600,000 - 600,000 -
Other unusual items
and contractual
settlements 516,392 - 516,392 -
---------- ------------ --------- ---------
Total current liabilities 14,644,725 (5,374,654) 9,270,071 7,693,768
---------- ------------ --------- ---------
Long term debt:
Payable to related
parties 31,053,337 (31,053,337)(a) - -
Payable to others 3,832,781 121,677,579 (e) 125,510,360 10,636,237
Capital leases 7,225,722 (7,093,053)(d) 132,669 -
Deferred taxes - - - 342,359
14% preferred mandatorily
redeemable at $6,978,963 6,539,053 - 6,539,053 -
Other equity:
Preferred stock - - - 2,400,000
Common stock 76,397 67,500 (f) 143,897 351,903
Additional paid in
capital 40,541,544 17,912,500 (f) 58,454,044 1,097,630
Accumulated deficit (28,973,186) (10,235,281)(f) (39,208,467) 2,834,888
----------- ------------ ------------- ------------
Total other equity 11,644,755 7,744,719 19,389,474 6,684,421
----------- ------------ ------------- ------------
$ 74,940,373 $ 85,901,254 $160,841,627 $ 25,356,785
============ ============ ============= ===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
for 1992
Pro Forma Acquisitions,
Adjustments Company Equity
Texas for 1997 Offering and Company
Coinphone Acquisitions Debt Offering
--------- ------------ --------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash $ 80,895 $(61,974,877)(g) $23,079,022
Accounts receivable,
net 55,140 186,117)(h) 6,377,267
Other current assets - 1,095,230 (h) 1,553,095
----------- ------------ -----------
Total current assets 136,035 (60,693,530) 31,009,384
Property and equipment,
net 1,143,869 7,270,037(i) 56,450,927
Intangible assets, net - 25,567,230(i) 70,791,225
Other assets 35,420 5,301,973(j) 6,707,910
------------- --------------- -------------
$1,315,324 $(22,554,290) $164,959,446
============= ============== ============
Liabilities and Equity
Current liabilities
Current long-term debt:
Payable to related
parties - - $ 517,246
Payable to others 183,300 $ (3,165,625)(j) 995,673
Current portion capital
leases - (6,108)(k) 1,117,714
Accounts payable 39,472 (793,520)(l) 2,969,681
Accrued expenses 21,590 (197,417)(l) 6,328,825
Deferred revenues - - 600,000
Other unusual items
and contractual
settlements - - 516,392
---------- ---------- ---------
Total current liabilities 244,362 (4,162,670) 13,045,531
Long term debt:
Payable to related
parties - - -
Payable to others 626,910 (11,263,147)(j) 125,510,360
Capital leases 40,578 (40,578)(k) 132,669
Deferred taxes 342,359
14% preferred mandatorily
redeemable at $6,978,963 - - 6,539,053
Other equity:
Preferred stock - (2,400,000)(m) -
Common stock 166,395 (518,298)(m) 143,897
Additional paid in
capital - (1,097,630)(m) 58,454,044
Accumulated deficit 237,079 (3,071,967)(m) (39,208,467)
------------ ------------ ------------
Total other equity 403,474 (7,087,895) 19,389,474
------------ ------------ ------------
1,315,324 $(22,554,290) $164,959,446
=========== ============ ============
The accompanying footnotes to the Unaudited Pro Forma Combined Condensed Balance Sheet
are an integral part of these financial statements.
</TABLE>
FOOTNOTES TO THE UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 1996
(a) Represents adjustments to cash.
Company Equity Offering Proceeds,
net of estimated expense $ 17,980,000
Company Debt Offering Proceeds,
net of expenses 118,475,000
Repayment of borrowings under Credit Agreement (41,000,000)
Fees payable on early retirement of borrowings
under Credit Agreement (430,000)
Repayment of POA Sellers' Notes (3,322,421)
Repayment of capital lease obligation (7,750,000)
-----------
$ 83,952,579
============
(b) Represents adjustments to the intangible assets.
Fees and expenses relating to the Company
Debt Offering 6,525,000
Write-off unamortized fees pertaining to
the Credit Agreement (4,576,325)
-----------
$1,948,675
===========
(c) Represents adjustments to current and long-term
debt payable to related parties.
Repay current portion of borrowings under Credit
Agreement $ (4,717,707)
=============
Repay long-term portion of borrowings under
Credit Agreement $(31,053,337)
=============
(d) Represents adjustments to current and long-term
obligations under capital leases.
Repay obligations under capital leases, current
portion $(656,947)
Repay obligations under capital leases, long-term ============
obligations
$(7,093,053)
============
(e) Represents adjustments to long-term debt
payable to others.
Repayment of POA Sellers' Notes $ (3,322,421)
Gross proceeds from the Company Debt Offering 125,000,000
------------
$121,677,579
=============
(f) Represents adjustments to other shareholders'
equity.
Common Stock
Issuance of 6,750,000 shares pursuant to
the Company Equity Offering $ 67,500
Additional paid-in capital
Proceeds from the sale of 6,750,000 shares
of Common Stock at an offering price of
$3.00 per share, net of estimated
transaction fees of $2,270,000 $17,912,500
Accumulated deficit
Warrant accretion - extraordinary loss on
early retirement of borrowings under the
Credit Agreement $(5,228,956)
Write-off of unamortized debt costs relating
to the early retirement of borrowings under
the Credit Agreement (4,576,325)
Fees payalbe on early retirement of borrow-
ings under the Credit Agreement (430,000)
------------
$(10,235,281)
============
(g) Represents adjustments to cash.
Purchase of Cherokee and payment of
related fees $(58,497,503)
Cash acquired in Cherokee Acquisition (263,521)
Purchase of Texas Coinphone (3,660,000)
Cash not acquired in Texas Coinphone Acquisition (80,895)
-------------
$(61,974,877)
=============
(h) Represents adjustments to accounts receivable,
net and other assets to eliminate assets not
acquired:
Accounts receivable, net
Cherokee $ 241,257
Texas Coinphone (55,410)
------------
$ 186,117
============
Other current assets
Cherokee $ 1,095,230
-----------
$ 1,095,230
===========
Other assets
Cherokee $(665,044)
Texas Coinphone (32,983)
Funds held pursuant to potential
Rate Cap Amounts 6,000,000
------------
$5,301,973
============
(i) Represents adjustments to property and equipment,
net and intangible assets, net to reflect
purchase price allocations:
Property and equipment
Cherokee $6,730,512
Texas Coinphone 539,525
-----------
$7,270,037
===========
Intangible assets
Telephone location contracts - Cherokee $22,293,063
Noncompetition agreements - Cherokee 1,249,998
Telephone location contracts - Texas Coinphone 2,024,169
-----------
$25,567,230
===========
(j) Represents adjustments to current
and long-term debt to others.
Current long-term debt not acquired
Cherokee $(2,982,325)
Texas Coinphone (183,300)
------------
$(3,165,625)
============
Long-term debt not acquired:
Cherokee $(10,636,237)
Texas Coinphone (626,910)
-------------
$(11,263,147)
-------------
(k) Represents adjustments to current and long-term
capital leases.
Current portion of capital leases of Cherokee
not acquired $ (6,108)
Long-term capital leases of Texas ==========
Coinphone not acquired $ (40,578)
==========
(l) Represents adjustments to accounts payable and
accrued expenses.
Accounts payable not assumed
Cherokee $(754,048)
Texas Coinphone (39,472)
----------
$(793,520)
==========
Accrued expenses not assumed, net of acquisition
expenses.
Cherokee $ (543,327)
Texas Coinphone (21,590)
Acquisition expenses 367,500
-----------
$ (197,417)
============
(m) Represents adjustments to the other shareholders'
equity.
Preferred stock of Cherokee redeemed prior to
acquisition completion date $(2,400,000)
============
Common stock eliminated
Cherokee $ (351,903)
Texas Coinphone (166,395)
------------
$ (518,298)
============
Paid-in capital of Cherokee eliminated $(1,097,630)
============
Retained earnings eliminated
Cherokee $(2,834,888)
Texas Coinphone (237,079)
------------
$(3,071,967)
============
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, the Company is able to derive
additional revenues from access it provides callers to any carrier other
than the presubscribed carrier. This practice is commonly referred to as
"dial-around" access. The Company believes that the rules and regulations
recently promulgated by the FCC under Section 276 of the Telecommunications
Act will result in additional revenues for the Company, net of related
expenses and processing fees, by (i) providing for dial-around compensation
of $45.85 per telephone per month from November 6, 1996 through October 6,
1997 (as compared with the flat fee of $6.00 per telephone per month in
place prior to November 6, 1996), and for per-call compensation thereafter,
at a rate initially set at $0.35 per call from October 7, 1997 to October
6, 1998 (as compared with the flat fee of $45.85 per telephone per month)
and thereafter, at a per-call rate equal to the local coin call rate and
(ii) requiring states to deregulate the price of a local phone call, which
the Company believes, may result in an increase in the local coin call rate
thereby generating additional revenues. However, there can be no assurance
as to the ultimate effect that the rules and policies adopted by the FCC on
its own or after any judicial review will have on the Company's business,
results of operations or financial condition. See "Business -- Governmental
Regulations."
The Company's principal operating expenses consist of (i) telephone
line and transmission charges, (ii) commissions paid to location providers
which are typically expressed as a percentage of revenues and are fixed for
the term of the agreements with the respective location providers, and
(iii) field service and collection costs which are principally comprised of
personnel costs of collecting coins from and maintaining the Company's
public pay telephones. The Company pays monthly line and usage charges to
BOCs and other LECs for interconnection to the local network for local
calls, which are computed on a flat monthly charge plus either a per
message or per minute usage rate based on the time and duration of the
call. The Company also pays fees to BOCs and other LECs and long distance
carriers based on usage for local or long distance coin calls. The Company
believes that the rules and regulations recently promulgated by the FCC
under Section 276 of the Telecommunications Act may result in lower
tariffed rates charged by BOCs and other LECs, since the FCC rules would
restrict certain subsidies and discriminatory practices now engaged in by
BOCs and other LECs in favor of their own public pay telephone services. A
number of parties have filed petitions for judicial review of these
regulations in federal courts of appeals. To date, the regulations remain
in effect. There can be no assurance that the rules and policies ultimately
adopted by the FCC on its own or after judicial review will not have a
material adverse effect on the Company's business, results of operations or
financial condition.
Notwithstanding the aforementioned anticipated benefits of Section
276 and the implementing regulations, as a result of the provisions
permitting BOCs and other LECs to negotiate with location providers and
select interLATA long distance carriers for their public pay telephones, it
is anticipated that Section 276 and the implementing regulations may also
result in increased competition for public pay telephone locations and an
accompanying increase in the commissions payable to location providers.
Moreover, revenues may be diminished if the FCC prescribes lower benchmark
rates for interstate operator long distance calls. See "Business --
Governmental Regulations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations,
included elsewhere in this Prospectus, expressed as a percentage of total
revenues. Certain of the following information for the years ended December
31, 1993, 1994 and 1995 has been reclassified to conform to the interim
period presentation based on management's belief that the revised
presentation more accurately reflects the Company's strategy of owning and
managing public pay telephones versus providing operator services. The
reclassifications have no impact on total revenues or total expenses as
previously reported.
<TABLE>
<CAPTION>
--------------------------------------------------------------
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ---------- ------ -----
<S> <C> <C> <C> <C> <C>
Revenues:
Coin calls................... 38.3% 53.1% 64.8% 64.3% 60.0%
Non-coin..................... 54.9 33.5 20.2 27.6 32.9
Other ....................... 6.8 13.4 15.0 8.1 7.1
--- ------ ------ --- ------
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ---- -----
Operating expenses:
Line and transmission charges 25.1 28.1 29.3 27.9 24.0
Location commissions......... 23.4 21.4 18.5 18.1 14.5
Other operating expenses..... 27.2 26.9 28.4 34.6 28.6
Depreciation and amortization 8.1 14.1 23.4 18.1 31.3
Selling, general and
administrative expenses..... 21.7 17.9 17.1 16.6 13.3
Other unusual charges and
contractual settlements... - - 11.6 11.8 19.5
------ ------ ---- ---- ---------
Total operating expenses..... 105.5 108.4 128.3 127.1 131.2
Other expenses................. 1.5 2.4 4.5 2.4 14.6
------ ------ ------ --- ------
Loss before extraordinary item. (7.0) (10.8) (32.8) (29.5) (45.8)
Extraordinary item............. - - - - (0.9)
------ ------ ------ ------ ------
Net loss....................... (7.0)% (10.8)% (32.8)% (29.5)% (46.7)%
EBITDA......................... 2.6 % 5.8% 6.8% 2.8% 19.6%
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Revenues. Total revenues increased $16,358,523, or 136.8% from
$11,956,903 for the nine months ended September 30, 1995, to $28,315,426
for the nine months ended September 30, 1996. This increase is attributable
primarily to an increase in the number of installed public pay telephones,
which increased by 16,388, or 196.4%, from 8,344 at September 30, 1995 to
approximately 24,732 at September 30, 1996, with the majority of the
increase occurring in the third and fourth quarters of 1995 and the first
and third quarters of 1996 due to the Company's recent acquisitions.
Revenues from coin calls increased $9,298,911, or 120.9%, from
$7,689,786 for the nine months ended September 30, 1995 to $16,988,697 for
the nine months ended September 30, 1996. Non-coin revenues increased
$6,006,569, or 181.9%, from $3,301,969 for the nine months ended September
30, 1995 to $9,308,538 for the nine months ended September 30, 1996. The
increases were primarily due to the acquisition and installation of public
pay telephones producing additional revenues and, to a lesser extent, to
the increases in coin calls resulting from the continuation of the 1994
program which offered customers a three minute long distance call anywhere
in the continental United States for $0.75 (the "$0.75 Long Distance Call
Program" subsequently changed to $1.00 for the first three minutes in some
locations). However, the increase in non-coin revenue was offset in part by
a reduction in operator assisted calls as a result of aggressive
dial-around advertising by long distance carriers such as AT&T and MCI
Communications Corporation ("MCI").
Other revenues increased $1,053,043, or 109.1%, from $965,148 for the
nine months ended September 30, 1995 to $2,018,191 for the nine months
ended September 30, 1996. This increase was primarily the result of an
increase in the number of public pay telephones and increased revenues from
dial-around calls.
Operating Expenses. Total operating expenses increased $21,952,874,
or 144.4%, from $15,202,967 for the nine months ended September 30, 1995 to
$37,155,841 for the nine months ended September 30, 1996. Operating
expenses represented 127.1% of total revenues for the nine months ended
September 30, 1995 and 131.2% of total revenues for the nine months ended
September 30, 1996. The percentage increase was due to other unusual
charges and contractual settlements and higher depreciation and
amortization as a result of recent acquisitions, offset in part by lower
operating expenses.
Line and transmission charges increased $3,459,970, or 103.6%, from
$3,340,812 for the nine months ended September 30, 1995 to $6,800,782 for
the nine months ended September 30, 1996. Line and transmission charges
represented 27.9% of total revenues for the nine months ended September 30,
1995 and 24.0% of total revenues for the nine months ended September 30,
1996, a decrease of 3.9%. The dollar increase in line and transmission
charges was, in part, due to additional public pay telephones acquired from
Public Telephone, IPP and Paramount, the increases in coin calls resulting
from the $0.75 Long Distance Call Program, and to a lesser extent, the
acquisitions of POA (completed September 16, 1996 with an effective
purchase date of August 1, 1996) and Amtel (completed September 13, 1996),
as well as increases in certain local telephone company line charges. The
percentage decrease was due to lower line charges for the acquired companies.
Location commissions increased $1,937,731, or 89.6%, from $2,163,464
for the nine months ended September 30, 1995 to $4,101,195 for the nine
months ended September 30, 1996. Location commissions represented 18.1% of
total revenues for the nine months ended September 30, 1995 and 14.5% of
total revenues for the nine months ended September 30, 1996, a decrease of
3.6%. The dollar increase is due to location agreements from public pay
telephones acquired in the acquisitions of World, Public Telephone, IPP and
Paramount, and to a lesser extent the location agreements acquired in the
acquisitions of POA and Amtel, while the percentage decrease is due to such
location agreements having lower commission rates than those from the
Company's existing public pay telephones.
Other operating expenses (consisting of personnel costs, rents,
utilities, repair and maintenance of the phones, operator services
processing fees and property and sales taxes), increased $3,969,464, or
96.0%, from $4,132,850 for the nine months ended September 30, 1995 to
$8,102,314 for the nine months ended September 30, 1996. Other operating
expenses represented 34.6% of total revenues for the nine months ended
September 30, 1995 and 28.6% of total revenues for the nine months ended
September 30, 1996, a decrease of 6.0%. The dollar increase was primarily
the result of higher personnel costs, rent, utilities and service related
expenses attributable to the outsourcing of operator services and to the
acquisitions of World, Public Telephone, IPP and Paramount and, to a
lesser extent, the acquisitions of Amtel and POA, the increase in the
Company's public pay telephone base, and the additional field personnel to
accommodate the increased business. The percentage decrease reflects the
economies of scale resulting from those acquisitions that the Company has
already realized. Such economies of scale come primarily from the
elimination of costs associated with the closing of certain offices, the
elimination of redundant executive and administrative personnel in billing
and other operations areas and leveraging the Company's existing field
technicians. Additional economies of scale are expected to be realized from
the Amtel and POA acquisitions made in September 1996, resulting in the
further decrease of other operating expenses as a percentage of total
revenues for the full year 1996.
Depreciation and amortization increased $6,711,416 or 310.0%, from
$2,164,822 for the nine months ended September 30, 1995 to $8,876,238 for
the nine months ended September 30, 1996. Depreciation and amortization
represented 18.1% of total revenues for the nine months ended September
30, 1995 and 31.3% of total revenues for the nine months ended
September 30, 1996, an increase of 13.2%. The dollar and percentage
increases were primarily due to the Company's acquisitions and expansion
of its public pay telephone base and purchases of additional computer
equipment, service vehicles and software to accommodate the Company's growth.
Selling, general and administrative ("SG&A") expenses increased
$1,775,070, or 89.5%, from $1,982,489 for the nine months ended September
30, 1995 to $3,757,559 for the nine months ended September 30, 1996. SG&A
represented 16.6% of total revenues for the nine months ended September 30,
1995 and 13.3% of total revenues for the nine months ended September 30,
1996, a decrease of 3.3%. The dollar increase was primarily the result of
the acquisitions of World, Public Telephone, IPP and Paramount, and to a
lesser extent, the acquisitions of Amtel and POA. The percentage decrease
reflects the economies of scale resulting from those acquisitions that the
Company has already realized.
Other unusual charges and contractual settlements increased
$4,099,223, or 289.0% from $1,418,530 for the nine months ended September
30, 1995 to $5,517,753 for the nine months ended September 30, 1996. For
the nine months ended September 30, 1996, other unusual charges and
contractual settlements consists primarily of: (i) the settlement of
contractual obligations under certain employment contracts, $330,627; (ii)
the settlement of other contractual obligations, $210,599; (iii) the
write-off of selected assets in connection with the continued evaluation of
the Company's operations and certain one-time charges for changes to the
operations of the Company, $459,743; (iv) losses recognized on the early
pay-off of obligations under capital leases and other debt concurrent with
the debt restructuring completed on March 15, 1996, $630,645; and (v) the
estimated fair market value of the Nominal Value Warrants charged to
operations on March 15, 1996, $3,886,139. Other unusual charges and
contractual settlements represented 11.9% of total revenues for the nine
months ended September 30, 1995, and 19.5% of total revenues for the nine
months ended September 30, 1996, an increase of 7.6%.
Other income (expense). Other income (expense) is comprised of
interest incurred on debt with related parties and others net of interest
income. Total other expense (net of interest income) increased $3,847,970,
or 1,319.2%, from $291,693 for the nine months ended September 30, 1995 to
$4,139,663 for the nine months ended September 30, 1996. Other expenses
represented 2.4% of total revenues for the nine months ended September 30,
1995 and 14.6% of total revenues for the nine months ended September 30,
1996, an increase of 12.2%. The dollar and percentage increases were due to
the financing obtained for the acquisitions completed in 1996. Related
party interest expense was $3,588,420 for the nine months ended September
30, 1996, representing 12.7% of total revenues. Included in related party
interest expense was non-cash interest expense of $1,182,544, or 4.2% of
total revenues for the nine months ended September 30, 1996, representing
the accretion of the debt under the Credit Agreement to its maturity
amount.
Extraordinary item. The Company recorded an extraordinary loss of
$267,281, representing 0.9% of total revenues for the nine months ended
September 30, 1996. The extraordinary loss related to non-recurring costs
that were incurred in connection with the restructuring of the Company's
long-term debt. Concurrent with the restructuring of the Company's debt and
the redemption of the 10% Preferred, 8% Preferred, and 7% Preferred, the
Company recorded the difference between the carrying value of the 10%
Preferred, 8% Preferred, and 7% Preferred and the redemption price as an
increase to the accumulated deficit of $2,002,386.
EBITDA. EBITDA (income before interest, taxes, depreciation and
amortization, other unusual charges and contractual settlements, and the
extraordinary loss on debt restructuring) increased $5,216,288 or 1,546.5%,
from $337,288 for the nine months ended September 30, 1995 to $5,553,576
for the nine months ended September 30, 1996. Based on the changes
discussed above, EBITDA represented 2.8% of total revenues for the nine
months ended September 30, 1995 and 19.6% for the nine months ended
September 30, 1996, an increase of 16.8%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues. Total revenues increased $2,851,896, or 18.0%, from
$15,866,087 for the year ended December 31, 1994 to $18,717,983 for the
year ended December 31, 1995. This increase was attributable primarily to
an increase in the number of installed public pay telephones. The total
installed public pay telephones increased by 4,567 public pay telephones,
or 93.4%, with the majority of the increase occurring late in the third
quarter and in the fourth quarter of fiscal 1995 and attributable to the
1995 Acquisitions. In addition, revenues improved as a result of the
continuation of the $0.75 Long Distance Call Program.
Revenues from coin calls increased $3,708,952, or 44.0%, from
$8,421,237 for the year ended December 31, 1994 to $12,130,189 for the year
ended December 31, 1995. The increase was due primarily to the 1995
Acquisitions. Non-coin revenues decreased $1,542,637, or 29.0%, from
$5,319,138 for the year ended December 31, 1994 to $3,776,501 for the year
ended December 31, 1995. The decrease was primarily the result of a
decrease in the number of public pay telephones to which the Company
provided operator services through pre-subscription arrangements and
aggressive dial-around advertising by AT&T, MCI and Sprint Communications
Company ("Sprint"). In December 1995, the Company decided to focus on the
ownership and maintenance of its public pay telephone business and
outsourced its operator service center to Intellicall. A substantial
portion of the transfer of such service center was completed by March 31,
1996. The Company wrote off the fixed assets of its operator service center
in 1995 and recorded a non-cash charge of $298,626.
Other revenues increased $685,581, or 32.3%, from $2,125,712 for the
year ended December 31, 1994 to $2,811,293 for the year ended December 31,
1995. This increase was primarily the result of the 1995 Acquisitions.
Operating expenses. Line and transmission charges increased
$1,019,190, or 22.9%, from $4,456,509 for the year ended December 31, 1994
to $5,475,699 for the year ended December 31, 1995. Line and transmission
charges represented 28.1% of total revenues for the year ended December 31,
1994 and 29.3% of total revenues for the year ended December 31, 1995. The
increase resulted, in part, from increased coin calls resulting from the
$0.75 Long Distance Call Program as well as increases in certain local
telephone company line charges. However, this program reduces billing,
collection and operator service costs.
Location commissions increased $76,436, or 2.3%, from $3,391,190 for
the year ended December 31, 1994 to $3,467,626 for the year ended December
31, 1995. Location commissions represented 21.4% of total revenues for the
year ended December 31, 1994 and 18.5% of total revenues for the year ended
December 31, 1995. The decrease in location commissions as a percentage of
total revenues is due to lower location commissions for those public pay
telephones acquired in the 1995 Acquisitions.
Other operating expenses increased $1,045,590, or 24.5%, from
$4,264,672 for the year ended December 31, 1994 to $5,310,262 for the year
ended December 31, 1995. Other operating expenses represented 26.9% of
total revenues for the year ended December 31, 1994 and 28.4% of total
revenues for the year ended December 31, 1995. The increase was the result
of higher personnel costs, rent, utilities and service related expenses
attributable to the 1995 Acquisitions, the increase in the Company's public
pay telephone base, and the additional personnel to accommodate the
increased business.
Depreciation and amortization increased $2,146,780, or 96.0%, from
$2,236,269 for the year ended December 31, 1994 to $4,383,049 for the year
ended December 31, 1995. Depreciation and amortization represented 14.1% of
total revenues for the year ended December 31, 1994 and 23.4% of total
revenues for the year ended December 31, 1995. The increase was primarily
due to the 1995 Acquisitions and the resultant expansion of its public pay
telephone base which included purchases of additional computer equipment,
service vehicles and software to accommodate the Company's growth.
SG&A expenses increased $368,967, or 13.0%, from $2,831,775 for the
year ended December 31, 1994 to $3,200,742 for the year ended December 31,
1995. The increase was due to increases in advertising, travel and
entertainment, wages and payroll related expenses and general office
expenses as a result of hiring additional personnel to conduct the
Company's expanded selling and marketing program and customer services.
SG&A expenses represented 17.9% of total revenues for the year ended
December 31, 1994 and 17.1% of total revenues for the year ended December
31, 1995. The Company expects that SG&A expenses will continue to decrease
as a percentage of total revenues as total revenues increase.
Other unusual charges and contractual settlements consist primarily
of costs associated with the settlement of contractual obligations to certain
former officers of the Company and related legal fees, the write-off of
selected assets in connection with the outsourcing of the operator service
center and consulting and legal fees incurred for changes to the operations
of the Company. Settlements of employment contracts and other unusual charges
were $2,169,503, and represented 11.6% of total revenues, for the year ended
December 31, 1995. There were no contractual settlements and other unusual
charges for 1994.
Other income (expense). Other income (expense) increased $440,005, or
115.5%, from $380,794 for the year ended December 31, 1994 to $820,799 for
the year ended December 31, 1995. Interest expense, net of interest income,
represented 2.4% of total revenues for the year ended December 31, 1994 and
4.5% of total revenues for the year ended December 31, 1995. The increase
was due to financing obtained for acquisitions, additional service vehicles
and switch operating equipment. In addition, the Company entered into
financing agreements with certain manufacturers throughout the year for the
purchase of phone equipment to accommodate the expansion of its public pay
telephone base.
EBITDA. EBITDA increased $341,713, or 37.1%, from $921,941 for the
year ended December 31, 1994 to $1,263,654 for the year ended December 31,
1995. For the reasons discussed above, EBITDA represented 5.8% of total
revenues for the year ended December 31, 1994 and 6.8% of total revenues
for the year ended December 31, 1995.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Revenues. Total revenues increased $4,796,570, or 43.3%, from
$11,069,517 for the year ended December 31, 1993 to $15,866,087 for the
year ended December 31, 1994. This increase was attributable primarily to
an increase in the number of installed public pay telephones, which
increased by 2,541 from 2,350 at December 31, 1993 to 4,891 at December 31,
1994, with the majority of the increase relating to an acquisition in the
first quarter of 1994.
Revenues from coin calls increased $4,183,389, or 98.7%, from
$4,237,848 for the year ended December 31, 1993 to $8,421,237 for the year
ended December 31, 1994. Non-coin revenue decreased $755,256, or 12.4%,
from $6,074,394 for the year ended December 31, 1993 to $5,319,138 for the
year ended December 31, 1994. The decrease was primarily the result of a
reduction in the number of telephones to which the Company provided
operator services through pre-subscription arrangements and aggressive
dial-around advertising by AT&T, Sprint and MCI.
Other revenues increased $1,368,437, or 180.7%, from $757,275 for the
year ended December 31, 1993 to $2,125,712 for the year ended December 31,
1994. This increase was primarily the result of an increase in the number
of installed telephones and dial-around compensation.
Operating expenses. Line and transmission charges increased
$1,680,061, or 60.5%, from $2,776,448 for the year ended December 31, 1993
to $4,456,509 for the year ended December 31, 1994. Line charges
represented 25.1% of total revenues for the year ended December 31, 1993
and 28.1% of total revenues for the year ended December 31, 1994. The
increase in line and transmission charges was, in part, due to increased
coin calls resulting from the implementation of the $0.75 Long Distance
Call Program, as well as increases in certain local telephone company line
charges.
Location commissions increased $791,860, or 30.5%, from $2,599,330
for the year ended December 31, 1993 to $3,391,190 for the year ended
December 31, 1994. Location commissions represented 23.4% of total revenues
for the year ended December 31, 1993 and 21.4% of total revenues for the
year ended December 31, 1994. The decrease as a percentage of total
revenues resulted from the renegotiation of location agreements acquired in
the acquisition of Alpha Pay Phones - IV L.P. ("Alpha").
Other operating expenses increased $1,256,539, or 41.8%, from
$3,008,133 for the year ended December 31, 1993 to $4,264,672 for the year
ended December 31, 1994. The increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable
to the addition of the Alpha assets, new operations in Texas, the
establishment of Florida and Nevada sales offices, the increase in the
Company's public pay telephone base and the additional field personnel to
accommodate the increased business. Other operating expenses represented
27.2% of total revenues for the year ended December 31, 1993 and 26.9% of
total revenues for the year ended December 31, 1994.
Depreciation and amortization increased $1,340,228, or 149.6%, from
$896,041 for the year ended December 31, 1993 to $2,236,269 for the year
ended December 31, 1994. Depreciation and amortization represented 8.1% of
total revenues for the year ended December 31, 1993 and 14.1% of total
revenues for the year ended December 31, 1994. This increase was primarily
due to the Company's acquisition of the Alpha assets at the end of the
first quarter of 1994, expansion of the public pay telephone base and
purchases of additional computer equipment, service vehicles and software
to accommodate the Company's growth.
SG&A expenses increased $429,192, or 17.9%, from $2,402,583 for the
year ended December 31, 1993 to $2,831,775 for the year ended December 31,
1994. The increase was primarily the result of the increases in
advertising, travel and entertainment, wages and payroll related expenses
and general office expenses as a result of hiring additional personnel to
conduct the Company's expanded selling and marketing program and customer
services. SG&A represented 21.7% of total revenues for the year ended
December 31, 1993 and 17.9% of total revenues for the year ended December
31, 1994.
Other income (expense). Other income (expense) increased $214,937,
or 129.6%, from $165,857 for the year ended December 31, 1993 to $380,794
for the year ended December 31, 1994. Interest expense, net of interest
income, represented 1.5% of total revenues for the year ended December
31, 1993 and 2.4% of total revenues for the year ended December 31, 1994.
The increase was due to the financing obtained for acquisitions,
additional service vehicles and switch operating equipment. In addition,
the Company entered into financing agreements with certain manufacturers
throughout the year for the purchase of its telephone base.
EBITDA. EBITDA increased $638,918, or 225.7%, from $283,023 for the
year ended December 31, 1993 to $921,941 for the year ended December 31,
1994. For the reasons discussed above, EBITDA represented 2.6% of total
revenues for the year ended December 31, 1993 and 5.8% of total revenues
for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating activities
during the fiscal years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1996 were $11,208, $2,380,216, ($579,133) and
($646,880), respectively. Net cash used in operating activities consisted
primarily of the funding of operating losses, increases in current assets
(other than cash) and repayment of significant current liabilities. Cash
flows used in operating activities increased $574,266 from $72,614 for the
nine months ended September 30, 1995 to $646,880 for the nine months ended
September 30, 1996, mostly due to the larger loss in 1996, offset by the
issuance of the Nominal Value Warrants (as defined herein), depreciation
and amortization, and accretion of debt.
Cash used in investing activities during the fiscal years ended
December 31, 1993, 1994 and 1995 and for the nine months ended September
30, 1996 were $1,196,761, $3,214,302, $2,354,011 and $24,778,656,
respectively. Cash used in investing activities consisted primarily of
payments to acquire companies and capital expenditures primarily due to
expansion of the public pay telephone base.
Cash provided by financing activities during the fiscal years ended
December 31, 1993, 1994 and 1995 and for the nine months ended September
30, 1996 were $859,846, $1,229,282, $3,167,850 and $25,367,8084,
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 with ING and Cerberus, pursuant to which the Lenders
agreed to lend the Company up to $37,250,000. On March 15, 1996, the
Company borrowed $30,530,954 pursuant to the Credit Agreement. During the
second quarter of 1996, the Company borrowed an additional $1,692,500
pursuant to the Credit Agreement. The initial borrowings under the Credit
Agreement were used to complete the Paramount and IPP acquisitions, to
repay $8,503,405 of outstanding debt and $3,173,931 of outstanding
obligations under capital leases, to redeem the 10% Preferred, 8%
Preferred, and 7% Preferred, to pay related transaction fees, to fund the
Amtel acquisition deposit of $1,300,000 and for working capital.
On September 13, 1996, concurrent with the acquisition of Amtel, the
Lenders amended the Credit Agreement to increase the maximum borrowings
available under the Credit Agreement to $41,000,000. The Company then
borrowed an additional $8,776,546 and used $5,950,000 of the proceeds to
complete the Amtel and POA acquisitions. The remainder of the proceeds
were used for working capital and payment of certain related acquisition
expenses. The Company was not in compliance with various financial
covenants contained in the Credit Agreement at June 30, 1996 and
subsequently received a waiver of such non-compliance from the Lenders. The
Credit Agreement was amended on October 8, 1996 to make the covenants less
restrictive and the Company was in compliance with such covenants as of
September 30, 1996. On November 22, 1996, the Lenders amended the Credit
Agreement to permit the incurrence of additional borrowings of up to $2.0
million to fund the deposits required in connection with the Cherokee
Acquisition and the Texas Coinphone Acquisition and for working capital
purposes, thereby increasing the maximum borrowings available under the
Credit Agreement to $43,000,000. As of November 30, 1996, borrowings of
$43,000,000 were outstanding and there was no additional borrowing
availability under the Credit Agreement.
On December 18, 1996, the Company repaid all of the indebtedness
under the Credit Agreement with a portion of the proceeds from the Company
Equity Offering and the Company Debt Offering, and the Credit Agreement was
terminated. The Company expects to realize an extraordinary loss of
approximately $9.8 million in the fourth quarter of 1996 in connection with
the prepayment of the Credit Agreement.
The Company expects to enter into the New Credit Agreement during the
first quarter of 1997, which would provide for a senior credit facility of
$25 to $75 million. See "Description of Certain Indebtedness" for
descriptions of the terms of the New Credit Agreement and the Indenture.
In connection with the execution of the 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. The
debt under the Credit Agreement was initially recorded net of an allocation
of the fair value of the Lenders' Warrants, such fair value being determined
using the Black-Scholes valuation model. The Company recorded non-cash
interest expense (accretion of debt) of $621,536 for the three months ended
September 30, 1996 and $1,182,544 for the nine months ended September 30, 1996.
See "Description of Capital Stock." ING and Cerberus may separately exercise
their warrants without any action of the other party.
Other. The redemption price for the 10% Preferred, 8% Preferred and
7% Preferred consisted of cash payments aggregating $1,117,371 and
34,436.33 shares of 14% Preferred. In the aggregate, $6,475,011 of the
Company's outstanding obligations, including portions of the purchase price
for the IPP and Paramount acquisitions, was liquidated by issuing
107,918.19 shares of 14% Preferred. The $2,002,386 excess of the redemption
price of the preferred issues redeemed over their aggregate carrying value
was recorded as a reduction of earnings available to common shareholders on
March 15, 1996. The Company may redeem approximately $5.5 million stated
value of 14% Preferred with a portion of the net proceeds of the Company
Debt Offering and the Company Equity Offering.
At September 30, 1996, long-term debt and obligations under capital
leases, including the current portions, but excluding the amount allocated
to the Lender Warrants, was $54,749,758 and consisted of: (i) related party
debt (payable to the Lenders and two directors of the Company), including
the current portion and including the portion allocated to the Lenders'
Warrants, of $41,517,246, an increase of $39,784,746 as compared to
$1,732,500 at December 31, 1995; (ii) capital leases of $8,029,058, an
increase of $4,496,121 as compared to $3,532,937 at December 31, 1995;
(iii) the POA Sellers' Notes in the amount of $3,322,421 (pursuant to the
purchase agreement relating to the POA Acquisition, the POA Sellers' Notes
were reduced at September 30, 1996 by the excess of acquired current
liabilities over acquired current assets, or $311,693, from the original
face amount of $3,634,114); and (iv) other long-term debt, including the
current portion, of $882,647, a decrease of $7,713,766 as compared to
$8,596,413 at December 31, 1995. The overall increase is primarily
attributable to debt incurred in connection with the acquisitions of IPP,
Paramount, POA and Amtel.
On March 15, 1996, warrants to purchase 2,018,942 shares of Common
Stock at an exercise price of $.01 per share ("Nominal Value Warrants")
were issued in conjunction with the acquisitions of IPP and Paramount,
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, and
conversion of certain related party debt of the Company to the 14%
Preferred. Certain holders of the 14% Preferred are deemed related parties.
See "Certain Transactions." The warrants expire on March 13, 2001. An
independent valuation company has estimated the fair value market value of
the Nominal Value Warrants to be $4,974,673, using the Black-Scholes
valuation model, of which $3,886,139 (the amount attributable to the
warrants provided to related parties in connection with the redemption of
the preferred shares and the conversion of certain debt) was recorded in
the caption "other unusual charges and contractual settlements" in the
Company's statement of operations for the nine months ended September 30,
1996.
In 1995, the Company sold, or issued in consideration for services
rendered, 602,003 shares of its Common Stock to officers, directors,
creditors and affiliates of the Company and to others, including a
predecessor of Southcoast Capital Corporation, one of the underwriters in
the Company Equity Offering and the Company Debt Offering, at values
ranging from $4.20 to $6.01 per share. See "Certain Transactions."
Additionally, certain warrants and options to purchase 660,506 shares of
the Company's Common Stock at prices ranging from $5.70 to $6.00 were
granted in 1995.
On September 12, 1995, the Company borrowed $1,200,000 (which was
recorded net of the value of warrants issued of $349,000) from third party
investors pursuant to a 19 month credit agreement, bearing interest at
12.5%. The proceeds were used for operating expenses and to make certain
employee severance payments. This debt was repaid on March 15, 1996 with
borrowings under the Credit Agreement.
SEASONALITY
The Company completed two acquisitions which added approximately
4,400 public pay telephones in 1995, and four acquisitions which added
approximately 14,600 telephones during the first nine months of 1996. The
seasonality of the Company's historical operating results has been affected
by shifts in the geographic concentrations of its telephones resulting from
such acquisitions. In recent years, the Company acquired a large number of
telephones in the northern and western states of the United States. As a
result of such acquisitions, the Company has more recently experienced
lower operating results in the first quarter due to the effect of the cold
weather in the northern and western states on outdoor public pay telephone
usage. Revenues are typically highest in the fourth quarter because of the
increased volume of calls made during the holiday season.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1996 the Company had capital
expenditures (exclusive of acquisitions) of $2,984,135, which were financed
through cash flow from operations and borrowings under the Credit
Agreement.
Capital expenditures are principally for the expansion of the
Company's installed public pay telephone base, and include purchases of
telephones, related equipment, site contracts, operating equipment and
computer hardware.
The Company expects to make capital expenditures (exclusive of
acquisitions) of approximately $225,000 during the three months ended
December 31, 1996 and approximately $4,100,000 during the year ended
December 31, 1997.
Management believes, but cannot assure, that cash flows from
operations and the proceeds to the Company from the Company Equity Offering
and the Company Debt Offering will be sufficient to meet the Company's cash
requirements for working capital, capital expenditures and debt service
over the next twelve months.
BUSINESS
GENERAL
The Company is currently one of the two largest independent public
pay telephone operators and the eleventh largest public pay telephone
operator in the United States. As of September 30, 1996, after giving
effect to the 1997 Acquisitions, the Company would have owned and operated
38,421 public pay telephones in 42 states, the District of Columbia and
Mexico, of which approximately 96% are located in 21 states. After giving
effect to the 1997 Acquisitions, approximately 44% of the Company's public
pay telephones are located in Florida, Texas and California, which are
three of the four most populous states. As of September 30, 1996, the
Company owned and operated 24,732 installed public pay telephones, of which
approximately 95% are located in 17 states and approximately 46% are
located in Florida, Texas and California. Since September 1, 1995, the
Company has added approximately 33,600 public pay telephones, through a
series of acquisitions by the Company of eight independent public pay
telephone companies. In addition, the Company maintains an active program
of installing public pay telephones.
The Company owns, operates, services and maintains a system of micro
processor controlled "smart" public pay telephones. The Company derives
substantially all of its revenues from coin and non-coin calls placed from
its public pay telephones. The Company obtains contracts with location
providers to operate public pay telephones at locations where significant
demand exists for public pay telephone services, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck
stops and bus terminals.
The following chart sets forth certain information with respect to
the locations of the Company's pay telephones as of September 30, 1996 on
an actual basis and a pro forma basis giving effect to the 1997
Acquisitions.
Actual Pro Forma
---------------------- ----------------------
Percentage Percentage
Public Pay of Public Pay of
Location Telephones Total Telephones Total
- -------- ---------- ---------- ---------- ----------
Florida 5,127 20.7% 5,127 13.3%
California 3,705 15.0 3,705 9.6
Missouri 2,912 11.8 2,912 7.6
Texas 2,533 10.2 8,064 21.0
Ohio 1,633 6.6 1,633 4.2
Illinois 1,329 5.4 1,329 3.4
South Carolina 1,249 5.1 1,249 3.2
Virginia 975 3.9 975 2.5
Colorado 764 3.1 1,442 3.8
Tennessee 674 2.7 674 1.8
Washington 616 2.5 616 1.6
Arizona 219 * 700 1.8
Utah 26 * 2,245 5.9
Montana 25 * 1,025 2.7
New Mexico 4 * 2,409 6.3
Other** 3,185 13.0 5,016 13.1
-------- ---- ------ ----
Total 24,732 100.0% 38,421 100.0%
====== ====== ========= ======
- -----------
* less than 1%
** includes all other states where the percentage of the total is less
than 1%.
On an actual basis, the Company had revenues and EBITDA of $28.3
million and $5.6 million, respectively, for the nine months ended September
30, 1996. On the same basis, the Company's EBITDA margins have increased to
19.6% for the nine months ended September 30, 1996 from 2.8% for the nine
months ended September 30, 1995. The increase in EBITDA margin is primarily
due to the significant increase in the number of installed public pay
telephones and the elimination of costs associated with the closing of
certain offices, 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 $59.5 million and
$45.4 million for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively, and EBITDA of $10.4 million and
$9.8 million for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively. After giving pro forma effect to the
Acquisitions, the Company would have achieved revenues of $91.4 million and
$70.4 million for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively, and EBITDA of $21.2 million and
$16.1 million for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively. See "Pro Forma Financial Data."
In June 1995, Peter Graf was appointed Chairman of the Board of
Directors and in September 1995 was appointed Chief Executive Officer of
the Company. In September 1995, Stuart Hollander, Joseph Abrams,
Aron Katzman and Steven Richman were appointed to the Board of
Directors of the Company, and the majority of the existing board
resigned at that time. The new board and management identified
and implemented the business strategy set forth below.
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale while implementing
cost savings. The Company has implemented the following strategy to meet
its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the public pay telephone industry. Selective acquisitions enable
the Company to expand its geographic presence and further its strategy of
clustering its public pay telephones more rapidly than with new
installations. Because smaller companies typically are not able to achieve
the economies of scale realized by the Company, when acquisitions are
integrated, the Company can operate the public pay telephones at lower
operating costs than the seller. Accordingly, the Company maintains an
active acquisition program to acquire public pay telephones that are in, or
contiguous to, its existing markets or that can form the basis of a new
cluster. Management believes that the Company's experience in completing
acquisitions of companies in the public pay telephone industry is
instrumental in identifying and negotiating additional acquisitions as well
as integrating such acquisitions. In addition, as the Company grows to
become the leading supplier of independent public pay telephone services in
an area, "fill-in" and contiguous acquisitions become less attractive to
other potential acquirors as their ability to create significant clusters
is reduced. Moreover, the Company believes that such growth will further
enhance its ability to negotiate favorable rates with long distance service
providers and operator service providers as well as suppliers of pay
telephones and other related equipment.
Facilitate internal growth. The Company actively seeks to install new
public pay telephones and intends to enhance its sales and marketing
efforts to obtain additional contracts to own and operate public pay
telephones with new and existing national, regional and local accounts. In
evaluating locations for the installation of public pay telephones, the
Company generally conducts a site survey to examine various factors,
including population density, traffic patterns, historical usage
information and other geographic factors. The installation of public pay
telephones is generally less expensive than acquiring public pay
telephones.
Reduce operating costs through geographically concentrated clusters.
The Company believes that in addition to facilitating fill-in and
contiguous acquisitions, the clustering of public pay telephones creates an
opportunity to generate savings through reduced field service and
collection expenses, the closing of duplicate offices, reduction in staff
and general corporate overhead expenses and reduced line and transmission
expenses associated with interLATA and intraLATA traffic.
Form strong relationships with service providers and suppliers. As
part of its strategy to continue to reduce operating costs, the Company
outsources its long distance and operator services to a number of
subcontractors that are OSPs, principally Intellicall. The Company intends
to strengthen its relationships with Intellicall, together with other OSPs,
and the suppliers of its public pay telephone equipment as its market
presence increases. By achieving close working relationships with its OSPs
and suppliers, the Company believes that it will be in a position to
negotiate more favorable agreements.
Use of state-of-the-art technology. The Company's public pay
telephones are "smart" telephones and are operated by means of advanced
microprocessor technology that enables the telephones to perform
substantially all of the necessary coin-driven and certain non coin-driven
functions independent of the Company's central office. Unlike "dumb"
telephones used by most BOCs and other LECs, smart telephones, in concert
with the Company's management information systems, enable the Company to
determine each telephone's operability and need for service as well as its
readiness for collection of coin revenues. In addition, rate changes and
other software-dependent functions can be performed from the central office
without dispatching service technicians to individual public pay telephones
of the Company.
Provide superior customer service. The Company strives to maximize
the number of its telephones that are operational at any one time and
thereby retain existing customers and attract new ones. Accordingly, the
Company employs both advanced telecommunications technology and trained
field technicians as part of its commitment to provide superior customer
service. The technology used by the Company enables it to (i) maintain
accurate records of telephone activity which can be verified by customers
and (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 as a result of the Company Debt Offering and the
Company Equity Offering, the Company intends to promote actively its brand
and customer service capabilities. The Company seeks to promote and achieve
recognition of its products and services by posting on all of its public
pay telephones the "PhoneTel" label and through advertisements in trade
magazines. The Company believes that achieving market recognition will
facilitate its expansion strategy by enhancing its ability to obtain
additional accounts and encouraging the use of its public pay telephones in
locations where consumers have multiple pay telephone options.
INDUSTRY OVERVIEW
Public pay telephones are primarily owned and operated by BOCs and
other LECs and independent public pay telephone companies. Of the
approximately 2.54 million public pay telephones operated in the United
States in 1995, Multimedia Telecommunications Association estimates that
approximately 87% are operated by BOCs and other LECs and approximately 13%
are operated by independent public pay telephone companies. Within the
United States, Multimedia Telecommunications Association estimates that
there were approximately 342,000 public pay telephones owned by independent
public pay telephone companies in 1995. Today's telecommunications
marketplace was principally shaped by the 1984 court-directed divestiture
of the BOCs by AT&T. The AT&T divestiture and the many regulatory changes
adopted by the FCC and state regulatory authorities in response to the AT&T
divestiture, including the authorization of the connection of competitive
or independently-owned public pay telephones to the public switched
network, have resulted in the creation of new business segments in the
telecommunications industry. Prior to these developments, only BOCs or
other LECs owned and operated public pay telephones.
As part of the AT&T divestiture, the United States was divided into
geographic areas known as Local Access Transport Areas or "LATAs." BOCs and
other LECs provide telephone service that both originates and terminates
within the same LATA ("intraLATA") pursuant to tariffs filed with and
approved by state regulatory authorities. Until recently, BOCs were
prohibited from offering or deriving revenues or income from
telecommunications services between LATAs ("interLATA"). Long distance
companies, such as AT&T, MCI and Sprint, provide interLATA services and, in
some circumstances, may also provide long distance service within LATAs. An
interLATA long distance telephone call generally begins with an originating
LEC transmitting the call from the originating telephone to a point of
connection with a long distance carrier. The long distance carrier, through
its owned or leased switching and transmission facilities, transmits the
call across its long distance network to the LEC servicing the local area
in which the recipient of the call is located. This terminating LEC then
delivers the call to the recipient.
As a result of the February 8, 1996 enactment of the
Telecommunications Act, the BOCs may provide interLATA telecommunications
services and may compete for the provision of interLATA toll calls, upon
receipt of all necessary regulatory approvals and the satisfaction of
applicable conditions. The Telecommunications Act permits the BOCs to
provide virtually all "out of region" long distance telecommunications
services immediately upon the receipt of any state and/or federal
regulatory approvals otherwise applicable to long distance service. For the
BOCs and other LECs to provide interLATA toll service within the same
states in which they also provide local exchange service ("in-region
service"), prior FCC approval must be obtained. The timing of such approval
is unclear and may depend on the outcome of litigation related to recent
regulations promulgated by the FCC relating to the duties of BOCs and other
incumbent LECs under Section 251 of the Telecommunications Act. This FCC
approval to provide "in-region" service is conditioned upon, among other
things, a showing by a BOC or other LEC that, with certain limited
exceptions, facilities-based local telephone competition is present in its
market, and that it has satisfied the 14-point "competitive checklist"
established by the Telecommunications Act which includes, among other
things, that the BOC or other LEC has entered into at least one
interconnection agreement. In addition, the Telecommunications Act is
designed to facilitate the entry of any entity (including cable television
companies and utilities) into both the competitive local exchange and long
distance telecommunications markets. As a result of the Telecommunications
Act, long distance companies (such as AT&T and MCI), cable television
companies, utilities and other new competitors will be able to provide
local exchange service in competition with the incumbent BOC or other LEC.
This should ultimately increase the number and variety of carriers that
provide local access line service to independent public pay telephone
providers such as the Company.
Prior to 1987, coin calls were the sole source of revenues for
independent public pay telephone operators. Long distance calling card and
collect calls from these public pay telephones were handled exclusively by
AT&T. Beginning in 1987, a competitive operator service system developed
which allowed OSPs, including long distance companies such as MCI and
Sprint, to handle non-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's implementing
regulations (both of which were recently enacted) will permit independent
public pay telephone providers to generate additional revenues from all of
these three categories, each of which consists of local, intraLATA toll,
intrastate interLATA, interstate interLATA and international call
components.
ACQUISITION STRATEGY
The Company believes that the existence of many small independent
public pay telephone providers presents acquisition opportunities for the
Company. The Company believes that the acquisition of other independent
public pay telephone companies and management's experience in identifying
and negotiating potential acquisitions and integrating acquired companies
into the Company's ongoing operations may substantially accelerate its rate
of growth, increase the Company's concentration of public pay telephones
through clustering and thereby generate economies of scale. The Company
intends to continue this acquisition program in 1997.
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.
Strategic Acquisitions
The following table summarizes the Company's acquisitions completed
by January 15, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------
NUMBER OF
INSTALLED PUBLIC
DATE OF PAY TELEPHONES PRIMARY
COMPANY ACQUIRED ACQUISITION ACQUIRED AREAS SERVED
- ------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
Texas Coinphone(1) January 13, 1,250 Texas
1997
Cherokee Communications, Inc.(2) January 3, 13,300 Texas; New Mexico;
1997 Colorado; Utah;
Montana
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
Systems, Inc.(6) March 15, 1996 2,528 Florida
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 35,758
telephones acquired
<FN>
- ----------------
(1) See "--The 1997 Acquisitions--The Texas Coinphone Acquisition."
(2) See "--The 1997 Acquisitions--The Cherokee Acquisition."
(3) The purchase price paid by the Company for Amtel consisted of $7.0
million in cash and 2,162,163 shares of Common Stock. The purchase
price was in consideration of the installed phones acquired and
approximately 728 public pay telephones and related parts in inventory.
(4) The purchase price paid by the Company for POA consisted of $0.5 million
in cash, 166,666 shares of Common Stock, assumption of $7.75 million of
capital lease obligations, $3.6 million in notes payable to the sellers,
the assumption of $0.2 million in liabilities, two five-year
non-competition and consulting agreements with two of the sellers for an
aggregate of approximately $0.3 million and approximately $166,748 in
related acquisition expenses.
(5) The purchase price paid by the Company for IPP consisted of $3.5 million
in cash, 555,589 shares of Common Stock, 5,453 shares of 14% Preferred,
117,785 Nominal Value Warrants and the assumption of $1.8 million in
liabilities, of which $1.6 million was repaid by the Company on March 15,
1996. The cash purchase price included three five year non-compete
agreements, with an aggregate value of $60,000, with three of IPP's former
officers.
(6) The purchase price paid by the Company for Paramount consisted of $9.6
million in cash, 8,333 shares of 14% Preferred, 179,996 Nominal Value
Warrants and the assumption of $0.7 million in liabilities which were
paid by the Company on March 15, 1996. The purchase price included a five
year consulting and non-compete agreement, valued at $50,000, with one of
Paramount's former officers.
(7) The purchase price paid by the Company for Public Telephone consisted of
224,879 shares of Common Stock and the assumption of $2.8 million in
liabilities. In connection with the acquisition, the Company entered into
five year non-compete agreements with two of Public's former
shareholders which require cash payments and the issuance, in the
aggregate, of 80,000 shares of 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.
</TABLE>
The 1997 Acquisitions
The Cherokee Acquisition. On January 3, 1997 (the "Closing Date"),
the Company consummated the Cherokee Acquisition and acquired 14,000 public
pay telephones from Cherokee, of which approximately 726 were under
contract waiting to be installed, a 50% interest in 300 installed public
pay telephones in Monterrey, Mexico which are owned by a joint venture and
Cherokee's public pay telephone enclosure refurbishing and manufacturing
facilities in Jacksonville. Pursuant to the Cherokee Merger Agreement, the
Company acquired all of the capital stock of Cherokee for a purchase price
consisting of: (i) $53,847,750, subject to certain purchase price
adjustments, which may include an increase of up to $6 million (the "Rate
Cap Amounts") payable in two installments due January 1998 and 1999 if the
FCC fails to implement certain rate caps, rate guidelines or third party
preferences (the "Rate Caps") during the first and second years after the
Closing Date, as the case may be; (ii) $5,888,089 for the cash in the
phones, outstanding accounts receivable and other current assets; (iii)
$3,407,961 representing assumed vehicle debt, accounts payable, and accrued
expenses; and (iv) $1,249,998 for non-competition agreements with three of
the former executives and owners of Cherokee who have become officers of
the Company. In addition, the Company paid related fees and expenses of
$1,125,216. For financial reporting purposes, the Cherokee Acquisition is
effective as of January 1, 1997.
Cherokee, with corporate headquarters in Jacksonville, Texas, is the
fifth largest independent public pay telephone operator in the United
States. At September 30, 1996, Cherokee owned and operated 12,344 installed
public pay telephones in 14 states, of which approximately 85% were located
in Texas, New Mexico, Utah, Montana and Colorado.
Pursuant to the Cherokee Merger Agreement and the escrow agreement
entered into in connection with the Cherokee Merger Agreement, the Company
has deposited $1,000,000 (of which $520,000 had been deposited on November
21, 1996) in escrow to fund certain indemnification arrangements. To the
extent not utilized to fund such payments, the escrowed funds will be
released to the sellers of Cherokee as follows: (i) $250,000 on the 90th
day after the Closing Date, (ii) $250,000 on the 180th day after the
Closing Date and (iii) the balance on the 270th day after the Closing Date.
In addition, the Company has deposited into escrow the following amounts:
(i) $624,999 to fund certain of the Company's obligations with respect to
the employment and non-competition agreements to be entered into with three
key employees of Cherokee, which escrowed funds will be released to such
employees 120 days after the Closing Date unless such employees are no
longer entitled to such funds under the terms of the employment and
non-competition agreements and (ii) $6,000,000 to fund the Rate Cap
Amounts, which escrowed funds will be released to Cherokee and/or PhoneTel
depending on the terms of the Rate Caps, if any, that are implemented by
the FCC.
The Cherokee Merger Agreement included customary representations and
warranties with respect to the condition and operation of Cherokee's
business. The sellers in the Cherokee Acquisition have each agreed to be
personally liable for any breach of their own representations and warranties
in the Cherokee Merger Agreement, and to varying extents, for breach of
Cherokee's representations, warranties and covenants and for certain other
liabilities (including any losses which may result from the litigation
referred to in Note 11 to the consolidated financial statements of Cherokee
included elsewhere in this Prospectus), in each case (with certain exceptions),
for losses in the aggregate in excess of $100,000, up to a maximum of
$2 million. There can be no assurance, however, that the escrowed funds will
be sufficient to satisfy such liabilities of Cherokee assumed by the Company
or that the sellers will satisfy their personal indemnification obligations to
the Company.
The Texas Coinphone Acquisition. On January 13, 1997, the Company
consummated the Texas Coinphone Acquisition and acquired 1,250 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, owned and
operated 1,250 installed public pay telephones in Texas, including Dallas,
Houston, San Antonio and the Bryan/College Station area. The Company
expects to realize significant costs savings in connection with the
integration of the Texas Coinphone business because all the public pay
telephones being acquired are located in Texas.
Pursuant to the Asset Purchase Agreement dated as of January 13, 1997
among the Company, Texas Coinphone and all of the partners of Texas
Coinphone (the "Texas Coinphone Asset Purchase Agreement"), the Company has
deposited $330,000 in escrow to fund certain indemnification arrangements
and certain purchase price adjustments. To the extent not utilized to fund
such payments, the escrowed funds would be released to Texas Coinphone as
follows: (i) $150,000 on the 90th day after closing and (ii) the balance on
the first anniversary date of the closing. There can be no assurance,
however, that the escrowed funds will be sufficient to satisfy such
amounts.
The Texas Coinphone Asset Purchase Agreement included customary
representations and warranties and a non-competition agreement with a key
employee of Texas Coinphone. Texas Coinphone and the partners of Texas
Coinphone have each agreed to be personally liable for any breach of their
own representations and warranties in the Texas Coinphone Asset Purchase
Agreement, and to varying extents, for breach of Texas Coinphone's
representations, warranties and covenants and for certain other
liabilities. There can be no assurance, however, that Texas Coinphone and
its partners will satisfy their indemnification obligations to the Company.
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 centers, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals, at no cost to the location
provider. The Company then services and collects money from these public
pay telephones and pays the location provider a share of the public pay
telephone's revenues. As of September 30, 1996, the Company owned and
operated 24,732 installed public pay telephones and after giving pro forma
effect to the 1997 Acquisitions would have owned and operated 38,421
installed public pay telephones.
The percentage of revenues paid by the Company to the location
provider is generally fixed for the term of the agreement and generally
ranges from 15% to 40% if based on gross revenues per public pay telephone
or from 10% to 40% if based on net revenues per public pay telephone. The
term of a location agreement generally ranges from three to ten years and
provides for the automatic renewal of the contract for the same period as
the original term of the contract if it is not cancelled by the location
provider under the terms of the agreement. The Company can generally
terminate a location agreement on 30-days' prior notice to the location
provider if the public pay telephone does not generate sufficient total
revenues for two consecutive months. Under certain of the Company's
location agreements, the failure of the Company to remedy a default within
a specified period after notice may give the location provider the right to
terminate such location agreement. The duration of the contract and the
commission arrangement depends on the location, number of telephones and
revenue potential of the account.
The Company's average cost of installing a public pay telephone in
1996 has ranged from $2,000 to $2,500, which costs include site surveys,
telephones, enclosures and related hardware, commissions and all other
costs incurred in connection with installation.
Local Service
Substantially all of the Company's public pay telephones accept coins
as well as other forms of payment for local or long-distance calls. The
Company's public pay telephones generate coin revenues primarily from local
calls. State regulatory authorities typically set the maximum rate for
local coin calls that may be charged by BOCs and other LECs and independent
public pay telephone companies, although this will change as states follow
the FCC's mandate and deregulate the price of a local coin call. See
"--Governmental Regulations." The Company charges the same rate as the BOCs
and the other LECs for local calls in substantially all of the territories
in which the Company's public pay telephones are located. In most
territories that charge is $0.25, although in some jurisdictions the charge
is less than $0.25 per local call and in a limited number of other
jurisdictions, which have already deregulated local calls, the charge is
$0.35. Whereas local coin calls have traditionally been provided for an
unlimited call duration, some jurisdictions in which the Company's public
pay telephones are located have begun to allow call timing, which requires
the deposit of an additional amount after a specified period. The Company
pays monthly line and usage charges to LECs for all of its installed public
pay telephones. These charges cover basic telephone service as well as the
transport of local coin calls.
Operator-Assisted Long Distance Services
The Company outsources its long distance and operator service
operations to a number of OSPs, including Intellicall, which is the
Company's primary provider of such services, AT&T, BellSouth, Opticom and
Conquest. The Company receives commissions from these services based on the
volume of calls made as well as on the amount of revenues generated per
call. In certain regions the Company may also install a
microprocessor-based automated operator system for select pay telephones
that allows the telephones to collect and store billing information and
forward calls to the called party, i.e. "store and forward" calls. The
Company also receives additional revenues from long distance carriers for
dial-around calls made from its public pay telephones whereby the consumer
gains access to an OSP or a long distance company other than one designated
by the Company. In May 1992, the FCC ruled that independent public pay
telephone providers are entitled to dial-around compensation on an interim
basis at a fixed rate of $6.00 per telephone per month for interstate
dial-around calls. Similarly state regulatory authorities, including
Illinois, Florida, Georgia and South Carolina, have implemented intrastate
dial-around compensation programs for independent public pay telephones.
Other states are currently considering intrastate dial-around compensation
programs for independent public pay telephones. The recently enacted
Section 276 of the Telecommunications Act requires the FCC to establish a
per-call compensation plan to ensure that public pay telephone service
providers are fairly compensated for all calls made from their telephones
commencing November 6, 1996. In an order released on September 20, 1996,
the FCC implemented new regulations that replace the current $6.00 flat fee
per telephone per month with an interim $45.85 flat fee per telephone per
month from November 6, 1996 to October 1997. In October 1997, the flat fee
will be replaced by a per-call compensation mechanism. See "--Governmental
Regulations." Management believes that both the interim plan and the
per-call compensation plan will generate significant additional revenues
for the Company, net of related expenses and processing fees, commencing
November 6, 1996 . A number of parties have filed petitions for judicial
review of these regulations in federal courts of appeals. To date, the
regulations remain in effect. There can be no assurance that the rules,
regulations and policies adopted by the FCC on its own or after judicial
review will not have a material adverse affect on the Company's business,
results of operations or financial condition.
TELEPHONE EQUIPMENT
The Company purchases its pay telephones from two of the three
largest independent manufacturers of public pay telephones, Intellicall and
Protel Inc. The Company has also acquired telephones manufactured by the
third of the three largest manufacturers of public pay telephones, Elcotel
Inc. Although all three manufacturers use similar technology, the Company
seeks to purchase primarily a single brand of telephone within a geographic
area. This maximizes the efficiency of the Company's field technicians and
makes it easier to stock appropriate spare parts. It is the Company's
policy to place the PhoneTel name on telephones that it acquires or
installs.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have enabled the Company
to enhance customer service and to achieve strong operational and financial
controls by enabling management to react quickly and efficiently to
critical information collected from the Company's public pay telephones.
The custom operational software used to manage the Company's public pay
telephone business is an internally developed application named Prophecy.
Prophecy is a comprehensive system of data collection and analysis that
supports daily operations in the field and provides the Company with
management data. The Prophecy software allows the Company's management
information systems to accept direct output from the polling operations of
the individual public pay telephones, analyze the data and produce daily
operational reports for the Company's field offices. In addition, Prophecy
develops summaries of management information.
The Prophecy software is scalable and is able to support the varying
proprietary protocols of the individual manufacturers of its public pay
telephones. The Company's polling operations are supported by the software
provided by the manufacturers of the public pay telephones owned by the
Company. The Company believes that its Prophecy management information
systems supports its 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
nine sales persons who report to the Vice President of Sales and Marketing.
The Company also markets its products and services through advertising in
trade publications, booths at trade shows and referrals from existing
accounts.
The Company directs a major portion of its marketing efforts for
public pay telephones to multi-station accounts, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck
stops and bus terminals. These multi-station accounts have the advantages
of greater efficiency in collection and maintenance. The Company also
solicits single station accounts, where there is a demonstrated high demand
for public pay telephone service. In evaluating locations for the
installation of public pay telephones, the Company generally conducts a
site survey to examine various factors, including population density,
traffic patterns, historical usage information and other geographical
factors. The Company generally will not install a public pay telephone
unless it believes based on the site survey that the site will generate a
minimum level of revenues.
CUSTOMERS
The Company's public pay telephone operations are diversified on both
a geographical and customer account basis. Currently, the Company owns and
operates public pay telephones in 42 states, the District of Columbia and
Mexico (approximately 96% of which public pay telephones are located in 21
states) through agreements with both multi-station customers such as
shopping centers, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals, as well as with single station
customers.
The Company owns and operates the public pay telephones for certain
properties owned by Simon DeBartolo. The Company derived approximately 15%
and 7% of its total revenue for the year ended December 31, 1995 and for
the nine months ended September 30, 1996, respectively, from the operation
of these public pay telephones. As the Company expands its installed public
pay telephone base through additional acquisitions, it expects that the
percentage of total revenues derived from Simon DeBartolo will continue to
decline. Other than Simon DeBartolo, no single customer generated more than
5% of the Company's total revenue for the year ended December 31, 1995 or
the nine months ended September 30, 1996. See "Risk Factors--Dependence on
Significant Customer." On a pro forma basis after giving effect to the 1997
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
nine months ended September 30, 1996.
GOVERNMENT 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 interpreting laws applicable to the
telecommunications industry may also have a significant effect on the
public pay telephone industry. Changes in existing laws and regulations as
well as the creation of new ones, applicable to the activities of the
Company or other telecommunications businesses (including the extent of
competition, the charges of providers of interexchange and operator
services and the implementation of new technologies), may have a material
adverse effect on the Company's business, results of operations or
financial condition.
State. Since the AT&T break-up, state regulatory authorities have
primarily been responsible for regulating intrastate public pay telephone
services. Public utility commissions in most states have established rules
and regulations that govern the provision of public pay telephone services,
including certification or registration, notice to end users of the
identity of the service provider in the form of postings or verbal
announcements, requirements for rate quotes upon request, call routing
restrictions, and maximum price limitations. While not necessarily uniform,
these rules and regulations generally establish minimum technical and
operational characteristics to assure that public interest considerations
are met. To date, each state has had the right to regulate pricing and
other aspects of the operations of independently-owned public pay
telephones and all intrastate telephone service. In some jurisdictions, in
order for the Company to operate its public pay telephones, it is necessary
to become certificated and have tariffs filed. The procedure and length of
time for the process varies from state to state. Until recently, in many
states only local telephone companies were permitted to process local
and/or intraLATA operator assisted calls. The Company has obtained the
requisite regulatory approvals to provide public pay telephone service in
all states in which it provides such services and complies with applicable
state regulations governing such services.
The recently enacted Section 276 of the Telecommunications Act gives
the FCC authority to adopt rules affecting intrastate telephone services
and to preempt state rules and regulations inconsistent with those adopted
by the FCC. As discussed in more detail under "--Federal," the FCC adopted
rules on September 20, 1996 that preempt certain existing state regulations
and limit the scope of future state regulation of pricing and other aspects
of public pay telephone operation. In particular, states are required to:
(a) deregulate the price of a local phone call;
(b) eliminate all intrastate subsidies for BOC and LEC pay
phone services;
(c) enact rules governing the provision of "public interest
pay phones;" and
(d) conduct a thorough review of all existing state pay phone
rules to ensure that those rules do not conflict with the
intent of Section 276 and the FCC implementing rules.
Federal. Until recently, the FCC has not actively regulated the
provision of intrastate public pay telephone services by independent public
pay telephone companies. However, the Company believes that the recent
enactment of Section 276 of the Telecommunications Act will have a
significant impact on the FCC's role in governing and regulating the
provision of intrastate public pay telephone services. In addition, the FCC
actively regulates the interstate and foreign telecommunications market,
which affects the Company's operations in numerous ways.
Until the enactment of Section 276, the FCC had regulated public pay
telephones primarily in the context of its regulation of OSPs, and in
particular, through its implementation of the Telephone Operator Consumer
Services Improvement Act (the "Operator Services Act"). The Operator
Services Act was enacted in October 1990 and established various
requirements for companies that provide operator services and call
aggregators (which send calls to these OSPs). The requirements of the
Operators Services Act include call branding, information posting, rate
quoting and the filing of informational tariffs. The Company must comply or
ensure compliance with certain billing and consumer information
requirements. For example, the Company is not permitted to or to allow its
OSP to bill consumers for unanswered calls, bill for calls that do not
reflect the location or the origination of the call, or bill the call from
any location other than from where the call is made, unless the consumer's
consent is explicitly obtained. Furthermore, the Company and its OSP must
identify the OSP presubscribed to the public pay telephone to end users in
the form of postings at or near the telephone or verbal announcements in
accordance with the FCC's requirements. The Company also must allow consumers
to access the interexchange carrier of their choice by entering a specific
code number, i.e., a "10XXX," "800" or a "950" number. The Company believes
that it complies with the provisions of the Operator Services Act as a call
aggregator (i.e., one who makes telephones available to the public for long
distance calls using an OSP). The Operator Services Act also requires the FCC
to take action to limit the exposure of public pay telephone companies to
undue risk of fraud.
The Operator Services Act also directed the FCC to consider the need
to prescribe compensation to owners of independent public pay telephones
for dial-around access to a long distance company other than the one
selected by the independent public pay telephone company. In May 1992, the
FCC ruled that independent public pay telephone companies are entitled to
compensation for these calls. Due to the complexity of establishing an
accounting system for determining compensation for these calls, the FCC
temporarily set compensation at $6.00 per public pay telephone per month,
to be allocated among long distance companies earning annual toll revenues
for interstate calls in excess of $100 million per year in accordance with
their market share. Similarly, state regulatory authorities, including, for
example, Illinois, Florida, Georgia and South Carolina, implemented
intrastate dial-around compensation programs for independent public pay
telephone providers and other states are considering such programs. In
1995, Section 276 of the Telecommunications Act was enacted, which required
the FCC to establish a per-call compensation plan to ensure that all public
pay telephone service providers are fairly compensated for all calls, both
intrastate and interstate. See "--Compensation."
In 1992, the FCC initiated a rulemaking in which it proposed to
implement the "billed party preference" system ("BPP") for 0+ interLATA
traffic from public pay telephones and other aggregator locations such as
hotels and motels. Under BPP, operator-assisted long distance traffic would
be carried automatically by the OSP preselected by the party being billed
for the call. Under the current presubscription system, unless an access
code is dialed, 0 + calls from public pay telephones are routed to the OSP
presubscribed to the public pay telephones. Under BPP as proposed, 0 +
calls would be completed by an OSP with no relationship to the public pay
telephone provider, and thus would eliminate commissions paid by the
presubscribed OSP to the public pay telephone provider on 0 + calls.
In June 1996, the FCC issued a Second Further Notice of Proposed
Rulemaking in CC Docket No. 92-77 in which it tentatively concluded that
the costs of BPP outweigh the benefits, and proposed to not implement BPP.
Instead, the FCC proposed to (i) establish benchmarks for OSP rates based
upon a composite of the rates charged by the three largest interexchange
carriers (AT&T, MCI, and Sprint), which composite is intended to reflect
rates in line with what consumers expect to pay, and (ii) require OSP's
that charge rates and/or fees imposed by location providers whose total is
greater than a given percentage above the benchmarks, to disclose the
applicable charges for the call to consumers orally before connecting a
call. Alternatively, the FCC proposed to require all OSP's to disclose
their rates on all operator assisted calls. The effect of the rules, if
any, ultimately adopted by the FCC, on the Company's business, results of
operations or financial condition can not be determined at this time.
In September 1996, the FCC adopted rules which implement the public
pay telephone provisions of Section 276 of the Telecommunications Act. Key
elements of the rulemaking include:
(a) Compensation. Currently independent public pay telephone
providers are not compensated on a per-call basis for toll-free
calls, such as "800" calls and debit card calls, both domestic
and international. The new FCC rules establish a three-phase
compensation plan to ensure that public pay telephone providers
are fairly compensated for all calls originating from public
pay telephones, with the exception of emergency calls and
telecommunications relay service calls for hearing-disabled
individuals. For the period from November 6, 1996 through
October 6, 1997, the $6.00 flat fee per telephone per month
will be replaced by an interim $45.85 flat fee per telephone
per month (which was established by the FCC by multiplying
$0.35 per call by the estimated industry average of 131 access
code calls and "800" calls per pay telephone per month). In
October 1997, the flat fee will be replaced by a per-call
compensation mechanism. From October 1997 to October 1998, the
per-call payment shall be $0.35; thereafter, the per-call rate
shall be equal to the local coin call rate for each location,
which rate will be determined by the marketplace, not by
regulation. Obtaining fair compensation for these dial-around
calls is particularly important since the use of access codes
to reach a preferred long distance carrier has recently gained
significant exposure and customer acceptance, because of
marketing campaigns of the larger interexchange carriers, such
as AT&T's "1-800-CALLATT" and MCI's "1-800-COLLECT." BOCs are
not permitted to receive compensation for dial-around calls
until they have complied with the Computer III non-structural
safeguards and have ceased subsidizing their public pay
telephone operations (see below).
The Section 276 requirement that public pay telephone operators
receive fair compensation for all public pay telephone calls also
applies to local coin drop calls. To implement the requirement, the
new FCC rules mandate a two phase transition to market-based rates
for local coin drop calls. During the first year-long phase, states
may continue to set the local coin rate in the same manner as they
currently do, but they are also free to adopt market-based rates at
any time during this one-year period. In addition, states are
required during this period to review and remove, if necessary,
those state regulations, such as entry and exit restrictions, that
affect public pay telephone competition and are inconsistent with
the Telecommunications Act and the new FCC rules. In the second
phase, which will begin in October 1997, the market will be allowed
to set the rate for local coin calls in each state, unless the state
can demonstrate to the satisfaction of the FCC that there are market
failures within the state that would not allow market-based rates.
(b) BOC subsidization. BOCs and other LECs have traditionally
included a public pay telephone cost element in determining the
access charges imposed upon carriers to terminate long distance
calls. Section 276 and the new FCC rules require LECs to
eliminate these and other subsidies, to reduce their interstate
access charges, to operate their public pay telephones as
detariffed customer premises equipment and to provide
independent public pay telephone providers all functionalities
used by the LEC in its own delivery of public pay telephone
service. In contrast to the past, when the LEC imposed a
subscriber line charge on public pay telephone providers but
not on its own public pay telephones, the FCC now
requires that any subscriber line charge and tariffed network
services charges apply equally to both LEC and independent
public pay telephones.
(c) Non-structural safeguards. The FCC adopted certain
non-structural safeguards in its Computer III inquiry which
were designed to prevent BOCs from using their incumbent market
power in an anti-competitive manner. These safeguards generally
allow the BOCs to provide certain services on an integrated
basis (i.e., directly rather than through a separate
subsidiary) provided that BOCs (i) allow nondiscriminatory
access to their network features and functionalities; (ii)
restrict use of customer proprietary network information; (iii)
subscribe to certain network information disclosure rules; (iv)
do not discriminate in the provision, installation, and
maintenance of services and reporting and (v) adopt certain
cost accounting safeguards. In its rulemaking, the FCC applied
these safeguards to the provision of public pay telephone
services by the BOCs, and found that further non-structural
safeguards were unnecessary. The FCC also decided to reclassify
BOC public pay telephone service as a "nonregulated activity"
so that costs from public pay telephone activities would be
separated from regulated non-public pay telephone accounts.
Consistent with this approach, in a rulemaking initiated in
July 1996 to implement certain accounting safeguards under the
Telecommunications Act, the FCC proposed to apply accounting
safeguards identical to those adopted in Computer III to
prevent the subsidization of BOC public pay telephone services
by non-public pay telephone revenues.
(d) InterLATA presubscription. In the past BOCs were not permitted
to compete in the interLATA marketplace. Section 276 permits
BOCs to negotiate with location providers and select interLATA
long distance service providers for their public pay
telephones, unless the FCC determines that it is not in the
public's interest. In its rulemaking, the FCC concluded that a
BOC should be permitted to negotiate for the right to select
the interLATA carrier serving its public pay telephones, but
not until its plan to comply with the Computer III
non-structural safeguards has been approved by the FCC.
(e) IntraLATA presubscription. Until recently, in almost every
state only the LEC has been able to be "presubscribed" to a
telephone for local and intraLATA toll calls, including at a
public pay telephone. "Presubscription" refers to an
arrangement whereby a call is automatically connected to a
pre-selected carrier, unless another carrier's access code is
dialed. According to the FCC, intraLATA presubscription has
been ordered to become available in eighteen states. Section
276 provides that all public pay telephone service providers
have the right to "negotiate with the location provider on the
location provider's selecting and contracting with, and subject
to the terms of any agreement with the location provider, to
select and contract with, the carriers that carry intraLATA
calls from their payphones." The FCC's new rules give all
public pay telephone service providers (including BOCs and
independent providers such as the Company) the right to
negotiate with location providers concerning the intraLATA
carrier.
(f) Public interest public pay telephones. Section 276 requires the
FCC to ensure that public pay telephones provided in the
interest of public health, safety, and welfare are maintained
and supported equitably. The new FCC rules adopt a narrow
definition of "public interest payphone," and leave to the
discretion of the states how to fund their respective public
interest public pay telephone programs, so long as the funding
mechanism (i) "fairly and equitably" distributes the costs of
such program, and (ii) does not involve the use of subsidies
prohibited by Section 276(b)(1)(B) of the Telecommunications
Act. Each state's funding review must be completed by October
1998.
The Company believes that Section 276 and the implementing
regulations adopted by the FCC will likely have an overall positive effect
on the public pay telephone industry in general and the Company in
particular. A number of parties have filed petitions for judicial review of
these regulations in federal courts of appeals. To date, the regulations
remain in effect. The final rules adopted by the FCC and Section 276 have
not yet been interpreted by the courts, and there can be no assurance
regarding the effect that the rules and policies ultimately adopted
thereunder will have on the Company.
SERVICEMARK
The Company uses the servicemark "PhoneTel" on its telephones,
letterhead and in various other manners. On November 22, 1988, the United
States Patent and Trademark Office granted the Company a Certificate of
Registration for the servicemark "PhoneTel" for providing
telecommunications services for a period of twenty years.
COMPETITION
The public pay telephone industry is, and can be expected to remain,
highly competitive. While the Company's principal competition comes from
BOCs and other LECs, the Company also competes with other independent
providers of public pay telephone services, major OSPs and interexchange
carriers. In addition, the Company competes with providers of cellular
communications services and personal communications services (wireless),
which provide an alternative to the use of public pay telephones.
Furthermore, pursuant to the recently enacted Section 276 of the
Telecommunications Act and the FCC's implementing regulations, BOCs are
permitted to negotiate with location providers and select interLATA long
distance service providers for their public pay telephones. See
"--Governmental Regulations." This will enable BOCs to generate revenues
from a new service, as well as to compete with independent public pay
telephone providers for locations to install their public pay telephones by
offering location providers higher commissions for long distance calls than
those currently offered by independent public pay telephone providers. This
competition for locations may have a material adverse effect on the
Company's business, results of operations and financial condition.
Some of the other public pay telephone companies have pursued an
acquisition strategy similar to the Company's and frequently compete with
the Company for the most favorable public pay telephone contracts and
sites. Although the Company is one of the largest independent public pay
telephone service providers, most BOCs and other LECs and interexchange
carriers have, and some independent public pay telephone companies with
which the Company competes may have, substantially greater financial,
marketing and other resources than the Company. In addition, in response to
competition from public pay telephone companies, many BOCs and other LECs
have increased their compensation arrangement with location providers by
offering higher commissions.
The Company believes the principal competitive factors in the public
pay telephone industry are (i) commission payments to location providers,
(ii) the ability to serve accounts with locations in several LATAs or
states and (iii) the quality of service provided to location owners and
public pay telephone users. The Company believes that it is well-positioned
to compete effectively in the public pay telephone industry.
EMPLOYEES
The Company had 168 employees at September 30, 1996, of whom 124 were
employed to perform or support field operations. The Company considers its
relations with its employees to be satisfactory. None of the employees of
the Company are a party to agreements with any unions.
PROPERTIES
The Company's principal office is located at 1127 Euclid Avenue,
Suite 650, Cleveland, Ohio, where the Company leases approximately 15,200
square feet of space at a monthly rental of $12,728. The lease is scheduled
to terminate in December 1997. The monthly rent will increase to $15,200 in
1997. The lease also provides the Company five, one year renewal options.
As of September 30, 1996, the Company also maintains service and sales
offices in leased premises in Fort Lauderdale, Orlando, Ocala, and Tampa,
Florida; Las Vegas, Nevada; Farmers Branch, Texas; Springfield, St. Louis,
and Kansas City, Missouri; Chicago, Illinois; Livonia, Michigan; Hilton
Head, South Carolina; Knoxville, Tennessee; San Diego, Hayward and Santa Fe
Springs, California; Kent, Washington; Denver, Colorado; Cicero, Indiana;
Lincolnton, North Carolina; Portland, Oregon; and Newport News, Virginia at
an aggregate monthly rental of $39,958. The Company believes that it would
be able to replace any leases that are not renewed upon expiration with
leases having comparable terms.
The Company expects that following the 1997 Acquisitions it will
maintain the acquired service and sales offices in owned or leased premises
in Houston, Lubbock, McAllen, El Paso and Corpus Christi, Texas;
Albuquerque, Farmington and Gallup, New Mexico; Billings and Missoula,
Montana; Salt Lake City and Cedar City, Utah; Bismarck, North Dakota;
Flagstaff, Arizona; and Grand Junction, Colorado.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which,
individually or in the aggregate, would have a material adverse effect on
the Company's business, results of operations or financial condition.
MANAGEMENT
The following table sets forth the names and ages (as of January 1,
1997) 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 67 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 the founder and for more
than five years prior to the acquisition of IPP by the Company in March
1996, served as President of each of International Pay Phones, Inc., a
Tennessee company and International Pay Phones, Inc., a South Carolina
company. Since 1990, Mr. Maxey has owned and operated Resort Hospitality
Services of South Carolina, Resort Hospitality Services of Tennessee and
Resort Hospitality Services International, a group of affiliated companies
which are resellers of long distance services.
GARY PACE has been Senior Vice President of the Company since its
merger with World in September 1995. Prior to such merger, Mr. Pace was
President of World since 1989.
RICHARD P. KEBERT has served as Chief Financial Officer of the
Company since September 1996. Prior to joining the Company, Mr. Kebert was
an independent consultant. From 1994 to 1996, he was Vice President -
Finance and Administration of Acordia of Cleveland, Inc. For 12 years prior
thereto, Mr. Kebert held several senior management positions with Mr.
Coffee, Inc., including Vice President - Administration and Secretary. Mr.
Kebert is a certified public accountant.
JOSEPH ABRAMS has been a Director since September 1995. Mr. Abrams is
also a director of Merisel, Inc. a public company that distributes micro
computer hardware and software, and Spectrum Signal Processing, Inc., a
public company that specializes in digital signal solutions. Mr. Abrams was
a co-founder of and served as the President of AGS Computers from 1967 to
1991. From 1991 to 1996, Mr. Abrams has been a private investor.
GEORGE H. HENRY has been a Director since April 1990. Mr. Henry has
been the President of G. Howard Associates, Inc., a private investment
firm, since 1986. Mr. Henry is also on the Board of Directors of Biovail
International Corporation and a trustee of Mitchell College.
STUART HOLLANDER has been a Director since September 1995. Mr.
Hollander was founder, principal owner and Chairman of the Board of World
from 1986 until it was merged into the Company in 1995. Prior to that he
was Executive Vice President of Hollander & Company, Inc., one of the
largest distributors of consumer electronics in the U.S., representing
Zenith Radio Corporation; the founder and an officer of Lesley Acceptance
Corporation; Chairman and a Member of the Board of Jaeger of Canada, Inc.;
and a member of the Board of Pioneer Bank and Trust Company.
ARON KATZMAN has been a Director since September 1995. Mr. Katzman is
President of New Legends, Inc., a country club/residential community in the
St. Louis, Missouri area, and Chairman and Chief Executive Officer of
Decorating Den of Missouri, a company engaged in the selling of decorating
franchises in Missouri. Previously, Mr. Katzman was founder and a former
Director of Medicine Shoppe, Inc., a franchisor of pharmacies, and Chairman
and Chief Executive Officer of Roman Company, a manufacturer and
distributor of fashion costume jewelry, from 1984 until it was sold in
1994. Mr. Katzman was formerly a director and officer of World, which was
merged into the Company in September 1995.
STEVEN RICHMAN has been a Director since September 1995. Mr. Richman
is the principal owner of, and has served as the Chief Executive Officer
of, Fabric Resources International for more than the past five years. Mr.
Richman was the co-founder and an officer of Cable Systems USA, and an
officer at Cellular Systems USA, a director of USA Mobile Communications
Holdings, Inc. Mr. Richman has been a director of Cable Systems USA II
since 1989.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a Compensation Committee
and an Audit Committee. Although neither committee had held any meetings in
1995, both committees are scheduled to meet in the fourth quarter of 1996.
The Audit Committee is expected to meet on a quarterly basis in 1997.
The Compensation Committee has the authority to make decisions with
respect to executive compensation matters. Joseph Abrams (Chairman of the
Compensation Committee), George Henry and Peter Graf are the members of the
Compensation Committee.
The Audit Committee has the authority to recommend to the Board of
Directors the independent accountants to audit the Company's financial
statements, to meet with the independent accountants and to review the
Company's financial statements, results of audits and fees charged. Aron
Katzman (Chairman of the Audit Committee) and Steven Richman are the
members of the Audit Committee.
COMPENSATION OF DIRECTORS
The Company compensates non-employee directors for serving on the
Board and reimburses them for any expenses incurred as a result of Board of
Directors meetings. The Board of Directors had approved an annual fee of
$5,000 for non-employee directors in cash, or at the director's election,
shares of Common Stock. During 1995, Mr. Henry received a fee of $5,000
which was paid in 1,111 shares of Common Stock of the Company.
EXECUTIVE COMPENSATION
On September 22, 1995, the Company entered into a consulting
agreement with Stuart Hollander, World's former Chairman, pursuant to the
terms of the acquisition of World. The agreement with Mr. Hollander
entitles him to annual salaries of $125,000 and $135,000 during the two
year term of the agreement.
On September 22, 1995 the Company also entered into an employment
agreement with the Company's Senior Vice President, Gary Pace, pursuant to
the terms of the acquisition of World. The agreement with Mr. Pace entitles
him to annual salaries of $110,000 and $120,000, as well as certain
bonuses, during the two year term of the agreement.
On September 1, 1996, the Company also entered into an employment
agreement with the Company's Chief Financial Officer, Richard Kebert. The
agreement with Mr. Kebert entitles him to an annual salary of $120,000, as
well as a guaranteed minimum bonus of $15,000 during the eighteen-month
term of the agreement.
The Company has not entered into employment agreements with Peter
Graf or Nickey Maxey, the Company's Chief Executive Officer and Chief
Operating Officer, respectively. Mr. Graf and Mr. Maxey provide their
services to the Company without any compensation. The Company does,
however, reimburse such officers for their business expenses.
The following table sets forth a summary of all compensation of the
Company's Chief Executive Officer and all other executive officers whose
total compensation exceeded $100,000 per year for any year in the three
year period ended December 31, 1995 (the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------
NAME AND
PRINCIPAL
POSITION YEAR ANNUAL COMPENSATION LONG-TERM COMPENSATION
- ------------- ------ ----------------------- ------------------------------------------
AWARDS PAYOUTS
-------------- ----------------------
OTHER LONG-
ANNUAL RESTRICTED TERM ALL OTHER
COMPEN- STOCK OPTIONS/ INCENTIVE COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
------ ----- ------ --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter G. Graf 1995 -- -- $5,000(1) -- 47,583 -- --
Chairman, 1994 -- -- -- -- 24,705 -- --
Chief Execu-
tive Officer,
and Director
Jerry H. Burger 1995 $ 74,293 $13,600 $13,600(2) -- 62,500 -- $212,000(3)
Former Chief 1994 $ 40,000 -- -- -- -- -- --
Executive
Officer 1993 $ 42,000 $75,000 5,917(4) 43,333(5)
Bernard Mandel 1995 $147,544 9,760 9,760(6) -- 41,666 -- $146,500(7)
Former
President, 1994 $ 88,894 -- 4,154(4) -- -- -- --
Chief
Operating 1993 $ 83,269 $25,000 3,698(4) -- 10,000(8) -- --
Officer and
Secretary
Daniel J. Moos 1995 $ 95,000 1,442 $12,800(9) -- 54,999(10) -- --(11)
Former
Executive
Vice
President,
Chief Financial
Officer, and
Treasurer
<FN>
- --------------------
(1) Represents fees payable to Mr. Graf as a non-employee director during
1995, which fees have not been paid by the Company.
(2) Represents the value of 2,833 shares paid to Mr. Burger for services
provided.
(3) On September 15, 1995, the Company and Mr. Burger entered into a
separation agreement which provided for the termination of the
employment agreement and the resignation of Mr. Burger as a director,
officer and employee of the Company. Pursuant to the separation
agreement, the Company agreed to pay Mr. Burger $650,000 in
installments, with the final amount paid March 15, 1996. All other
compensation represents payment under the separation agreement with Mr.
Burger and related expenses excluding payment of $445,000, plus
accrued interest of $4,291, paid on March 15, 1996.
(4) Value of non-business use of Company automobile.
(5) 26,000 options expired in 1995.
(6) Represents the value of 2,033 shares paid to Mr. Mandel for services
provided.
(7) On September 15, 1995, the Company and Mr. Mandel entered into a
separation agreement which provided for the termination of the
employment agreement and the resignation of Mr. Mandel as a director,
officer and employee of the Company. Pursuant to the separation
agreement, the Company agreed to pay Mr. Mandel the amount of $450,000
in installments, with the final amount paid March 15, 1996. All other
compensation represents payment under the separation agreement with Mr.
Mandel, excluding payment of $308,500, plus accrued interest of
$2,976, paid on March 15, 1996.
(8) Expired in 1995.
(9) Represents the value of 2,666 shares paid to Mr. Moos for services
provided.
(10) 33,000 options not vested at December 31, 1995.
(11) On July 29, 1996, the Company and Mr. Moos entered into a separation
agreement which provided for the termination of his employment agreement
and the resignation of Mr. Moos as an executive vice president, chief
financial officer and treasurer of the Company, effective August 2,
1996. Pursuant to the separation agreement, the Company agreed to pay
Mr. Moos the amount of $325,000 in installments, all of which has been
paid.
</TABLE>
The following table sets forth certain information concerning
individual grants of stock options made during the year ended December 31,
1995 to each of the named executive officers.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
-----------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS/
SECURITIES WARRANTS/
UNDERLYING SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE
NAME AND SARS EMPLOYEES IN PRICE
PRINCIPAL POSITION GRANTED (#) FISCAL YEAR ($/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
<FN>
- ------------------------
(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 $3.72 per share.
(3) Excludes 25,537 additional options issued pursuant to anti-dilution
provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-dilution
provisions.
</TABLE>
The following table sets forth certain information about unexercised
stock options held by the named executive officers at December 31, 1995. No
stock options were exercised by such persons during 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
--------------------------------------------------------------------
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
SHARES (#) ($)
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 December 31, 1996 (after giving
effect to the sale of shares pursuant to the Over-Allotment Option). Unless
otherwise indicated, the number of shares of Common Stock owned by the
named shareholders assumes the exercise of the warrants or options that are
exercisable within 60 days, the number of which is separately referred to
in a footnote, and the percentage shown assumes the exercise of such
warrants or options and assumes that no warrants or options held by others
are exercised. This information is based upon information furnished by such
persons and statements filed with the Commission and other information
known by the Company.
----------------------------------------
NUMBER OF SHARES
NAME AND ADDRESS OF COMMON STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OF CLASS
- ------------------- ------------------ -------------------
DIRECTORS
- ---------
Peter G. Graf(1)(15) 1,262,673 7.90%
Chairman, Chief Executive
Officer and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Nickey B. Maxey(2)(15) 407,279 2.60%
Chief Operating Officer and Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
George H. Henry(3) 360,376 2.30%
Director
6860 Sunrise Court
Coral Gables, FL 33133
Stuart Hollander(4) 323,559 2.07%
Director
32 Lake Forest
St. Louis, Mo 63117
Steven Richman(5)(15) 260,107 1.65%
Director
9 Beech Lane
Kings Point, NY 11024
Aron Katzman (6)(15) 246,325 1.56%
Director
10 Layton Terrace
St. Louis, MO 63124
Joseph Abrams (7)(15) 197,736 1.25%
Director
85 Old Farm Road
Bedminster, NJ 07921
Named Executive Officers
- ------------------------
Jerry H. Burger (8) 323,164 2.03%
Former Chief Executive Officer
27040 Cedar Road
Beachwood, OH 44122
Bernard Mandel (9) 129,221 *
Former President, Chief Operating
Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos (10) 135,592 *
Former Executive Vice President,
Chief Financial Officer & Treasurer
7399 Stow Road
Hudson, OH 44236
Executive Officers and Directors 3,201,298 19.34%
as a group (10 persons)(11)(15)
5% Beneficial Owners
- --------------------
ING (U.S.) Investment 2,048,240 11.59%
Corporation(12)
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P. (13) 2,048,240 11.59%
450 Park Avenue
New York, NY 10022
ACI - HDT Supply Company, et al., 2,162,163 13.84%
as Debtors-in-Possession (14)
5452 Oberlin Drive, Suite B
San Diego, CA 92121
- --------------------
* less than 1%.
(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 278,885 shares of Common Stock.
(2) Includes 14% Preferred which is convertible through June 30, 2000 into
32,357 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 46,481
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 49,130 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 65,073 shares of Common Stock.
(8) Includes options to purchase 293,664 shares of Common Stock through
August 31, 1997. Beneficial owner has anti-dilution rights pursuant
to stock option agreements or other rights which may require
adjustments to the number of shares beneficially owned as a result of
certain transactions which occur subsequent to January 1, 1997.
(9) Includes options to purchase 127,188 shares of Common Stock through
August 1, 2001 and 1,250 shares of Common Stock held by his spouse.
Beneficial owner has anti-dilution rights pursuant to stock option
agreements or other rights which will require adjustments to the number
of shares beneficially owned as a result of certain transactions which
occur subsequent to January 1, 1997.
(10) Includes options to purchase 123,593 shares of Common Stock which
expire August 2, 2000. Beneficial owner has anti-dilution rights
pursuant to stock option agreements or other rights which will require
adjustments to the number of shares beneficially owned as a result of
certain transactions which occur subsequent to January 1, 1997.
(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) Reflects Lenders' Warrants to purchase the Series A Preferred, which
is immediately convertible into 2,048,240 shares of Common Stock.
ING (U.S.) Investment Corporation is a wholly-owned subsidiary of ING.
in December 1996, ING transferred the Lenders' Warrants to ING (U.S.)
Investment Corporation. All references to "ING" as holder of the
Lenders' Warrants or as a holder of shares of Common Stock refer to
ING (U.S.) Investment Corporation. An affiliate of ING was one of the
underwriters in the Company Debt Offering.
(13) Reflects Lenders' Warrants to purchase the Series A Preferred, which is
immediately convertible into 2,048,240 shares of Common Stock.
(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 United States Bankruptcy
Court for the Southern District of California (the "Bankruptcy Court")
identified as Case Nos. 95-08253-all. Pursuant to the Amtel Asset
Purchase Agreement, Amtel has agreed to distribute the shares of
Common Stock to its creditors pursuant to the terms of the final plan
of reorganization, which was confirmed by order of the Bankruptcy
Court on December 2, 1996.
(15) See "Certain Transactions" for information with respect to the 14%
Preferred and the Nominal Value Warrants.
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 who at the time held 5% or more of the Common Stock
received the amount of 14% Preferred and Nominal Value Warrants shown
below. The Company may use a portion of the net proceeds of the Company
Debt Offering and the Company Equity Offering to redeem all of the 14%
Preferred other than the shares of 14% Preferred beneficially owned by
Peter G. Graf.
VALUE OF
DEBT/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 Inc. 825,000 296,994
5% Owner
Southcoast Capital Corporation 600,000 143,994
5% Owner
In 1995, Mr. Graf loaned an aggregate of $325,000 to the Company. Such
amounts were subordinated to the Company's other indebtedness and accrued
interest at the rate of prime plus 5%. In 1996, Mr. Graf loaned to the
Company an additional $260,000 under similar terms. On December 31, 1996,
Mr. Graf and the Company agreed to convert approximately $337,000 of the
principal amount of such indebtedness, plus accrued interest thereon, into
99,119 shares of Common Stock. On January 2, 1997, Mr. Graf and the Company
agreed to convert the remaining indebtedness of approximately $337,000
principal amount, plus accrued interest thereon, into 124,747 shares of
Common Stock.
In March 1996, a predecessor of Southcoast Capital Corporation
("Southcoast"), which at the time and prior to the consummation of the
Company Equity Offering was a 5% or more stockholder of the Company, was
paid fees consisting of (i) $600,000 in cash, (ii) $600,000 of 14%
Preferred and (iii) Nominal Value Warrants to purchase 143,944 shares of
Common Stock of the Company at the price of $.01 per share for providing
financial advisory services to the Company in connection with the Credit
Agreement. In addition, in December 1995, a predecessor of Southcoast
received 56,666 shares of Common Stock and warrants to purchase 166,666
shares of the Company's Common Stock at an exercise price of $6.00 per
share for services rendered in connection with the acquisition of World and
a working capital loan. Southcoast was the representative of the
underwriters in the Company Equity Offering and an underwriter in the
Company Debt Offering. Southcoast received approximately $1,517,500
million in December 1996 for acting as an underwriter in connection with
the Company Equity Offering and $810,000 in January 1997 for providing
financial advisory services to the Company in connection with the Cherokee
Acquisition.
ING and Cerberus, each of 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, including fees
upon the prepayment and termination of the Credit Agreement in December
1996. In addition, an affiliate of ING received approximately $656,250 in
December 1996 for acting as an underwriter in the Company Debt Offering.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $.01 par value per share, and 10,000,000 shares of
Preferred Stock, without par value, except as further designated by the
Board of Directors (the "Preferred Stock"). As of December 31, 1996 after
giving effect to the sale of shares pursuant to the Over-Allotment Option,
there was outstanding (i) 15,626,075 shares of Common Stock, (ii)
120,387.11 shares of 14% Cumulative Redeemable Convertible Preferred Stock,
$60 stated value per share (the "14% Preferred"), which are then
convertible into 1,203,871 shares of Common Stock, (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) 805,351 additional warrants which are
exercisable into the same number of shares of Common Stock and (vi) 825,263
stock options for Common Stock, all of which are immediately exercisable.
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 which were outstanding
in 1996 under the Credit Agreement, were convertible 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. All of such
term loans were repaid with a portion of the net proceeds from the Company
Debt Offering and the Company Equity Offering. See "Prospectus Summary--The
Company Equity Offering and the Company Debt Offering."
The Series B Preferred shares are pari passu with the Common Stock
with respect to the payment of dividends. If a dividend or other
distribution is declared by the Board of Directors to be paid to holders of
the Common Stock, then simultaneously with the payment of such dividend or
making of such distribution, and as a condition precedent to its right to
do so, the Board of Directors will pay or distribute to the holders of the
Series B Preferred the same dividends or distributions as such holders
would have been entitled to receive if such holders had converted their
shares of Series B Preferred into Common Stock prior to the record date
used by the Board of Directors for determining the holders of Common Stock
entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series B Preferred is
pari passu with the Series A Preferred and senior to the Common Stock and
any other series of Preferred Stock. Accordingly, upon the liquidation,
dissolution or winding up of the Company, holders of the Series B Preferred
will be entitled to receive, on a ratable and pari passu basis with the
holders of the Series A Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any payment to
holders of Common Stock or any other series of Preferred Stock, a
liquidation preference of $120 per share plus accrued and unpaid dividends
to the date of payment.
Holders of the Series B Preferred have the right, at any time, to
convert each share of Series B Preferred into 20 shares of fully paid and
nonassessable Common Stock, subject to certain antidilution adjustments and
regulatory restrictions applicable to bank holding companies.
Except as provided by law, the holders of Series B Preferred have no
voting rights.
14% Preferred
The Company has 200,000 shares of 14% Preferred authorized of which
116,316.05 shares were issued at November 30, 1996. Holders of the 14%
Preferred are entitled to receive dividends payable in additional shares of
14% Preferred at a quarterly rate of 0.035 shares per share of 14%
Preferred outstanding, on the first business day of each April, July,
October and January, commencing April 1, 1996. Dividends on the outstanding
shares of 14% Preferred accrue, whether or not declared. Unless full
cumulative dividends on all shares of 14% Preferred outstanding have been
paid, no redemption or fund for such redemption may be authorized, no
dividend (other than a dividend payable in Common Stock or any other class
of stock ranking junior to the 14% Preferred as to dividends and upon
liquidation) or other distribution may be declared or paid on any class of
the Company's stock ranking junior to the 14% Preferred as to dividends or
as to liquidation preferences. However, the holders of at least 50% of the
outstanding shares of 14% Preferred may vote to approve a redemption.
With respect to liquidation preferences, the 14% Preferred is junior
to the Series A Preferred and the Series B Preferred and is senior to the
Common Stock and any other series of Preferred Stock. Accordingly, upon the
liquidation, dissolution or winding up of the Company, holders of the 14%
Preferred will be entitled to receive out of the assets of the Company
legally available for distribution to its stockholders after making payment
to the holders of the Series A Preferred and the Series B Preferred and
before making any payment to holders of Common Stock or any other series of
Preferred Stock, a liquidation preference of $60.00 per share.
Holders of the 14% Preferred have the right, at any time, to convert
each share of 14% Preferred, including any accrued and unpaid dividend
shares, into 10 shares of fully paid and nonassessable Common Stock,
subject to certain antidilution adjustments.
The 14% Preferred is mandatorily redeemable by the Company on June
30, 2000, and is redeemable at any time prior thereto at the Company's
option, in each case, at a redemption price of $60 per share plus accrued
and unpaid dividends. Holders of the 14% Preferred have 20 days from
receipt of notice of a redemption by the Company to convert their 14%
Preferred shares into Common Stock. The Company may use a portion of the
net proceeds of the Company Debt Offering and the Company Equity Offering
to redeem shares of 14% Preferred having a liquidation preference of
approximately $5.4 million. See "Prospectus Summary--The Company Equity
Offering and The Company Debt Offering."
Except as provided by law, the holders of the 14% Preferred have no
voting rights.
From time to time, the Board of Directors has designated other series
of Preferred Stock, none of which are currently outstanding.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of December 31, 1996, the Company has reserved 7,914,770 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 120,387.11 shares of 14% Preferred into 1,203,871 shares of
Common Stock; (iii) exercise of 983,805 Nominal Value Warrants at an
exercise price of $.01 per share; (iv) exercise of 805,351 warrants at
prices ranging from $5.70 to $15.75 per share; and (v) exercise of 825,263
stock options at prices ranging from $2.62 to $19.50 per share.
REGISTRATION RIGHTS AND LOCK-UPS
The Company has entered into several registration rights agreements
with certain of the Selling Shareholders and has filed the Registration
Statement of which this Prospectus forms a part in order to satisfy its
obligations under such agreements.
Notwithstanding the filing of the Registration Statement, however,
each of ING and Cerberus (who each beneficially own 2,048,240 shares of the
Common Stock offered hereby) have agreed not to transfer, sell or otherwise
dispose of shares of Common Stock (except for 250,000 shares which may be
sold by each of ING and Cerberus at any time on or after January 27, 1997)
on or prior to December 7, 1997 without the consent of Southcoast Capital
Corporation except as follows: (i) up to 900,000 shares in the aggregate
may be transferred, sold or otherwise disposed of by each of ING and
Cerberus during the period commencing on June 11, 1997 and ending on
September 8, 1997 and (ii) up to 1,150,000 shares in the aggregate
(including any shares sold pursuant to clause (i)) may be transferred, sold
or otherwise disposed of by each of ING and Cerberus during the period
commencing on September 9, 1997 and ending on December 7, 1997. In
addition, other Selling Shareholders who beneficially own 6,105,000 shares
of the Common Stock offered hereby have agreed not to transfer, sell or
otherwise dispose of such shares on or prior to June 16, 1997 without the
consent of Southcoast Capital Corporation.
In connection with the Company Equity Offering, the Company and its
directors and executive officers have agreed not to offer, sell, contract
to sell, grant any option or other right for the sale of, or otherwise
dispose of any shares of Common Stock in any manner during the Lock-up
Period without the prior written consent of Southcoast Capital Corporation,
except that the Company may issue shares of Common Stock upon the exercise
of options or in connection with acquisitions.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE 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 $75.0 million in the form of a senior secured credit
facility. The obligations under the New Credit Agreement are expected to be
secured by a first priority lien on all of the Company's installed
telephones and certain other assets. Funds available under the New Credit
Agreement are expected to be available to finance certain acquisitions, to
fund the optional redemption of the Notes and for capital expenditures and
working capital needs.
The Company expects that the New Credit Agreement will contain
restrictions on the Company's ability to pay dividends, incur or permit to
exist debt, liens or lease obligations, make investments and capital
expenditures, dispose of assets and also include restrictions on the
activities of the Subsidiary Guarantors. The New Credit Agreement is also
expected to contain provisions requiring the Company to maintain certain
financial ratios.
THE NOTES
The Notes offered in the Company Debt Offering were issued under an
Indenture (the "Indenture") dated as of December 18, 1996 by and among the
Company, each subsidiary of the Company (the "Subsidiary Guarantors") and
Marine Midland Bank, as trustee (the "Trustee"). The following summary of
the terms of the Notes and the Indenture does not purport to be complete,
and is subject to the detailed provisions of, and is qualified in its
entirety by reference to, the Notes and the Indenture. A copy of the
Indenture, which includes the form of Note, has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
The Notes are general unsecured obligations of the Company limited in
aggregate principal amount to $125.0 million and will mature on December
15, 2006. Interest on the Notes accrues at the rate of 12% per annum and is
payable semi-annually in arrears on June 15 and December 15 in each year
commencing June 15, 1997. The Notes rank senior in right of payment to all
indebtedness of the Company that is expressly subordinated and are pari
passu in right of payment with all other senior indebtedness of the
Company. The Notes are guaranteed jointly and severally and fully and
unconditionally on a senior unsecured basis by the Subsidiary Guarantors,
including any and all future subsidiaries of the Company.
The Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after December 15, 2001, at the redemption prices
set forth in the Indenture, plus accrued and unpaid interest to the date of
redemption. In addition, at any time or from time to time prior to December
15, 1999, the Company may redeem up to 40% of the aggregate principal
amount of the Notes originally issued with the net cash proceeds to the
Company of one or more public equity offerings or equity private placements
(other than the Company Equity Offering) at a redemption price equal to
112% of the principal amount thereof, plus accrued and unpaid interest to
the date of redemption provided that at least $75.0 million principal
amount of the Notes remains outstanding immediately after any such
redemption.
The Indenture imposes certain limitations on the ability of the
Company and the Subsidiary Guarantors to, among other things, incur
additional indebtedness, pay dividends or make certain other restricted
payments, consummate certain asset sales, enter into certain transactions
with interested persons, incur liens, impose restrictions on the ability of
a Subsidiary Guarantor to pay dividends or make certain payments to the
Company, conduct business other than the pay telephone and ancillary
businesses, merge or consolidate with any other person or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
the assets of the Company.
The Indenture contains customary events of default, including,
without limitation, the following: (i) the failure to pay principal or
interest when due on the Notes; (ii) certain defaults under agreements
relating to other indebtedness; (iii) the breach of any covenant in the
Indenture; (iv) the levy of certain judgments; and (v) certain bankruptcy,
reorganization and insolvency events. The occurrence of an event of default
under the Indenture permits the holders of the Notes to accelerate the
Notes and to pursue other remedies.
In addition, upon a "change of control" (as defined in the
Indenture), the Company has the obligation to offer to repurchase all
outstanding Notes from the holders thereof at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase.
SELLING SHAREHOLDERS
This Prospectus relates to offers and sales from time to time of up
to 13,304,263 shares of Common Stock by the selling shareholders named
below (collectively, the "Selling Shareholders"). The table below sets
forth certain information with respect to the Selling Shareholders and
their beneficial ownership of Common Stock as of the date hereof. In
addition to the shares of Common Stock beneficially owned by the Selling
Shareholders set forth in the table below, this Prospectus relates to an
additional 564,519 shares of Common Stock which may be acquired by
certain of the Selling Shareholders as a result of contractual
anti-dilution rights provided by the Company to such Selling Shareholders.
Except as otherwise disclosed in "Management," "Certain Transactions,"
"Security Ownership of Certain Beneficial Owners and Management" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Credit Agreement," none of
the Selling Shareholders holds any position, office or has had any other
material relationship with the Company, or any of its predecessors or
affiliates, during the past three years. The table has been prepared based
upon information furnished to the Company by or on behalf of the Selling
Shareholders. The shares of Common Stock offered hereby shall be deemed to
include (i) all of the shares of Common Stock listed in the table below as
being registered on behalf of the Selling Shareholders, (ii) any additional
shares of Common Stock acquired from the Company by any of the Selling
Shareholders listed below as a result of their contractual anti-dilution
rights and (iii) shares of Common Stock offered by any pledgee, donee,
transferee or other successor in interest of any of the Selling
Shareholders listed below, provided, however, that in the case of clause
(ii) or (iii), this Prospectus is amended or supplemented if required by
applicable law.
SHARES BEING
SELLING SHAREHOLDER REGISTERED
- ------------------- ------------
Abrams, Douglas 24,165
Abrams, Joseph (1) 237,997
Ackerman, R. Kevin 233
Allenstown Investments Limited c/o Charles Johnston 113,333
Ariel Fund Limited 177,082
Arnstein, Frederick Jr., as trustee for Frederick A.
Arnstein, Jr. 12,901
Axelbaum, Jerold L. and Shirley F. Axelbaum, as
trustees for Jerold L. Axelbaum Revocable Trust 10,895
Berk, Gary 10,833
Berthel Fisher & Company Inc. 70,222
Blackman, Paul 4,166
Blumenfeld, Andrew D. 1,787
Blumenfeld, Emily A. 1,787
Blumenfeld, James M. 1,787
Blumenfeld, Jane A. 1,787
Blumenfeld, John A., as trustee for John A. Blumenfeld 378
Blumenfeld, John A., Jr. 1,787
Bowlin, Richard R. 11,175
Bridges, W. Lloyd, M.D. 2,328
Bridges, W. Lloyd, M.D. Trust 4,656
Brinkmeier, William 42,233
Burger, Jerry 303,164
Cerberus Partners, L.P. (2) 2,048,240
Collins, Hugh 109,334
Commercial Alloys Corporation 4,166
Danco (G.R. Nolan, M.D. IRA-FWNB) 11,640
Danco (S. Schouweiler-FWNB) 6,229
DeBartolo (3) 517,856
Delaware Charter (Samuel B. Gregory, Jr. IRA) 12,804
Evans, Richard & Martha, Trust 2,328
Evans, Richard 1,164
Evans, Ryan M. 1,164
French, Arleen N., as trustee for Arleen N. French
Revocable Trust 2,680
Gabriel Capital, L.P. 177,082
Galakatos, George, as Trustee under living trust
of George Galakatos 78,155
Gavatin, Linda S. 933
Graf, Peter (4) 1,431,885
Greenberg, Lawrence H. and Sandra M. Greenberg,
with right of survivorship 4,764
Gregory, Constance A. 2,794
Gregory, Samuel B., Jr. 3,260
Guyer, Gerald H. 4,656
Harvey, Linda M. (5) 29,773
Harvey, Michael S. and Linda M. Harvey, as joint
tenants with right of survivorship 6,449
Harvey, Michael S. 1,086
Henry, George (1) 360,376
Hoffman, Augusta 10,344
Hoffman, Burton D. 2,978
Hoffman, David 26,221
Hoffman, James 10,344
Hoffman, Larry 2,978
Hollander, Jason 6,267
Hollander, Sharon M., as trustee for
Sharon M. Hollander 148,865
Hollander, Stuart S. (1) 6,267
Hollander, Stuart., as trustee for
Stuart Hollander 162,163
Huffman, Alton L. (6) 119,120
Huffman, Jeff (7) 116,091
ING (U.S.) Investment
Corporation (8) 2,048,240
J&C Resources Inc. 586,946
Katzman, Aron (1) 276,722
Klaehn, William R. and Yvonne J. 8,148
Klaehn, Gary R. 2,328
Klaehn, Jeffrey R. 2,328
Kliethermes, Roberta (9) 2,918
Kliethermes, Roberta Ann, as custodial trustee for
Kimberly Anne Kliethermes 30
Kliethermes, Roberta Ann, as custodial trustee for
Ragina Linn Kliethermes 30
Kolbrener, Maynard, II 26,795
Kolbrener, Richard 5,955
Kolbrener, Robert 15,879
Kolbrener, Thomas 5,955
Komisarow, Howard 6,000
Komisarow, Marvin L. 7,296
Komisarow, Steven and Amanda 2,000
M & M Financial Services 12,500
Mandel, Bernard 127,188
Mandel, Jane 1,250
Mann, Vincent 833
Mark Twain Trust for separate account of Richard S.
Marx under Blumenfeld, Kaplan & Sandweiss Profit
Sharing 39,696
Mark Twain Trust for the separate account of John A.
Blumenfeld under Blumenfeld, Kaplan and Sandweiss
Profit Sharing Plan Account 14,887
Martin, James R. 128,805
Martin, Thomas J. 201,974
Martin, Thomas James, as trustee for the Thomas
James Martin living trust 232
Martin, Thomas J. Jr. 18,158
Marx, Richard S., as trustee for Richard S. Marx 9,311
Maxey, Nickey (10) 427,297
McCadden, John E., Jr. and Patricia N. McCadden,
as trustees for John E. McCadden, Jr. 13,876
Miniaci, Albert J. (11) 330,473
Minner, Jack D. 160,256
Mitchusson, Margaret, as trustee for Margaret M.
Mitchusson Trust 1,936
Mitchusson, Robert L., as trustee for Robert L.
Mitchusson Trust 298
Moos, Daniel J. 123,593
Morgan, Jerald L. 10,476
Morgan Motors 5,820
Moses, William Jr., Estate of & Partners 134,862
Moulton, Edmond A. 833
Newman, Andrew R. 1,490
Newman, Elizabeth J. 1,490
Newman, Lee I. 1,490
Newman, Matthew 14,887
Niedt, Greg S. or Moira M.B. Niedt with right of
survivorship 12,945
Nolan, Gerald R. M.D. 1,164
Pace, Gary (12) 142,910
Paine Weber (Krueger-IRA) 11,640
Steven Richman (1) 284,420
Rojeski, Stanley 54,211
Roman, Adele G., as trustee for Adele G. Rowan
Revocable Living Trust 8,038
Roman, Melvin F., as trustee for Melvin F. Roman
Revocable Living Trust 15,928
Sale, Fred R. and Susan W. Sale, as trustees for
Fred R. Sale 11,768
Sale, Susan W. and Fred R. Sale, as trustees for
Susan W. Sale 11,770
Sass, Richard 8,394
Schlott, Richard L. Sr. 5,519
Schlott, Richard L. Jr. 1,000
Schouweiler, David E. 2,095
Schouweiler, Jeanne R. 2,328
Schouweiler, Scott C. 755
Schraier, Mark Z. 2,665
SKBW Partnership (Edward E. Beck) 2,794
Southcoast Capital Corporation (13) 547,898
Spitzer, Gloria F., as trustee for Gloria F.
Spitzer Living Trust 10,344
Spitzer, Jeffrey A. 933
Spitzer, Michael N. 933
Spitzer, Sanford, as trustee for Sanford J.
Spitzer Living Trust 276,269
Spitzer-Resnick, Sheryl K. 933
Tymoszczuk, William 40,894
Vella, Donald J. 3,333
WEA Investments 8,333
Willing, Richard M. (14) 1,489
Willing, Susan 1,489
Wolff, Robert S. 5,032
Yavitz, Marvyn 14,887
----------
Total 12,739,744
- ---------------------
(1) Director of the Company. See "Management," "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Transactions."
(2) See note (13) under "Security Ownership of Certain Beneficial Owners
and Management" and "Certain Transactions."
(3) Includes various affiliated trusts, partnerships and REITS controlled
by Edward J. Debartolo or members of his immediate family.
(4) Chairman, Chief Executive Officer and a director of the Company. See
"Management," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Transactions."
(5) Vice President of the Company.
(6) Employee of the Company.
(7) Eastern Regional Vice President of the Company.
(8) See note (12) under "Security Ownership of Certain Beneficial Owners
and Management" and "Certain Transactions."
(9) Missouri Operations Manager for the Company.
(10) Chief Operating Officer and a director of the Company. See
"Management," "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Transactions."
(11) Includes shares held by Albert J. Miniaci directly and indirectly by
Frank Miniaci, as trustee for the Frank Miniaci Revocable Living Trust,
Rose Miniaci, as trustee for each of the Albert J. Miniaci Irrevocable
Trust and the Dominick F. Miniaci Irrevocable Trust and Dominick F.
Miniaci, as trustee for the Dominick F. Miniaci Trust.
(12) Senior Vice President, Acquisitions and Regulatory Matters of the
Company. See "Management," "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Transactions."
(13) See "Certain Transactions."
(14) Midwest Regional Vice President of the Company.
Because the Selling Shareholders may sell all or a part of their
shares of Common Stock offered hereby, no estimate can be given as to the
number of shares of Common Stock that will be held by any Selling
Shareholder upon termination of any offering made hereby.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by
the Selling Shareholders of up to 13,304,263 shares of Common Stock. Any or
all of the shares of Common Stock offered hereby may be sold from time to
time directly by the Selling Shareholders. Alternatively, the Common Stock
may from time to time be offered by the Selling Shareholders to or through
broker-dealers or underwriters, who may act solely as agents or who may
acquire Common Stock as principals. The distribution of shares of the
Common Stock being offered by the Selling Shareholders may be effected in
one or more transactions that may take place on Nasdaq or on such other
national securities exchange or automated interdealer quotation system on
which the shares of Common Stock are then listed, or in the over-the-
counter market, including block trades or ordinary broker's transactions,
through privately negotiated transactions, through an underwritten public
offering or through a combination of any such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Such prices will be determined by
the Selling Shareholders or by agreement between the Selling Shareholders
and their underwriters, broker-dealers or agents. The Company will not
receive any proceeds from the sale of Common Stock by the Selling
Shareholders.
The aggregate proceeds to the Selling Shareholders from the sale of
the Common Stock so offered will be the purchase price of the Common Stock
sold less the aggregate agents' commissions and underwriters' discounts, if
any, and other expenses of issuance and distribution not borne by the
Company. The Selling Shareholders may pay usual and customary or
specifically negotiated underwriting discounts, concessions or commissions
in connection with such sales. The Selling Shareholders and such
broker-dealers, underwriters or agents that participate with the Selling
Shareholders in the distribution of the Common Stock may be deemed to be
underwriters under the Securities Act, and any commissions received by them
and any profit on the resale of the Common Stock purchased by them might be
deemed to be underwriting discounts and commissions under the Securities
Act. Those persons who act as broker-dealers, underwriters or agents in
connection with the sale of the Common Stock will be selected by the
Selling Shareholders and may have other business relationships with, and
perform services for, the Company or its affiliates in the ordinary course
of business.
The Company has agreed to pay all expenses (other than commissions or
discounts of underwriters, broker-dealers or agents, brokers' fees, state
and local transfer taxes and fees and any other expenses that certain of
the registration rights agreements have assigned to particular Selling
Shareholders) in connection with the registration and sale of the Common
Stock being offered by the Selling Shareholders. Pursuant to the
registration rights agreements entered into by the Company and the Selling
Shareholders, the Company has agreed to indemnify the Selling Shareholders,
and with respect to certain Selling Shareholders, each of their respective
officers and directors and any person who controls such Selling
Shareholders, against certain liabilities incurred in connection with the
registration and sale of the Common Stock offered hereby, including
liabilities under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, the shares of Common Stock offered hereby will be sold in such
jurisdictions only through registered or licensed broker-dealers. In
certain states the Common Stock offered hereby may not be sold unless the
Common Stock has been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied
with.
At any time that a particular offer of Common Stock is made by the
Selling Shareholders, to the extent required, a Prospectus Supplement will
be distributed which will set forth the identity of, and certain
information relating to, the particular Selling Shareholder who is offering
the Common Stock, the number of shares of Common Stock being offered and
the terms thereof, including the name or names of any underwriters,
broker-dealers or agents, any discounts, commissions or other items
constituting compensation from such Selling Shareholder and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon by Tammy L. Martin, Esq., General Counsel of the Company.
EXPERTS
The consolidated financial statements of the Company as of December
31, 1994 and 1995 and for the three years ended December 31, 1995 included
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Paramount Communications Systems, Inc. as
of December 31, 1995 and for the year then ended included in this
Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Paramount Communications Systems, Inc. as
of December 31, 1994 and for the year then ended included herein and in the
registration statement of which this Prospectus forms a part have been so
included in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the
authority of said firm as experts in auditing and accounting.
The financial statements of International Pay Phones, Inc. (South
Carolina) as of December 31, 1994 and 1995 and for each of the two years
ended December 31, 1994 and 1995 included in this Prospectus have been so
included in reliance on the report of Miller Sherrill Blake, CPA, PA,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of International 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, 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, 1996 and 1995 and for each of the three years in the period
ended September 30, 1996 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>
<CAPTION>
PAGE
-----
<S> <C>
PHONETEL TECHNOLOGIES, INC.
Audited Financial Statements:
Report of Independent Accountants.................................. F-3
Consolidated Balance Sheets as of December 31, 1994 and December
31, 1995.......................................................... F-4
Consolidated Statements of Operations for the years ended December
31, 1993, 1994 and 1995........................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995.................................. F-6
Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1994 and 1995........................................... F-8
Notes to Consolidated Financial Statements......................... F-10
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and September
30, 1996.......................................................... F-26
Consolidated Statements of Operations for the nine and three months
ended September 30, 1995 and 1996................................. F-27
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1995 and 1996....................................... F-28
Consolidated Statements of Changes in Mandatorily Redeemable
Preferred Stock and Non-Mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity as of December 31,
1995 and September 30, 1996....................................... F-29
Notes to Consolidated Financial Statements......................... F-31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Audited Financial Statements -- 1995:
Report of Independent Accountants.................................. F-39
Balance Sheet as of December 31, 1995.............................. F-40
Statement of Income for the year ended December 31, 1995........... F-41
Statement of Cash Flows for the year ended December 31, 1995....... F-42
Statement of Changes in Shareholders' Equity for the year ended
December 31, 1995................................................. F-43
Notes to Financial Statements...................................... F-44
Audited Financial Statements -- 1994:
Report of Independent Certified Public Accountants................. F-47
Balance Sheet as of December 31, 1994.............................. F-48
Statement of Income for the year ended December 31, 1994........... F-49
Statement of Shareholders' Equity for the year ended December 31,
1994.............................................................. F-50
Statement of Cash Flows for the year ended December 31, 1994....... F-51
Notes to Financial Statements...................................... F-52
INTERNATIONAL PAY PHONES, INC. (SOUTH CAROLINA)
Audited Financial Statements -- 1995:
Independent Auditors' Report....................................... F-55
Balance Sheet as of December 31, 1995.............................. F-56
Statement of Income and Retained Earnings for the year ended
December 31, 1995................................................. F-57
Statement of Cash Flows for the year ended December 31, 1995....... F-58
Notes to Financial Statements...................................... F-59
Audited Financial Statements -- 1994:
Independent Auditors' Report....................................... F-64
Balance Sheet as of December 31, 1994.............................. F-65
Statement of Income and Retained Earnings for the year ended
December 31, 1994................................................. F-66
Statement of Cash Flows for the year ended December 31, 1994....... F-67
Notes to Financial Statements...................................... F-68
</TABLE>
F-1
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTERNATIONAL PAY PHONES, INC. (TENNESSEE)
Audited Financial Statements:
Independent Auditors' Report....................................... F-72
Balance Sheets as of December 31, 1995 and 1994.................... F-73
Statements of Earnings and Retained Earnings for the years ended
December 31, 1995 and 1994........................................ F-74
Statements of Cash Flows for the years ended December 31, 1995 and
1994.............................................................. F-75
Notes to Financial Statements...................................... F-76
PAYPHONES OF AMERICA, INC.
Audited Financial Statements:
Independent Auditors' Report....................................... F-79
Consolidated Balance Sheets as of December 31, 1995 and 1994....... F-80
Consolidated Statements of Operations for the years ended December
31, 1995 and 1994................................................. F-81
Consolidated Statement of Stockholders' Equity (Deficit) for the
years ended December 31, 1995 and 1994............................ F-82
Consolidated Statements of Cash Flows for the years ended December
31, 1995 and 1994................................................. F-83
Notes to Financial Statements...................................... F-84
Unaudited Financial Statements:
Independent Accountants' Report.................................... F-91
Consolidated Balance Sheets as of June 30, 1996 and 1995........... F-92
Consolidated Statements of Operations for the six months ended June
30, 1996 and 1995................................................. F-93
Consolidated Statements of Cash Flows for the six months ended June
30, 1996 and 1995................................................. F-94
Notes to Consolidated Financial Statements......................... F-95
AMTEL COMMUNICATIONS INC. AND COMBINED COMPANIES (DEBTOR-IN POSSESSION)
Audited Financial Statements:
Independent Auditors' Report....................................... F-100
Combined Balance Sheets as of June 30, 1996 and December 31,
1995.............................................................. F-101
Combined Statements of Operations for the six months ended June 30,
1996 and the year ended December 31, 1995......................... F-102
Combined Statements of Changes in Stockholder's Deficit for the six
months ended June 30, 1996 and the year ended December 31, 1995... F-103
Combined Statements of Cash Flows for the six months ended June 30,
1996 and the year ended December 31, 1995......................... F-104
Notes to Financial Statements...................................... F-105
Audited Statement of Revenues and Direct Operating Expenses:
Independent Auditors' Report....................................... F-109
Combined Statement of Revenues and Direct Operating Expenses for
the three months ended December 31, 1994.......................... F-110
Notes to Combined Statement of Revenues and Direct Operating
Expenses.......................................................... F-111
CHEROKEE COMMUNICATIONS, INC.
Audited Financial Statements:
Independent Auditors' Report....................................... F-113
Balance Sheets as of September 30, 1996 and 1995................... F-114
Statements of Income for the years ended September 30, 1996, 1995
and 1994.......................................................... F-115
Statement of Shareholders' Equity for the years ended September 30,
1996, 1995 and 1994............................................... F-116
Statements of Cash Flows for the years ended September 30, 1996,
1995 and 1994..................................................... F-117
Notes to Financial Statements...................................... F-118
</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
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of
year...................... $ 3,482,110 $ 6,552,473 $ 8,755,364
Employee stock grants....... 10,335 -- --
Issuance of stock........... 222,917 276,414 528,532
Private sales of stock...... -- 1,473,638 2,010,067
Exercise of warrants and
options................... 1,335,876 552,581 34,917
JTMFC settlement............ 537,500 -- --
Zandec interest and
commitment fee
conversion................ 220,195 -- --
Options issued below fair
value..................... 24,785 -- --
Conversion of 12% Preferred
to Common Stock........... 741,346 -- --
Financing costs............. (22,591) (99,742) (83,212)
Acquisition of World
Communications, Inc....... -- -- 2,712,852
Conversion of debt to
equity.................... -- -- 137,375
Acquisition of Public
Telephone Corporation..... -- -- 2,054,902
Acquisition escrow
deposits.................. -- -- 149,762
Warrants issued with debt... -- -- 349,000
----------- ----------- ------------
Balance at end of year...... $ 6,552,473 $ 8,755,364 $ 16,649,559
----------- ----------- ------------
ACCUMULATED DEFICIT
Balance at beginning of
year...................... $(4,658,009) $(5,556,807) $ (7,303,804)
Net loss for the year....... (778,875) (1,695,122) (6,109,697)
Conversion of 12% Preferred
to Common Stock........... (92,584) -- --
Dividends paid on 12% and 8%
Preferred Stock........... (27,339) -- --
Dividends paid on 7% and 8%
Preferred Stock........... -- (51,875) (40,375)
----------- ----------- ------------
Balance at end of year...... $(5,556,807) $(7,303,804) $(13,453,876)
----------- ----------- ------------
TOTAL SHAREHOLDERS' EQUITY.... $ 2,189,596 $ 2,647,867 $ 9,710,662
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 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 Utility Commissions
of the various States and the Federal Trade Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company capitalizes all
labor and overhead costs related to installing telephones and depreciates those
costs over the life of the telephone or the length of the location contract,
whichever is shorter. Depreciation for financial reporting and tax purposes is
computed using the straight-line method and accelerated methods, respectively,
over the estimated useful lives of the assets commencing when the equipment is
installed or placed in service.
INTANGIBLE ASSETS
Intangible assets include location contracts, non-compete agreements, costs
associated with obtaining operating certification in various states and
capitalized location contract fees. Intangible assets are amortized over the
life of the respective location contract, non-compete and sales commission
agreements, and five years for state operating certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets. A loss relating to an impairment of assets occurs when the aggregate of
the estimated undiscounted future cash inflows, (including any salvage values,
less estimated cash outflows) to be generated by an asset is less than the
asset's carrying value. Impairment is measured based on the difference between
the present value of the discounted expected future cash flows and the asset's
carrying value. No impairment was recorded in 1995 or 1994.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, " Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which establishes criterion for when impairment should be evaluated, how an
asset is determined to be impaired and the method of calculating the impairment
loss. The methods
F-10
<PAGE> 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
OF SHARES EXERCISE PRICE
--------- --------------
<S> <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>
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.
CREDIT FACILITY AMENDMENT
On November 22, 1996, the Lenders amended the Credit Facility increasing
the maximum borrowings available under the Credit Facility to $43,000,000. The
Company then borrowed an additional $2,000,000 and used the proceeds to fund the
Cherokee and Texas Coinphone acquisition deposits and for working capital. There
are no additional amounts available under the Credit Facility. The Company
intends to repay the Credit Facility with the proceeds from an equity and debt
public offering.
F-25
<PAGE> 26
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 713,462 $ 655,734
Accounts receivable, net of allowance for
doubtful accounts of $40,000 and $100,961,
respectively............................... 901,508 2,423,060
Other current assets.......................... 185,634 247,426
----------- -----------
Total current assets....................... 1,800,604 3,326,220
Property and equipment, net..................... 14,099,111 31,682,061
Intangible assets, net.......................... 11,592,157 39,226,619
Other assets.................................... 1,425,384 705,473
----------- -----------
$28,917,256 $74,940,373
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt -- related
parties.................................... -- $ 5,234,953
Current portion of long-term debt -- others... $ 1,010,412 995,673
Current portion of obligations under capital
leases..................................... 288,972 803,336
Accounts payable.............................. 2,772,306 2,969,681
Accrued expenses.............................. 1,610,100 3,524,690
Deferred revenues............................. -- 600,000
Other unusual charges and contractual
settlements................................ 962,338 516,392
----------- -----------
Total current liabilities.................. 6,644,128 14,644,725
Long-term debt -- related parties (amounts due
at maturity $1,732,500 and $29,000,000,
respectively)................................. 1,732,500 31,053,337
Long-term debt -- others........................ 7,586,001 3,832,781
Obligations under capital leases................ 3,243,965 7,225,722
14% cumulative preferred stock mandatorily
redeemable (redemption amount $6,978,963, due
June 30, 2000)................................ -- 6,539,053
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity... 9,710,662 11,644,755
----------- -----------
$28,917,256 $74,940,373
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 27
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER THREE MONTHS ENDED
30, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls.......................... $ 7,689,786 $ 16,988,697 $ 2,694,457 $ 6,577,353
Non-coin............................ 3,301,969 9,308,538 996,474 4,016,008
Other............................... 965,148 2,018,191 387,910 916,555
----------- ------------ ----------- -----------
11,956,903 28,315,426 4,078,841 11,509,916
----------- ------------ ----------- -----------
OPERATING EXPENSES:
Line and transmission charges....... 3,340,812 6,800,782 1,240,385 2,934,575
Location commissions................ 2,163,464 4,101,195 647,099 1,564,465
Other operating expenses............ 4,132,850 8,102,314 1,450,140 3,054,863
Depreciation and amortization....... 2,164,822 8,876,238 732,331 3,563,353
Selling, general & administrative... 1,982,489 3,757,559 637,062 1,358,835
Other unusual charges and
contractual settlements.......... 1,418,530 5,517,753 1,418,530 183,239
----------- ------------ ----------- -----------
15,202,967 37,155,841 6,125,547 12,659,330
----------- ------------ ----------- -----------
Loss from operations.................. (3,246,064) (8,840,415) (2,046,706) (1,149,414)
----------- ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense -- related
parties.......................... -- (3,588,420) -- (1,771,530)
Interest expense -- others.......... (304,105) (551,243) (83,875) (278,998)
Interest income..................... 12,412 -- 5,824 --
----------- ------------ ----------- -----------
(291,693) (4,139,663) (78,051) (2,050,528)
----------- ------------ ----------- -----------
Loss before extraordinary item........ (3,537,757) (12,980,078) (2,124,757) (3,199,942)
Extraordinary item:
Loss on debt restructuring.......... -- (267,281) -- --
----------- ------------ ----------- -----------
NET LOSS.............................. $(3,537,757) $(13,247,359) $(2,124,757) $(3,199,942)
=========== ============ =========== ===========
Earnings per share calculation:
Preferred dividend payable in
cash............................. (232,251) -- (77,417) --
Preferred dividend payable in
kind............................. -- (211,293) -- (100,671)
Accretion of 14% Preferred to its
redemption value................. -- (58,272) -- (34,153)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred..................... -- (2,002,386) -- --
----------- ------------ ----------- -----------
Net loss applicable to
common shareholders................. $(3,770,008) $(15,519,310) $(2,202,174) $(3,334,766)
=========== ============ =========== ===========
Net loss per common share before
extraordinary item.................. $ (2.22) $ (3.54) $ (1.15) $ (0.58)
=========== ============ =========== ===========
Net loss per common share............. $ (2.22) $ (3.60) $ (1.15) $ (0.58)
=========== ============ =========== ===========
Weighted average number of shares..... 1,695,280 4,305,130 1,909,997 5,746,785
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 28
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1996
----------- ------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $(3,537,757) $(13,247,359)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Depreciation and amortization............................... 2,164,822 8,876,238
Issuance of Nominal Value Warrants.......................... -- 3,886,140
Stock issued in lieu of cash payments....................... 90,552 20,619
Accretion of related parties debt........................... -- 1,182,544
Accretion of other debt..................................... -- 45,921
Non-cash interest expense................................... -- 7,012
Loss on debt restructuring.................................. -- 338,546
Loss on disposal of assets.................................. -- 2,544
Increase in allowance for doubtful accounts................. 4,000 60,961
Amortization of deferred revenues........................... -- (600,000)
Changes in assets and liabilities net of effects of
acquisitions:
Accounts receivable....................................... (453,438) (1,063,630)
Other current assets...................................... 114,207 (61,792)
Accounts payable.......................................... 564,682 (500,520)
Accrued expenses.......................................... (209,515) 851,842
Other unusual charges and contractual settlements......... 1,189,833 (445,946)
----------- ------------
(72,614) (646,880)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc................... -- (4,827,480)
Acquisition of Paramount Communications Systems................ -- (9,780,644)
Acquisition of Pay Phones of America, Inc...................... -- (200,000)
Acquisition of Amtel Communications............................ -- (7,222,496)
Acquisition of World and Public Telephone...................... (50,828) (350,568)
Deferred charges on pending acquisitions....................... (868,496) (73,226)
Deferred charges on pending stock and debt offerings........... -- (114,235)
Deferred revenues -- signing bonus............................. -- 1,200,000
Purchases of intangible assets................................. (206,683) (625,153)
Change in other assets......................................... (82,051) (426,372)
Proceeds from sale of assets................................... -- 500
Purchases of property and equipment............................ (120,703) (2,358,982)
----------- ------------
(1,328,761) (24,778,656)
----------- ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances................................... 1,400,000 --
Proceeds from related party debt............................... -- 41,000,000
Proceeds from shareholder debt................................. -- 575,000
Principal payments on borrowings............................... (1,313,060) (10,539,531)
Proceeds from issuance of preferred and common stock and
other....................................................... 1,850,412 --
Dividends paid................................................. (40,375) --
Debt financing costs........................................... -- (4,473,107)
Redemption of 10% Preferred and 8% Preferred................... -- (1,117,371)
Equity financing costs......................................... (83,212) (87,535)
Proceeds from warrant and option exercises..................... 35,000 10,352
----------- ------------
1,848,765 25,367,808
----------- ------------
(Decrease) increase in cash...................................... 447,390 (57,728)
Cash at beginning of period...................................... 478,756 713,462
----------- ------------
Cash at end of period............................................ $ 926,146 $ 655,734
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 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 NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
-------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MANDATORILY REDEEMABLE PREFERRED STOCK
14% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
Redemption of 7% Preferred................... -- -- 3,625.00 $ 217,500
Redemption of 8% Preferred................... -- -- 14,143.33 848,600
Redemption of 10% Preferred.................. -- -- 16,668.00 1,000,000
Conversion of debt........................... -- -- 59,695.39 3,581,723
Acquisition of Paramount Communications...... -- -- 8,333.33 375,768
Acquisition of International Payphones....... -- -- 5,453.14 245,896
Dividends payable-in-kind.................... -- -- 8,397.86 211,294
Accretion of carrying value to amount
payable at redemption, June 30, 2000...... -- -- -- 58,272
------- ---------- ---------- -----------
TOTAL MANDATORILY REDEEMABLE
PREFERRED STOCK.............................. -- -- 116,316.05 $ 6,539,053
======= ========== ========== ===========
NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. 2,500 $ 200,000 2,500 $ 200,000
Redemption of 7% Preferred................... -- -- (2,500) (200,000)
------- ---------- ---------- -----------
Balance at end of period..................... 2,500 $ 200,000 --
======= ==========
---------- -----------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 12,200 $ 981,084 12,200 $ 981,084
Redemption of 8% Preferred................... -- -- (12,200) (981,084)
------- ---------- ---------- -----------
Balance at end of period..................... 12,200 $ 981,084 -- --
======= ==========
---------- -----------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 1,496 $ 1 1,496 $ 1
Redemption of 10% Preferred.................. -- -- (1,496) (1)
------- ---------- ---------- -----------
Balance at end of period..................... 1,496 $ 1 -- --
======= ==========
---------- -----------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. -- -- 530,534 $ 5,305,340
Acquisition of World Communications, Inc..... 530,534 $5,305,340 -- --
Redemption of 10% Preferred.................. -- -- (530,534) (5,305,340)
------- ---------- ---------- -----------
Balance at end of period..................... 530,534 $5,305,340 -- --
======= ========== ========== ===========
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
------- ---------- ---------- -----------
Balance at end of period..................... -- -- -- --
======= ==========
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 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)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
1995 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
SERIES B SPECIAL CONVERTIBLE PREFERRED STOCK
Balance at beginning of year.............. -- -- -- --
--------- ------------ --------- ------------
Balance at end of period.................. -- -- -- --
========= =========
------------ ------------
COMMON STOCK
Balance at beginning of year.............. 1,522,158 $ 15,222 2,855,350 $ 28,554
Issuance of stock for services............ 91,383 914 4,400 44
Private sales of stock.................... 472,056 4,720 -- --
Exercise of warrants and options.......... 8,333 83 1,035,137 10,351
Conversion of debt to equity.............. 30,231 303 -- --
Acquisition of World Communications,
Inc.................................... 402,500 4,025 -- --
Acquisition of Public Telephone
Corporation............................ 304,879 3,049 -- --
Acquisition of International Payphones.... -- -- 555,589 5,555
Acquisition of Payphones of America....... -- -- 166,666 1,667
Acquisition of Amtel Communications....... -- -- 2,162,163 21,622
Acquisition escrow deposits............... 23,810 238 (23,810) (238)
Redemption of 10% Non-Voting Preferred.... -- -- 884,214 8,842
--------- ------------ --------- ------------
Balance at end of period.................. 2,855,350 $ 28,554 7,639,709 $ 76,397
========= =========
------------ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............. $ 8,755,364 $ 16,649,559
Issuance of stock for services............ 528,532 20,574
Private sales of stock.................... 2,010,067 --
Exercise of warrants and options.......... 34,917 --
Acquisition of World Communications,
Inc.................................... 2,712,852 --
Conversion of debt to equity.............. 137,375 --
Acquisition of Public Telephone
Corporation............................ 2,054,902 --
Acquisition escrow deposits............... 149,762 (149,762)
Financing costs........................... (83,212) (87,535)
Acquisition of International Payphones.... -- 2,790,042
Acquisition of Paramount Communications... -- 443,510
Acquisition of Payphones of America....... -- 309,999
Acquisition of Amtel Communications....... -- 4,616,218
Warrants issued with debt................. 349,000 6,411,500
Issuance of Nominal Value Warrants........ -- 4,240,941
Redemption of 10% Non-voting Preferred.... -- 5,296,498
------------ ------------
Balance at end of period.................. $ 16,649,559 $ 40,541,544
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year.............. $ (7,303,804) $(13,453,876)
Net loss for the period................... (6,109,697) (13,247,359)
Dividends paid on 7% and 8% Preferred..... (40,375) --
14% Preferred dividend payable-in-kind.... -- (211,293)
Accretion of 14% Preferred carrying
value.................................. -- (58,272)
Redemption of 7% Preferred................ -- (17,500)
Redemption of 8% Preferred................ -- (293,516)
Redemption of 10% Preferred............... -- (1,691,370)
------------ ------------
Balance at end of period.................. $(13,453,876) $(28,973,186)
------------ ------------
TOTAL NON-MANDATORILY REDEEMABLE PREFERRED
STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY...................... $ 9,710,662 $ 11,644,755
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 31
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1995.
Certain amounts relating to the three and nine months ended September 30,
1995 have been reclassified to conform to the current quarter presentation. The
reclassifications have no impact on total assets, shareholders' equity or net
loss as previously reported.
2. ACQUISITIONS AND MERGERS
On September 16, 1996, the Company completed the acquisition of the
outstanding stock of Payphones of America, Inc. ("POA"), pursuant to which the
Company acquired 3,115 installed public pay telephones, $373,283 in current
assets and $727,323 in current liabilities for a purchase price, consisting of:
(i) $500,000 in cash; (ii) 166,666 unregistered shares of the Company's Common
Stock, par value $0.01 ("Common Stock"), with a value of $311,665, or $1.87 per
share; (iii) assumption of capital lease obligations of $7,750,000; (iv) notes
payable to the selling shareholders in the face amount of $3,634,114 (pursuant
to the purchase agreement, the notes payable are to be reduced for the excess of
acquired current liabilities over acquired current assets, or $311,693,
resulting in a net amount due of $3,322,421); (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, valued at $307,264; and (vii) $166,748 in related
acquisition expenses.
On September 13, 1996, the Company completed the acquisition of certain
assets from ACI-HDT Supply Company, Amtel Communications Services, Amtel
Communications Correctional Facilities, Amtel Communications, Inc. and Amtel
Communications Payphones, Inc. (all California corporations and Debtors-
in-Possession) collectively referred to as "Amtel". The acquired assets included
6,872 installed public pay telephones and inventory of an additional 728 public
pay telephones and related parts inventory for a purchase price consisting of:
(i) $7,000,000 in cash; (ii) 2,162,163 shares of the Company's Common Stock,
with a value of $4,637,840, or $2.15 per share; and (iii) approximately $675,122
in related acquisition expenses.
The Amtel and POA acquisitions were recorded as purchases and the
differences between the aggregate fair values of the tangibles assets acquired
and the total purchase price, $13,546,504, (an intangible) was recorded as
acquired public pay telephone location contracts and non-competition agreements
($307,264 was assigned to the POA non-competition agreements) and will be
amortized over the estimated average remaining life of the acquired location
contracts (54 months for Amtel's contracts, 72 months for POA's contracts, and
60 months for POA's non-competition agreements). The results of operations of
POA and Amtel are included in the results of operations of the Company from
August 1, 1996 (the effective date of the POA acquisition) and September 13,
1996, respectively.
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. In connection with
the acquisition of IPP, the Company acquired 2,101 installed public pay
telephones for a purchase price consisting of: (i) $3,496,487 in cash; (ii)
555,589 unregistered shares of the Company's
F-31
<PAGE> 32
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Common Stock; (iii) 5,453.14 unregistered shares of 14% Convertible Cumulative
Redeemable Preferred Stock ("14% Preferred"); and (iv) warrants to purchase
117,785 shares of the Company's Common Stock at a nominal exercise price per
share ("Nominal Value Warrants"). Additionally, the Company assumed
approximately $1,757,000 in liabilities, of which $1,551,796 was repaid by the
Company on March 15, 1996. The cash purchase price included three five year
non-competition agreements, with an aggregate value of $60,000, with three of
IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed public
pay telephones for a purchase price consisting of: (i) $9,618,553 in cash; (ii)
8,333.33 shares of 14% Preferred; and (iii) Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock. In addition, the Company assumed
outstanding liabilities of approximately $733,000, of which $697,947 was repaid
on March 15, 1996. The purchase price included a five year consulting and
non-compete agreement, valued at $50,000, with one of Paramount's former
officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the aggregate fair values of the tangibles assets acquired
and the total purchase price, $9,531,404, (an intangible) was recorded as
acquired public pay telephone location contracts and non-competition agreements
($110,000 was assigned to the IPP and Paramount non-competition agreements) and
will be amortized over the estimated average remaining life of the acquired
location contracts (60 months for IPP and Paramount's contracts and 60 months
for IPP and Paramount's non-competition agreements). The results of operations
of IPP and Paramount are included in the results of operations of the Company
from March 15, 1996.
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public Telephone") in a transaction accounted for as a purchase.
The Company acquired current assets of $54,742, approximately 1,200 installed
public pay telephones, assumed approximately $2,800,000 in debt and outstanding
liabilities of Public Telephone and issued 224,879 unregistered shares of the
Company's Common Stock to the shareholders of Public Telephone. In connection
with the acquisition, the Company entered into five year non-competition
agreements with two of Public Telephone's former owners which require both cash
payments and the issuance, in the aggregate, of 80,000 unregistered shares of
the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571 and
3,237 installed public pay telephones, assumed approximately $6,900,000 in debt
and outstanding liabilities of World and issued 402,500 unregistered shares of
the Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock, which was subsequently converted to 884,214
unregistered shares of Common Stock on June 28, 1996.
The Public Telephone and World acquisitions were recorded as purchases and
the differences between the aggregate fair values of the tangibles assets
acquired and the total purchase price, $9,305,168, (an intangible) was recorded
as acquired public pay telephone location contracts and non-competition
agreements ($798,479 was assigned to the Public Telephone non-competition
agreements and $315,286 was assigned to the World non-competition agreements)
and will be amortized over the estimated average remaining life of the acquired
location contracts (36 months for Public Telephone and World's contracts, 60
months for Public Telephone's non-competition agreements and 24 months for
World's non-competition agreements). The results of operations of Public
Telephone and World are included in the results of operations of the Company
from October 16, 1995 and September 22, 1995, respectively.
F-32
<PAGE> 33
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public Telephone, IPP, Paramount, Amtel and
POA acquisitions had occurred at the beginning of 1995 and as though the IPP,
Paramount, Amtel and POA acquisitions had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
PRO FORMA SELECTED RESULTS OF OPERATIONS DATA
--------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
---------------------------------- -------------------------------
1995 1996 1995 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenues.................. $ 44,595,053 $ 45,308,800 $15,006,667 $15,069,188
Net loss before extraordinary
item.......................... (13,871,600) (16,083,544) (5,643,428) (4,790,789)
Net loss applicable to common
shareholders.................. (14,501,750) (16,325,859) (5,853,478) (4,925,603)
Net loss per common share....... (2.74) (2.46) (1.07) (0.65)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995 or 1996, or of future results.
The pro forma statement of operations data includes adjustments related to the
depreciation and amortization of tangible and intangible assets, reductions in
certain operating, other, and selling, general, and administrative expenses,
interest expense on borrowings used to finance the acquisitions and the weighted
average number of common shares outstanding after giving effect to the
acquisitions.
PENDING ACQUISITIONS
The Company has entered into an Agreement and Plan of Merger dated as of
November 21, 1996 (the "Cherokee Merger Agreement") to acquire all of the
capital stock of Cherokee Communications, Inc. ("Cherokee") for a purchase price
of $54,000,000 plus related fees and expenses, subject to certain purchase price
adjustments, which may include an increase of up to $6,000,000 payable in two
installments due January 1998 and 1999, if the FCC fails to implement certain
rate caps, rate guidelines or third party preferences during the first and
second years after closing, as the case may be. In addition, the Company will
pay $1,250,000 in connection with certain non-competition agreements. Cherokee,
headquartered in Jacksonville, Texas, is the fifth largest independent public
pay telephone operator in the United States. At September 30, 1996, Cherokee
owned and operated 12,344 public pay telephones in 14 states, of which
approximately 85% were located in Texas, New Mexico, Utah, Montana, and
Colorado.
The Company has entered into a letter of intent dated October 9, 1996, as
amended on November 25, 1996 to acquire 1,200 installed public pay telephones
from Texas Coinphone (collectively with Cherokee the "Pending Acquisitions") for
a purchase price of approximately $3,700,000, subject to certain purchase price
adjustments. Texas Coinphone owns and operates approximately 1,200 public pay
telephones in Dallas, Houston, and San Antonio, Texas.
The Company expects to fund the Pending Acquisitions with the proceeds from
a contemplated debt offering expected to be completed in the fourth quarter of
1996.
F-33
<PAGE> 34
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and September 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Telephones, boards, enclosures
and cases................... 3-7 $16,386,987 $36,992,307
Furniture, fixtures and other
equipment................... 3-5 989,300 1,752,387
Leasehold improvements........ 2-5 231,466 246,609
----------- -----------
17,607,753 38,991,303
Less: accumulated
depreciation............. (3,508,642) (7,309,242)
----------- -----------
$14,099,111 $31,682,061
=========== ===========
</TABLE>
4. INTANGIBLE ASSETS
As of December 31, 1995 and September 30, 1996, intangible assets consisted
of the following:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD DECEMBER 31, SEPTEMBER 30,
(IN MONTHS) 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Value assigned to location
contracts acquired and
installation of public pay
telephones.................. 36-120 $13,403,126 $39,627,197
Debt restructuring costs...... 40 -- 5,802,908
Non-competition agreements.... 24-60 1,513,765 2,090,690
State operating
certifications.............. 60 466,796 498,470
----------- -----------
15,383,687 48,019,265
Less: accumulated
amortization................ (3,791,530) (8,792,646)
----------- -----------
$11,592,157 $39,226,619
=========== ===========
</TABLE>
5. LONG-TERM DEBT -- RELATED PARTIES
On March 15, 1996, the Company entered into a Credit Agreement (the "Credit
Agreement") with Internationale Nederlanden (U.S.) Capital Corporation ("ING")
and Cerberus Partners, L.P. ("Cerberus" and, together with ING, the "Lenders"),
pursuant to which the Lenders agreed to lend the Company up to $37,250,000. On
March 15, 1996, the Company borrowed $30,530,954 pursuant to the Credit
Agreement. During the second quarter of 1996, the Company borrowed an additional
$1,692,500 under the Credit Agreement. The initial borrowings under the Credit
Agreement were used to complete the Paramount and IPP acquisitions, to repay
$8,503,405 of outstanding debt and $3,173,931 of outstanding obligations under
capital leases, to redeem the 10% Cumulative Redeemable Preferred Stock ("10%
Preferred"), 8% Cumulative Redeemable Preferred Stock ("8% Preferred"), and 7%
Cumulative Convertible Redeemable Preferred Stock ("7% Preferred"), and to pay
related transaction fees. The additional borrowings of $1,692,500 were used for
the Amtel acquisition deposit ($1,300,000) and working capital.
On September 13, 1996, concurrent with the acquisition of Amtel, the
Lenders amended the Credit Agreement to increase the maximum borrowings
available under the Credit Agreement to $41,000,000. The Company then borrowed
an additional $8,776,546 and used $5,950,000 of the proceeds to complete the
Amtel and POA acquisitions and the remainder of the proceeds, $2,826,546, for
working capital and payment of certain related acquisition expenses. As of
September 30, 1996, borrowings of $41,000,000 were outstanding and there was no
additional borrowing availability under the Credit Agreement.
F-34
<PAGE> 35
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
5. LONG-TERM DEBT -- RELATED PARTIES (CONTINUED)
The Credit Agreement requires monthly interest payments at the Alternate
Base Rate (as defined therein) plus 5% and contains various covenants
restricting the Company's ability to pay dividends or incur additional debt,
among other conditions, and also contains financial covenants requiring minimum
net worth, working capital and earnings before interest, depreciation and
amortization among other covenants. The Credit Agreement also contains a
subjective acceleration clause which states that in the event of a material
adverse change in the business, as determined by the Lenders, the Lenders can
call the debt at their discretion. The Lenders have waived their right to
exercise this subjective acceleration clause through December 31, 1997.
Pursuant to the Credit Agreement amendments dated September 13, 1996,
principal payments commence in April 1997, and continue monthly and/or quarterly
through June 1999 at which time the remaining principal balance is due. The
amount of the principal payment is contingent upon numerous factors, including
the borrowing base and cash flow of the Company. Based on amounts borrowed under
the Credit Agreement at September 30, 1996, the estimated principal payment due
April 30, 1997 would be $2,972,222, with monthly principal payments of $222,222
thereafter until December 31, 1997, and quarterly principal payments of $634,375
commencing September 30, 1997, increasing to $1,087,500 quarterly for 1998 and
$1,268,750 at March 31, 1999.
All of the Company's installed public pay telephones, excluding those
acquired from POA which are pledged to another creditor, are pledged as
collateral to the Credit Agreement.
The Company was not in compliance with various financial covenants
contained in the Credit Agreement at June 30, 1996 and subsequently received a
waiver of such non-compliance from the Lenders. The Credit Agreement was amended
on October 8, 1996 to make the covenants less restrictive and the Company was in
compliance with such covenants as of September 30, 1996.
A portion of the borrowings under the Credit Agreement (currently
$29,000,000) can be converted into Series B Special Convertible Preferred Stock
("Series B Preferred"), at the ratio of 833 shares for each $100,000 in
outstanding debt and accrued interest. Additionally, in connection with the
execution of the original Credit Agreement on March 15, 1996, ING and Cerberus
each received 102,412 warrants (204,824 warrants in the aggregate and referred
to herein as the "Lenders' Warrants"), which would collectively allow them to
purchase up to 204,824 shares of Series A Special Convertible Preferred Stock
("Series A Preferred"), at an exercise price of $0.20 per share. Each share of
Series A Preferred and Series B Preferred is convertible into 20 shares of
Common Stock. The debt under the Credit Agreement was initially recorded net of
an allocation of the fair value of the Lenders' Warrants, such fair value being
determined using the Black-Scholes valuation model. The Company recorded
non-cash interest expense (accretion of debt) of $621,536 for the three months
ended September 30, 1996 and $1,182,544 for the nine months ended September 30,
1996.
F-35
<PAGE> 36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and September 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
14% Cumulative Redeemable Convertible -- $ 6,539,053
Preferred Stock ($60 stated
value -- 200,000 shares authorized;
107,918.19 shares issued and outstanding
at September 30, 1996; cumulative
dividends issuable of 8,397.86 shares,
valued at $211,294; mandatory redemption
amount of $6,978,963 due June 30,
2000)....................................
</TABLE>
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the three and nine months ended September 30, 1996, the
carrying value of the 14% Preferred was increased by $34,153 and $58,272,
respectively, through accretions. Each share of 14% Preferred is entitled to
receive a quarterly dividend of 0.035 shares of 14% Preferred. Each share of 14%
Preferred is convertible into 10 shares of Common Stock.
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
As of December 31, 1995 and September 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
10% Cumulative Nonvoting Redeemable $ 5,305,340 --
Preferred Stock ($10 stated
value -- 550,000 shares authorized;
530,534 shares issued and outstanding at
December 31, 1995, redeemed on June 28,
1996)....................................
Series A Special Convertible Preferred -- --
Stock ($0.20 par value, $0.20 stated
value -- 250,000 shares authorized; no
shares issued)...........................
Series B Special Convertible Preferred -- --
Stock ($0.20 par value, $120 stated
value -- 250,000 shares authorized; no
shares issued)...........................
10% Cumulative Redeemable Preferred Stock 1 --
($1,000 stated value -- 3,880 shares
authorized; 1,496 shares issued and
outstanding at December 31, 1995,
redeemed on March 15, 1996)..............
8% Cumulative Redeemable Preferred Stock 981,084 --
($100 stated value -- 16,000 shares
authorized; 12,200 shares issued and
outstanding at December 31, 1995,
redeemed on March 15, 1996)..............
7% Cumulative Convertible Redeemable 200,000 --
Preferred Stock ($100 stated
value -- 2,500 shares authorized, issued
and outstanding at December 31, 1995,
redeemed on March 15, 1996)..............
</TABLE>
F-36
<PAGE> 37
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Common Stock 28,554 76,397
($0.01 par value -- 50,000,000 shares
authorized; 2,855,350 and 7,639,709
shares issued and outstanding at December
31, 1995 and September 30, 1996).........
Additional paid-in capital................. 16,649,559 40,541,544
Accumulated deficit........................ (13,453,876) (28,973,186)
------------ ------------
$ 9,710,662 $ 11,644,755
============ ============
</TABLE>
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14% Preferred.
On March 15, 1996, concurrent with the Credit Agreement, the Company
redeemed the 10% Cumulative Redeemable Preferred Stock ("10% Preferred"), 8%
Preferred, and 7% Preferred. The redemption price was comprised of cash payments
aggregating $1,117,371 and 34,436.33 shares of 14% Preferred. In the aggregate,
$6,269,487 of the Company's outstanding obligations, including portions of the
purchase price for the IPP and Paramount acquisitions, was liquidated by issuing
107,918.19 shares of 14% Preferred.
The $2,002,386 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value was recorded as a reduction of
earnings available to common shareholders as of March 31, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of
Common Stock were issued in conjunction with the IPP and Paramount acquisitions,
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, and conversion
of certain related party debt of the Company to the 14% Preferred. Certain
holders of the 14% Preferred are deemed related parties. The warrants expire on
March 13, 2001. An independent valuation company estimated the fair market value
of the Nominal Value Warrants to be $4,974,673, using the Black-Scholes
valuation model, of which $3,886,139 (the amount attributable to the warrants
provided to related parties in connection with the redemption of the 10%
Preferred, 8% Preferred, and 7% Preferred shares and conversion of certain debt)
was recorded as an unusual charge in the Company's statement of operations for
the three months ended March 31, 1996.
During April and May 1996, warrants representing 972,487 shares of Common
Stock were exercised, and total proceeds to the Company were $9,725. Of the
total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Cumulative Non-voting Redeemable Preferred Stock
("10% Redeemable Preferred"). Each share of 10% Redeemable Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Redeemable Preferred into 884,214 shares of Common Stock.
F-37
<PAGE> 38
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
8. SUBSEQUENT EVENTS
PENDING ACQUISITIONS -- COMPLETION CONTINGENT ON OBTAINING FINANCING
On October 16, 1996, the Company executed a Letter of Intent with Cherokee
Communications, Inc. ("Cherokee") for the acquisition of 14,000 public pay
telephones for a purchase price consisting of (i) $54,000,000 in cash; (ii)
three five year non-compete and consulting agreements with the selling
shareholders, $1,250,000, of which $625,000 is payable at closing; (iii) three
two year employment agreements with the selling shareholders and former officers
of Cherokee requiring 24 monthly payments aggregating $739,640; (iv) additional
consideration of $6,000,000 in cash or Common Stock payable in two equal
installments due January 10, 1998 and 1999 only if the Federal Communications
Commission fails to implement Rate Caps, Rate Guidelines, and/or Billed Party
Preferences during the calendar years of 1997 and 1998; (v) $3,103,933 for
$3,655,761 in current receivables net of assumed income tax liabilities of
$551,828; and (vi) approximately $317,500 in related acquisition expenses.
On October 9, 1996, the Company executed a Letter of Intent with Texas
Coinphone for the acquisition of 1,200 installed pay telephones for a purchase
price of $3,660,000 and $50,000 in related acquisition expenses. Both of these
transactions are subject to financing.
CREDIT FACILITY AMENDMENT
On November 22, 1996, the Lenders amended the Credit Facility increasing
the maximum borrowings available under the Credit Facility to $43,000,000. The
Company then borrowed an additional $2,000,000 and used the proceeds to fund the
Cherokee and Texas Coinphone acquisition deposits and for working capital. There
are no additional amounts available under the Credit Facility. The Company
intends to repay the Credit Facility with the proceeds from an equity and debt
public offering.
On October 9, 1996, the Company filed a Registration Statement on Form SB-2
with the Securities and Exchange Commission ("SEC") relating to the proposed
offering of approximately $25,000,000 of Common Stock by the Company. On October
31, 1996, the Company filed a Registration Statement on Form SB-2 with the SEC
relating to the proposed offering of approximately $110,000,000 of senior
unsecured notes. The Company anticipates completing both offerings during the
fourth quarter of 1996. There can be no assurances, however that either offering
will be completed or that the terms will remain the same.
The registration statements relating to these offerings filed with the SEC
have not yet become effective, and the securities may not be sold nor may offers
to buy be accepted prior to the time the applicable registration statements
become effective.
F-38
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
May 17, 1996
The Board of Directors of
Paramount Communications Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1995 and the results of its operations, its
changes in shareholders' equity and its cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 6, on March 15, 1996, the Company's net assets were sold to
an unrelated party.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-39
<PAGE> 40
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 479,984
Receivables:
Trade....................................................................... 237,455
Shareholder................................................................. 38,168
----------
Total current assets................................................... 755,607
Property and equipment, net...................................................... 788,582
Intangible assets, net........................................................... 146,029
Other assets..................................................................... 15,098
----------
$1,705,316
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 373,866
Location commissions payable................................................... 65,958
Shareholder distributions payable.............................................. 155,532
Notes payable to affiliates.................................................... 483,246
----------
Total current liabilities.............................................. 1,078,602
----------
Commitments and contingencies.................................................... --
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 606,714
----------
Total shareholders' equity.................................................. 626,714
----------
$1,705,316
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 41
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Revenues:
Coin calls..................................................................... $3,751,744
Non-coin calls................................................................. 1,923,724
----------
Total revenues.............................................................. 5,675,468
----------
Operating costs and expenses:
Telephone charges.............................................................. 1,543,956
Commissions.................................................................... 696,443
Selling, general and administrative............................................ 2,407,479
Depreciation and amortization.................................................. 393,204
----------
Total operating costs and expenses.......................................... 5,041,082
----------
Operating income............................................................ 634,386
----------
Other income (expenses):
Interest and other income...................................................... 14,800
Interest expense............................................................... (64,210)
Other.......................................................................... (85,231)
----------
Total other expenses........................................................ (134,641)
----------
Net income.................................................................. $ 499,745
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE> 42
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income..................................................................... $ 499,745
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 393,204
Changes in assets and liabilities:
Decrease in receivables................................................... 2,392
Decrease in other current assets.......................................... 11,190
Decrease in other assets.................................................. 9,632
Increase in other accounts payable and accrued expenses................... 179,706
Increase in location commissions payable.................................. 10,915
----------
Net cash provided by operating activities.............................. 1,106,784
----------
Cash flows from investing activities:
Purchases of equipment......................................................... (356,791)
----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party....................... 200,000
Distributions to shareholders.................................................. (229,088)
Repayments of notes payable to related parties................................. (439,470)
----------
Net cash used in financing activities.................................. (468,558)
----------
Net increase in cash and cash equivalents.............................. 281,435
Cash and cash equivalents, beginning of year..................................... 198,549
----------
Cash and cash equivalents, end of year........................................... $ 479,984
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................... $ 64,210
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE> 43
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance
December 31, 1994............................... 100 $100 $ 19,900 $106,969 $126,969
Net income........................................ -- -- -- 499,745 499,745
Distributions..................................... -- -- -- -- --
--- ---- -------- -------- --------
Balance
December 31, 1995............................... 100 $100 $ 19,900 $606,714 $626,714
=== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 44
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March 1987 as a result of the deregulation of the
telephone industry. The Company is in the business of installing, maintaining
and operating pay telephones throughout South Florida.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over five years, the estimated useful lives of the respective assets.
Maintenance, repairs and minor replacements of these items are charged to
expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July 1998. Also, in connection
with certain equipment acquisitions, the Company entered into location contracts
for two and one-half years terms. These contracts expired in June 1995.
REVENUE RECOGNITION
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida.
SHAREHOLDERS DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", which requires the disclosure of fair value of financial
instruments. The Company's financial instruments consist of cash and cash
equivalents, trade receivables and notes payable to affiliates. The carrying
amount of these instruments at December 31, 1995 approximates their fair value.
F-44
<PAGE> 45
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Installed pay telephones and related equipment.............. $ 3,259,133
Furniture, fixtures and office equipment.................... 40,125
Automobiles................................................. 31,943
Leasehold improvements...................................... 4,025
Warehouse equipment......................................... 1,772
-----------
3,336,998
Accumulated depreciation.................................... (2,548,416)
-----------
Property and equipment, net................................. $ 788,582
===========
</TABLE>
Depreciation expense amounted to $282,902 for the year ended December 31,
1995.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Non-compete agreements...................................... $ 533,135
Location contracts.......................................... 194,240
-----------
727,375
Accumulated amortization.................................... (581,346)
-----------
Intangible assets, net...................................... $ 146,029
===========
</TABLE>
Amortization expense related to intangible assets amounted to $110,302 for
the year ended December 31, 1995.
4. RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Company has notes payable to related parties, with principal and
interest payable monthly at an annual rate of 10% and due in 1996. These notes
are collateralized by installed pay telephones and related equipment. The notes
were assumed and subsequently paid-off by the acquiring company (Note 6).
Interest expense paid to related parties relating on these notes amounted
to $64,210 in 1995.
F-45
<PAGE> 46
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. RELATED PARTY TRANSACTIONS (CONTINUED)
PAYROLL ALLOCATION
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
OPERATING LEASE
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the facility on a month-to-month basis. The lease provides that the Company pay
its proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1995 amounted to $22,812.
VEHICLE LEASES
The Company leases various vehicles from a related party. Total lease
payments made in connection with these leases amounted to $46,866 during 1995.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's financial
position or results of operations.
6. SUBSEQUENT EVENTS
ACQUISITION
On March 15, 1996, the Company completed an Asset Purchase Agreement with
an unrelated party. Under the terms of the Agreement, the Company sold its
assets, including 2,528 installed telephones and related equipment, for a cash
price of approximately $9.6 million, warrants to purchase shares of stock of the
acquiring company, and the assumption, by the acquiring company, of
approximately $733,000 of outstanding Company liabilities. The purchase price
also included a five year consulting agreement with one of the Company's former
officers valued at $50,000.
TELECOMMUNICATIONS REFORM
On February 8, 1996, the President of the United States signed into law the
Telecommunications Act of 1996 (the "Act"). The Act changes many provisions of
the Communications Act of 1934 and requires the Federal Communications
Commission (the "FCC") to change its existing rules and adopt new rules in
several areas affecting broadcasting. This Act is one of the most significant
changes to the Communications Act since its adoption in 1934. Since the Act
recently was passed and became law, the FCC has only begun the proceedings that
the Act requires and it remains to be seen how the FCC will interpret certain of
its provisions. Congress and the FCC currently have under consideration and may
in the future adopt new laws and regulations and policies regarding a wide
variety of matters which could, directly or indirectly, adversely affect the
operation of the Company as well as its business strategies.
F-46
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheet of Paramount Communications
Systems, Inc. as of December 31, 1994, and the related statement of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-47
<PAGE> 48
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 198,549
Accounts receivable............................................................ 258,931
Other current assets........................................................... 30,274
----------
Total current assets................................................... 487,754
Property and equipment, net (note 2)............................................. 714,693
Intangible assets, less accumulated amortization of $471,044..................... 256,331
Other assets..................................................................... 15,188
----------
$1,473,966
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 177,908
Location commissions payable................................................... 55,043
Accrued interest payable....................................................... --
Sales tax payable.............................................................. 16,252
Shareholder distributions payable.............................................. 384,620
Current maturities of notes payable -- related parties (note 3)................ 436,619
----------
Total current liabilities.............................................. 1,070,442
Long-term portion of notes payable -- related parties (note 3)................... 276,555
----------
Total liabilities...................................................... 1,346,997
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 106,969
----------
Total shareholders' equity............................................. 126,969
Commitments and contingencies (note 4)........................................... --
----------
$1,473,966
==========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 49
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Revenues:
Coin calls.................................................................... $3,685,295
Non-coin calls................................................................ 2,030,194
----------
Total revenues........................................................ 5,715,489
----------
Operating costs and expenses:
Telephone charges............................................................. 1,748,270
Commissions................................................................... 676,304
Selling, general and administrative........................................... 2,099,203
Depreciation and amortization................................................. 770,429
----------
Total operating costs and expenses.................................... 5,294,206
----------
Operating income...................................................... 421,283
----------
Other expense:
Interest and other expense.................................................... (4,686)
Interest expense.............................................................. (72,902)
----------
Total other expenses.................................................. (77,588)
----------
Net income............................................................ $ 343,695
==========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 50
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993......... 100 100 $ 19,900 $ 397,894 $ 417,894
Net income............................ -- -- -- 343,695 343,695
Distributions......................... -- -- -- (634,620) (634,620)
--- ---- ------ ------- -------
Balances at December 31, 1994......... 100 $100 $ 19,900 $ 106,969 $ 126,969
=== ==== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE> 51
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
1994
-----------
<S> <C>
Cash flows from operating activities:
Net income.................................................................... $ 343,695
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of plant and equipment....................... 582,753
Amortization of intangible assets.......................................... 129,726
Amortization of deferred asset............................................. 57,950
Loss on write-off of property and equipment................................ 14,980
Changes in assets and liabilities:
Decrease in accounts receivable.......................................... 6,814
Increase in other current assets......................................... (5,841)
Increase in other assets................................................. (270)
Decrease in other current liabilities.................................... (5,131)
-----------
Net cash provided by operating activities............................. 1,124,676
-----------
Cash flows from investing activities:
Purchases of equipment........................................................ (59,625)
Proceeds from sale of equipment............................................... 3,578
Purchase of investments....................................................... (11,715)
Purchase of intangible assets................................................. --
-----------
Net cash used in investing activities................................. (67,762)
-----------
Cash flows from financing activities:
Increase in notes payable -- related party.................................... 200,000
Distributions to shareholders................................................. (626,989)
Repayments of notes payable -- related parties................................ (591,366)
-----------
Net cash used in financing activities................................. (1,018,355)
-----------
Net increase in cash and cash equivalents............................. 38,559
Cash and cash equivalents at beginning of year.................................. 159,990
-----------
Cash and cash equivalents at end of year........................................ $ 198,549
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................................ $ 74,570
===========
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 52
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) THE COMPANY
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March, 1987 as a result of the deregulation of the
telephone industry. The Company is a Subchapter S corporation in the business of
installing, maintaining and operating pay telephones throughout South Florida.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment are calculated on a straight-line basis over five years,
the estimated useful lives of the assets.
(D) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July, 1998. The location
contracts are amortized over two and one-half years and expire through June,
1995.
(E) RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
(F) INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
(G) CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida. No single customer
accounted for more than 5% of the Company's sales.
(H) DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
F-52
<PAGE> 53
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Installed pay telephones and related equipment............... $2,845,325
Furniture, fixtures and office equipment..................... 35,525
Automobiles.................................................. 26,328
Leasehold improvements....................................... 4,025
Warehouse equipment.......................................... 1,772
----------
2,912,975
Less accumulated depreciation and amortization............... 2,198,282
----------
$ 714,693
==========
</TABLE>
Depreciation and amortization of property and equipment was $582,753.
(3) RELATED PARTY TRANSACTIONS
(A) NOTES PAYABLE -- RELATED PARTIES
<TABLE>
<CAPTION>
1994
----------
<S> <C>
Notes payable to various related parties, principal and
interest payable monthly at rates ranging from 8% to 10%,
due from March, 1993 to April, 1997, collateralized by
installed pay telephones and related equipment............. $ 713,174
Less current maturities of notes payable -- related
parties.................................................... 436,619
----------
Long-term portion of notes payable -- related
parties.......................................... $ 276,555
==========
</TABLE>
Interest expense paid to related parties relating to the above amounted to
$72,902.
Aggregate maturities of notes payable -- related parties subsequent to
December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995.. $436,619
1996.. 276,555
--------
$713,174
========
</TABLE>
(B) PAYROLL ALLOCATION -- RELATED PARTY
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
(C) COMMISSION REVENUE -- RELATED PARTY
Operator assisted service commissions received from a company under common
ownership which are included in non-coin call revenue amounted to $-0- in 1994.
(4) OPERATING LEASE -- RELATED PARTY
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the
F-53
<PAGE> 54
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(4) OPERATING LEASE -- RELATED PARTY (CONTINUED)
facility on a month-to-month basis. The lease provides that the Company pay its
proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1994 was $23,373.
F-54
<PAGE> 55
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
LOGO
Lincolnton, North Carolina
F-55
<PAGE> 56
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and Cash Equivalents..................................................... $ 11,336
Accounts Receivable........................................................... 142,801
-----------
Total Current Assets....................................................... 154,137
-----------
Property and Equipment
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 28,441
Vehicles...................................................................... 236,393
Telephone Equipment........................................................... 2,304,632
Accumulated Depreciation...................................................... (1,563,039)
-----------
Total Property and Equipment............................................... 1,022,427
-----------
Other Assets
Covenants Not to Compete -- Net of Amortization............................... 105,528
Goodwill -- Net of Amortization............................................... 21,282
-----------
Total Other Assets......................................................... 126,810
-----------
Total Assets.................................................................... $ 1,303,374
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses......................................... $ 151,539
Notes Payable................................................................. 107,125
Notes Payable -- Related Party................................................ 25,000
Current Portion of Long-Term Debt............................................. 343,763
-----------
Total Current Liabilities.................................................. 627,427
-----------
Long-Term Liabilities
Notes Payable -- Less Current Portion......................................... 643,935
Obligations under Capital Leases -- Less Current Portion...................... 95,895
-----------
Total Long-Term Liabilities................................................ 739,830
-----------
Total Liabilities..................................................... 1,367,257
-----------
Stockholders' Equity
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (131,107)
-----------
Total Stockholders' Equity................................................. (63,883)
-----------
Total Liabilities And Stockholders' Equity...................................... $ 1,303,374
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-56
<PAGE> 57
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales............................................................................ $3,360,596
Cost of Goods Sold............................................................... 2,308,012
----------
Gross Profit........................................................... 1,052,584
OPERATING EXPENSES
General And Administrative Expenses............................................ 517,868
Depreciation Expense........................................................... 413,144
Interest Expense............................................................... 149,248
----------
Total Operating Expenses............................................... 1,080,260
----------
Income From Operations........................................................... (27,676)
OTHER (INCOME) EXPENSE
(Gain) Loss on Sale of Assets.................................................. (733)
----------
Total Other (Income) Expense........................................... (733)
Income Before Corporate Taxes.......................................... (26,943)
Deferred Tax Expense............................................................. 35,800
----------
Net Income............................................................. (62,743)
Beginning Retained Earnings...................................................... (68,364)
----------
Ending Retained Earnings......................................................... $ (131,107)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-57
<PAGE> 58
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES:
Net Income..................................................................... $ (62,743)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and Amortization............................................... 451,929
Net (increase) decrease in receivables...................................... (61,817)
Net increase (decrease) in accounts payable and accrued expenses............ 40,406
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... (733)
---------
Net Cash Provided (Used) by Operating Activities................................. 402,842
---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment.......................................................... (66,943)
---------
Net Cash Provided (Used) by Investing Activities................................. (66,943)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to settle short-term debt............................................. (148,738)
Payments to settle long-term debt.............................................. (187,055)
Proceeds from short-term debt.................................................. 52,315
Proceeds from long-term debt................................................... 50,000
Payments under capital lease obligations....................................... (105,024)
---------
Net Cash Provided (Used) by Financing Activities................................. (338,502)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (2,603)
Cash and Cash Equivalents at beginning of year................................. 13,939
---------
Cash and Cash Equivalents at end of year......................................... $ 11,336
=========
SUPPLEMENTAL DISCLOSURES
Interest Paid.................................................................. $ 149,248
=========
Income Taxes Paid.............................................................. $ 0
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement.
F-58
<PAGE> 59
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1995:
<TABLE>
<S> <C>
Amounts payable to shareholders due on demand............................. $25,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 14,800
-------
$39,800
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $19,508 for the year ended December
31, 1995.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employees deferred
salary up to a maximum to 2% of compensation. The contribution was $3,115 for
the year ended December 31, 1995.
NOTE D -- NOTES PAYABLE
Short-term notes payable consist of the following at December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Lincoln Bank....... $ 50,000 10.25% Personal Guarantees
Olen Beal.......... 50,000 12.00% Personal Guarantees
Conquest........... 7,125 10.00% Personal Guarantees
--------
$107,125
========
</TABLE>
See Independent Auditors' Report.
F-59
<PAGE> 60
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following notes:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Note Payable -- NationsBank...................................................... $ 10,261
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- NationsBank...................................................... 10,264
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 9,616
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle.
Note Payable -- Ford Motor Credit................................................ 13,576
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 12,285
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle.
Note Payable -- GMAC............................................................. 16,105
Due in monthly installments of $362.68 which includes interest calculated at
10.0%. Matures in August of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 21,478
Due in monthly installments of $485.00 which includes interest calculated at
8.99%. Matures in June of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 29,398
Due in monthly installments of $550.46 which includes interest calculated at
9.99%. Matures in December of 2001. Secured by vehicle.
Note Payable -- First Union National............................................. 32,958
Due in monthly installments of $694.24 which includes interest calculated at
9.06%. Matures in December of 2000. Secured by vehicle.
Note Payable -- Olen Beal........................................................ 41,627
Due in monthly installments of $1,660.72 which includes interest calculated at
12.0%. Matures in April of 1998. Guaranteed by officers.
Note Payable -- First National Bank.............................................. 437,098
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance.
</TABLE>
See Independent Auditors' Report.
F-60
<PAGE> 61
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1995
---------
<S> <C>
</TABLE>
NOTE E -- LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C>
Note Payable -- Karl Baker....................................................... 191,741
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment.
Note Payable -- First Union National Bank........................................ 2,000
Due in monthly installments of $666.67 principle plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company.
Note Payable -- Elcotel.......................................................... 11,300
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and
guaranteed by officers.
---------
857,361
Less: Current Maturities....................................................... (213,426)
---------
Total Long-Term Debt................................................... $ 643,935
=========
</TABLE>
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1996.. $213,426
1997.. 221,139
1998.. 228,947
1999.. 169,611
2000.. 24,238
--------
$857,361
========
</TABLE>
NOTE F -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carryforward........................................ $ 38,350
Valuation Allowance.................................................... (38,350)
--------
Net deferred tax asset................................................... $ 0
========
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was
approximately $250,000 at December 31, 1995 and will expire in the year 2010.
NOTE G -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1998. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included
See Independent Auditors' Report.
F-61
<PAGE> 62
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- LEASES (CONTINUED)
in depreciation expense for the year ended December 31, 1995. The following is a
summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment........ $ 416,160
Accumulated Depreciation... (113,159)
---------
$ 303,001
=========
</TABLE>
Minimum future lease payments under capital leases as of December 31, 1995
for each of the next five years are as follows:
<TABLE>
<S> <C>
1996.. $130,337
1997.. 84,811
1998.. 11,084
1999.. 0
2000.. 0
--------
$226,232
========
</TABLE>
NOTE H -- RENTALS UNDER OPERATING LEASES
The Company leased various vehicles under operating leases. Several of
those leases were terminated during the year ended December 31, 1995. The
remaining operating leases will expire in 1998.
Future minimum rental payments required under operating leases that have
remaining terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.. $ 5,016
1997.. 5,016
1998.. 2,508
-------
$12,540
=======
</TABLE>
Rental expense was approximately $19,577.
NOTE I -- CONTINGENCIES
The Company is a party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period, the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE J -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. have negotiated to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
was finalized on March 15, 1996. Also, an additional loan was secured from
NationsBank on January 3, 1996 in the amount of $50,000. Interest is calculated
at 10%, and the note matures March 3, 1996.
See Independent Auditors' Report.
F-62
<PAGE> 63
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE L -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
outstanding at December 31, 1995.
See Independent Auditors' Report.
F-63
<PAGE> 64
January 17, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones,
Inc. (a South Carolina corporation) as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Pay Phones,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ TERRI A. BLAKE, CPA
- ------------------------------------------------------
For the Firm
F-64
<PAGE> 65
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents..................................................... $ 13,939
Accounts Receivable........................................................... 80,984
-----------
TOTAL CURRENT ASSETS.................................................. 94,923
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 27,441
Vehicles...................................................................... 146,295
Telephone Equipment........................................................... 2,134,307
Accumulated Depreciation...................................................... (1,155,533)
-----------
TOTAL PROPERTY AND EQUIPMENT.......................................... 1,168,510
-----------
OTHER ASSETS
Covenants Not to Compete -- Net of Amortization............................... 143,695
Goodwill -- Net of Amortization............................................... 21,900
Deferred Tax Asset............................................................ 35,800
-----------
TOTAL OTHER ASSETS.................................................... 201,395
-----------
TOTAL ASSETS.................................................................... $ 1,464,828
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses......................................... $ 93,151
Bank Overdraft................................................................ 17,982
Notes Payable................................................................. 166,645
Notes Payable -- Related Party................................................ 61,903
Current Portion of Long-Term Debt............................................. 264,089
-----------
TOTAL CURRENT LIABILITIES............................................. 603,770
-----------
LONG-TERM LIABILITIES
Notes Payable -- Less Current Portion......................................... 724,379
Obligations under Capital Leases -- Less Current Portion...................... 137,819
-----------
TOTAL LONG-TERM LIABILITIES........................................... 862,198
-----------
TOTAL LIABILITIES................................................... 1,465,968
-----------
STOCKHOLDERS' EQUITY
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (68,364)
-----------
TOTAL STOCKHOLDERS' EQUITY............................................ (1,140)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 1,464,828
===========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-65
<PAGE> 66
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Sales............................................................................ $2,631,627
Cost of Goods Sold............................................................... 1,950,062
----------
GROSS PROFIT................................................................... 681,565
OPERATING EXPENSES
General And Administrative Expenses............................................ 435,365
Depreciation Expense........................................................... 389,201
Interest Expense............................................................... 103,697
----------
TOTAL OPERATING EXPENSES............................................... 928,263
----------
INCOME FROM OPERATIONS............................................ (246,698)
OTHER (INCOME) EXPENSE
Miscellaneous Income........................................................... (2,076)
(Gain) Loss on Sale of Assets.................................................. 28,571
----------
Total Other (Income) Expense........................................... 26,495
Income Before Corporate Taxes.......................................... (273,193)
Deferred Tax Benefit Provision................................................... (35,800)
----------
NET INCOME........................................................ (237,393)
BEGINNING RETAINED EARNINGS...................................................... 169,029
----------
ENDING RETAINED EARNINGS............................................... $ (68,364)
==========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-66
<PAGE> 67
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Net Cash Flow From Operating Activities:
Net Income..................................................................... $(237,393)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation................................................................ 389,201
Net (increase) decrease in receivables...................................... (24,429)
Net increase (decrease) in accounts payable and accrued expenses............ 50,764
Net increase (decrease) in accrued taxes.................................... (3,791)
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... 28,571
---------
Net Cash Provided (Used) by Operating Activities................................. 238,723
---------
Cash Flow From Investing Activities:
Purchase of equipment....................................................... (186,716)
---------
Net Cash Provided (Used) by Investing Activities................................. (186,716)
---------
Cash Flow From Financing Activities:
Payments to settle short-term debt.......................................... (133,405)
Payments to settle long-term debt........................................... (352,114)
Proceeds from short-term debt............................................... 206,903
Proceeds from long-term debt................................................ 260,736
Payments under capital lease obligations.................................... (43,290)
---------
Net Cash Provided (Used) by Financing Activities................................. (61,170)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (9,163)
Cash and Cash Equivalents at beginning of year................................. 23,102
---------
Cash and Cash Equivalents at end of year......................................... $ 13,939
=========
Supplemental Disclosures
Interest Paid.................................................................. $ 103,697
=========
Income Taxes Paid.............................................................. $ 3,587
=========
</TABLE>
See Independent Auditors' Report and Notes to Financial Statement
F-67
<PAGE> 68
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1994:
<TABLE>
<S> <C>
Amounts payable to officers due on demand................................. $ 5,000
Amounts payable to shareholders due on demand............................. 50,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 6,903
-------
$61,903
=======
</TABLE>
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $14,934 for the year ended December
31, 1994.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employee's deferred
salary up to a maximum of 2% of compensation. The contribution was $5,847 for
1994.
See Independent Auditors' Report
F-68
<PAGE> 69
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT
<TABLE>
<S> <C>
Long-term debt consists of the following notes:
Note Payable -- NationsBank....................................................... $ 13,293
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- NationsBank....................................................... 13,295
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 11,677
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle
Note Payable -- First Union National Bank......................................... 12,702
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,539
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle
Note Payable -- First Union National Bank......................................... 15,486
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle
Note Payable -- Ford Motor Credit................................................. 16,802
Due in monthly installments of $401.09 which includes interest calculated at
7.75%. Matures in January of 1999. Secured by vehicle
Note Payable -- First National Bank............................................... 528,493
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance
Note Payable -- Karl Baker........................................................ 231,643
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment
Note Payable -- First Union National Bank......................................... 9,998
Due in monthly installments of $666.67 principal plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company
Note Payable -- Elcotel........................................................... 24,411
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and guarantees
of officers..................................................................... 906,016
--------
Less: Current Maturities.......................................................... (181,637)
--------
Total Long-Term Debt.................................................... $724,379
========
</TABLE>
See Independent Auditors' Report
F-69
<PAGE> 70
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt in each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $181,637
1996........................................ 193,141
1997........................................ 194,620
1998........................................ 209,562
1999........................................ 127,056
--------
$906,016
========
</TABLE>
NOTE E -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
<TABLE>
<S> <C>
Deferred tax asset arising from:
Net operating loss carry forward........................................ $34,300
Temporary differences -- Principally depreciation methods............... 1,500
-------
Total deferred tax asset.................................................. $35,800
=======
</TABLE>
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was $228,776
at December 31, 1994 and will expire in the year 2009.
NOTE F -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1997. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included in depreciation expense
for the year ended December 31, 1994.
The following is a summary of property held under capital leases:
<TABLE>
<S> <C>
Telephone Equipment...................................................... $292,845
Accumulated Depreciation................................................. (35,686)
--------
$257,159
========
</TABLE>
See Independent Auditors' Report
F-70
<PAGE> 71
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE F -- LEASES (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1994
for each of the next five years are as follows:
<TABLE>
<S> <C>
1995........................................ $ 82,452
1996........................................ 94,760
1997........................................ 43,059
1998........................................ 0
1999........................................ 0
--------
$220,271
========
</TABLE>
NOTE G -- CONTINGENCIES
The Company is party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE H -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. are negotiating to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
has not been finalized as of the date this statement was issued.
NOTE I -- LINE OF CREDIT
The Company has a line of credit for $150,000 that expires in March of
1995. At December 31, 1994 the company has outstanding $100,000 on the line of
credit. Interest is calculated at 10.50%. Loan is guaranteed by officers and
their spouses.
NOTE J -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
shares outstanding at December 31, 1994.
See Independent Auditors' Report
F-71
<PAGE> 72
INDEPENDENT AUDITOR'S REPORT
To The Stockholders
International Payphones, Inc.
Hilton Head Island, South Carolina
We have audited the accompanying Balance Sheets of International Payphones, Inc.
(a Tennessee corporation) as of December 31, 1995 and December 31, 1994, and the
related Statements of Earnings and Retained Earnings and Cash Flows for years
then ended. These financial statements are the responsibility of the management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Payphones, Inc.
and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ ERNEST M. SEWELL, CPA
April 24, 1996
F-72
<PAGE> 73
INTERNATIONAL PAYPHONES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash.......................................................... $ 17,321.08 $ 25,530.67
Accounts receivable - trade................................... 48,996.42 35,913.21
Other amounts receivable (Note D)............................. 5,600.00 25,574.54
Parts and supplies inventory.................................. 9,420.00 11,625.00
------------ ------------
Total Current Assets.......................................... 81,337.50 98,643.42
Property and Equipment
Property and equipment (Note B and F)......................... 816,148.89 720,142.61
Accumulated depreciation...................................... (539,338.28) (455,592.94)
------------ ------------
Net Property and Equipment.................................... 276,810.61 264,549.67
------------ ------------
TOTAL ASSETS.......................................... $ 358,148.11 $ 363,193.09
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note F).................... $ 73,978.08 $ 48,761.05
Accounts payable - trade...................................... 2,717.23 7,822.66
Accrued payroll and payroll taxes............................. -- 10,265.07
Other accrued liabilities (Note E)............................ 18,391.81 24,220.91
Deferred income taxes (Note C)................................ 6,000.00 5,100.00
------------ ------------
Total Current Liabilities..................................... 101,087.12 96,169.69
Long-term debt - net of current portion (Note F)................ 118,654.10 81,515.83
------------ ------------
TOTAL LIABILITIES..................................... 219,741.22 177,685.52
Shareholders' Equity
Common stock.................................................. 3,321.00 3,321.00
Additional paid-in capital.................................... 106,000.00 106,000.00
Retained earnings............................................. 29,085.89 76,186.57
------------ ------------
Total Shareholders' Equity.................................... 138,406.89 185,507.57
------------ ------------
TOTAL LIABILITIES AND EQUITY.......................... $ 358,148.11 $ 363,193.09
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-73
<PAGE> 74
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Revenue.......................................................... $1,194,620.91 $1,135,734.73
Direct costs..................................................... 608,061.14 553,336.70
------------- -------------
Gross Profit................................................... 586,559.77 582,398.03
General and Administrative Expenses.............................. 563,028.15 546,365.04
------------- -------------
Earnings from operations....................................... 23,531.62 36,032.99
Other income (expense):
Interest income................................................ 665.84 --
Gain (loss) on asset sale...................................... 916.16 (2,731.45)
------------- -------------
Earnings before taxes.......................................... 25,113.62 33,301.54
Provision for income tax expense (Note C)........................ 2,300.00 2,535.00
------------- -------------
Net earnings........................................... 22,813.62 30,766.54
BEGINNING RETAINED EARNINGS............................ 76,186.57 88,677.65
------------- -------------
99,000.19 119,444.19
Less dividend distributions...................................... (69,914.30) (43,257.62)
------------- -------------
ENDING RETAINED EARNINGS............................... $ 29,085.89 $ 76,186.57
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-74
<PAGE> 75
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................. $ 22,813.62 $ 30,766.54
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Depreciation................................................ 91,174.16 96,689.77
(Gain) loss on disposal of property......................... (916.16) 2,731.45
(Increase) decrease in accounts receivable.................. (13,083.21) (4,610.68)
(Increase) decrease in inventories.......................... 2,205.00 32,152.00
Increase (decrease) in accounts payable..................... (5,105.43) (16,981.09)
Increase (decrease) in income taxes payable................. 3,000.00 (5,280.00)
Increase (decrease) in other accrued expenses............... (5,829.10) 3,112.86
Increase (decrease) in payroll taxes........................ (10,265.07) 9,691.53
----------- ------------
Total adjustments........................................... 61,180.19 117,505.84
----------- ------------
Net Cash Provided (Used) by Operating Activities............... 83,993.81 148,272.38
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property............................. 18,250.06 5,312.20
Purchases of fixed assets...................................... (71,329.00) (18,225.16)
Leasehold improvements......................................... -- (10,274.42)
----------- ------------
Net Cash Provided (Used) by Investing Activities............... (53,078.94) (23,187.38)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................................... 96,329.00 30,893.30
Decrease in other accounts receivable.......................... 19,974.54 29,012.38
Repayment of long-term debt.................................... (49,068.19) (52,552.75)
Repayment of capital lease obligations......................... (34,345.51) (59,869.12)
Repayment of stockholder loans................................. -- (22,575.20)
Dividends paid................................................. (72,014.30) (43,257.62)
----------- ------------
Net Cash Provided (Used) by Financing Activities............... (39,124.46) (118,349.01)
----------- ------------
NET INCREASE (DECREASE) IN CASH............................. (8,209.59) 6,735.99
CASH AT BEGINNING OF YEAR................................... 25,530.67 18,794.68
----------- ------------
CASH AT END OF YEAR......................................... $ 17,321.08 $ 25,530.67
=========== ============
SUPPLEMENTAL DISCLOSURES
Noncash Investing and Financing Activities:
Assets acquired through capital lease.......................... $(49,440.00) $ (66,598.00)
Capital lease used to acquire assets........................... 49,440.00 66,598.00
Cash Paid During the Year for:
Interest....................................................... $ 13,489.00 $ 20,919.00
Income taxes................................................... 2,300.00 2,535.00
</TABLE>
The accompanying notes are an integral part of this statement.
F-75
<PAGE> 76
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE A -- GENERAL
International Payphones, Inc. is a Tennessee corporation formed in 1985 to
sell, install, lease and maintain pay telephone equipment. The majority of the
Company's operations are in the eastern region of the the state of Tennessee
where it owns approximately 500 telephones and receives pay telephone coin
income and long distance commissions. Under agreements with pay phone site
location owners the Company collects the pay phone coin revenue and the long,
terms run distance commission income and pays a percentage of this revenue to
the site location owner each month. These agreements cover periods ranging from
five to twenty years.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over useful lives ranging from 5 to 7 years for equipment
and vehicles and 31.5 years for leasehold improvements. Repairs and maintenance
are charged to expense when incurred and improvements which substantially
prolong the useful lives of the assets involved are capitalized and depreciated.
The cost of assets classified by major categories is as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Furniture & fixtures.................................... $ 58,120.58 $ 58,120.58
Office equipment........................................ 35,998.97 35,998.97
Telephone equipment..................................... 515,563.78 466,123.78
Leasehold improvements.................................. 74,802.66 74,802.66
Vehicles................................................ 131,662.90 85,096.62
----------- -----------
Total cost.................................... $816,148.89 $720,142.61
=========== ===========
</TABLE>
NOTE C -- INCOME TAXES
The Company is an S corporation for Federal income tax purposes. As a
result, no provision for Federal income taxes is made by the Company because the
individual shareholders' report and pay Federal income tax on their allocated
percentage of the corporation's net earnings. The Company does pay Tennessee
state excise tax on its net earnings at a 6% tax rate. There are timing
differences in how items of income and expense are reported on the tax return
and in the financial statements. These differences involve trade receivables for
long distance commission income which is reported as income when earned in the
financial statements but is reported as received for tax purposes. In addition,
depreciation expense is claimed under IRS Code Section 179 and using accelerated
writeoff methods for tax purposes while the straight-line writeoff method is
used for financial reporting. State excise tax is provided for in the financial
statements as the items of income and deduction are recognized therein
regardless of when they are reported on the income tax return. As a result of
these timing differences, deferred tax liabilities of $ 6,000 and $ 3,000,
respectively, have been accrued at December 31, 1995 and December 31, 1994.
NOTE D -- OTHER AMOUNTS RECEIVABLE:
The Company is affiliated through common stock ownership and control with
other companies involved in the telecommunications industry. Loans to these
affiliates on open account totaled $19,886 at December 31, 1994. Loans to
employees at December 31, 1994 totaled $7,937.
F-76
<PAGE> 77
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- OTHER ACCRUED LIABILITIES:
Other accrued liabilities include the Company's estimate of accrued site
commissions due as of December 31, 1995 and December 31, 1994. Under the terms
of the Company's royalty agreements with its customers, site commissions are
payable after the end of the month in which the net coin and long distance
revenue is received. As of December 31, 1995 and December 31, 1994, the Company
has accrued approximately two months, respectively, of unpaid site commissions.
NOTE F -- LONG-TERM DEBT:
Long-term debt at December 31, 1995 and December 31, 1994 includes the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Note payable to First National Bank of Gatlinburg dated November
2, 1994 in the face amount of $17,000 payable in 18 monthly
installments of $1,000 including interest at prime plus 1.5%........ $ 4,377.89 $ 15,269.36
Note payable to Conquest Communications dated in December, 1993 in
the face amount of $25,000 payable in monthly installments with
interest............................................................ -- 5,117.01
Note payable to First Union Bank of Georgia dated October 11, 1993
in the face amount of $24,763 payable in 60 monthly installments of
$487 including interest at 6.75%. This note is collateralized by a
1994 Ford Explorer.................................................. -- 19,773.54
Notes payable (two) to First Union Bank of South Carolina dated
September 17, 1993 in the face amounts of $15,022 each, both payable
in 60 monthly installments of $292 including interest at 6.25%.
These notes are collateralized by two 1993 Ford cargo vans.......... 18,219.80 23,457.12
Note payable to First Tennessee Bank dated January 31, 1994 in the
face amount of $13,893 payable in 60 monthly installments of $289
including interest at 9.00%. This note is collateralized by a 1994
Toyota Corolla...................................................... 9,422.68 11,681.97
Note payable to Nationsbank of South Carolina dated December 14,
1993 in the face amount of $15,596 payable in 60 monthly
installments of $309 including interest at 7.00%. This note is
collateralized by a 1994 Ford Econoline............................. 10,187.33 12,867.48
Note payable to First National Bank of Gatlinburg dated August 28,
1995 in the face amount of $25,000 payable in 23 monthly
installments of $1,000 including interest at prime plus 2.362%. This
note is collateralized by pay phones and royalty contracts.......... 21,890.59 --
Capitalized lease purchase agreement dated January 26, 1994 in the
original sum of $66,370, due in monthly installments of $2,139
through December, 1996, decreasing to $1,123 through March, 1997,
including sales tax and finance charges at 14%...................... 21,412.70 42,110.40
Capitalized lease purchase agreement dated May 5, 1995 in the
original sum of $49,440, due in monthly installments of $1,842
through March, 1998, including sales tax and finance charges at
19%................................................................. 36,981.01 --
Note payable to Nationsbank of South Carolina dated November 4,
1995 in the face amount of $71,329 payable in 60 monthly
installments of $1,484 including interest at 8.95%. This note is
collateralized by a 1995 Mercedes................................... 70,140.18 --
----------- -----------
192,632.18 130,276.88
Less current portion................................................ (73,978.08) (48,761.05)
----------- -----------
$118,654.10 $ 81,515.83
=========== ===========
</TABLE>
F-77
<PAGE> 78
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- OPERATING LEASES
The Company leases its office space from one of the stockholders under an
oral agreement at a monthly rate of $1,000 plus utilities, taxes, repairs,
maintenance and leasehold improvements. The Company also leases three vehicles
under separate noncancelable operating lease agreements dated March 25, 1993,
January 22, 1994 and April 21, 1995. These agreements call for monthly lease
payments of $509, $1,006, and $444, respectively, including sales tax. Each
agreement allows for additional charges for excess milage upon expiration of the
lease. Future minimum annual lease payments under the vehicle leases are as
follows:
<TABLE>
<S> <C>
Year ended December 31, 1995..................................................... $22,183.00
Year ended December 31, 1996..................................................... 18,936.00
Year ended December 31, 1997..................................................... 11,371.00
Year ended December 31, 1998..................................................... 1,333.00
----------
$53,823.00
</TABLE>
NOTE H -- EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Effective March 15, 1996 the Company entered into a merger agreement with
PhoneTel Technologies, Inc. under which 100% of the Company stock was acquired
by PhoneTel and the Company ceased to exist as a separate entity.
F-78
<PAGE> 79
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-79
<PAGE> 80
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 3,852 $ 147,910
Accounts receivable................................................. 377,325 367,973
Prepaid expenses.................................................... 25,754 14,315
---------- ----------
Total current assets......................................... 406,931 530,198
PROPERTY AND EQUIPMENT
Telephone equipment................................................. 3,891,230 3,831,941
Furniture and fixtures.............................................. 59,497 47,396
Trucks and autos.................................................... 201,555 154,956
---------- ----------
4,152,282 4,034,293
Less accumulated depreciation and amortization................. 1,422,621 820,509
---------- ----------
2,729,661 3,213,784
Uninstalled pay telephone equipment................................. 89,145 104,074
Building not used in operations, net of accumulated depreciation of
$5,375
for 1995 and $3,763 for 1994...................................... 59,125 60,738
---------- ----------
2,877,931 3,378,596
OTHER ASSETS
Site location contracts, less accumulated amortization of $1,000,928
for 1995 and $406,776 for 1994.................................... 1,980,822 2,530,488
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $70,377 for 1995 and $50,889 for
1994.............................................................. 709,125 728,613
Covenants not to compete, less accumulated amortization of $545,417
for 1995 and $380,417 for 1994.................................... 279,584 444,584
Other intangibles, less accumulated amortization of $59,099 for 1995
and $43,589 for 1994.............................................. 102,558 117,767
Other............................................................... 24,332 21,510
---------- ----------
3,096,421 3,842,962
---------- ----------
$6,381,283 $7,751,756
========= =========
LIABILITIES
CURRENT LIABILITIES
Notes payable to bank............................................... $ 243,750 $ 262,750
Current maturities of long-term obligations......................... 1,330,954 1,241,818
Accounts payable.................................................... 882,723 699,385
Accrued expenses.................................................... 146,063 18,656
---------- ----------
Total current liabilities.................................... 2,603,490 2,222,609
LONG-TERM OBLIGATIONS, less current maturities...................... 4,753,853 5,355,740
DEFERRED INCOME TAXES............................................... --........ 284,000
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock -- authorized but unissued, 10,000,000
shares............................................................ -- --
Common stock -- authorized, 10,000,000 shares without par value;
issued
and outstanding, 2,567,324 shares in 1995 and 1,033,990 shares in
1994.............................................................. 348,756 339,423
Additional contributed capital...................................... -- 132,230
Accumulated deficit................................................. (1,324,816) (582,246)
---------- ----------
(976,060) (110,593)
---------- ----------
$6,381,283 $7,751,756
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE> 81
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales
Coin calls........................................................ $ 3,747,247 $2,153,974
Non-coin calls.................................................... 4,418,667 3,692,117
Other............................................................. 49,221 22,053
----------- ----------
Total net Sales................................................ 8,215,135 5,868,144
Cost of sales
Telephone charges................................................. 3,599,271 2,676,604
Commissions....................................................... 1,178,156 722,746
Service, maintenance and network expense.......................... 289,036 214,636
Depreciation and amortization..................................... 1,218,095 723,516
----------- ----------
6,284,558 4,337,502
----------- ----------
Gross profit................................................... 1,930,577 1,530,642
Selling, general and administrative expenses
Salaries, wages and benefits...................................... 823,430 488,913
Depreciation and amortization..................................... 200,095 198,398
Dues and subscriptions............................................ 53,905 50,960
Outside services.................................................. 40,521 63,736
Phone maintenance................................................. 118,824 --
Professional services............................................. 171,303 85,920
Taxes
Personal property.............................................. 75,785 4,295
Sales.......................................................... 63,948 37,907
Telephone......................................................... 69,137 24,696
Rent.............................................................. 71,511 31,389
Other............................................................. 223,165 120,105
----------- ----------
1,911,624 1,106,319
----------- ----------
Earnings from operations....................................... 18,953 424,323
Other income (expense)
Interest income................................................... 415 14,741
Interest expense.................................................. (971,141) (600,624)
Gain (loss) on sale of assets..................................... (80,652) 98,904
Other income...................................................... 12,135 9,366
----------- ----------
(1,039,243) (477,613)
----------- ----------
Loss before income taxes....................................... (1,020,290) (53,290)
Income taxes
Current........................................................... (6,280) (8,856)
Deferred.......................................................... 284,000 (128,000)
----------- ----------
277,720 (136,856)
----------- ----------
NET LOSS....................................................... $ (742,570) $ (190,146)
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 82
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD INDICATED BELOW
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON CONTRIBUTED EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1994
As originally reported...................... $339,423 $210,219 $ (153,727) $ 395,915
Prior period adjustment..................... -- 55,192 (238,373) (183,181)
-------- ---------- ----------- ---------
As restated................................. 339,423 265,411 (392,100) 212,734
Net loss for the year ended
December 31, 1994........................... -- -- (190,146) (190,146)
Cash dividends................................ -- (133,181) -- (133,181)
-------- ---------- ----------- ---------
Balance at December 3l, 1994.................. 339,423 132,230 (582,246) (110,593)
Net loss for the year ended
December 31, 1995........................... -- -- (742,570) (742,570)
Stock warrants exercised...................... 9,333 -- -- 9,333
Cash dividends................................ -- (132,230) -- (132,230)
-------- ---------- ----------- ---------
Balance at December 31, 1995.................. $348,756 $ -- $(1,324,816) $(976,060)
======== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-82
<PAGE> 83
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities
Net loss......................................................... $ (742,570) $ (190,146)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization............................... 1,418,191 921,914
(Gain) loss on sale of assets............................... 80,652 (98,904)
Changes in assets and liabilities
(Increase) decrease in accounts receivable............... (9,352) 9,040
(Increase) decrease in prepaid expenses.................. (11,439) 72
Increase in other asset.................................. (2,822) --
Increase in accounts payable............................. 183,338 244,517
Increase in accrued expenses............................. 127,407 18,554
Increase (decrease) in deferred income taxes............. (284,000) 128,000
----------- -----------
Total adjustments................................... 1,501,975 1,223,193
----------- -----------
Net cash provided by operating activities........... 759,405 1,033,047
Cash flows from investing activities
Capital expenditures............................................. (203,112) (229,613)
Proceeds from sale of assets..................................... 54,297 195,714
----------- -----------
Net cash used in investing activities............... (148,815) (33,899)
Cash flows from financing activities
Proceeds from long-term obligations.............................. 507,239 123,355
Payments on notes payable to bank................................ (19,000) (11,900)
Payments on long-term obligations................................ (1,119,990) (696,191)
Stock warrants exercised......................................... 9,333 --
Dividends paid................................................... (132,230) (133,181)
----------- -----------
Net cash used in financing activities............... (754,648) (717,917)
----------- -----------
Net increase (decrease) in cash.................................... (144,058) 281,231
Cash (overdraft) at beginning of period............................ 147,910 (133,321)
----------- -----------
Cash at end of period.............................................. $ 3,852 $ 147,910
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-83
<PAGE> 84
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. THE COMPANY
Payphones of America, Inc. operates, services and maintains a system of
approximately 2,800 pay telephones in the Southeastern and Midwestern United
States.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. INTANGIBLE ASSETS
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. CONCENTRATIONS OF CREDIT RISK
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of 1995 revenues
were generated by the Company's pay telephones located in the states of Missouri
(36%) and Virginia (33%). No other area has a disproportionate credit risk.
F-84
<PAGE> 85
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- GOING CONCERN
The Company has experienced recurring losses and has accumulated losses
since inception of $1,324,816. As of December 31, 1995, the Company's current
liabilities exceed its current assets by $2,196,559. These factors raise doubt
about the Company's ability to continue as a going concern. The Company's
continued existence as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its debt and lease obligations and to obtain additional financing
or refinancing as may be required. Historically, the Company has generated
sufficient cash flow to meet its obligations and to pay its debt and lease
obligations, and, although it cannot be assured that the Company will be able to
continue as a going concern in view of its present financial condition,
management believes that continued strategic business acquisitions and
improvements in planning and budgeting should enable the Company to meet its
obligations and sustain its operations.
NOTE C -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.50% at December 31, 1995). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on February 10, 1996.
F-85
<PAGE> 86
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
<TABLE>
<CAPTION>
1995
--------------------------------------
CURRENT LONG-TERM 1994
PORTION PORTION TOTAL TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Notes payable to stockholders................ $ 248,333 $ 184,276 $ 432,609 $ 149,000
Note payable to Mark Twain Bank.............. 1,594 26,988 28,582 29,683
Notes payable to Ford Motor Credit Company... 36,098 36,389 72,487 63,582
Notes payable to Ronald L. Coleman........... 14,069 299,868 313,937 426,517
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom...................... 105,454 185,273 290,727 397,818
Note payable to Communications
Finance Corporation........................ 87,466 320,034 407,500 482,853
Note payable to R. Greg Kintz and
Paul Wm. Schindler......................... 103,350 45,750 149,100 236,550
Capital lease obligations
Berthel, Fisher & Company Leasing, Inc..... 717,554 3,655,275 4,372,829 4,749,921
Intellicall, Inc............................. 17,036 -- 17,036 59,466
Copying Concepts Office Systems.............. -- -- -- 2,168
---------- ---------- ---------- ----------
$1,330,954 $4,753,853 $6,084,807 $6,597,558
========= ========= ========= =========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
F-86
<PAGE> 87
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS (CONTINUED)
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment..................................... $ 3,871,519
Site location contracts................................. 2,980,749
-----------
6,852,268
Less accumulated depreciation and amortization........ (2,256,701)
-----------
$ 4,595,567
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following December 31, 1995:
<TABLE>
<S> <C>
1996.................................................... $ 1,330,954
1997.................................................... 1,087,032
1998.................................................... 1,024,518
1999.................................................... 998,138
2000.................................................... 771,115
2001 and thereafter..................................... 873,050
-----------
$ 6,084,807
==========
</TABLE>
NOTE E -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
The provision for income taxes consists of the following for the year ended
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Current...................................... $ (6,280) $ (8,856)
Deferred..................................... 284,000 (128,000)
--------- ---------
$ 277,720 $(136,856)
========= =========
</TABLE>
F-87
<PAGE> 88
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are attributable to the following at
December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation................................ $(472,000) $(365,000)
Accumulated amortization................................ 262,000 81,000
Tax benefit of net operating loss carryforward.......... 460,000 --
--------- ---------
250,000 (284,000)
Less valuation allowance..................................... (250,000) --
--------- ---------
Net deferred tax asset (liability).................... $ -- $(284,000)
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards for Federal income tax
purposes which are available to offset future Federal taxable income. These
carryforwards expire as follows:
<TABLE>
<S> <C>
2008..................................................... $ 9,194
2009..................................................... 332,849
2010..................................................... 836,510
----------
$1,178,553
=========
</TABLE>
NOTE F -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended December 31:
<TABLE>
<S> <C>
1996...................................................... $ 95,091
1997...................................................... 93,246
1998...................................................... 60,550
1999...................................................... 59,000
2000...................................................... 64,400
2001 and thereafter....................................... 310,500
--------
Total minimum lease payments.............................. $682,787
========
</TABLE>
Rent expense for all operating leases for the years ended December 31, 1995
and 1994, was $71,512 and $31,389, respectively.
NOTE G -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
- ------- --------- -------- -----------------
<C> <C> <C> <S>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
F-88
<PAGE> 89
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- STOCK WARRANTS (CONTINUED)
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE H -- STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the year
ended December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Interest....................................... $852,612 $597,956
Income taxes................................... 6,280 16,388
</TABLE>
During 1995 and 1994, the Company entered into capital lease obligations
totalling $100,000 and $4,000,000, respectively, which represent noncash
financing activities.
NOTE I -- PRIOR PERIOD ADJUSTMENT
Retained earnings at December 31, 1994, were restated following completion
of the Company's first audit to reflect the correction of the following account
balances:
<TABLE>
<S> <C>
Accounts receivable...................................... $ (14,061)
Property and equipment................................... 15,307
Other assets............................................. 20,521
Accumulated depreciation and amortization................ 21,219
Accounts payable......................................... (94,965)
Income taxes payable..................................... (20,639)
Notes payable............................................ 49,112
Deferred income taxes.................................... (156,000)
Additional contributed capital........................... (55,192)
Other.................................................... (3,675)
---------
$ 238,373
=========
</TABLE>
NOTE J -- ACQUISITION
On September 23, 1994, the Company purchased certain assets of Eastern
Telecom Corporation, operators of pay telephones in the Southeastern region of
the United States. The acquisition was accounted for using the purchase method.
The purchase price of $4,000,000 was allocated as follows:
<TABLE>
<S> <C>
Fair market value of assets acquired
Inventories............................................ $ 2,000
Equipment.............................................. 1,721,839
Site contracts......................................... 2,276,161
----------
Purchase price........................................... $4,000,000
=========
</TABLE>
In connection with the asset purchase, the Company entered into a purchase
commitment with the seller for services of $500,000. In 1995, the commitment
decreased to approximately $192,000 based on actual revenues generated by the
assets acquired. The Company's annual obligation under this agreement is $32,000
through 2001.
F-89
<PAGE> 90
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.
NOTE L -- SUBSEQUENT EVENT
On February 7, 1996, the Telecommunications Act of 1996 was signed into
law. The Act recognizes that independent public payphone providers are entitled
to fair rules to compete with the Regional Bell Operating Companies and other
local exchange companies. For instance, the Act prohibits Bell operating
companies from subsidizing payphone service directly or indirectly with revenues
generated from their exchange or access services. Bell companies are also
prohibited from discriminating in favor of their payphone services. The
legislation directs the Federal Communications Commission to develop fair rules
in implementing the payphone provision within nine months. The potential impact
of this Act on the financial position of the Company is unknown at this time.
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the short-term
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at December 31, 1995, based on
market rates and conditions.
F-90
<PAGE> 91
INDEPENDENT ACCOUNTANTS' REPORT
Payphones of America, Inc. and Subsidiary
Stockholders and Board of Directors
We have reviewed the accompanying consolidated balance sheets, income
statements and cash flow statements of Payphones of America, Inc. and Subsidiary
as of June 30, 1996 and 1995, and for the six month periods then ended. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
October 16, 1996
F-91
<PAGE> 92
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30,
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Current assets
Accounts receivable....................................... $ 372,557.99 $ 339,498.44
Prepaid expenses.......................................... 39,245.11 26,097.67
Other..................................................... 40,210.91 91,139.99
-------------- --------------
Total current assets.............................. 452,014.01 456,736.10
-------------- --------------
Operating equipment
Telecommunications equipment.............................. 3,924,343.66 3,848,670.36
Telephone equipment held for installation................. 20,684.45 20,684.45
-------------- --------------
3,945,028.11 3,869,354.81
Less accumulated depreciation and amortization............ (1,533,605.18) (991,873.18)
-------------- --------------
Net operating equipment..................................... 2,411,422.93 2,877,481.63
-------------- --------------
Leasehold improvements, equipment, furniture and fixtures
net of accumulated depreciation and amortization of
$180,991.76 and $118,347.19 respectively.................. 30,706.63 167,422.68
Intangible assets
Site contracts, net....................................... 1,688,500.68 2,234,952.07
Non compete agreements, net............................... 197,083.33 362,083.35
Other..................................................... 793,406.35 831,335.75
-------------- --------------
2,678,990.36 3,428,371.17
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
LIABILITIES
Current liabilities
Book overdraft of cash.................................... $ 170,709.08 $ 169,071.69
Notes payable to bank..................................... 243,750.00 249,750.00
Accounts payable.......................................... 73,168.23 53,245.60
Accrued expenses.......................................... 583,216.66 773,202.58
Current maturities of long term debt...................... 736,073.00 63,003.28
-------------- --------------
Total current liabilities......................... 1,806,916.97 1,308,273.15
-------------- --------------
Long-term debt, less current maturities
Notes payable and obligations under capital leases........ 4,568,293.81 5,891,563.57
Notes payable to stockholders............................. 568,090.19 262,894.81
Deferred income taxes....................................... -- 284,000.00
-------------- --------------
Total liabilities................................. 6,943,300.97 7,746,731.53
-------------- --------------
Stockholders' equity
Common stock.............................................. 348,756.03 348,756.03
Additional paid-in-capital................................ -- (46,133.09)
Accumulated deficit....................................... (1,718,923.07) (1,119,342.89)
-------------- --------------
Total stockholders' equity........................ (1,370,167.04) (816,719.95)
-------------- --------------
$ 5,573,133.93 $ 6,930,011.58
============== ==============
</TABLE>
F-92
<PAGE> 93
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Revenues
Coin calls................................................... $1,516,505.67 $1,649,738.77
Non coin calls............................................... 1,539,280.30 1,937,053.41
Other........................................................ 712,438.98 13,786.67
------------- -------------
Total revenues....................................... 3,768,224.95 3,600,578.85
------------- -------------
Cost of revenues
Line access charges.......................................... 698,365.13 866,025.91
Commissions.................................................. 436,680.69 556,942.49
Service and collections...................................... 1,060,772.30 777,406.11
Depreciation and amortization................................ 596,134.05 572,783.12
------------- -------------
Total cost of revenues............................... 2,791,952.17 2,773,157.63
------------- -------------
Gross profit................................................... 976,272.78 827,421.22
Selling, general and admin. expenses........................... 985,289.98 943,668.15
------------- -------------
Operating loss................................................. (9,017.20) (116,246.93)
Other income(expense)
Interest expense............................................. (333,229.92) (479,226.62)
Gain(loss) on sale of assets................................. (55,474.76) 6,273.67
Other income................................................. 4,110.74 4,192.64
------------- -------------
Total other income(expense).......................... (384,593.94) (468,760.31)
------------- -------------
Loss before taxes on income.................................... (393,611.14) (585,007.24)
Taxes on income................................................ -- --
------------- -------------
Net loss............................................. $ (393,611.14) $ (585,007.24)
============= =============
</TABLE>
F-93
<PAGE> 94
PAYPHONES OF AMERICA, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
SIX MONTHS ENDED JUNE 30,
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Increase(decrease) in cash
Operating activities
Net loss................................................... $(393,611.14) $(585,007.24)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.............................. 698,211.55 679,329.58
(Gain) loss on sale of property and equipment.............. 55,474.76 (6,273.67)
Changes in assets and liabilities:
Decrease in accounts receivable.......................... 4,767.01 28,474.56
Increase in prepaid expenses............................. (13,491.11) (11,782.67)
(Decrease)increase in accounts payable and accrued
expenses.............................................. (372,401.11) 108,407.18
------------ ------------
Total adjustments..................................... 372,561.10 798,154.98
------------ ------------
Net cash provided by operating activities............. (21,050.04) 213,147.74
Investing activities
Purchase of fixed assets...................................... (54,350.00) (40,442.55)
Proceeds from sale of assets.................................. 20,000.00 6,273.67
------------ ------------
Net cash used in investing activities................. (34,350.00) (34,168.88)
------------ ------------
Financing activities
Proceeds from notes and capital leases........................ 489,928.35 210,816.45
Principal payments on debt.................................... (609,089.39) (601,496.75)
Stock warrants exercised...................................... -- 9,333.34
Dividends paid................................................ -- (114,613.68)
------------ ------------
Net cash used in financing activities........................... (119,161.04) (495,960.64)
------------ ------------
Net increase(decrease) in cash.................................. (174,561.08) (316,981.78)
Cash beginning of period........................................ 3,852.00 147,910.09
------------ ------------
Cash overdraft at end of period................................. $(170,709.08) $(169,071.69)
============ ============
</TABLE>
F-94
<PAGE> 95
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. The Company
Payphones of America, Inc. operates, services and a system of approximately
2,800 pay telephones in the Southeastern and Midwestern United States.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. Intangible Assets
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. Concentrations of Credit Risk
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of revenues were
generated by the Company's pay telephones located in the states of Missouri and
Virginia. No other area has a disproportionate credit risk.
F-95
<PAGE> 96
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.25% at June 30, 1996). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on October 10, 1996.
NOTE C -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
PORTION PORTION TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
Notes payable to stockholders................. $ 76,100 $ 568,090 $ 644,190
Notes payable to Ford Motor Credit Company.... 14,070 36,389 50,459
Notes payable to Ronald L. Coleman............ 7,232 299,868 307,100
Note payable to Pay-Tele Communications, Inc.
d/b/a Midwest Telecom....................... 23,909 185,273 209,182
Note payable to Communications Finance
Corporation................................. 66,806 320,034 386,840
Note payable to R. Greg Kintz and Paul Wm.
Schindler................................... 47,700 45,750 93,450
Capital lease obligations Berthel, Fisher &
Company Leasing, Inc........................ 492,910 3,680,980 4,173,890
Intellicall, Inc............................ 7,346 -- 7,346
-------- ---------- ----------
$736,073 $5,136,384 $5,872,457
======== ========== ==========
</TABLE>
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
F-96
<PAGE> 97
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
<TABLE>
<S> <C>
Telephone equipment...................... $3,871,519
Site location contracts.................. 2,980,749
----------
6,852,268
Less accumulated depreciation and
amortization........................ 2,934,631
----------
$3,917,637
==========
</TABLE>
Annual maturities of all long-term obligations are as follows for years
following June 30, 1996:
<TABLE>
<S> <C>
1997..................................... $1,208,993
1998..................................... 1,055,775
1999..................................... 1,011,328
2000..................................... 884,627
2001..................................... 822,083
2002 and thereafter...................... 436,524
----------
$5,419,330
==========
</TABLE>
NOTE D -- INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and liabilities
for financial statement and tax return purposes are accumulated depreciation and
accumulated amortization.
There was no provision for income taxes for the periods ended June 30, 1996
and 1995.
F-97
<PAGE> 98
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
Deferred tax assets and liabilities are attributable to the following at
June 30,:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation........................ $(472,000) $(365,000)
Accumulated amortization........................ 262,000 81,000
Tax benefit of net operating loss
carryforward.................................. 460,000 284,000
--------- ---------
250,000 --
Less valuation allowance........................... (250,000) --
--------- ---------
Net deferred tax asset (liability)......... $ -- $ --
========= =========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards (based on filed tax
returns through December 31, 1995) for Federal income tax purposes which are
available to offset future Federal taxable income. These carryforwards expire as
follows:
<TABLE>
<S> <C>
2008..................................... $ 9,194
2009..................................... 332,849
2010..................................... 836,510
----------
$1,178,553
==========
</TABLE>
NOTE E -- COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under operating
leases are as follows for the year ended June 30,:
<TABLE>
<S> <C>
1997................................... $ 94,169
1998................................... 76,898
1999................................... 59,775
2000................................... 61,700
2001................................... 64,400
2002 and thereafter.................... 278,300
-----------
Total minimum lease payments........... $ 635,242
===========
</TABLE>
Rent expense for all operating leases for the periods ended June 30, 1996
and 1995, was $47,545 and $35,756, respectively.
F-98
<PAGE> 99
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
UNAUDITED
NOTE F -- STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
<TABLE>
<CAPTION>
WARRANT NUMBER EXERCISE EXPIRATION
NUMBER OF SHARES PRICE DATE
- ------- ---------- -------- -----------------
<C> <C> <C> <S>
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
</TABLE>
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE G -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the shortterm
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at June 30, 1996, based on market
rates and conditions.
F-99
<PAGE> 100
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined balance sheets of Amtel
Communications, Inc., and Combined Companies (Note B) as of June 30, 1996 and
December 31, 1995, and the related combined statements of operations,
stockholder's deficit, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amtel Communications, Inc., and
combined Companies (Note B) as of June 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, on August
3, 1995, the Company filed voluntary petitions for relief under Chapter 11 of
Title II of the United States Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-100
<PAGE> 101
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1996 DECEMBER 31, 1995
------------ -----------------
<S> <C> <C>
CURRENT ASSETS
Cash..................................................... $ 422,566 $ 616,974
Accounts receivable...................................... 527,883 791,238
Inventory................................................ 2,001,072 1,874,290
Other.................................................... 137,553 180,280
------------ -----------------
TOTAL CURRENT ASSETS..................................... 3,089,074 3,462,782
------------ -----------------
FIXED ASSETS (Note C)
Property and equipment, net.............................. 462,813 1,060,119
Deferred site costs, net................................. 9,812,154 10,359,692
------------ -----------------
TOTAL FIXED ASSETS.................................... 10,274,967 11,419,811
------------ -----------------
OTHER ASSETS............................................... 294,619 289,216
------------ -----------------
TOTAL ASSETS.......................................... $13,658,660 $15,171,809
=========== =================
POST-PETITION LIABILITIES
Accounts payable - trade................................. $ 677,425 $ 1,010,211
Accounts payable - bankruptcy............................ 1,253,555 539,942
Accrued expenses......................................... 767,661 709,518
------------ -----------------
TOTAL POST-PETITION LIABILITIES.......................... 2,698,641 2,259,671
PRE-PETITION LIABILITIES
SUBJECT TO COMPROMISE (Note D)
Accounts payable - trade................................. 6,123,480 6,123,480
Accrued sales tax........................................ 1,615,671 1,615,671
Notes payable............................................ 7,774,805 7,774,805
Lessor liabilities....................................... 65,085,000 65,085,000
------------ -----------------
TOTAL PRE-PETITION LIABILITIES........................... 80,598,956 80,598,956
------------ -----------------
STOCKHOLDER'S DEFICIT
Common stock, 1,000,000 shares authorized, $0.01 par
value, 400,000 shares authorized, no par value, 50,000
shares issued and outstanding......................... 50,000 50,000
Retained deficit......................................... (69,688,937) (67,736,818)
------------ -----------------
TOTAL STOCKHOLDER'S DEFICIT.............................. (69,638,937) (67,686,818)
------------ -----------------
TOTAL LIABILITIES & DEFICIT.............................. $13,658,660 $15,171,809
=========== =================
</TABLE>
See accompanying notes to the financial statements.
F-101
<PAGE> 102
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
REVENUE
Coin.................................................... $ 4,696,852 $ 9,689,179
LD Commissions.......................................... 1,406,593 2,848,753
Interstate.............................................. 578,681 761,181
Intralata............................................... 460,601 1,849,477
Other................................................... 62,095 1,910,550
------------- -----------------
TOTAL REVENUE........................................... 7,204,822 17,059,140
------------- -----------------
COSTS AND EXPENSES
Line charges............................................ 2,428,704 6,862,015
Location commissions.................................... 1,639,127 3,921,741
Other operating expenses................................ 321,947 2,651,734
Selling, general and administrative..................... 2,231,970 15,103,091
Depreciation and amortization........................... 777,823 1,621,029
Other................................................... -- 67,356
------------- -----------------
LOSS FROM OPERATIONS BEFORE OTHER
EXPENSES AND REORGANIZATION ITEMS....................... (194,749) (13,167,826)
------------- -----------------
OTHER
Interest income......................................... (1,606) --
Interest expense........................................ 6,077 7,429,502
Loss on asset disposal.................................. 453,898 429,967
Other expenses.......................................... 505,113 --
------------- -----------------
LOSS BEFORE REORGANIZATION ITEMS........................ (1,158,231) (21,027,295)
REORGANIZATION ITEMS (Note E)
Professional fees....................................... 721,277 539,942
Other................................................... 68,611 --
------------- -----------------
LOSS BEFORE INCOME TAXES.................................. (1,948,119) (21,567,237)
INCOME TAXES (Note F)..................................... 4,000 4,000
------------- -----------------
NET LOSS.................................................. $(1,952,119) $ (21,571,237)
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-102
<PAGE> 103
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994............................. 50,000 $50,000 $(46,165,581) $(46,115,581)
Net loss.................................... -- -- (21,571,237) (21,571,237)
------ ------- ------------ -------------
DECEMBER 31, 1995............................. 50,000 50,000 (67,736,818) (67,686,818)
Net loss.................................... -- -- (1,952,119) (1,952,119)
------ ------- ------------ -------------
JUNE 30, 1996................................. 50,000 $50,000 $(69,688,937) $(69,638,937)
====== ======= =========== ============
</TABLE>
See accompanying notes to the financial statements.
F-103
<PAGE> 104
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(1,952,119) $ (21,571,237)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 777,823 1,621,029
Loss on disposal of property......................... 453,898 429,966
Non-cash reorganization items........................ 713,613 539,942
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................ 263,355 50,449
Inventory.......................................... (126,782) (16,077)
Deposits........................................... (5,401) (140,157)
Other assets....................................... 42,726 (175,612)
Increase (decrease) in:
Accounts payable................................... (332,786) 2,426,573
Accrued expenses................................... 58,143 2,325,189
Notes payable...................................... -- 4,556,207
------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES..................... (107,530) (9,953,728)
------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (103,518) (64,151)
Proceeds from sale of property.......................... 147,635 --
Expenditures for deferred site costs.................... (130,995) (2,866,920)
------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES..................... (86,878) (2,931,071)
------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................... -- (76,148)
Proceeds from lessor liabilities........................ -- 13,209,000
------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. -- 13,132,852
NET INCREASE (DECREASE) IN CASH........................... (194,408) 248,053
CASH, BEGINNING OF PERIOD................................. 616,974 368,921
------------- -----------------
CASH, END OF PERIOD....................................... $ 422,566 $ 616,974
============ =================
</TABLE>
See accompanying notes to the financial statements.
F-104
<PAGE> 105
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-All. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates continuity of operations
and the realization of assets and the satisfaction of liabilities in the normal
course of business. The Chapter 11 filings, the Company's leveraged financial
structure, and recurring net losses resulting in a deficit in stockholder's
equity, raise substantial doubt about its ability to continue as a going
concern. A plan of reorganization may materially change the amounts reported in
the consolidated financial statements (which do not give effect to adjustments
to the carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of these actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in these combined financial statements.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined financial statements include the accounts of Amtel
Communications, Inc., Amtel Communications Payphones, Inc., Amtel Communications
Services, Inc., Amtel Communications Correctional Facilities, Inc. and ACI-HDT
Supply Company. The five entities are all owned 100% by the same individual.
Collectively, the five entities will be referred to as "the Company". Material
intercompany transactions and balances have been eliminated.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
and money market funds to be cash equivalents.
F-105
<PAGE> 106
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORY
Inventory consists primarily of pay telephones, pedestals, and enclosures
to be installed in the Company's business locations. Inventory is stated at the
lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over estimated useful lives of 3-5 years.
DEFERRED SITE COSTS
Deferred site costs consist of pay telephones and related components and
installation costs necessary to make the pay phone ready for operation. Costs
are being amortized on the straight-line method over estimated useful lives of 8
years.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
INCOME TAXES
The Company provides for federal and state income taxes currently payable
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes and income and expenses for
tax purposes.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. FIXED ASSETS:
Included in fixed assets are property and equipment (furniture, fixtures,
and computers) and deferred site costs (pay phones, housing and installation
costs) both of which are carried at cost.
Property and equipment and deferred site costs are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
Property and equipment............... $ 989,108 $ 1,898,564
Accumulated depreciation............. (526,295) (838,446)
------------- -----------------
Net........................... $ 462,813 $ 1,060,118
============ =================
Deferred site costs.................. $13,284,000 $13,153,005
Accumulated amortization............. (3,471,849) (2,793,313)
------------- -----------------
Net........................... $ 9,812,151 $10,359,692
============ =================
</TABLE>
F-106
<PAGE> 107
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
D. PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS:
Pre-petition liabilities consist of secured and unsecured debt, all of
which are subject to compromise under the proposed plan of reorganization.
Certain inventory was returned to the parties claiming a secured interest in the
asset at or around the petition filing date. The claimed secured claims are
classified as subject to compromise as the value of the collateral is less than
the corresponding obligation.
Pre-petition liabilities at June 30, 1996 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accounts payable................................. $ 6,123,480 $ 6,123,480
Accrued state sales tax.......................... 1,615,671 1,615,671
Secured notes payable............................ 7,774,805 7,774,805
Lessor liabilities............................... 65,085,000 65,085,000
----------- -----------
$80,598,956 $80,598,956
========== ==========
</TABLE>
A plan of reorganization may materially change the amount and terms of
these pre-petition liabilities.
Lessor liability consists of funds borrowed from independent third parties,
under which the Company agreed to sell, lease-back, install and maintain, a pay
telephone for an initial investment of $3,000 -- $3,600 per pay telephone. The
Company agreed to pay $51 per month per phone, for a five year period and then
return the initial investment to the investors. Investors had the right to have
their investment returned at any time within the five year period for a nominal
surrender fee. These transactions have been accounted for as financing
transactions and payments made by the Company have been recorded as interest
expense in the statement of operations.
Payments to investors for the six months ended June 30, 1996 and the year
ended December 31, 1995 were approximately $0 and $6,762,000, respectively.
As of the petition date, in accordance with current accounting
pronouncements, the Company discontinued accruing interest on its pre-petition
debt obligations. If such interest had continued to be accrued, interest expense
for the first six months of 1996 and the last five months of 1995 would have
been $457,628 and $379,351, respectively. Interest expense associated with the
lessor liability is not reflected in these accruals as the obligations are not
represented by formal notes.
In conjunction with the Chapter 11 case, there are differences between
claims filed by potential creditors and amounts recorded by the Company. These
differences will be resolved by negotiated agreement between the Company and the
claimant or by the Court. Additional claims may arise in conjunction with the
termination of contractual obligations related to executory contracts and
leases. As a result, recorded amounts may be adjusted but the Company believes
that any such adjustments will not be material.
E. REORGANIZATION ITEMS:
Reorganization items represent expenses resulting from the reorganization
and restructuring of the business. Since these expenses do not relate to the
Company's normal operations they are reported separately on the statement of
operations.
F. INCOME TAXES:
As discussed in Note B, the Company adopted SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires the use of the balance sheet method of
accounting for income taxes. Under this method, a deferred
F-107
<PAGE> 108
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
F. INCOME TAXES (CONTINUED):
tax asset or liability represents the tax effect of temporary differences
between financial statement and tax bases of assets and liabilities and is
measured using the latest enacted tax rates.
The provision for income taxes for the six months ended June 30, 1996 and
the year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current provision.................... $4,000 $4,000
====== ======
</TABLE>
The Company realized substantial net operating losses for the six months
ended June 30, 1996 and the year ended December 31, 1995 as well as in prior
periods. Calculation of the temporary differences between financial statement
and tax bases of assets and liabilities is complicated by the fact the Company
has not filed tax returns since 1993. A valuation reserve has been established
equal to the potential tax benefit that could result from the use of the net
operating losses for these periods since there is reasonable doubt the Company
can generate income to utilize these losses.
G. COMMITMENTS:
The Company leases building space for its six branches, including warehouse
facilities in Seattle, Washington; Denver, Colorado; Portland, Oregon; Hayward,
California; Los Angeles, California; and its corporate headquarters in San
Diego, California. The leases have expiration dates ranging from September, 1996
to October, 1998. The agreements call for a cumulative annual base rent of
$246,336.
Net future minimum rental payments required under this lease as of June 30,
1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30,
- -------------------------------------
<S> <C>
1997................................. $209,461
1998................................. 113,040
1999................................. 33,600
2000................................. --
2001................................. --
--------
$356,101
========
</TABLE>
Total rent expense charged to operations for the six months ended June 30,
1996 and the year ended December 31, 1995 was $204,227 and $544,193,
respectively.
H. PROPOSED PLAN OF REORGANIZATION:
During the six months ended June 30, 1996, the Company evaluated its
long-term market strategies with the goal of reducing expenses and improving
overall operating results. As a result, the Company entered into an asset
purchase agreement with PhoneTel Technologies, Inc. (an Ohio Corporation)
("PhoneTel") dated June 26, 1996 wherein the Company will sell substantially all
of its pay phone operating assets for cash and stock of PhoneTel totaling
$13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel stock). In July, 1996
PhoneTel made a non refundable deposit of $1,300,000 to open escrow for the
purchase of these assets.
F-108
<PAGE> 109
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined statement of revenues and direct
operating expenses of Amtel Communications, Inc., and combined Companies (Note
B) for the three months ended December 31, 1994. This combined statement of
revenues and direct operating expenses is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and direct operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the revenues and direct
operating expenses for the three months ended December 31, 1994, pursuant to the
Securities and Exchange Commission's communication dated July 25, 1996 described
in Note C, and is not intended to be a complete presentation of the Company's
operations.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenue and direct operating expenses of Amtel Communications, Inc., and
combined Companies (Note B) for the three months ended December 31, 1994 in
conformity with generally accepted accounting principles.
The accompanying combined statement of revenues and direct operating
expenses has been prepared assuming that the Company will continue as a going
concern. As described in Note A, on August 3, 1995, the Company filed voluntary
petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The combined statement of revenues and
direct operating expenses does not include any adjustment that might result from
the outcome of this uncertainty.
Harlan & Boettger
San Diego, California
August 23, 1996
F-109
<PAGE> 110
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1994
-----------------
<S> <C>
REVENUE
Coin.......................................................... $ 2,603,577
LD Commissions................................................ 593,370
Interstate.................................................... 68,155
Intralata..................................................... 593,842
Other......................................................... 1,509,861
-----------------
TOTAL REVENUE................................................. 5,368,805
-----------------
COSTS AND EXPENSES
Line charges.................................................. 1,342,855
Location commissions.......................................... 890,903
Other operating expenses...................................... 1,481,073
Selling, general and administrative........................... 4,115,854
Depreciation and amortization................................. 480,702
-----------------
LOSS FROM OPERATIONS BEFORE OTHER INCOME AND EXPENSES......... (2,942,582)
-----------------
OTHER
Interest income............................................... (105)
Interest expense.............................................. 2,295,382
-----------------
NET LOSS...................................................... $(5,237,859)
=================
</TABLE>
The accompanying notes are an integral part of this statement.
F-110
<PAGE> 111
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-A11. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined statement of revenues and direct operating expenses has been
prepared assuming the Company will continue as a going concern, which
contemplates continuity of operations and the realization of assets and the
satisfaction of liabilities in the normal course of business. The Chapter 11
filings, the Company's leveraged financial structure, and recurring net losses
resulting in a deficit in stockholder's equity, raise substantial doubt about
its ability to continue as a going concern. A plan of reorganization may
materially change the amounts reported in the combined statement of revenues and
direct operating expenses (which do not give effect to adjustments to the
carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of this actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in this combined statement of revenues and direct operating expenses.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined statement of revenues and direct operating expenses includes
the accounts of Amtel Communications, Inc., Amtel Communications Payphones,
Inc., Amtel Communications Services, Inc., Amtel Communications Correctional
Facilities, Inc. and ACI-HDT Supply Company. The five entities are all owned
100% by the same individual. Collectively, the five entities will be referred to
as "the Company". Material intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
F-111
<PAGE> 112
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
ESTIMATES
The preparation of a combined statement of revenues and direct operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the combined statement of revenues and direct operating expenses and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. INCOMPLETE PRESENTATION:
By letter dated July 25, 1996 to PhoneTel Technologies, Inc., the
Securities and Exchange Commission (SEC) granted a waiver of Item 310(c) of
Regulation S-B which requires submission of two years of audited statements of
operations. Instead, the SEC has accepted audited statements of operations for a
twenty-one month period. This combined statement of revenues and direct
operating expenses together with the combined statement of operations from the
audited financial statements for the six months ended June 30, 1996 and for the
year ended December 31, 1996 comprise the twenty-one month period.
D. SUBSEQUENT EVENT -- PROPOSED PLAN OF REORGANIZATION:
In 1996, the Company evaluated its long-term market strategies with the
goal of reducing expenses and improving overall operating results. As a result,
the Company entered into an asset purchase agreement with PhoneTel Technologies,
Inc. (an Ohio Corporation) ("PhoneTel") dated June 26, 1996 wherein the Company
will sell substantially all of its pay phone operating assets for cash and stock
of PhoneTel totaling $13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel
stock). In July, 1996 PhoneTel made a non refundable deposit of $1,300,000 to
open escrow for the purchase of these assets.
F-112
<PAGE> 113
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, 1996 and 1995, and the related statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1996. 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, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended September 30, 1996, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
December 20, 1996
F-113
<PAGE> 114
CHEROKEE COMMUNICATIONS, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 592,491 $ 668,778
Trade accounts receivable, less allowance for doubtful accounts
of $364,074 and $264,803, respectively (Notes 6 and 10)....... 3,888,621 4,453,192
Inventories (Note 6)............................................. 112,699 137,036
Prepaid expenses and other current assets........................ 262,748 303,273
Deferred income tax benefits (Note 9)............................ 144,526 108,717
------------ ------------
Total current assets..................................... 5,001,085 5,670,996
Property and equipment -- net (Notes 2, 3 and 6)................... 16,466,001 12,935,453
Site licenses -- net (Notes 1 and 2)............................... 3,771,571 1,941,467
Investment in and advances to affiliates (Note 5).................. 251,672 164,549
Other assets -- net (Note 4)....................................... 455,488 681,754
------------ ------------
TOTAL............................................... $25,945,817 $21,394,219
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable -- receivable financing (Note 6).................... $ -- $ 659,604
Current portion of other notes payable (Note 6).................. 3,320,197 1,491,767
Current portion of capital lease obligations (Note 7)............ 668,826 1,094,381
Accounts payable................................................. 835,384 310,358
Accrued telecommunication and other expenses..................... 3,036,633 2,971,935
Income taxes payable............................................. 475,945 256,140
------------ ------------
Total current liabilities................................ 8,336,985 6,784,185
Long-term liabilities:
Notes payable, less current portion (Note 6)..................... 10,030,963 6,605,835
Capital lease obligations, less current portion (Note 7)......... 56,219 780,593
Deferred income tax liability (Note 9)........................... 306,021 342,359
------------ ------------
Total long-term liabilities.............................. 10,393,203 7,728,787
Commitments and Contingencies (Notes 7 and 11)
Shareholders' equity (Notes 8 and 12):
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 shares issued and outstanding....................... 351,903 351,903
Additional paid-in capital....................................... 10,630 10,630
Retained earnings................................................ 3,366,096 3,031,714
------------ ------------
Total shareholders' equity............................... 7,215,629 6,881,247
------------ ------------
TOTAL............................................... $25,945,817 $21,394,219
============ ============
</TABLE>
See notes to financial statements.
F-114
<PAGE> 115
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Telecommunications revenues:
Pay phone coin calls............................... $17,615,059 $14,036,665 $10,797,869
Automated operator, routed calls................... 15,932,154 17,049,394 16,425,708
Other (Note 5)..................................... 1,363,738 505,581 641,899
----------- ----------- -----------
Total...................................... 34,910,951 31,591,640 27,865,476
Operating costs and expenses:
Telephone charges.................................. 9,078,851 7,851,842 7,257,272
Commissions........................................ 5,627,288 4,909,445 4,341,260
Telecommunication fees and validation.............. 1,519,095 1,821,930 1,834,389
Depreciation and amortization...................... 5,353,797 4,298,090 4,284,734
Field operations personnel......................... 2,988,456 2,016,935 1,610,952
Chargebacks and doubtful accounts.................. 1,111,857 1,104,896 784,636
Selling, general and administrative (Note 10)...... 6,435,919 5,520,405 4,634,890
----------- ----------- -----------
Total...................................... 32,115,263 27,523,543 24,748,133
----------- ----------- -----------
Operating income..................................... 2,795,688 4,068,097 3,117,343
Other income (expense):
Interest expense................................... (1,635,055) (1,450,249) (1,682,465)
Amortization of debt discount...................... (181,167) (181,167) (181,167)
Interest income.................................... 5,069 57,278 20,329
Equity in earnings (losses) of affiliates (Note
5).............................................. (108,556) (34,608) (226,625)
Gain on equipment sales and other (Note 3)......... 27,234 1,160,238 67,917
----------- ----------- -----------
Total...................................... (1,892,475) (448,508) (2,002,011)
----------- ----------- -----------
Income before income taxes........................... 903,213 3,619,589 1,115,332
Provision for income taxes (Note 9).................. 424,831 1,399,140 512,402
----------- ----------- -----------
Net income................................. $ 478,382 $ 2,220,449 $ 602,930
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-115
<PAGE> 116
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON COMMON STOCK ADDITIONAL
-------------------- STOCK -------------------- PAID-IN RETAINED
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL EARNINGS
------- ---------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 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
Cash dividends on preferred
stock..................... (144,000)
Net income.................. 478,382
------- ---------- ---------- --------- -------- ------- ----------
Balance, September 30, 1996... 240,000 $2,400,000 $1,087,000 5,320,467 $351,903 $ 10,630 $3,366,096
======= ========== ========== ========= ======== ======= ==========
</TABLE>
See notes to financial statements.
F-116
<PAGE> 117
CHEROKEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income.................................................. $ 478,382 $ 2,220,449 $ 602,930
Noncash items in net income:
Depreciation and amortization............................. 5,353,797 4,298,090 4,284,734
Amortization of debt discount............................. 181,167 181,167 181,167
Equity in losses of affiliates............................ 108,556 34,608 226,625
Deferred income taxes..................................... (72,147) 440,064 88,456
Gain on sale of property and equipment.................... (188) (1,136,894) (51,854)
Cash from (used for) changes in operating working capital:
Trade accounts receivable................................. 564,571 (201,298) (946,867)
Inventories............................................... 24,337 (58,244) 58,875
Prepaid expenses and other current assets................. 40,525 (89,410) (56,234)
Accounts payable and accrued liabilities.................. 589,724 438,730 619,244
Income taxes payable...................................... 219,805 (112,003) 335,672
------------ ----------- -----------
Net cash from operating activities................... 7,488,529 6,015,259 5,342,748
------------ ----------- -----------
Investing Activities:
Additions to property and equipment......................... (6,691,601) (5,794,108) (4,059,111)
Increase in site licenses (Note 2).......................... (3,854,153) (440,220) (433,746)
Increase in other assets.................................... (79,353)
Proceeds from sale of property and equipment................ 57,759 2,041,310 96,905
Investments in and advances to affiliates................... (206,252) (218,767) (40,591)
Distributions from affiliates............................... 10,573 49,798 60,427
Sale (purchase) of short-term cash investments.............. 150,000 (150,000)
------------ ----------- -----------
Net cash used for investing activities............... (10,683,674) (4,291,340) (4,526,116)
------------ ----------- -----------
Financing Activities:
Issuance of (payments on) note payable -- receivable
financing................................................. (659,604) (1,045,570) 161,812
Issuance of other notes payable............................. 8,035,810 4,048,753 2,122,523
Payments on notes payable and capital lease obligations..... (4,113,348) (4,704,006) (2,948,227)
Issuance of common stock.................................... -- 8,720 --
Cash dividends on preferred stock........................... (144,000) (144,000) (144,000)
------------ ----------- -----------
Net cash from (used for) financing activities........ 3,118,858 (1,836,103) (807,892)
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents.............. (76,287) (112,184) 8,740
Cash and cash equivalents:
Beginning of year........................................... 668,778 780,962 772,222
------------ ----------- -----------
End of year................................................. $ 592,491 $ 668,778 $ 780,962
============ =========== ===========
Supplemental information:
Interest paid............................................... $ 1,606,376 $ 1,462,519 $ 1,635,052
============ =========== ===========
Income taxes paid........................................... $ 277,173 $ 1,091,368 $ 23,000
============ =========== ===========
Noncash investing and financing activities:
Equipment and other assets acquired under capital lease
obligations and debt.................................... $ -- $ -- $ 367,500
============ =========== ===========
</TABLE>
See notes to financial statements.
F-117
<PAGE> 118
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Owned............................................ 12,344 9,333 8,182
Managed.......................................... 168 276 233
------ ------ ------
Total.................................. 12,512 9,609 8,415
====== ====== ======
</TABLE>
FINANCIAL STATEMENT PREPARATION requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Differences from those estimates are recorded in the period they become known.
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.
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 or the life of the lease,
whichever is shorter; telecommunications equipment, seven years and ten years;
telecommunications software licenses, four to five years; vehicles, computer
equipment and software, five years; and furniture and office equipment, five to
seven years. 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 $4,131,855 and $2,690,403 at
September 30, 1996 and 1995, respectively. Amortization is provided using the
straight-line method over the terms of the related site license agreements,
generally two to seven years.
FINANCIAL INSTRUMENTS consist of cash, short-term investments, receivables,
payables and debt, the carrying value or disclosed value of which is a
reasonable estimate of their fair values due to their maturities or variable
interest rates.
F-118
<PAGE> 119
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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.
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.
STOCK-BASED COMPENSATION arising from stock option grants is accounted for
by the intrinsic value method under APB Opinion No. 25. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," will be
effective for the Company beginning October 1, 1996. This statement requires
expanded disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. As permitted by SFAS No. 123, the
Company will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro forma effect
on net income and earnings per share.
2. ACQUISITIONS
On November 1, 1995, the Company acquired the assets of Teltrust, Inc. (a
Utah corporation), primarily 1,488 installed pay phones and 81 jail phones, for
a purchase price of $3,538,247 in cash. The acquisition was recorded as a
purchase, and the difference between the fair value of the tangible assets
acquired and the total purchase price was recorded as site licenses of
$2,503,972 and is being amortized over the estimated average life of the
acquired location contracts of 60 months.
3. PROPERTY AND EQUIPMENT
Property and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Telecommunications equipment:
Owned................................................... $21,224,578 $12,577,986
Under capital leases.................................... 2,856,787 5,725,587
Telecommunications software licenses...................... 2,578,425 2,214,455
Vehicles.................................................. 2,813,392 2,184,227
Furniture and office equipment............................ 858,430 686,820
Machinery................................................. 30,005 30,005
Land and buildings........................................ 77,640 75,747
----------- -----------
Total..................................................... 30,439,257 23,494,827
Less accumulated depreciation and amortization............ 13,973,256 10,559,374
----------- -----------
Property and equipment -- net............................. $16,466,001 $12,935,453
=========== ===========
</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.
F-119
<PAGE> 120
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. OTHER ASSETS -- Other assets at September 30 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred financing costs.................................... $1,113,451 $1,113,451
Patents..................................................... 46,009 46,009
Noncompete agreements....................................... 252,500 252,500
---------- ----------
Total....................................................... 1,411,960 1,411,960
Less accumulated amortization............................... 956,472 730,206
---------- ----------
Other assets -- net......................................... $ 455,488 $ 681,754
========== ==========
</TABLE>
5. INVESTMENT IN AND ADVANCES TO AFFILIATES
The Company has a 50% 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. The Company
invested an additional $25,000 in 1995 and made additional cash advances of
$206,252 and $193,767 to CID during 1996 and 1995, respectively, which are
included in the investment.
The Company had a 50% investment in a partnership, Cherokee Public Phones
(CPP), which owned pay phones. The Company provided certain management and
recordkeeping services to CPP. During 1996, this partnership was dissolved.
The following balances with these affiliates at September 30 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CID -- Investment and advances, at equity...................... $251,672 $179,020
CPP -- Equity interest in (net advances from) the
partnership.................................................. -- (14,471)
-------- --------
Total........................................................ $251,672 $164,549
======== ========
</TABLE>
Equity in earnings (losses) of affiliates consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
CID.............................................. $(133,600) $(84,406) $(287,052)
CPP.............................................. 25,044 49,798 60,427
--------- -------- ---------
Total.......................................... $(108,556) $(34,608) $(226,625)
========= ======== =========
</TABLE>
Transactions in the Company's financial statements arising from the above
arrangement with CPP are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Other revenue -- management fees........................ $ 5,057 $47,637 $50,525
Distributions from affiliates........................... 10,573 49,798 60,427
</TABLE>
F-120
<PAGE> 121
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. NOTES PAYABLE
Long-term notes payable at September 30 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Equipment notes:
Notes payable, Comerica Bank:
Revolving capital expenditure facility.................. $ 3,086,019 $ 906,200
Revolving acquisition facility.......................... 4,118,359 1,636,582
Other notes payable....................................... 209,469 131,327
----------- -----------
Total equipment notes..................................... 7,413,847 2,674,109
Vehicle notes:
Notes payable, FMCC -- due in monthly installments,
including interest ranging from 2.9% to 16.75%, maturing
through September 1999, collateralized by automobiles... 1,140,470 902,726
Other notes payable....................................... 75,787 22,630
----------- -----------
Total vehicle notes....................................... 1,216,257 925,356
Subordinated and other notes:
Subordinated note payable, Banc One Capital Partners
Corporation -- bearing interest at 12% payable
quarterly, with principal due at maturity in May 1999,
net of $468,014 and $649,181, 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.................. 4,531,986 4,350,819
Notes payable insurance companies -- due in monthly
installments through June 1996, including interest,
unsecured............................................... 189,070 147,318
----------- -----------
Total subordinated and other notes payable................ 4,721,056 4,498,137
----------- -----------
Total................................................ 13,351,160 8,097,602
Less current portion...................................... 3,320,197 1,491,767
----------- -----------
Long-term notes payable, less current portion............. $10,030,963 $ 6,605,835
=========== ===========
</TABLE>
Notes payable to Comerica Bank consist of revolving credit loans under
which the Company may borrow up to $5 million under a capital expenditure
facility and $10 million under an acquisition facility, 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.
Borrowings under the facilities are payable in 48 equal monthly payments
beginning the month after 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 10.25% at September 30, 1996. Borrowings under the acquisition
facility may occur through January 24, 1997.
F-121
<PAGE> 122
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Maturities of long-term notes payable at September 30, 1996 (before
reduction for the $468,014 unamortized debt discount), are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 3,320,197
1998............................................................ 2,763,475
1999............................................................ 7,058,681
2000............................................................ 646,406
2001............................................................ 30,415
----------
Total......................................................... $13,819,174
==========
</TABLE>
Notes payable to Zero Plus Dialing Inc. (ZPDI) of $659,604 at September 30,
1995, were due on demand 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 expired July 1, 1996, and were
collateralized by accounts receivable of $3,651,571 at September 30, 1995. Trade
accounts receivable totaling $3,059,149 are being collected by and are due from
ZPDI at September 30, 1996.
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 $210,162,
$174,808 and $116,009 for 1996, 1995 and 1994, respectively. Future minimum
rental payments required under these noncancelable leases at September 30, 1996,
are as follows:
Year ending September 30:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- --------
<S> <C> <C>
1997........................................................... $737,844 $153,556
1998........................................................... 57,026 117,409
1999........................................................... 38,468
-------- --------
794,870 $309,433
========
Amount representing interest................................... 69,825
--------
Present value of minimum lease payments........................ 725,045
Less current portion........................................... 668,826
--------
Capital lease obligations, less current portion................ $ 56,219
========
</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.
F-122
<PAGE> 123
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Holders of the preferred stock are entitled to receive cumulative cash
dividends payable quarterly, at an annual rate of $.60 per share 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.
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 1,322,779 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
December 1995.................................. 400,000 $ 2.15
Forfeited:
February 1994.................................. (26,882) $ 1.09
Exercised:
December 1994.................................. (8,000) $ 1.09
-------
Total options outstanding at September 30,
1996........................................... 849,795
=======
Options exercisable at September 30, 1996........ 413,683 $ 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.................... 849,795
---------
Total shares contingently issuable.............. 4,630,133
Common stock options available for future
grants........................................ 464,984
---------
Total common shares reserved.................... 5,095,117
=========
</TABLE>
F-123
<PAGE> 124
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
tax benefits (liability) as of September 30, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Allowance for doubtful accounts, not currently deductible............ $ 123,785 $ 90,033
Accrued expenses, not currently deductible........................... 20,741 18,684
--------- ---------
Total current asset.................................................. 144,526 108,717
Accelerated depreciation and amortization for tax purposes........... (390,720) (348,391)
Alternative minimum tax (AMT) credit carryforwards................... 84,699 6,032
--------- ---------
Total noncurrent asset (liability)................................... (306,021) (342,359)
--------- ---------
Net deferred tax asset (liability)................................... $(161,495) $(233,642)
========= =========
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- --------
<S> <C> <C> <C>
Current.............. $496,978 $ 959,076 $423,946
Deferred............. (72,147) 440,064 88,456
-------- ---------- --------
$424,831 $1,399,140 $512,402
======== ========== ========
</TABLE>
A reconciliation between income taxes computed at the federal statutory
rate and income tax expense is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- --------
<S> <C> <C> <C>
Income taxes computed at federal statutory rate............. $307,092 $1,230,661 $379,213
State income taxes, net of federal tax benefit.............. 49,290 103,210 34,000
Expenses not deductible for tax purposes.................... 16,245 13,585 5,578
Nondeductible loss of foreign affiliate..................... 44,404 28,590 67,642
Other....................................................... 7,800 23,094 25,969
-------- ---------- --------
Total.................................................. $424,831 $1,399,140 $512,402
======== ========== ========
</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% owned by the shareholder.
Transactions and balances in the Company's financial statements arising from the
above arrangements are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
During the period:
Rent expense............................... $52,893 $49,200 $43,200
Airplane charter expense................... 80,930 96,470
Other operating expenses................... 35,135 32,483 37,717
Accounts receivable from employees........... 18,930 12,428 18,039
</TABLE>
Trade accounts receivable include $390,799 and $385,146 at September 30,
1996 and 1995, respectively, 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.
F-124
<PAGE> 125
CHEROKEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
11. CONTINGENCIES -- LAWSUITS
In October 1996, AT&T Communications, Inc. filed a lawsuit against the
Company asserting claims in the amount of $3 million for an alleged breach of
contract related to the routing of certain long-distance calls originating at
the Company's pay phones during fiscal 1996 and prior periods. Discovery has not
commenced and in view of the early stage of the litigation, no accrual is made
for this loss contingency at September 30, 1996. An ultimate adverse resolution
of this matter could result in a material loss in the Company's future financial
statements. Management believes that the maximum potential damages that could be
alleged, assuming its breach, is less than $500,000. However, management denies
any failure in contract performance, plans a vigorous defense as well as a
potential cross-action suit against AT&T for disclosure of confidential phone
data and for breach of contract, and believes that a loss, if any, from this
matter will not have a material adverse effect on the Company's financial
statements.
The Company is a defendant in various other 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 statements.
12. SUBSEQUENT SALE OF COMPANY
The Company and its shareholders have entered into an agreement and plan of
merger dated November 21, 1996, with PhoneTel Technologies, Inc. This sale of
the Company is expected to close in January 1997.
F-125
NO DEALER, SALESPERSON OR ANY
OTHER INDIVIDUAL HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT. IF GIVEN OR
MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED 13,304,263 SHARES
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER OR AGENT.
THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY PHONETEL TECHNOLOGIES, INC.
JURISDICTION WHERE OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION
HEREIN OR THEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THEIR RESPECTIVE
DATES.
------------- COMMON STOCK
TABLE OF CONTENTS
Page
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 12
Use of Proceeds..................... 21
Capitalization...................... 21
Price Range of Common
Stock............................. 23 -----------------
Dividend Policy..................... 24
Selected Financial Data............. 25
Pro Forma Financial Data............ 28 PROSPECTUS
Management's Discussion
and Analysis of Financial
Condition and Results of ----------------
Operations ....................... 41
Business............................ 55
Management.......................... 77
Security Ownership of
Certain Beneficial Owners
and Management.................... 84
Certain Transactions................ 87
Description of Capital Stock........ 88
Description of Certain
Indebtedness...................... 94 January 24, 1997
Selling Shareholders................ 96
Plan of Distribution................102
Legal Matters.......................104
Experts.............................104
Glossary............................A-1
Index to Financial
Statements........................ F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Articles of Incorporation of the Company
provides for indemnification, to the fullest extent permitted or required
under law, of any director or officer of the Company or any person serving
at the request of the Company as a director, trustee or officer of another
entity, in connection with any action, suit or proceeding, criminal, civil
or administrative, to which such person, is or may be a party by reason of
their status as such.
Pursuant to section 1701.13(E) of the Ohio Revised Code, a director,
officer or employee is entitled to indemnification only if a determination
is made (i) by the directors of the Company acting at a meeting at which a
quorum consisting of directors who neither were nor are parties to or
threatened with any such action, suit or proceeding is present or (ii) by
the shareholders of the Company at a meeting held for such purpose by the
affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Company on such proposal or without a
meeting by the written consent of the holders of shares entitling them to
exercise two-thirds of the voting power on such proposal, that such
director, officer or employee (a) was not, and has not been adjudicated to
have been, negligent or guilty of misconduct in the performance of his duty
to the Company, (b) acted in good faith and in a manner he reasonably
believed to be in the best interest of the Company and (c) in any matter
the subject of a criminal action, suit or proceeding, had no reasonable
cause to believe that his conduct was unlawful.
Additionally, section 1701.13(E)(5)(a) of the Ohio Revised Code
provides that, unless prohibited by specific reference in a corporation's
articles of incorporation or code of regulations, a corporation shall pay a
director's expenses, including attorneys' fees, incurred in defending an
action, suit or proceeding brought against a director in such capacity,
whether such action, suit or proceeding is brought by a third party or by
or in the right of the corporation, provided the director delivers to the
corporation an undertaking to (a) repay such amount if it is proved in a
court of competent jurisdiction that his action or failure to act was
undertaken with deliberate intent to injure the corporation or with
reckless disregard for the best interests of the corporation and (b)
reasonably cooperate with the corporation in such action, suit or
proceeding.
Section 1701.13(E)(7) of the Ohio Revised Code provides that a
corporation may purchase insurance or furnish similar protection for any
director, officer or employee against any liability asserted against him in
any such capacity, whether or not the corporation would have power to
indemnify him under Ohio law. Such insurance may be purchased from or
maintained with a person in which the corporation has a financial interest.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
Except for the Securities and Exchange Commission registration fee,
all fees and expenses are estimated and will be paid by the Company.
Securities and Exchange Commission
Registration Fee............................. $ 11,591
Printing and Engraving Expenses................. 100,000
Accounting Fees and Expenses.................... 25,000
Legal Fees and Expenses......................... 130,000
Transfer Agent's and Registrar's Fees
and Expenses................................. 5,000
Miscellaneous................................... 8,409
--------
Total...................................... $280,000
========
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 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 totaled
$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 totaling $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 in 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.
On December 31, 1996, the Company issued 99,119 shares of Common
Stock to Peter Graf in exchange for indebtedness owed by the Company to
Mr. Graf of approximately $248,000 principal amount, plus accrued interest
thereon. On January 2, 1997, the Company issued 124,747 shares of Common
Stock to Mr. Graf in exchange for indebtedness owed by the Company to Mr.
Graf of approximately $337,000 principal amount, plus accrued interest
thereon. Said shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation. (1)*
3.2 Amendment to Articles of Incorporation dated August 30, 1989.
(2)*
3.3 Amended and Restated Code of Governmental Regulations. (5)*
3.5 Amendment to Articles of Incorporation dated January 3, 1992.
(5)*
3.6 Amendment to Articles of Incorporation dated January 20, 1992.
(5)*
3.7 Amendment to Articles of Incorporation dated April 9, 1992.
(8)*
3.8 Amendment to Articles of Incorporation dated June 18, 1993.
(8)*
3.9 Amendment to Articles of Incorporation dated June 30, 1993.
(8)*
3.10 Amendment to Articles of Incorporation dated September 22,
1995. (13)*
3.11 Amendment to Articles of Incorporation dated December 15,
1995. (13)*
3.12 Amendment to Articles of Incorporation dated February 28,
1996. (13)*
4.1 Specimen of Common Stock Certificate. (3)*
4.2 Form of 14% Convertible Preferred Stock. (13)*
4.3 Indenture relating to the Notes offered in the Company Debt
Offering (including the form of Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the
Notes registered hereby.
10.1 Stock Option Agreement between William Tymoszczuk and
PhoneTel Technologies, Inc., dated March 1, 1987. (3)*
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987.
(1)*
10.3 Amended and Restated Stock Option Agreement between PhoneTel
Technologies, Inc. and Jerry H. Burger dated July 1, 1993.
(8)*
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel
Technologies, Inc. and Bernard Mandel. (8)*
10.5 Form of Stock Option Agreement between PhoneTel Technologies,
Inc. and DeBartolo, Inc. (4)*
10.6 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corporation.
(8)*
10.7 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Jerry Burger, together with
amendments thereto. (13)*
10.8 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (13)*
10.9 Lease Agreement between PhoneTel Technologies, Inc. and
Bankers Leasing Association, Inc. dated February 12, 1992.
(5)*
10.10 Registration Rights Agreement dated April 10, 1992 among
PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff
and Charles Stuart. (5)*
10.11 Registration Rights Agreement among PhoneTel Technologies,
Inc. J & C Resources, Inc. and Allen Moskowitz. (5)*
10.12 Form of Stock Option Agreement and Registration Rights
Agreement between PhoneTel Technologies, Inc. and The Edward
J. DeBartolo Corporation. (5)*
10.13 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and William D. Moses, Jr.
dated May 11, 1992. (5)*
10.14 Assignment Agreement between William D. Moses, Jr. and Edward
A. Moulton transferring the right to receive options to
acquire 5,000 shares of Common Stock of PhoneTel
Technologies, Inc. (9)*
10.15 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and George H. Henry dated
March 24, 1992. (5)*
10.16 Amendment No. 1 to Amended and Restated Loan Agreement and
Registration Rights Agreement dated October 23, 1992 by and
among PhoneTel Technologies, Inc., J & C Resources, Inc. and
Allen Moskowitz. (6)*
10.17 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April 23,
1992. (6)*
10.18 Master Agreement between The Cafaro Company and PhoneTel
Technologies, Inc. dated December 23, 1992. (6)*
10.19 Operator Subscriber Service Agreement dated March 25, 1994
between U.S. Long Distance, Inc. and Alpha Pay Phones-IV,
L.P. (7)*
10.20 Non-competition Agreement among PhoneTel Technologies, Inc.,
Alpha Pay Phone-IV, L.P., American Telecommunications
Management Corporation, Stephen C. Fowler and Ronald T.
Huggard dated January 5, 1994. (8)*
10.21 Stock Option Agreement for WEA Investments, Inc. relative to
50,000 shares of Common Stock under option dated on or about
November 30, 1993. (8)*
10.22 Stock Option Agreement with Allenstown Investments Limited
dated on or about January 10, 1994 relative to grant of an
option to purchase 126,000 shares of PhoneTel Technologies,
Inc. Common Stock. (8)*
10.23 Stock Option Agreement with Douglas Abrams with respect to
45,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 10, 1994. (8)*
10.24 Amendment to Stock Option Agreement dated January 10, 1994
with Douglas Abrams with respect to 45,000 shares of Common
Stock of PhoneTel Technologies, Inc. (9)*
10.25 Stock Option Agreement with William Moses, Jr. relative to
75,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 29, 1993. (8)*
10.26 Agreement dated January 5, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses relative
to loan in the amount of one million dollars and providing
for warrants to purchase 100,000 shares and contingent right
to acquire warrants to purchase 400,000 shares of PhoneTel
Technologies, Inc. Common Stock. (8)*
10.27 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses relative
to restructuring the repayment schedule of certain monies
owed by PhoneTel Technologies, Inc. and providing for
warrants to purchase 45,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)*
10.28 Loan Agreement dated December 29, 1993 between PhoneTel
Technologies, Inc. and certain lenders identified therein
with respect to borrowing by PhoneTel Technologies, Inc. of
$400,000 and the granting of warrants to purchase, in the
aggregate, a total of 62,745 shares of Common Stock by
PhoneTel Technologies, Inc. (8)*
10.29 Letter Agreement dated February 23, 1995 between PhoneTel
Technologies, Inc. and certain lenders identified therein
with respect to the extension of the maturity dates of
certain promissory notes and the granting of additional
warrants to purchase Common Stock of PhoneTel Technologies,
Inc. (9)*
10.30 Stock Option Agreement dated March 3, 1994 between PhoneTel
Technologies, Inc. and George H. Henry relative to a grant of
an option to purchase 39,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)*
10.31 Stock Option Agreements dated in January 1994 between
PhoneTel Technologies, Inc. and George H. Henry granting
options to purchase, in the aggregate, a total of 106,551
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.32 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.33 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994.
(9)*
10.34 Stock Option Agreement with Donald Vella with respect to
20,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about November 15, 1994. (9)*
10.35 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.36 Warrant Agreements with Richard Thatcher dated February,
March and April 1995, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 7,500 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.37 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.38 Warrant Agreements with Gerald Waldshutz dated February,
March and April 1995, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 6,250 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.39 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.40 Warrant Agreements with Steven Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.41 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.42 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.43 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
148,235 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.44 Warrant Agreements with Peter Graf dated February, March and
April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 28,750 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.45 Stock Option Agreement dated May 24, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995,
relative to the grant of an option to purchase 50,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)*
10.46 Stock Option Agreement dated September 13, 1994 between
PhoneTel Technologies, Inc. and the Estate of William D.
Moses, and subsequent assignment thereof dated February 2,
1995, relative to the grant of an option to purchase 45,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.47 Warrant Agreement dated March 31, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995,
relative to the grant of warrants to purchase 200,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)*
10.48 Agreement and Plan of Merger dated September 22, 1995,
together with Exhibits attached thereto, by and among
PhoneTel Technologies, Inc. Phone Tel II, Inc., and World
Communications, Inc. (10)*
10.49 Amendment to Agreement and Plan of Merger dated September 22,
1995 by and among PhoneTel Technologies, Inc., PhoneTel II,
Inc., and World Communications, Inc. (10)*
10.50 Agreement and Plan of Merger dated October 16, 1995, together
with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone
Corporation. (11)*
10.51 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corporation, and all amendments thereto.
(12)*
10.52 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto.
(12)*
10.53 Share Purchase Agreement dated as of November 16, 1995,
between PhoneTel Technologies, Inc. and Paramount
Communications Systems, Inc., and all amendments thereto.
(12)*
10.54 Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation (the "Credit
Agreement"). (12)*
10.55 Security Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc. Public Telephone Corporation, World
Communications, Inc., Northern Florida Telephone Corporation
and Paramount Communications Systems, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation as Agent for itself
and certain other lenders. (12)*
10.56 Warrant Purchase Agreement dated as of March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P. (12)*
10.57 Registration Rights Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation and Cerberus Partners,
L.P. (12)*
10.58 Warrant Certificate dated as of March 15, 1996 granting
Internationale Nederlanden (U.S.) Capital Corporation the
right to purchase 102,412 shares of Series A Special
Convertible Preferred Stock of PhoneTel Technologies, Inc.
(13)*
10.59 Warrant Certificate dated as of March 15, 1996 granting
Cerberus Partners, L.P. the right to purchase 102,412 shares
of Series A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (13)*
10.60 Form of Warrant issued on March 15, 1996 to persons listed on
Schedule A to this exhibit. (13)*
10.61 Operator Service Subscriber Agreement dated as of February 29,
1996 by and between Intellicall Operator Services, Inc. and
PhoneTel Technologies, Inc. (13)*
10.62 Intellistar License Agreement dated as of February 29, 1996
by and between Intellicall, Inc. and PhoneTel Technologies,
Inc. (13)*
10.63 Relay Services Agreement dated as of February 29, 1996 by and
between Intellicall, Inc. and PhoneTel Technologies, Inc.
(13)*
10.64 Stock Option Agreement dated April 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (13)*
10.65 Separation Agreement dated July 29, 1996 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.66 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert. (15)
10.67 First Amendment to Credit Agreement dated as of April 11,
1996. (15)
10.68 Second Amendment to Credit Agreement dated as of June 1996.
(14)*
10.69 Third Amendment to Credit Agreement dated as of August 1,
1996. (14)*
10.70 Fourth Amendment to Credit Agreement dated as of September
13, 1996. (14)*
10.71 Fifth Amendment to Credit Agreement dated as of September 13,
1996. (14)*
10.72 Sixth Amendment to Credit Agreement dated as of October 8,
1996. (15)
10.73 Asset Purchase Agreement among PhoneTel Technologies, Inc.,
an Ohio Corporation As Buyer and ACI-HDT Supply Company, a
California corporation, Amtel Communications Services, a
California corporation, Amtel Communications Correctional
Facilities, a California corporation, Amtel Communication,
Inc., a California corporation, Amtel Communications, Inc., a
California corporation, and Amtel Communications Payphones,
Inc., a California corporation, as Seller, dated June 26,
1996, and all amendments thereto. (14)*
10.74 Amended and Restated Share Purchase Agreement among PhoneTel
III, Inc., Payphones of America, Inc. and All of the
Shareholders of Payphones of America, Inc., dated as of
August 1, 1996, and all amendments thereto. (14)*
10.75 Seventh Amendment to Credit Agreement dated as of November
22, 1996. (16)
10.76 Agreement and Plan of Merger dated as of November 21, 1996
among PhoneTel Technologies, Inc., PhoneTel CCI, Inc.,
Cherokee Communication, Inc. and all of the shareholders of
Cherokee Communications, Inc. (the "Cherokee Merger
Agreement") (16)
10.77 Escrow Agreement dated as of November 21, 1996 among Comerica
Bank-Texas, as escrow agent, Cherokee Communications, Inc.,
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized
agents for all of the shareholders of Cherokee
Communications, Inc., PhoneTel Technologies, Inc. and Bill H.
Bailey, Jr., Jerry T. Beddow and Edward L. Marshall,
individually. (16)
10.78 Amendment dated as of December 31, 1996 to the Cherokee
Merger Agreement. (17)
10.79 Asset Purchase Agreement dated January 13, 1997, among
PhoneTel Technologies, Inc., an Ohio Corporation, Texas
Coinphone, a Texas general partnership, Pete W. Catalena and
Dennis H. Goehring. (17)
21.1 Subsidiaries of PhoneTel Technologies, Inc.
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature pages hereof).*
-----------------
* Previously filed .
(1) Incorporated by reference from the Registration Statement on Form
S-18 (Registration No. 33-16962C) of PhoneTel Technologies, Inc. (the
"Company"), filed with the Securities and Exchange Commission on
September 1, 1987.
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-1, Registration No. 33-30428, filed
September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-18 (Registration No. 33-16962C),
filed with the Securities and Exchange Commission on October 30, 1987.
(4) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated March 25,
1994.
(8) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated September
22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated October
16, 1995.
(12) Incorporated by reference from the Company's Form 8-K dated March 15,
1996.
(13) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated September
13, 1996.
(15) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended September 30, 1996.
(16) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-13767),
filed with the Securities and Exchange Commission on December 12,
1996.
(17) Incorporated by reference from the Company's Form 8-K dated January
3, 1997.
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission that
such indemnification is against public policy as expressed in the Act and
is therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business
issuer of expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel that
matter has been settled by controlling precedent, submit to a court of
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.
(b) 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 the 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.
(c) The undersigned small business issuer will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form SB-2 and authorizes this
Amendment No. 1 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State
of New York, on January 23, 1997.
PHONETEL TECHNOLOGIES, INC.
By:/s/ Peter G. Graf
Peter G. Graf
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, January 23, 1997
Peter G. Graf Chief Executive Officer,
and Director
* Chief Operating Officer and January 23, 1997
Nickey B. Maxey Director
* Director January 23, 1997
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer January 23, 1997
Richard Kebert and Treasurer
(Principal Financial and
Accounting Officer)
* Director January 23, 1997
Joseph Abrams
* Director January 23, 1997
George Henry
* Director January 23, 1997
Aron Katzman
* Director January 23, 1997
Steven Richman
==============
* Tammy L. Martin, by signing her name hereto, does hereby execute this
Amendment No. 1 to the Registration Statement on behalf of the directors
of the Registrant indicated above by asterisks, pursuant to powers of
attorney duly executed by such directors contained on the signature
pages of the original Registration Statement.
By: /s/ Tammy L. Martin
Tammy L. Martin
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
3.1 Articles of Incorporation. (1)*
3.2 Amendment to Articles of Incorporation dated August 30, 1989.
(2)*
3.3 Amendment and Restated Code of Governmental Regulations. (5)*
3.5 Amendment to Articles of Incorporation dated January 3, 1992.
(5)*
3.6 Amendment to Articles of Incorporation dated January 20, 1992.
(5)*
3.7 Amendment to Articles of Incorporation dated April 9, 1992.
(8)*
3.8 Amendment to Articles of Incorporation dated June 18, 1993.
(8)*
3.9 Amendment to Articles of Incorporation dated June 30, 1993.
(8)*
3.10 Amendment to Articles of Incorporation dated September 22,
1995. (13)*
3.11 Amendment to Articles of Incorporation dated December 15,
1995. (13)*
3.12 Amendment to Articles of Incorporation dated February 28,
1996. (13)*
4.1 Specimen of Common Stock Certificate. (3)*
4.2 Form of 14% Convertible Preferred Stock. (13)*
4.3 Indenture relating to the Notes offered in the Company Debt
Offering (including the form of Note).
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the
Notes registered hereby.
10.1 Stock Option Agreement between William Tymoszczuk and
PhoneTel Technologies, Inc., dated March 1, 1987. (3)*
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987.
(1)*
10.3 Amended and Restated Stock Option Agreement between PhoneTel
Technologies, Inc. and Jerry H. Burger dated July 1, 1993.
(8)*
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel
Technologies, Inc. and Bernard Mandel. (8)*
10.5 Form of Stock Option Agreement between PhoneTel Technologies,
Inc. and DeBartolo, Inc. (4)*
10.6 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corporation.
(8)*
10.7 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Jerry Burger, together with
amendments thereto. (13)*
10.8 Separation Agreement dated September 15, 1995 between
PhoneTel Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (13)*
10.9 Lease Agreement between PhoneTel Technologies, Inc. and
Bankers Leasing Association, Inc. dated February 12, 1992.
(5)*
10.10 Registration Rights Agreement dated April 10, 1992 among
PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff
and Charles Stuart. (5)*
10.11 Registration Rights Agreement among PhoneTel Technologies,
Inc. J & C Resources, Inc. and Allen Moskowitz. (5)*
10.12 Form of Stock Option Agreement and Registration Rights
Agreement between PhoneTel Technologies, Inc. and The Edward
J. DeBartolo Corporation. (5)*
10.13 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and William D. Moses, Jr.
dated May 11, 1992. (5)*
10.14 Assignment Agreement between William D. Moses, Jr. and Edward
A. Moulton transferring the right to receive options to
acquire 5,000 shares of Common Stock of PhoneTel
Technologies, Inc. (9)*
10.15 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and George H. Henry dated
March 24, 1992. (5)*
10.16 Amendment No. 1 to Amended and Restated Loan Agreement and
Registration Rights Agreement dated October 23, 1992 by and
among PhoneTel Technologies, Inc., J & C Resources, Inc. and
Allen Moskowitz. (6)*
10.17 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April 23,
1992. (6)*
10.18 Master Agreement between The Cafaro Company and PhoneTel
Technologies, Inc. dated December 23, 1992. (6)*
10.19 Operator Subscriber Service Agreement dated March 25, 1994
between U.S. Long Distance, Inc. and Alpha Pay Phones-IV, L.P.
(7)*
10.20 Non-competition Agreement among PhoneTel Technologies, Inc.,
Alpha Pay Phones-IV, L.P., American Telecommunications
Management Corporation, Stephen C. Fowler and Ronald T.
Huggard dated January 5, 1994. (8)*
10.21 Stock Option Agreement for WEA Investments, Inc. relative to
50,000 shares of Common Stock under option dated on or about
November 30, 1993. (8)*
10.22 Stock Option Agreement with Allenstown Investments Limited
dated on or about January 10, 1994 relative to grant of an
option to purchase 126,000 shares of PhoneTel Technologies,
Inc. Common Stock. (8)*
10.23 Stock Option Agreement with Douglas Abrams with respect to
45,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 10, 1994. (8)*
10.24 Amendment to Stock Option Agreement dated January 10, 1994
with Douglas Abrams with respect to 45,000 shares of Common
Stock of PhoneTel Technologies, Inc. (9)*
10.25 Stock Option Agreement with William Moses, Jr. relative to
75,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 29, 1993. (8)*
10.26 Agreement dated January 5, 1994 between PhoneTel Technologies,
Inc. and the Estate of William Moses relative to loan in the
amount of one million dollars and providing for warrants to
purchase 100,000 shares and contingent right to acquire
warrants to purchase 400,000 shares of PhoneTel Technologies,
Inc. Common Stock. (8)*
10.27 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses relative
to restructuring the repayment schedule of certain monies
owed by PhoneTel Technologies, Inc. and providing for
warrants to purchase 45,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)*
10.28 Loan Agreement dated December 29, 1993 between PhoneTel
Technologies, Inc. and certain lenders identified therein
with respect to borrowing by PhoneTel Technologies, Inc. of
$400,000 and the granting of warrants to purchase, in the
aggregate, a total of 62,745 shares of Common Stock by
PhoneTel Technologies, Inc. (8)*
10.29 Letter Agreement dated February 23, 1995 between PhoneTel
Technologies, Inc. and certain lenders identified therein
with respect to the extension of the maturity dates of
certain promissory notes and the granting of additional
warrants to purchase Common Stock of PhoneTel Technologies,
Inc. (9)*
10.30 Stock Option Agreement dated March 3, 1994 between PhoneTel
Technologies, Inc. and George H. Henry relative to a grant of
an option to purchase 39,000 shares of PhoneTel Technologies,
Inc. Common Stock. (9)*
10.31 Stock Option Agreements dated in January 1994 between
PhoneTel Technologies, Inc. and George H. Henry granting
options to purchase, in the aggregate, a total of 106,551
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.32 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.33 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994.
(9)*
10.34 Stock Option Agreement with Donald Vella with respect to
20,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about November 15, 1994. (9)*
10.35 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.36 Warrant Agreements with Richard Thatcher dated February,
March and April 1995, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 7,500 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.37 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.38 Warrant Agreements with Gerald Waldshutz dated February,
March and April 1995, issued pursuant to a Letter Agreement
dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 6,250 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.39 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.40 Warrant Agreements with Steven Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.41 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.42 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.43 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
148,235 shares of PhoneTel Technologies, Inc. Common Stock.
(9)*
10.44 Warrant Agreements with Peter Graf dated February, March and
April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 28,750 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.45 Stock Option Agreement dated May 24, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995,
relative to the grant of an option to purchase 50,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)*
10.46 Stock Option Agreement dated September 13, 1994 between
PhoneTel Technologies, Inc. and the Estate of William D.
Moses, and subsequent assignment thereof dated February 2,
1995, relative to the grant of an option to purchase 45,000
shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.47 Warrant Agreement dated March 31, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995,
relative to the grant of warrants to purchase 200,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)*
10.48 Agreement and Plan of Merger dated September 22, 1995,
together with Exhibits attached thereto, by and among
PhoneTel Technologies, Inc. Phone Tel II, Inc., and World
Communications, Inc. (10)*
10.49 Amendment to Agreement and Plan of Merger dated September 22,
1995 by and among PhoneTel Technologies, Inc., PhoneTel II,
Inc., and World Communications, Inc. (10)*
10.50 Agreement and Plan of Merger dated October 16, 1995, together
with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone
Corporation. (11)*
10.51 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corporation, and all amendments thereto.
(12)*
10.52 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto.
(12)*
10.53 Share Purchase Agreement dated as of November 16, 1995,
between PhoneTel Technologies, Inc. and Paramount
Communications Systems, Inc., and all amendments thereto.
(12)*
10.54 Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation (the "Credit
Agreement"). (12)*
10.55 Security Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc. Public Telephone Corporation, World
Communications, Inc., Northern Florida Telephone Corporation
and Paramount Communications Systems, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation as Agent for itself
and certain other lenders. (12)*
10.56 Warrant Purchase Agreement dated as of March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P. (12)*
10.57 Registration Rights Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation and Cerberus Partners,
L.P. (12)*
10.58 Warrant Certificate dated as of March 15, 1996 granting
Internationale Nederlanden (U.S.) Capital Corporation the
right to purchase 102,412 shares of Series A Special
Convertible Preferred Stock of PhoneTel Technologies, Inc.
(13)*
10.59 Warrant Certificate dated as of March 15, 1996 granting
Cerberus Partners, L.P. the right to purchase 102,412 shares
of Series A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (13)*
10.60 Form of Warrant issued on March 15, 1996 to persons listed on
Schedule A to this exhibit. (13)*
10.61 Operator Service Subscriber Agreement dated as of February
29, 1996 by and between Intellicall Operator Services, Inc.
and PhoneTel Technologies, Inc. (13)*
10.62 Intellistar License Agreement dated as of February 29, 1996
by and between Intellicall, Inc. and PhoneTel Technologies,
Inc. (13)*
10.63 Relay Services Agreement dated as of February 29, 1996 by and
between Intellicall, Inc. and PhoneTel Technologies, Inc.
(13)*
10.64 Stock Option Agreement dated April 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (13)*
10.65 Separation Agreement dated July 29, 1996 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.66 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert. (15)
10.67 First Amendment to Credit Agreement dated as of April 11,
1996. (15)
10.68 Second Amendment to Credit Agreement dated as of June 1996.
(14)*
10.69 Third Amendment to Credit Agreement dated as of August 1,
1996. (14)*
10.70 Fourth Amendment to Credit Agreement dated as of September
13, 1996. (14)*
10.71 Fifth Amendment to Credit Agreement dated as of September
13, 1996. (14)*
10.72 Sixth Amendment to Credit Agreement dated as of October 8,
1996. (15)
10.73 Asset Purchase Agreement among PhoneTel Technologies, Inc.,
an Ohio Corporation As Buyer and ACI-HDT Supply Company, a
California corporation, Amtel Communications Services, a
California corporation, Amtel Communications Correctional
Facilities, a California corporation, Amtel Communication,
Inc., a California corporation, Amtel Communications, Inc.,
a California corporation, and Amtel Communications Payphones,
Inc., a California corporation, as Seller, dated June 26,
1996, and all amendments thereto.(14)*
10.74 Amended and Restated Share Purchase Agreement among PhoneTel
III, Inc., Payphones of America, Inc. and All of the
Shareholders of Payphones of America, Inc., dated as of
August 1, 1996, and all amendments thereto. (14)*
10.75 Seventh Amendment to Credit Agreement dated as of November
22, 1996. (16)
10.76 Agreement and Plan of Merger dated as of November 21, 1996
among PhoneTel Technologies, Inc., PhoneTel CCI, Inc.,
Cherokee Communications, Inc. and all of the shareholders of
Cherokee Communications, Inc. (the "Cherokee Merger
Agreement") (16)
10.77 Escrow Agreement dated as of November 21, 1996 among Comerica
Bank-Texas, as escrow agent, Cherokee Communications, Inc.,
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized
agents for all of the shareholders of Cherokee
Communications, Inc., PhoneTel Technologies, Inc. and Bill H.
Bailey, Jr., Jerry T. Beddow and Edward L. Marshall,
individually. (16)
10.78 Amendment dated as of December 31, 1996 to the Cherokee
Merger Agreement. (17)
10.79 Asset Purchase Agreement dated January 13, 1997, among
PhoneTel Technologies, Inc., an Ohio Corporation, Texas
Coinphone, a Texas general partnership, Pete W. Catalena and
Dennis H. Goehring. (17)
21.1 Subsidiaries of PhoneTel Technologies, Inc.
23.1 Consent of Price Waterhouse LLP regarding PhoneTel
Technologies, Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount
Communication Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs.
23.4 Consent of KPMG Peat Marwick LLP.
23.5 Consent of Ernest M. Sewell, CPA.
23.6 Consent of Miller Sherrill Blake, CPA, PA.
23.7 Consent of Kerber, Eck & Braeckel, LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature pages hereof).*
-----------------
* Previously filed .
(1) Incorporated by reference from the Registration Statement on
Form S-18 (Registration No. 33-16962C) of PhoneTel
Technologies, Inc. (the "Company"), filed with the Securities
and Exchange Commission on September 1, 1987.
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-1, Registration No. 33-30428,
filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-18 (Registration No.
33-16962C), filed with the Securities and Exchange Commission
on October 30, 1987.
(4) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated
March 25, 1994.
(8) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated
September 22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated
October 16, 1995.
(12) Incorporated by reference from the Company's Form 8-K dated
March 15, 1996.
(13) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated
September 13, 1996.
(15) Incorporated by reference from the Company's Form 10-QSB for
the quarter ended September 30, 1996.
(16) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No.
333-13767), filed with the Securities and Exchange Commission
on December 12, 1996.
(17) Incorporated by reference from the Company's Form 8-K dated
January 3, 1997.
EXHIBIT 4.1
=====================================
PHONETEL TECHNOLOGIES, INC.,
As Issuer,
THE SUBSIDIARY GUARANTORS
named on Schedule I hereto
AND
MARINE MIDLAND BANK,
As Trustee
INDENTURE
Dated as of December 18, 1996
$125,000,000
12% SENIOR NOTES DUE 2006
=====================================
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
310(a)(1)......................................... 7.10
(a)(2)....................................... 7.10
(a)(3)....................................... N.A.**
(a)(4)....................................... N.A.
(a)(5)....................................... 7.10
(b).......................................... 7.10
(c).......................................... N.A.
311(a)............................................ 7.11
(b).......................................... 7.11
(c).......................................... N.A.
312(a)............................................ 2.05
(b).......................................... 11.03
(c).......................................... 11.03
313(a)............................................ 7.06
(b)(1)....................................... 7.06
(b)(2)....................................... 7.06
(c).......................................... 7.06; 11.02
(d).......................................... 7.06
314(a)............................................ 4.02; 4.03;
............................................. 11.02
(b).......................................... 4.18
(c)(1)....................................... 11.04
(c)(2)....................................... 11.04
(c)(3)....................................... N.A.
(d).......................................... 4.18
(e).......................................... 11.05
(f).......................................... N.A.
315(a)............................................ 7.01
(b).......................................... 7.05
(c).......................................... 7.01
(d).......................................... 7.01
(e).......................................... 6.11
316(a)(last sentence)............................. 2.09
(a)(1)(A).................................... 6.05
(a)(1)(B).................................... 6.04
(a)(2)....................................... N.A.
(b).......................................... 6.04; 6.07
(c).......................................... 2.13
317(a)(1)......................................... 6.08
(a)(2)....................................... 6.09
(b).......................................... 2.04
318(a)............................................ 11.01
- ----------
* This Cross-Reference Table is not part of the Indenture.
** Not applicable.
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. Definitions........................................... 1
SECTION 1.02. Other Definitions..................................... 17
SECTION 1.03. Incorporation by Reference of TIA .................... 18
SECTION 1.04. Rules of Construction................................. 18
ARTICLE II
THE NOTES
SECTION 2.01. Form and Dating....................................... 18
SECTION 2.02. Execution and Authentication.......................... 19
SECTION 2.03. Registrar; Paying Agent; Depositary................... 20
SECTION 2.04. Paying Agent To Hold Money in Trust................... 20
SECTION 2.05. Holder Lists.......................................... 21
SECTION 2.06. Transfer and Exchange................................. 21
SECTION 2.07. Replacement Notes..................................... 22
SECTION 2.08. Outstanding Notes..................................... 22
SECTION 2.09. Treasury Notes........................................ 23
SECTION 2.10. Temporary Notes....................................... 23
SECTION 2.11. Cancellation.......................................... 23
SECTION 2.12. Defaulted Interest.................................... 24
SECTION 2.13. Record Date........................................... 24
SECTION 2.14. CUSIP Number.......................................... 24
SECTION 2.15. Book-Entry Provisions for Global Notes................ 24
ARTICLE III
REDEMPTION
SECTION 3.01. Redemption Provisions................................. 26
SECTION 3.02. Notice to Trustee..................................... 27
SECTION 3.03. Selection of Notes To Be Redeemed..................... 27
SECTION 3.04. Notice of Redemption.................................. 28
SECTION 3.05. Effect of Notice of Redemption........................ 28
SECTION 3.06. Deposit of Redemption Price........................... 29
SECTION 3.07. Notes Redeemed in Part................................ 29
ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Principal, Premium and Interest............ 29
SECTION 4.02. Provision of Financial Statements..................... 30
SECTION 4.03. Compliance Certificate................................ 31
SECTION 4.04. Stay, Extension and Usury Laws........................ 32
SECTION 4.05. Limitation on Restricted Payments..................... 32
SECTION 4.06. Corporate Existence................................... 34
SECTION 4.07. Limitation on Incurrence of Indebtedness.............. 34
SECTION 4.08. Taxes................................................. 36
SECTION 4.09. Limitation on Dividends and Other Payment
Restrictions Affecting Subsidiaries................ 36
SECTION 4.10. Maintenance of Office or Agency....................... 37
SECTION 4.11. Change of Control..................................... 38
SECTION 4.12. Special Offer upon Failure To Consummate Cherokee
Acquisition........................................ 40
SECTION 4.13. Limitation on Asset Sales............................. 42
SECTION 4.14. Limitation on Issuance and Sale of Preferred
Stock of Subsidiaries.............................. 44
SECTION 4.15. Future Subsidiary Guarantors.......................... 45
SECTION 4.16. Maintenance of Properties............................. 45
SECTION 4.17. Maintenance of Insurance.............................. 45
SECTION 4.18. Deposit of Trust Funds with Trustee
Pending Consummation of Cherokee Acquisition....... 45
SECTION 4.19. Limitation on Transactions with Interested
Persons............................................ 47
SECTION 4.20. Limitation on Lines of Business....................... 48
SECTION 4.21. Limitation on Liens................................... 48
ARTICLE V
SUCCESSORS
SECTION 5.01. Merger, Consolidation and Sale of Assets.............. 49
SECTION 5.02. Surviving Person Substituted.......................... 49
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default..................................... 50
SECTION 6.02. Acceleration.......................................... 52
SECTION 6.03. Other Remedies........................................ 52
SECTION 6.04. Waiver of Past Defaults............................... 53
SECTION 6.05. Control by Majority of Holders........................ 53
SECTION 6.06. Limitation of Suits by Holders........................ 53
SECTION 6.07. Rights of Holders To Receive Payment.................. 54
SECTION 6.08. Collection Suit by Trustee............................ 54
SECTION 6.09. Trustee May File Proofs of Claim...................... 54
SECTION 6.10. Priorities............................................ 55
SECTION 6.11. Undertaking for Costs................................. 55
ARTICLE VII
TRUSTEE
SECTION 7.01. Duties of Trustee..................................... 56
SECTION 7.02. Rights of Trustee..................................... 57
SECTION 7.03. Individual Rights of Trustee.......................... 58
SECTION 7.04. Trustee's Disclaimer.................................. 58
SECTION 7.05. Notice to Holders of Defaults and Events of Default... 58
SECTION 7.06. Reports by Trustee to Holders......................... 59
SECTION 7.07. Compensation and Indemnity............................ 59
SECTION 7.08. Replacement of Trustee................................ 60
SECTION 7.09. Successor Trustee by Merger, Etc...................... 61
SECTION 7.10. Eligibility; Disqualification......................... 61
SECTION 7.11. Preferential Collection of Claims Against Company..... 61
ARTICLE VIII
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Notes; Defeasance........... 62
SECTION 8.02. Conditions to Defeasance.............................. 63
SECTION 8.03. Application of Trust Money............................ 64
SECTION 8.04. Repayment to Company.................................. 64
SECTION 8.05. Indemnity for U.S. Government Obligations............. 64
SECTION 8.06. Reinstatement......................................... 65
ARTICLE IX
AMENDMENTS
SECTION 9.01. Amendments and Supplements Permitted
Without Consent of Holders......................... 65
SECTION 9.02. Amendments and Supplements Requiring
Consent of Holders ................................ 66
SECTION 9.03. Compliance with TIA................................... 67
SECTION 9.04. Revocation and Effect of Consents..................... 67
SECTION 9.05. Notation on or Exchange of Notes...................... 68
SECTION 9.06. Trustee Protected..................................... 68
ARTICLE X
SUBSIDIARY GUARANTEES
SECTION 10.01. Subsidiary Guarantees................................. 69
SECTION 10.02. Trustee To Include Paying Agents...................... 71
SECTION 10.03. Limits on Subsidiary Guarantees....................... 71
SECTION 10.04. Execution of Subsidiary Guarantee..................... 71
SECTION 10.05. Stay, Extension and Usury Laws........................ 72
SECTION 10.06. Payment............................................... 72
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act Controls.......................... 72
SECTION 11.02. Notices............................................... 73
SECTION 11.03. Communication by Holders with Other Holders........... 74
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.... 74
SECTION 11.05. Statements Required in Certificate or Opinion......... 75
SECTION 11.06. Rules by Trustee and Agents........................... 75
SECTION 11.07. Legal Holidays........................................ 75
SECTION 11.08. No Recourse Against Others............................ 75
SECTION 11.09. Counterparts.......................................... 76
SECTION 11.10. Initial Appointments, Compliance Certificates......... 76
SECTION 11.11. Governing Law......................................... 76
SECTION 11.12. No Adverse Interpretation of Other Agreements......... 76
SECTION 11.13. Successors............................................ 76
SECTION 11.14. Severability.......................................... 76
SECTION 11.15. No Recourse Against Others............................ 77
SECTION 11.16. Table of Contents, Headings, Etc...................... 77
SCHEDULE ISUBSIDIARY GUARANTORS EXISTING ON THE ISSUE DATE
EXHIBIT A FORM OF NOTE
EXHIBIT A-1 FORM OF NOTATION ON NOTE RELATING TO GUARANTEE
EXHIBIT B FORM OF BOOK-ENTRY LEGEND AND
SCHEDULE OF EXCHANGES OF GLOBAL NOTE
THIS INDENTURE, dated as of December 18, 1996, is by and
among (i) PhoneTel Technologies, Inc., an Ohio corporation (the
"Company"), as issuer of the 12% Senior Notes due 2006, (ii) each
Subsidiary of the Company existing on the Issue Date as set forth on
Schedule I hereto and each of the Company's Subsidiaries which becomes a
guarantor of the Notes in compliance with Section 4.15 and executes a
supplemental indenture in which such Subsidiary agrees to be bound by the
terms of this Indenture, as guarantors of the Company's obligations under
this Indenture and the Notes (each a "Subsidiary Guarantor"), and (iii)
Marine Midland Bank, as trustee (the "Trustee").
The Company, each Subsidiary Guarantor and the Trustee
agree as follows for the benefit of each other and for the equal and
ratable benefit of the holders of the Notes:
ARTICLE I
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Debt" means, with respect to any specified
Person, Indebtedness of any other Person (the "Acquired Person") existing
at the time the Acquired Person merges with or into, or becomes a
Subsidiary of, such specified Person, including Indebtedness incurred in
connection with, or in contemplation of, the Acquired Person merging with
or into, or becoming a Subsidiary of, such specified Person.
"Affiliate" means, with respect to any specified Person,
any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling," "controlled by" and "under common
control with") of any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of
voting securities, by agreement or otherwise.
"Agent" means any Registrar, Paying Agent, or
co-registrar.
"Asset Acquisition" means (a) an Investment by the Company
or any Subsidiary of the Company in any other Person pursuant to which
such Person shall become a Subsidiary of the Company or shall be merged
with or into the Company or any Subsidiary of the Company, (b) the
acquisition by the Company or any Subsidiary of the Company of the assets
of any Person which constitute all or substantially all of the assets of
such Person or any division or line (whether based on product or
geography) of business of such Person or (c) the acquisition by the
Company or any Subsidiary of the Company of any public pay telephones
from any Person other than the manufacturer (or an Affiliate thereof or
special purpose finance entity related thereto) of such telephones in a
transaction involving consideration having a Fair Market Value equal to
or greater than $250,000.
"Asset Sale" means (i) any sale, lease, conveyance or
other disposition by the Company or any Subsidiary of the Company of any
assets (including by way of a sale-and-leaseback) other than in the
ordinary course of business (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the
Company shall not be an "Asset Sale" but instead shall be governed by the
provisions of Section 5.01), or (ii) the issuance or sale of Capital
Stock of any Subsidiary of the Company, in each case, whether in a single
transaction or a series of related transactions, to any Person (other
than to the Company or a Subsidiary Guarantor), provided that the term
"Asset Sale" shall not include (i) any simultaneous exchange of public
pay telephones and related location agreements of the Company or any of
its Subsidiaries for public pay telephones and related location
agreements of another Person with equivalent Fair Market Value; provided
that the number of pay telephones so exchanged in any calendar year shall
not exceed 10% of (A) the sum of the number of pay telephones owned by
the Company and its Subsidiaries on January 1 of such year and the number
of pay telephones acquired by the Company and its Subsidiaries since
January 1 of such year less (B) the number of pay telephones sold by the
Company and its Subsidiaries since January 1 of such year, and (ii) any
disposition or dispositions during any twelve-month period of assets or
property having a Fair Market Value of less than $250,000 in the
aggregate.
"Bankruptcy Law" means Title 11, United States Bankruptcy
Code of 1978, as amended, or any similar United States federal or state
law relating to bankruptcy, insolvency, receivership, winding up,
liquidation, reorganization or relief of debtors, or any amendment to,
succession to or change in any such law.
"Board of Directors" means the Company's board of
directors or, except with respect to clause (c) of the definition of a
Change of Control, any authorized committee of such board of directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligations" of any Person means the
obligations to pay rent or other amounts under a lease of (or other
Indebtedness arrangements conveying the right to use) real or personal
property of such Person which are required to be classified and accounted
for as a capital lease or liability on the face of a balance sheet of
such Person in accordance with GAAP. The amount of such obligations shall
be the capitalized amount thereof in accordance with GAAP and the stated
maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) corporate stock or
other equity participations, including partnership interests, whether
general or limited, of such Person, including any Preferred Stock.
"Cash Equivalents" means (i) marketable direct obligations
issued or guaranteed by the United States of America, or any governmental
entity or agency or political subdivision thereof (provided, that the
full faith and credit of the United States of America is pledged in
support thereof) maturing within one year of the date of purchase; (ii)
commercial paper issued by corporations, each of which shall have a
consolidated net worth of at least $500 million, maturing within 180 days
from the date of the original issue thereof, and rated "P-1" or better by
Moody's Investors Service or "A-1" or better by Standard & Poor's or an
equivalent rating or better by any other nationally recognized securities
rating agency; (iii) certificates of deposit issued or acceptances
accepted by or guaranteed by any bank or trust company organized under
the laws of the United States of America or any state thereof or the
District of Columbia, in each case having capital, surplus and undivided
profits totalling more than $500 million, maturing within one year of the
date of purchase; and (iv) money market accounts with a bank or trust
company of a type described in clause (iii).
"Change of Control" means the occurrence of any of the
following events:
(a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than the Permitted
Holders, becomes the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person or group shall be
deemed to have beneficial ownership of all shares of Capital Stock that
such person or group has the right to acquire regardless of when such
right is first exercisable), directly or indirectly, of more than 35% of
the total voting power represented by the outstanding Voting Stock of the
Company;
(b) the Company merges with or into another Person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any Person, or any Person merges
with or into the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company is converted into or
exchanged for cash, securities or other property, other than any such
transaction where (x) the outstanding Voting Stock of the Company is
converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee corporation and (y) immediately
after such transaction no "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), disregarding the Permitted
Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person or group shall be deemed to
have beneficial ownership of all shares of Capital Stock that such person
or group has the right to acquire regardless of when such right is first
exercisable), directly or indirectly, of more than 35% of the total
voting power represented by the outstanding Voting Stock of the surviving
or transferee corporation;
(c) during any consecutive two-year period, individuals
who at the beginning of such period constituted the Board of Directors of
the Company (together with any new directors whose election by the Board
of Directors of the Company or whose nomination for election by the
stockholders of the Company was approved by (x) a vote of at least a
majority of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for
election was previously so approved (as described in this clause (x) or
in the following clause (y)) or (y) Permitted Holders that are
"beneficial owners" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act) of a majority of the total voting power represented by the
outstanding Voting Stock of the Company) cease for any reason to
constitute a majority of the Board of Directors then in office; or
(d) the Company is liquidated or dissolved or adopts a
plan of liquidation.
"Cherokee Acquisition" means the acquisition by the
Company of all of the capital stock of Cherokee Communications Inc.
("Cherokee") pursuant to the Agreement and Plan of Merger dated as of
November 21, 1996, among the Company, Cherokee, PhoneTel CCI, Inc. and
all of the shareholders of Cherokee.
"Commission" means the Securities and Exchange Commission.
"Company" means PhoneTel Technologies, Inc., an Ohio
corporation, unless and until a successor replaces it in accordance with
Article V and thereafter means such successor.
"Concurrent Offering" means the public offering by the
Company of up to 7,762,500 shares of its common stock, $.01 par value, as
contemplated by the related prospectus dated December 13, 1996, including
the sale of any such shares of common stock in connection with the
exercise of any over-allotment options granted to the underwriters of
such public offering.
"Consolidated EBITDA" is defined to mean, for any period,
the sum of the amounts for such period of (i) Consolidated Net Income,
(ii) Consolidated Interest Expense, (iii) income taxes, to the extent
such amount was deducted in calculating Consolidated Net Income (other
than income taxes (either positive or negative) attributable to
extraordinary and non-recurring gains or losses or sales of assets), (iv)
depreciation expense, to the extent such amount was deducted in
calculating Consolidated Net Income, (v) amortization expense, to the
extent such amount was deducted in calculating Consolidated Net Income,
and (vi) all other non-cash items reducing Consolidated Net Income, less
all non-cash items increasing Consolidated Net Income, all as determined
on a consolidated basis for the Company and its Subsidiaries in
conformity with GAAP; provided that, if any Subsidiary of the Company is
not a Wholly-Owned Subsidiary of the Company, Consolidated EBITDA shall
be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Consolidated Net Income
attributable to such Subsidiary multiplied by (B) the quotient of (1) the
number of shares of outstanding common stock of such Subsidiary not owned
on the last day of such period by the Company or any of its Subsidiaries
divided by (2) the total number of shares of outstanding common stock of
such Subsidiary on the last day of such period.
"Consolidated Fixed Charge Coverage Ratio" means, on any
determination date (the "Transaction Date"), the ratio of (i)
Consolidated EBITDA for the four fiscal quarters for which financial
information in respect thereof is available immediately prior to such
Transaction Date (the "Reference Period") to (ii) the aggregate
Consolidated Fixed Charges during such Reference Period. In making the
foregoing calculation, (A) pro forma effect shall be given to (1) any
Indebtedness Incurred subsequent to the end of the Reference Period and
prior to the Transaction Date, (2) any Indebtedness Incurred during such
Reference Period to the extent such Indebtedness is outstanding at the
Transaction Date, and (3) any Indebtedness to be Incurred on the
Transaction Date, in each case as if such Indebtedness had been Incurred
on the first day of such Reference Period and after giving pro forma
effect to the application of the proceeds thereof as if such application
had occurred on such first day, (B) Consolidated Interest Expense
attributable to interest on any Indebtedness (whether existing or being
Incurred) computed on a pro forma basis and bearing a floating interest
rate shall be computed as if the rate in effect on the Transaction Date
(taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in
excess of 12 months) had been the applicable rate for the entire period,
(C) there shall be excluded from Consolidated Fixed Charges any
Consolidated Fixed Charges related to any amount of Indebtedness,
Disqualified Stock, or obligations under leases that were outstanding
during such Reference Period or thereafter but that are not outstanding
or are to be repaid on the Transaction Date, except for Consolidated
Interest Expense accrued (as adjusted pursuant to clause (B) above)
during such Reference Period under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any
successor revolving credit or similar arrangement) in effect on the
Transaction Date, (D) pro forma effect shall be given to asset sales and
asset acquisitions (including giving pro forma effect to the application
of proceeds of any asset sales) that occur during such Reference Period
or thereafter and on or prior to the Transaction Date as if they had
occurred and such proceeds had been applied on the first day of such
Reference Period, (E) with respect to any such Reference Period
commencing prior to the Issue Date, the issuance of the Notes shall be
deemed to have taken place on the first day of such Reference Period, and
(F) pro forma effect shall be given to asset sales and asset acquisitions
(including giving pro forma effect to the application of proceeds of any
asset sale) that have been made by any Person that has become a
Subsidiary of the Company or has been merged with or into the Company or
any Subsidiary of the Company during such Reference Period or subsequent
to such period and prior to the Transaction Date and that would have
constituted Asset Sales or Asset Acquisitions had such transactions
occurred when such person was a Subsidiary of the Company as if such
asset dispositions or asset acquisitions were Asset Sales or Asset
Acquisitions that occurred on the first day of such Reference Period;
provided that to the extent that clause (D) or (F) of this sentence
requires that pro forma effect be given to an asset acquisition or asset
disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the person,
or division or line of business of the person, or property, that is
acquired or disposed of, for which financial information is available.
"Consolidated Fixed Charges" is defined to mean, for any
period, the sum (without duplication) of (i) Consolidated Interest
Expense for such period, (ii) all but the principal component of rentals
in respect of Capitalized Lease Obligations paid, accrued, or scheduled
to be paid or to be accrued by the Company and its Subsidiaries during
such period, and (iii) cash dividends declared or paid in respect of any
Preferred Stock of the Company and its Subsidiaries during such period
(other than dividends paid or payable to the Company or a Wholly-Owned
Subsidiary of the Company), in each case as determined on a consolidated
basis in accordance with GAAP consistently applied. For purposes of this
definition, the amount of any cash dividends declared or paid will be
deemed to be equal to the amount of such dividends multiplied by a
fraction, the numerator of which is one and the denominator of which is
one minus the maximum statutory combined Federal, state, local and
foreign income tax rate then applicable to the Company and its
Subsidiaries (expressed as a decimal between one and zero) on a
consolidated basis.
"Consolidated Interest Expense" means, with respect to any
period, the interest expense of the Company and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP
consistently applied, including, without limitation, (a) amortization of
debt discount, (b) the net payments, if any, under interest rate
contracts (including amortization of discounts), (c) the interest portion
of any deferred payment obligation and (d) accrued interest.
"Consolidated Net Income" means, with respect to any
period, the net income (or loss) of the Company and its Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP
consistently applied, adjusted, to the extent included in calculating
such net income (or loss), by excluding, without duplication, (i) all
extraordinary gains and losses (net of fees and expenses relating to the
transaction giving rise thereto), (ii) the portion of net income (or
loss) of the Company and its Subsidiaries allocable to interests in
unconsolidated Persons, except to the extent of the amount of dividends
or distributions actually paid to the Company or its Subsidiaries by such
other Person during such period, (iii) net income (or loss) of any Person
combined with the Company or any of its Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of
combination, (iv) net gain but not losses in respect of Asset Sales, or
(v) the net income of any Subsidiary of the Company to the extent that
the declaration of dividends or similar distributions by that Subsidiary
of that income to the Company is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person
on any date, the equity of the common and preferred stockholders of such
Person and its Subsidiaries as of such date, determined on a consolidated
basis in accordance with GAAP consistently applied.
"Corporate Trust Office" shall be at the address of the
Trustee specified in Section 11.02 or such other address as the Trustee
may give notice to the Company.
"Credit Facility" means the Credit Agreement to be entered
into among the Company and one or more lending institutions, as the same
may be amended, modified, renewed, refunded, replaced or refinanced from
time to time, including (i) any related notes, letters of credit,
guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed,
refunded, replaced or refinanced from time to time, and (ii) any notes,
guarantees, collateral documents, instruments and agreements executed in
connection with any such amendment, modification, renewal, refunding,
replacement or refinancing.
"Custodian" means any custodian, receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law.
"Default" means any event that is, or after the giving of
notice or passage of time or both would be, an Event of Default.
"Depositary" means, with respect to Notes issued in the
form of one or more Global Notes, DTC or another Person designated as
Depositary by the Company, which Person must be a clearing agency
registered under Section 17A of the Exchange Act.
"Disposition" means, with respect to any Person, any
merger, consolidation or other business combination involving such Person
(whether or not such Person is the Surviving Person) or the sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of such Person's assets.
"Disqualified Stock" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event,
matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder
thereof, in whole or in part on or prior to the stated maturity of the
Notes.
"Dollars" and "$" mean lawful money of the United States
of America.
"DTC" means The Depository Trust Company.
"Eligible Pay Telephones" means, unless otherwise defined
in the Credit Facility which definition shall control for purposes of the
Indenture, only those telephones (a) in which the lenders under the
Credit Facility have a first priority security interest, (b) which are
located in the continental United States, (c) which are in full
operation, (d) which, in the opinion of a majority of the lenders under
the Credit Facility, are in good operating condition and are not obsolete
or unmerchantable, and (e) which are subject to a valid Telephone
Placement Agreement and a valid OSP Agreement, provided, however, that a
telephone shall not be deemed to be an Eligible Pay Telephone if a
majority of the lenders under the Credit Facility, in their reasonable
judgment, determine that such telephone should not be included in such
definition regardless of whether such telephone meets the requirements of
clauses (a) through (e).
"Equity Offering" means (i) an underwritten public
offering of Capital Stock (other than Disqualified Stock) of the Company
subsequent to the Issue Date (excluding Capital Stock which may be issued
upon exercise of any over-allotment option exercisable after the Issue
Date and granted in connection with the Concurrent Offering), pursuant to
an effective registration statement filed under the Securities Act, or
(ii) any private placement of Capital Stock (other than Disqualified
Stock) of the Company subsequent to the Issue Date, in either case the
net proceeds of which to the Company (after deducting any underwriting
discounts and commissions) exceed $25 million.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" means, with respect to any asset, the
price (after taking into account any liabilities relating to such asset)
which could be negotiated in an arm's length free market transaction, for
cash, between a willing seller and a willing buyer, neither of which is
under pressure or compulsion to complete the transaction; provided that,
except with respect of any Asset Sale which involves an asset or assets
the value of which could reasonably be expected to exceed $250,000, the
Fair Market Value of any such asset or assets shall be determined by the
Board of Directors of the Company, acting in good faith, and shall be
evidenced by resolutions of the Board of Directors of the Company
delivered to the Trustee; and provided, further, that the Fair Market
Value of a location agreement shall be the present value of the revenue
to be received by the Company under such agreement until the expiration
of the term of such agreement, without giving effect to any rights to
renew or extend such agreement, based on the actual amount of revenue,
net of related costs associated with the telephone or telephones covered
by such agreement, received by the Company under such agreement for the
most recent fiscal quarter.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board
or in such other statements by such other entity as have been approved by
a significant segment of the accounting profession, which are in effect
on the Issue Date.
"Global Note" means a Note evidencing all or part of the
Notes issued to the Depositary in accordance with Section 2.15 and
bearing the legend described in Exhibit B.
"guarantee" by any Person means any obligation, contingent
or otherwise, of such Person guaranteeing any Indebtedness of any other
Person (the "primary obligor") in any manner, whether directly or
indirectly, and including, without limitation, any obligation of such
Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness, (ii) to purchase property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of
such Indebtedness, or (iii) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness (and
"guaranteed," "guaranteeing" and "guarantor" shall have meanings
correlative to the foregoing); provided, however, that the guarantee by
any Person shall not include endorsements by such Person for collection
or deposit, in either case, in the ordinary course of business.
"Holder" means any person in whose name a Note is
registered.
"Indebtedness" means, with respect to any Person, without
duplication, and whether or not contingent, (i) all indebtedness of such
Person for borrowed money or for the deferred purchase price of property
or services or which is evidenced by a note, bond, debenture or similar
instrument, (ii) all Capital Lease Obligations of such Person, (iii) all
obligations of such Person in respect of letters of credit or bankers'
acceptances issued or created for the account of such Person, (iv) all
Interest Rate Agreement Obligations of such Person, (v) all liabilities
secured by any Lien on any property owned by such Person even if such
Person has not assumed or otherwise become liable for the payment thereof
to the extent of the lesser of (x) the amount of the Obligation so
secured and (y) the Fair Market Value of the property subject to such
Lien, (vi) all obligations to purchase, redeem, retire, or otherwise
acquire for value any Capital Stock of such Person, or any warrants,
rights or options to acquire such Capital Stock, now or hereafter
outstanding, (vii) to the extent not included in (vi), all Disqualified
Stock issued by such Person, valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid
dividends thereon, and (viii) to the extent not otherwise included, any
guarantee by such Person of any other Person's indebtedness or other
obligations described in clauses (i) through (vii) above. "Indebtedness"
of the Company and its Subsidiaries shall not include current trade
payables incurred in the ordinary course of business and payable in
accordance with customary practices, and non-interest bearing installment
obligations and accrued liabilities incurred in the ordinary course of
business which are not more than 90 days past due. For purposes hereof,
the "maximum fixed repurchase price" of any Disqualified Stock which does
not have a fixed repurchase price shall be calculated in accordance with
the terms of such Disqualified Stock as if such Disqualified Stock were
purchased on any date on which Indebtedness shall be required to be
determined pursuant to this Indenture, and if such price is based upon,
or measured by the fair market value of, such Disqualified Stock, such
fair market value is to be determined in good faith by the board of
directors of the issuer of such Disqualified Stock.
"Indenture" means this Indenture as amended or
supplemented from time to time.
"Independent Director" means a director of the Company
other than a director (i) who (apart from being a director of the Company
or any Subsidiary) is an employee or Affiliate of the Company or a
Subsidiary of the Company or has held any such position during the
previous five years, (ii) who is a director, employee or Affiliate of
another party to the transaction in question, or (iii) who has, or who
has been appointed to the Board of Directors by a shareholder who has, a
direct or indirect financial interest in the transaction in question.
"Insolvency or Liquidation Proceeding" means, with respect
to any Person, any liquidation, dissolution or winding up of such Person,
or any bankruptcy, reorganization, insolvency, receivership or similar
proceeding with respect to such Person, whether voluntary or involuntary.
"Interest Rate Agreement Obligations" means, with respect
to any Person, the Obligations of such Person under (i) interest rate
swap agreements, interest rate cap agreements and interest rate collar
agreements, and (ii) other agreements or arrangements designed to protect
such Person against fluctuations in interest rates.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates of such
Person) in the form of loans, guarantees, advances or capital
contributions (excluding commission, travel, relocation expenses and
similar loans and advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Capital Stock or other securities and all other items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. "Investments" shall exclude extensions of trade
credit (including extensions of credit in respect of equipment leases) by
the Company and its Subsidiaries in the ordinary course of business in
accordance with normal trade practices of the Company or such Subsidiary,
as the case may be.
"Issue" means create, issue, assume, guarantee, incur or
otherwise become, directly or indirectly, liable for any Indebtedness or
Capital Stock, as applicable; provided, however, that any Indebtedness or
Capital Stock of a Person existing at the time such Person becomes a
Subsidiary (whether by designation, merger, consolidation, acquisition or
otherwise) shall be deemed to be issued by such Subsidiary at the time it
becomes a Subsidiary. For this definition, the terms "issuing," "issuer,"
"issuance" and "issued" have meanings correlative to the foregoing.
"Issue Date" means the date of original issuance of the
Notes.
"Legal Holiday" means a Saturday, a Sunday or a day on
which banking institutions in the City of New York, or in the city in
which the principal office of the Trustee is located, are not required to
be open.
"Lien" means, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in
respect of such asset, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other
title retention agreement, any lease in the nature thereof, any option or
other agreement to sell or give a security interest in any asset and any
filing of, or agreement to give, any financing statement under the
Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" means, with respect to any Asset Sale by
any Person, the aggregate cash proceeds received by such Person and/or
its Affiliates in respect of such Asset Sale, which amount is equal to
the excess, if any, of (i) the cash received by such Person and/or its
Affiliates (including any cash payments received by way of deferred
payment pursuant to, or monetization of, a note, an equity security or
installment receivable or otherwise, but only as and when received) in
connection with such Asset Sale, over (ii) the sum of (a) the amount of
any Indebtedness that is secured by such asset and which is required to
be repaid by such Person in connection with such Asset Sale, plus (b) all
fees, commissions and other expenses incurred by such Person in
connection with such Asset Sale, plus (c) provision for taxes, including
income taxes, attributable to the Asset Sale or attributable to required
prepayments or repayments of Indebtedness with the proceeds of such Asset
Sale, plus (d) a reasonable reserve for the after-tax cost of any
indemnification payments (fixed or contingent) attributable to seller's
indemnities to purchaser in respect of such Asset Sale undertaken by the
Company or any of its Subsidiaries in connection with such Asset Sale
plus (e) if such Person is a Subsidiary of the Company, any dividends or
distributions payable to holders of minority interests in such Subsidiary
from the proceeds of such Asset Sale.
"Notes" means the 12% Senior Notes due 2006, including the
Subsidiary Guarantees, as amended or supplemented from time to time in
accordance with the terms hereof that are issued pursuant to this
Indenture.
"Notes Custodian" means the Trustee, as custodian with
respect to the Notes in global form, or any successor entity thereto.
"Obligations" means any principal, interest, penalties,
fees, indemnifications, reimbursement obligations, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman,
the President, the Treasurer, any Assistant Treasurer, the Controller,
the Secretary, any Assistant Secretary or any Vice-President of such
Person.
"Officers' Certificate" means a certificate signed by two
Officers of the Company which shall include at least one of the Chairman,
the President or any Vice President and otherwise complying with the
applicable requirements of Sections 11.04 and 11.05.
"Opinion of Counsel" means a written opinion in form and
substance satisfactory to, and from legal counsel acceptable to, the
Trustee (such counsel may be an employee of or counsel to the Company or
the Trustee) and complying with the applicable requirements of Sections
11.04 and 11.05.
"OSP Agreement" means any agreement with an operator
service provider pursuant to which commissions, fees or surcharges are to
be paid to the Company or one of its Subsidiaries on all or a portion of
the long distance traffic relating to any pay telephones owned or leased
by or to the Company or one of its Subsidiaries.
"Other Senior Debt" means Indebtedness of the Company
ranking pari passu in right of payment with the Notes and Indebtedness of
a Subsidiary Guarantor ranking pari passu in right of payment with the
Subsidiary Guarantees, in each case, the terms of which require that Net
Proceeds be used to permanently reduce (and thereby also reduce
commitments relating to) such Indebtedness.
"Other Senior Debt Pro Rata Share" means a fraction, (i)
the numerator of which is the aggregate principal amount of Other Senior
Debt outstanding on the date Net Proceeds are received and (ii) the
denominator of which is the sum of (x) the aggregate principal amount of
Notes outstanding on such date and (y) the aggregate principal amount of
any Other Senior Debt outstanding on such date.
"Pari Passu Indebtedness" means any Indebtedness of the
Company or a Subsidiary Guarantor which ranks pari passu in right of
payment with the Notes or the Subsidiary Guarantee of such Subsidiary
Guarantor, as the case may be (whether or not such Indebtedness is
secured by any Lien).
"Permitted Holders" means (i) Peter G. Graf; (ii) his
spouse and lineal descendants; (iii) in the event of the incompetence or
death of any of the Persons described in clauses (i) and (ii), such
Person's estate, executor, administrator, committee or other personal
representative; (iv) any trusts created for the benefit of the Persons
described in clause (i) or (ii); (v) each of Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P.; or (vi) any
Person controlled by any of the Persons described in clause (i), (ii),
(iv) or (v). For purposes of this definition, "control," as used with
respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and
policies of such Person, whether through ownership of voting securities
or by contract or otherwise.
"Permitted Investments" means (i) any Investment in the
Company or any Subsidiary Guarantor; (ii) any Investments in Cash
Equivalents; (iii) any Investment in a Person (an "Acquired Person") if,
as a result of such Investment, (a) the Acquired Person becomes a
Subsidiary Guarantor, or (b) the Acquired Person either (1) is merged,
consolidated or amalgamated with or into the Company or a Subsidiary
Guarantor and the Company or such Subsidiary Guarantor is the Surviving
Person, or (2) transfers or conveys substantially all of its assets to,
or is liquidated into, the Company or a Subsidiary Guarantor; (iv)
Investments in accounts and notes receivable acquired in the ordinary
course of business; (v) Interest Rate Agreement Obligations permitted
pursuant to Section 4.07(b)(vi); (vi) loans to employees the proceeds of
which are used to pay taxes due in respect of stock grants to such
employees in an amount not to exceed in the aggregate $1 million in each
of calendar year 1997 and 1998 and $750,000 in calendar year 1999; and
(vii) Investments, not to exceed $2.5 million at any time outstanding, in
joint ventures in which Cherokee or any of its Subsidiaries is a party as
of the Issue Date and which relate solely to certain public pay
telephones located in Mexico that are to be acquired in connection with
the Cherokee Acquisition.
"Permitted Liens" means (i) (A) Liens on assets or
property of the Company that secure Indebtedness outstanding under the
Credit Facility pursuant to Section 4.07(b)(i); (B) Liens securing up to
$25 million of additional Indebtedness outstanding under the Credit
Facility incurred pursuant to the Consolidated Fixed Charge Coverage
Ratio in Section 4.07(a); and (C) Liens securing up to $25 million of
additional Indebtedness, if the Consolidated Fixed Charge Coverage Ratio
at the time of such incurrence, after giving effect to such Indebtedness,
is 3.0 to 1.0; (ii) Liens securing Indebtedness of a Person existing at
the time that such Person is merged into or consolidated with the Company
or a Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of such Person; (iii) Liens
on property acquired by the Company or a Subsidiary; provided that such
Liens were in existence prior to the contemplation of such acquisition
and do not extend to any other property; (iv) Liens in favor of the
Company or any Subsidiary of the Company; (v) Liens incurred, or pledges
and deposits in connection with, workers' compensation, unemployment
insurance and other social security benefits, and leases, appeal bonds
and other obligations of like nature incurred by the Company or any
Subsidiary of the Company in the ordinary course of business; (vi) Liens
imposed by law, including, without limitation, mechanics', carriers',
warehousemen's, materialmen's, suppliers' and vendors' Liens, incurred by
the Company or any Subsidiary of the Company in the ordinary course of
business; (vii) Liens for ad valorem, income or property taxes or
assessments and similar charges which either are not delinquent or are
being contested in good faith by appropriate proceedings for which the
Company has set aside on its books reserves to the extent required by
GAAP; (viii) Liens created under this Indenture; (ix) Liens securing
Capital Lease Obligations on property subject to the applicable lease;
(x) Liens securing Interest Rate Agreement Obligations; (xi) Liens
securing Purchase Money Indebtedness, provided that such Liens relate
only to the property or assets acquired and such Liens are created within
90 days of the acquisition of such property or assets; and (xii) Liens
Incurred as a result of the filing of financing statements in connection
with the credit agreement dated as of March 15, 1996, as amended through
November 22, 1996, among the Company, Internationale Nederlanden (U.S.)
Capital Corporation, Cerberus Partners, L.P. and the lenders named
therein, that are subject to an effective termination agreement, provided
that all of such financing statements are terminated within ninety days
of the Issue Date.
"Person" means any individual, corporation, partnership,
joint venture, association, joint-stock company, limited liability
company, trust, unincorporated organization or government or any agency
or political subdivision thereof.
"Physical Notes" has the meaning set forth in Section
2.15.
"Preferred Stock" as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends or distributions, or as
to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over Capital Stock of any
other class of such Person.
"Prospectus" means the final prospectus relating to the
public offering of the Notes dated December 13, 1996.
"Purchase Money Indebtedness" means Indebtedness of the
Company and its Subsidiaries incurred in connection with the purchase of
property or assets for the business of the Company and its Subsidiaries.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Payment" means (i) any dividend or other
distribution declared or paid on any Capital Stock of the Company or any
of its Subsidiaries (other than dividends or distributions payable solely
in Capital Stock (other than Disqualified Stock) of the Company or such
Subsidiary or dividends or distributions payable to the Company or any
Subsidiary Guarantor); (ii) any payment to purchase, redeem or otherwise
acquire or retire for value any Capital Stock of the Company or any
Subsidiary of the Company or other Affiliate of the Company (other than
any Capital Stock owned by the Company or any Subsidiary Guarantor);
(iii) any payment to purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness prior to the maturity
thereof; or (iv) any Restricted Investment.
"Securities Act" means the Securities Act of 1933, as
amended.
"Special Offer Notice Date" means March 18, 1997.
"Subordinated Indebtedness" means any Indebtedness of the
Company or a Subsidiary Guarantor if the instrument creating or
evidencing such Indebtedness or pursuant to which such Indebtedness is
outstanding expressly provides that such Indebtedness is subordinated in
right of payment to the Notes or the Subsidiary Guarantee of such
Subsidiary Guarantor, as the case may be.
"Subsidiary" of any Person means (i) any corporation more
than 50% of the outstanding Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other
Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries thereof, or (ii) any limited partnership of which such
Person or any Subsidiary of such Person is a general partner, or (iii)
any other Person (other than a corporation or limited partnership) in
which such Person, or one or more other Subsidiaries of such Person, or
such Person and one or more other Subsidiaries thereof, directly or
indirectly, has more than 50% of the outstanding partnership or similar
interests or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
"Subsidiary Guarantees" means the guarantees of the Notes
issued by the Subsidiary Guarantors.
"Subsidiary Guarantor" means (i) each Subsidiary of the
Company existing on the Issue Date, (ii) each of the Company's
Subsidiaries which becomes a guarantor of the Notes in compliance with
the provisions pursuant to Section 4.17 and (iii) each of the Company's
Subsidiaries executing a supplemental indenture in which such Subsidiary
agrees to be bound by the terms of this Indenture.
"Surviving Person" means, with respect to any Person
involved in or that makes any Disposition, the Person formed by or
surviving such Disposition or the Person to which such Disposition is
made.
"Telephone Placement Agreement" shall mean any agreement
between the Company or one of its Subsidiaries and another person
pursuant to which the Company or such Subsidiary installs one or more
telephones on property or properties owned, leased or operated by such
person and pays to such person a fee or percentage of revenues earned
from such telephone(s), and such other compensation as may be provided
pursuant thereto, in return for such installation right.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb), as amended by the Trust Indenture Reform Act of
1990, and as in effect on the Issue Date.
"Trustee" means Marine Midland Bank until a successor
replaces it in accordance with the applicable provisions of this
Indenture and thereafter means such successor.
"Trust Officer" means any officer of the Trustee assigned
by the Trustee to administer the Indenture, or in the case of a successor
trustee, an officer assigned to the department, division or group
performing the corporation trust work of such successor and assigned to
administer this Indenture.
"U.S. Government Obligations" means direct obligations of
the United States of America for the payment of which the full faith and
credit of the United States of America is pledged, provided that no U.S.
Government Obligation shall be callable at the Issuer's option prior to
the stated maturity date of the Notes.
"Voting Stock" means, with respect to any Person, Capital
Stock of such Person of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of such Person (irrespective of whether or not at
the time stock of any other class or classes shall have or might have
voting power by reason of the happening of any contingency).
"Weighted Average Life to Maturity" means, with respect to
any Indebtedness at any date, the number of years obtained by dividing
(i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required scheduled payment of principal, including payment at final
maturity, in respect thereof, with (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the
making of such payment, by (ii) the then outstanding aggregate principal
amount of such Indebtedness.
"Wholly-Owned Subsidiary" means any Subsidiary of which
100% of the outstanding Capital Stock is owned by the Company or another
Wholly-Owned Subsidiary. For purposes of this definition, any director's
qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a
Subsidiary.
SECTION 1.02. Other Definitions.
Defined in
Term Section
"Asset Sale Offer"................................. 4.13
"Asset Sale Offer Purchase Date"................... 4.13
"Asset Sale Offer Trigger Date".................... 4.13
"Change of Control Offer".......................... 4.11
"Change of Control Purchase Date".................. 4.11
"Collateral Account"............................... 4.18
"Covenant Defeasance Option"....................... 8.01
"Event of Default"................................. 6.01
"Excess Proceeds".................................. 4.13
"Final Special Offer Purchase Date"................ 4.12
"Incur"............................................ 4.07
"Interested Person"................................ 4.19
"Legal Defeasance Option".......................... 8.01
"Notice of Default"................................ 6.01
"Participants"..................................... 2.15
"Paying Agent"..................................... 2.03
"Payment Restriction".............................. 4.09
"Permitted Indebtedness"........................... 4.07
"Permitted Payments"............................... 4.05
"Purchase Date".................................... 3.08
"Refinancing Indebtedness"......................... 4.07
"Registrar"........................................ 2.03
"Required Filing Dates"............................ 4.02
"Special Offer".................................... 4.12
"Special Offer Price".............................. 4.12
"Special Offer Purchase Date"...................... 4.12
"Trustee Expenses"................................. 6.08
"Trust Funds"...................................... 4.18
SECTION 1.03. Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the Trust
Indenture Act of 1939, as amended, the provision is incorporated by
reference in, and made a part of, this Indenture. Any terms incorporated
by reference in this Indenture that are defined by the TIA, defined by
the TIA's reference to another statute or defined by Commission rule
under the TIA have the meanings so assigned to them therein.
SECTION 1.04. Rules of Construction.
Unless the context otherwise requires: (1) a term has the
meaning assigned to it in this Indenture; (2) an accounting term not
otherwise defined herein has the meaning assigned to it under GAAP; (3)
"or" is not exclusive; (4) words in the singular include the plural, and
in the plural include the singular; (5) provisions apply to successive
events and transactions; and (6) unless otherwise specified, any
reference to a Section or Article refers to such Section or Article of
this Indenture.
ARTICLE II
THE NOTES
SECTION 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A, and the notation thereon
relating to the Subsidiary Guarantees shall be substantially in the form
of Exhibit A-1. The Notes may have notations, legends or endorsements
required by law, stock exchange rule or usage. The Company and the
Trustee shall approve the form of the Notes and any notation, legend or
endorsement on them. Each Note shall be dated the date of its issuance
and shall show the date of its authentication.
The terms and provisions contained in the Notes and the
Subsidiary Guarantees shall constitute, and are hereby expressly made, a
part of this Indenture and, to the extent applicable, the Company, the
Subsidiary Guarantors and the Trustee, by their execution and delivery of
this Indenture, expressly agree to such terms and provisions and to be
bound thereby.
SECTION 2.02. Execution and Authentication.
Two Officers of the Company, one of whom must be the
Secretary or an assistant secretary, shall sign each Note for the Company
by manual or facsimile signature. If an Officer whose signature is on a
Note no longer holds that office at the time the Note is authenticated,
the Note shall nevertheless be valid. Each Subsidiary Guarantor shall
execute the Subsidiary Guarantee in the manner set forth in Section
10.04.
A Note shall not be valid until authenticated by the
manual signature of the Trustee, and the Trustee's signature shall be
conclusive evidence that the Note has been authenticated under this
Indenture. The form of Trustee's certificate of authentication to be
borne by the Notes shall be substantially as set forth in Exhibit A. The
Trustee may appoint an authenticating agent acceptable to the Company to
authenticate Notes. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Notes whenever the Trustee may do
so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the
same rights as an Agent to deal with the Company or any of its
Affiliates.
The Trustee shall authenticate Notes for original issue in
the aggregate principal amount of $125,000,000 upon receipt of (i) a
written order of the Company specifying the amount of Notes to be
authenticated and the date on which the Notes are to be authenticated and
(ii) an Officers' Certificate and an Opinion of Counsel, each complying
with Section 314(c) of the TIA and Sections 11.04 and 11.05. The
aggregate principal amount of Notes outstanding at any time may not
exceed $125,000,000, except as provided in Section 2.07. Upon receipt of
a written order of the Company, the Trustee shall authenticate Notes in
substitution of Notes originally issued to reflect any name change of the
Company.
The Notes shall initially be issued in the form of one or
more permanent Global Notes, substantially in the form set forth in
Exhibit A. Global Notes shall be registered in the name of a nominee of
the Depositary and deposited with the Trustee, at its New York office, in
its capacity as Notes Custodian, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. Each Global Note
shall evidence such of the outstanding Notes as shall be specified
therein and each shall provide that it shall evidence the aggregate
principal amount of outstanding Notes from time to time endorsed thereon,
and that the aggregate principal amount of outstanding Notes represented
thereby may from time to time be reduced or increased, as applicable, to
reflect exchanges, redemptions, and other similar transactions. Any
endorsement of a Global Note to reflect the amount of any increase or
decrease in the amount of outstanding Notes represented thereby shall be
made by the Trustee or the Notes Custodian, at the direction of the
Trustee, in accordance with instructions given by the Holder thereof.
The Notes shall be issuable only in registered form
without coupons in denominations of $1,000 and any integral multiple
thereof.
SECTION 2.03. Registrar; Paying Agent; Depositary.
The Company shall maintain an office or agency (the
"Registrar") where Notes may be presented for registration of transfer or
for exchange and an office or agency (the "Paying Agent") where Notes may
be presented for payment. The Registrar shall keep a register of the
Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term
"Paying Agent" includes any additional paying agent. The Company may
change the Paying Agent, Registrar or co-registrar without prior notice
to any Holder. The Company shall notify the Trustee and the Trustee shall
notify the Holders of the name and address of any Agent not a party to
this Indenture. The Company shall enter into an appropriate agency
agreement with any Agent not a party to this Indenture, and such
agreement shall incorporate the provisions of the TIA and implement the
provisions of this Indenture that relate to such Agent.
The Company initially appoints the Trustee as Registrar,
Paying Agent and agent for service of notices and demands in connection
with the Notes. If the Company fails to appoint or maintain a Registrar
and/or Paying Agent, the Trustee shall act as such, and shall be entitled
to appropriate compensation in accordance with Section 7.07.
The Company initially appoints DTC to act as Depositary
with respect to any Global Notes and initially appoints the Trustee to
act as Notes Custodian with respect to any Global Notes.
SECTION 2.04. Paying Agent To Hold Money in Trust.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for
the benefit of the Holders or the Trustee all money the Paying Agent
holds for the redemption or purchase of the Notes or for the payment of
principal of, or premium, if any, or interest on, the Notes, and will
notify the Trustee of any default by the Company in providing the Paying
Agent with sufficient funds to redeem or purchase Notes or make any
payment on the Notes as and to the extent required to be redeemed,
purchased or paid under the terms of this Indenture. While any such
default continues, the Trustee may require the Paying Agent to pay all
money it holds to the Trustee. The Company at any time may require the
Paying Agent to pay all money it holds to the Trustee. Upon payment over
to the Trustee, the Paying Agent (if other than the Company or any of its
Affiliates) shall have no further liability for the money it delivered to
the Trustee. If the Company or any of its Subsidiaries acts as Paying
Agent, it shall segregate and hold in a separate trust fund for the
Holders' benefit all money it holds as Paying Agent.
SECTION 2.05. Holder Lists.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names
and addresses of Holders and shall otherwise comply with Section 312(a)
of the TIA. If the Trustee is not the Registrar, the Company shall
furnish to the Trustee, semiannually at least fifteen Business Days
before each interest payment date and at such other times as the Trustee
may request in writing, within 30 days after receipt by the Company of
any such request, a list in such form and as of such date as the Trustee
may reasonably require that sets forth the names and addresses of, and
the aggregate principal amount of Notes held by, each Holder, and the
Company shall otherwise comply with Section 312(a) of the TIA.
SECTION 2.06. Transfer and Exchange.
Subject to the provisions of Section 2.15, when Notes are
presented to the Registrar or a co-registrar with a request to register a
transfer or to exchange them for an equal principal amount of Notes of
other denominations, the Registrar shall register the transfer or make
the exchange if its requirements for such transaction are met; provided,
however, that any Note presented or surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Registrar and the
Trustee duly executed by the Holder of such Note or by its attorney duly
authorized in writing. To permit registrations of transfers and
exchanges, the Company shall Issue (and the Subsidiary Guarantors shall
execute the Subsidiary Guarantee endorsed thereon), and the Trustee shall
authenticate, Notes at the Registrar's request. The Trustee shall notify
the Company of all such registered transfers and exchanges within five
Business Days of the occurrence of such transfer or exchange.
Neither the Company nor the Registrar shall be required to
issue, register the transfer of or exchange any Note (i) during a period
beginning at the opening of business 15 days before the day of the
mailing of notice of any redemption from the Company and ending at the
close of business on the day the notice of redemption is sent to Holders,
(ii) selected for redemption, in whole or in part, except the unredeemed
portion of any Note being redeemed in part may be transferred or
exchanged, and (iii) during any Change of Control Offer or Special Offer
or Asset Sale Offer if such Note is tendered pursuant to such Change of
Control Offer or Special Offer or Asset Sale Offer and not withdrawn.
No service charge shall be made for any registration of
transfer or exchange (except as otherwise expressly permitted herein),
but the Company may require payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer tax or similar governmental
charge payable upon exchange pursuant to Section 2.10, 3.07 or 9.05,
which the Company shall pay).
Prior to due presentment for registration of transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the
Person in whose name any Note is registered as the absolute owner of such
Note (whether or not such Note shall be overdue and notwithstanding any
notation of ownership or other writing on such Note made by anyone other
than the Company, the Registrar or any co-registrar) for the purpose of
receiving payment of principal of, and premium, if any, and interest on,
such Note and for all other purposes, and notice to the contrary shall
not affect the Trustee, any Agent or the Company.
Any Holder of the Global Note shall, by acceptance of such
Global Note, agree that transfers of beneficial interests in such Global
Note may be effected only through a book-entry system (as described in
Section 2.15) maintained by the Depositary (or its agent), and that
ownership of a beneficial interest in the Global Note shall be required
to be reflected in a book entry.
SECTION 2.07. Replacement Notes.
If any mutilated Note is surrendered to the Trustee, or if
the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the
Trustee shall, upon receipt of a written order in the form of an
Officers' Certificate, authenticate a replacement Note if the Trustee's
requirements are met, and each such replacement Note shall be an
additional Obligation of the Company. If the Trustee or the Company
requires, the Holder must supply an indemnity bond that is sufficient in
the judgment of the Trustee and the Company to protect the Company, the
Trustee, any Agent or any authenticating agent from any loss that any of
them may suffer if a Note is replaced. The Company and the Trustee may
charge for their reasonable expenses in replacing a Note.
SECTION 2.08. Outstanding Notes.
The Notes outstanding at any time are all the Notes the
Trustee has authenticated except those it has cancelled, those delivered
to it for cancellation, and those described in this Section 2.08 as not
outstanding. If a Note is replaced pursuant to Section 2.07, it ceases to
be outstanding unless the Trustee receives proof satisfactory to it that
a bona fide purchaser holds the replaced Note. If the entire principal
of, and premium, if any, and accrued interest on, any Note is considered
paid under Section 4.01, it ceases to be outstanding and interest on it
ceases to accrue. Subject to Section 2.09, a Note does not cease to be
outstanding because the Company or any Affiliate of the Company holds
such Note.
SECTION 2.09. Treasury Notes.
In determining whether the Holders of the required
principal amount of Notes have concurred in any direction, waiver or
consent, Notes owned by the Company or any Affiliate of the Company shall
be considered as though they are not outstanding; provided, however, that
for the purpose of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Notes that the
Trustee knows are so owned shall be so disregarded. Notwithstanding the
foregoing, Notes that the Company or any Affiliate of the Company offers
to purchase or acquires pursuant to an exchange offer, tender offer or
otherwise shall not be deemed to be owned by the Company or any Affiliate
of the Company until legal title to such Notes passes to the Company or
such Affiliate, as the case may be.
SECTION 2.10. Temporary Notes.
Until definitive Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Notes. Temporary
Notes shall be substantially in the form of definitive Notes but may have
variations that the Company considers appropriate for temporary Notes.
Without unreasonable delay, the Company shall prepare and the Trustee,
upon receipt of a written order in the form of an Officers' Certificate,
shall authenticate definitive Notes in exchange for temporary Notes.
Until such exchange, temporary Notes shall be entitled to the same
rights, benefits and privileges as definitive Notes.
SECTION 2.11. Cancellation.
The Company at any time may deliver Notes to the Trustee
for cancellation. The Registrar, any co-registrar, the Paying Agent, the
Company and its Subsidiaries shall forward to the Trustee any Notes
surrendered to them for registration of transfer, exchange, replacement,
payment (including all Notes called for redemption and all Notes accepted
for payment pursuant to an Offer) or cancellation, and the Trustee shall
cancel all such Notes and shall destroy all cancelled Notes (subject to
the record retention requirements of the Exchange Act) and deliver a
certificate of their destruction to the Company unless, by written order
signed by two Officers of the Company, the Company shall direct that
cancelled Notes be returned to it. The Company may not issue new Notes to
replace any Notes that have been cancelled by the Trustee or that have
been delivered to the Trustee for cancellation. If the Company or any
Affiliate of the Company acquires any Notes (other than by redemption
pursuant to Section 3.01 or an Offer pursuant to Section 4.11, 4.12 or
4.13), such acquisition shall not operate as a redemption or satisfaction
of the Indebtedness represented by such Notes unless and until such Notes
are delivered to the Trustee for cancellation.
SECTION 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the
Notes, it shall pay the defaulted interest in any lawful manner plus, to
the extent lawful, interest payable on the defaulted interest, to Holders
on a subsequent special record date, in each case at the rate provided in
the Notes and Section 4.01. The Company shall, with the Trustee's
consent, fix or cause to be fixed each such special record date and
payment date. At least 15 days before the special record date, the
Company (or, at the request of the Company, the Trustee in the name of,
and at the expense of, the Company) shall mail a notice that states the
special record date, the related payment date and the amount of interest
to be paid.
SECTION 2.13. Record Date
The record date for purposes of determining the identity
of holders of Notes entitled to vote or consent to any action by vote or
consent authorized or permitted under this Indenture shall be determined
as provided for in Section 316(c) of the TIA.
SECTION 2.14. CUSIP Number.
A "CUSIP" number will be printed on the Notes, and the
Trustee shall use the CUSIP number in notices of redemption, purchase or
exchange as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness or accuracy of
the CUSIP number printed in the notice or on the Notes and that reliance
may be placed only on the other identification numbers printed on the
Notes. The Company will promptly notify the Trustee of any change in the
CUSIP number.
SECTION 2.15. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in
the name of the Depositary or the nominee of such Depositary, (ii) be
delivered to the Trustee as custodian for such Depositary and (iii) bear
legends as set forth in Exhibit B.
Members of, or participants in, the Depositary
("Participants") shall have no rights under this Indenture with respect
to any Global Note held on their behalf by the Depositary, or the Trustee
as its custodian, or under the Global Note, and the Depositary may be
treated by the Company, the Trustee and any agent of the Company or the
Trustee as the absolute owner of the Global Note for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Company, the Trustee or any agent of the Company or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depositary or impair, as between the Depositary and its
Participants, the operation of customary practices governing the exercise
of the rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to
transfers in whole, but not in part, to the Depositary, its successors or
their respective nominees. Interests of beneficial owners in the Global
Notes may be transferred or exchanged for certificated notes ("Physical
Notes") in accordance with the rules and procedures of the Depositary. In
addition, Physical Notes shall be transferred to all beneficial owners in
exchange for their beneficial interests in Global Notes if (i) the
Depositary notifies the Company that it is unwilling or unable to
continue as Depositary for any Global Note and a successor depositary is
not appointed by the Company within 30 days of such notice or (ii) an
Event of Default has occurred and is continuing and the Registrar has
received a request from the Depositary to issue Physical Notes.
(c) In connection with any transfer or exchange of a
portion of the beneficial interest in any Global Note to beneficial
owners pursuant to paragraph (b), the Registrar shall (if one or more
Physical Notes are to be issued) reflect on its books and records the
date and a decrease in the principal amount of the Global Note in an
amount equal to the principal amount of the beneficial interest in the
Global Note to be transferred or exchanged, and the Company shall execute
(and the Subsidiary Guarantors shall execute the Subsidiary Guarantee
endorsed thereon), and the Trustee, pursuant to instructions set forth in
an Officers' Certificate from the Company, shall authenticate and
deliver, one or more Physical Notes of like tenor and amount.
(d) In connection with the transfer or exchange of Global
Notes as an entirety to beneficial owners pursuant to paragraph (b), the
Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute (and the Subsidiary
Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and
the Trustee, pursuant to instructions set forth in an Officers'
Certificate from the Company, shall authenticate and deliver, to each
beneficial owner identified by the Depositary in exchange for its
beneficial interest in the Global Notes, an equal aggregate principal
amount of Physical Notes of authorized denominations.
(e) Upon consummation of any redemption pursuant to
Section 3.01 or any Offer pursuant to Sections 4.11, 4.12 or 4.13, the
Registrar shall reflect on its book and records the date and a decrease
in the principal amount of the Global Note in an amount equal to the
aggregate principal amount being redeemed or purchased by the Company.
The Global Note shall be deemed to be surrendered to the Trustee by the
Notes Custodian and the Company shall execute (and the Subsidiary
Guarantors shall execute the Subsidiary Guarantee endorsed thereon), and
the Trustee, pursuant to instructions set forth in an Officers'
Certificate from the Company, shall authenticate and deliver to the Notes
Custodian, a new Global Note reflecting such reduction in principal
amount outstanding.
(f) The Holder of any Global Note may grant proxies and
otherwise authorize any person, including Participants and persons that
may hold interests through Participants, to take any action which a
Holder is entitled to take under this Indenture or the Notes.
ARTICLE III
REDEMPTION
SECTION 3.01. Redemption Provisions.
The Notes are not redeemable at the Company's option prior
to December 15, 2001. On and after such date, the Notes will be subject
to redemption at the option of the Company, in whole or in part, at the
redemption prices (expressed as percentages of the principal amount of
the Notes) set forth below, plus accrued and unpaid interest to the date
fixed for redemption, if redeemed during the twelve-month period
beginning on December 15 of the years indicated below.
Year Percentage
2001................................. 106.0%
2002................................. 104.0%
2003................................. 102.0%
2004 and thereafter.................. 100.0%
Notwithstanding the foregoing, at any time prior to
December 15, 1999, the Company, at its option, may redeem from time to
time up to 40% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more Equity Offerings, other
than the Concurrent Offering at a redemption price equal to 112% of the
principal amount thereof, together with accrued and unpaid interest to
the date fixed for redemption; provided, however, that at least $75
million in aggregate principal amount of the Notes remains outstanding
immediately after any such redemption.
SECTION 3.02. Notice to Trustee.
If the Company elects to redeem Notes pursuant to Section
3.01, it shall furnish to the Trustee, at least 30 but not more than 60
days before notice of any redemption is to be mailed to Holders, an
Officers' Certificate stating that the Company is redeeming Notes
pursuant to Section 3.01, the date notice of redemption is to be mailed
to Holders, the redemption date, the aggregate principal amount of Notes
to be redeemed, the redemption price for such Notes, the amount of
accrued and unpaid interest on such Notes as of the redemption date and,
if applicable, the manner in which Notes are to be selected for
redemption, in accordance with Section 3.03, if less than all outstanding
Notes are to be redeemed. If the Trustee is not the Registrar, the
Company shall, concurrently with delivery of its notice to the Trustee of
a redemption, cause the Registrar to deliver to the Trustee a certificate
(upon which the Trustee may rely) setting forth the name of, and the
aggregate principal amount of Notes held by each Holder.
The Company will also provide the Trustee with any
additional information that the Trustee reasonably requests in connection
with any redemption.
SECTION 3.03. Selection of Notes To Be Redeemed.
If less than all outstanding Notes are to be redeemed by
the Company, the Trustee, on behalf of the Company, shall select the
outstanding Notes to be redeemed in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes
are listed or, if the Notes are not listed on such an exchange the
Trustee, on behalf of the Company, shall select the outstanding Notes to
be redeemed on a pro rata basis, by lot or by any other method that the
Trustee deems fair and appropriate; provided, that a redemption pursuant
to the provisions relating to Equity Offerings will be on a pro rata
basis. Notes redeemed in part shall only be redeemed in integral
multiples of $1,000. If the Company elects to mail notice of a redemption
to Holders, the Trustee shall at least five days prior to the date notice
of redemption is to be mailed, (i) select, on behalf of the Company, the
Notes to be redeemed from Notes outstanding not previously called for
redemption, and (ii) notify the Company of the names of each Holder of
Notes selected for redemption, the principal amount of Notes held by each
such Holder and the principal amount of such Holder's Notes that are to
be redeemed. The Trustee shall select for redemption Notes or portions of
Notes in principal amounts of $1,000 or integral multiples of $1,000.
Except as provided in the preceding sentence, provisions of this
Indenture that apply to Notes called for redemption also apply to
portions of Notes called for redemption. The Trustee shall notify the
Company promptly of the Notes or portions of Notes to be called for
redemption. The Company shall notify the Trustee of its acceptance for
payment of the Notes selected for redemption.
SECTION 3.04. Notice of Redemption.
(a) At least 30 days but not more than 60 days before any
redemption date, the Company shall mail by first class mail a notice of
redemption to each Holder of Notes that are to be redeemed. With respect
to any redemption of Notes, the notice shall identify the Notes or
portions thereof, if applicable, to be redeemed and shall state: (1) the
redemption date; (2) the redemption price for the Notes and the amount of
unpaid and accrued interest on such Notes as of the date of redemption;
(3) the paragraph of the Notes pursuant to which the Notes called for
redemption are being redeemed; (4) if any Note is being redeemed in part,
the portion of the principal amount of such Note to be redeemed and that,
after the redemption date, upon surrender of such Note, a new Note or
Notes in principal amount equal to the unredeemed portion will be issued;
(5) the name and address of the Paying Agent; (6) that Notes called for
redemption must be surrendered to the Paying Agent to collect the
redemption price for, and any accrued and unpaid interest on, such Notes;
(7) that, unless the Company defaults in making such redemption payment,
interest on Notes called for redemption ceases to accrue on and after the
redemption date; and (8) that no representation is made as to the
correctness or accuracy of the CUSIP number listed in such notice and
printed on the Notes.
(b) At the Company's request, the Trustee shall (at the
Company's expense) give the notice of any redemption to Holders;
provided, however, that the Company shall deliver to the Trustee, at
least 45 days prior to the date of any optional redemption and at least
10 days prior to the date that notice of such redemption is to be mailed
to Holders, an Officers' Certificate that (i) requests the Trustee to
give notice of the redemption to Holders, (ii) sets forth the information
to be provided to Holders in the notice of redemption, as set forth in
the preceding paragraph, and (iii) sets forth the aggregate principal
amount of Notes to be redeemed and the amount of accrued and unpaid
interest thereon as of the redemption date. If the Trustee is not a
Registrar, the Company shall, concurrently with any such request, cause
the Registrar to deliver to the Trustee a certificate (upon which the
Trustee may rely) setting forth the name of, the address of, and the
aggregate principal amount of Notes held by, each Holder.
SECTION 3.05. Effect of Notice of Redemption.
Once notice of redemption is mailed, Notes called for
redemption become due and payable on the redemption date at the price set
forth in the Note.
SECTION 3.06. Deposit of Redemption Price.
(a) On or prior to any redemption date, the Company shall
deposit with the Trustee or with the Paying Agent money sufficient to pay
the redemption price of, and accrued interest on, all Notes to be
redeemed on that date. The Trustee or the Paying Agent shall return to
the Company, no later than five days after any redemption date, any money
(including accrued interest) that exceeds the amount necessary to pay the
redemption price of, and accrued interest on, all Notes redeemed.
(b) If the Company complies with Section 3.06(a), interest
on the Notes to be redeemed will cease to accrue on such Notes on the
applicable redemption date, whether or not such Notes are presented for
payment. If a Note is redeemed on or after an interest record date but on
or prior to the related interest payment date, then any accrued and
unpaid interest shall be paid to the Person in whose name such Note was
registered at the close of business of such record date. If any Note
called for redemption shall not be so paid upon surrender for redemption
because of the failure of the Company to comply with the preceding
paragraph, to the extent lawful, the Company shall pay interest on the
overdue principal, premium, if any, and interest from the redemption date
until such principal, premium and interest are paid, at a rate equal to
2% per annum in excess of the then applicable interest rate on the Notes
compounded semi-annually as provided in the Notes and Section 4.01.
SECTION 3.07. Notes Redeemed in Part.
Subject to Section 2.15, upon surrender of a Note that is
redeemed in part, the Company shall issue and the Trustee shall
authenticate for the Holder at the Company's expense a new Note equal in
principal amount to the unredeemed portion of the Note surrendered.
ARTICLE IV
COVENANTS
SECTION 4.01. Payment of Principal, Premium and Interest.
The Company shall pay the principal of, and premium, if
any, and interest on, the Notes on the dates and in the manner provided
in the Notes and in this Indenture.
Holders must surrender their Notes to the Paying Agent to
collect principal payments. Principal, premium, or interest shall be
considered paid on the date due if, by 11 a.m. Eastern Standard Time on
such date, the Company has deposited with the Paying Agent money in
immediately available funds designated for and sufficient to pay such
principal, premium or interest. The Paying Agent shall return to the
Company, no later than five days following the date of payment, any money
(including accrued interest) that exceeds the amount then due and payable
on the Notes.
The Company shall pay interest on overdue principal,
premium and interest (without regard to any applicable grace period) at a
rate equal to 2% per annum in excess of the then applicable interest rate
on the Notes, compounded semiannually.
Payments of the principal of, premium (if any) and
interest on any Global Notes will be made to the Depositary or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in any Global Notes or for
maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
SECTION 4.02. Provision of Financial Statements.
Whether or not the Company is then subject to Section
13(a) or 15(d) of the Exchange Act, the Company will file with the
Commission, so long as any Notes are outstanding, the annual reports,
quarterly reports and other periodic reports which the Company would have
been required to file with the Commission pursuant to such Section 13(a)
or 15(d) if the Company were so subject, and such documents shall be
filed with the Commission on or prior to the respective dates (the
"Required Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject. The Company will
also, in any event, (i) within 15 days of each Required Filing Date, (a)
transmit by mail to all holders of Notes, as their names and addresses
appear in the Note register, without cost to such holders and (b) file
with the Trustee copies of the annual reports, quarterly reports and
other periodic reports which the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange
Act if the Company were subject to such Sections and (ii) if filing such
documents by the Company with the Commission is prohibited under the
Exchange Act, promptly upon written request and payment of the reasonable
cost of duplication and delivery, supply copies of such documents to any
prospective Holder at the Company's cost. In addition, the Company will
file with the Commission and with the Trustee, in accordance with rules
and regulations prescribed by the Commission, such additional
information, documents and reports with respect to compliance with the
conditions and covenants provided for herein as may be required by such
rules and regulations.
SECTION 4.03. Compliance Certificate.
The Company shall deliver to the Trustee, within 135 days
after the end of each fiscal year of the Company, an Officers'
Certificate, which shall be executed, on behalf of the Company by two
Officers, at least one of which shall be the principal executive officer,
principal financial officer or principal accounting officer of the
Company, stating that (i) a review of the activities of the Company and
its Subsidiaries during the preceding fiscal year has been made to
determine whether the Company has kept, observed, performed and fulfilled
all of its obligations under this Indenture and the Notes, (ii) such
review was supervised by the Officers of the Company signing such
certificate, and (iii) that to the best knowledge of each Officer signing
such certificate, (a) the Company has kept, observed, performed and
fulfilled each and every condition and covenant contained in this
Indenture and is not in default in the performance or observance of any
of the terms, provisions and conditions of this Indenture (or, if a
Default or Event of Default occurred, describing all such Defaults or
Events of Default of which each such Officer may have knowledge and what
action the Company has taken or proposes to take with respect thereto),
and (b) no event has occurred and remains in existence by reason of which
payments on account of the principal of, or premium, if any, or interest
on, the Notes are prohibited or if such event has occurred, a description
of the event and what action the Company is taking or proposes to take
with respect thereto. The Officers' Certificate shall also notify the
Trustee should the Company elect to change the manner in which it fixes
its fiscal year end. For purposes of this paragraph, such compliance
shall be determined without regard to any period of grace or requirement
of notice provided hereunder.
So long as not contrary to the then current
recommendations of the American Institute of Certified Public
Accountants, the annual financial statements delivered pursuant to
Section 4.02 shall be accompanied by a written statement of the Company's
independent public accountants (who shall be a firm of established
national reputation reasonably satisfactory to the Trustee) that in
making the examination necessary for certification of such financial
statements nothing has come to their attention that would lead them to
believe that the Company has violated any provision of Section 4.01,
4.05, 4.07, 4.08, 4.09, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17 or 4.18
or Article V or, if any such violation has occurred, specifying the
nature and period of existence thereof, it being understood that such
accountants shall not be liable directly or indirectly to any Person for
any failure to obtain knowledge of any such violation.
The Company will, so long as any of the Notes are
outstanding, deliver to the Trustee, promptly after any Officer of the
Company becomes aware of any Default or Event of Default, an Officers'
Certificate specifying such Default or Event of Default and what action
the Company is taking or proposes to take with respect thereto.
The Company shall deliver to the Trustee such other
information or documents reasonably requested by the Trustee in
connection with the compliance by the Trustee or the Company with the
TIA.
SECTION 4.04. Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully
do so) that it will not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force,
that might affect the covenants or the performance of its obligations
under this Indenture and the Notes; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any
such law, and covenants that it will not, by resort to any such law,
hinder, delay or impede the execution of any power granted to the Trustee
pursuant to this Indenture, but will suffer and permit the execution of
every such power as though no such law has been enacted.
SECTION 4.05. Limitation on Restricted Payments.
(a) The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, make any Restricted Payment,
unless at the time of and immediately after giving effect to the proposed
Restricted Payment (with the value of any such Restricted Payment, if
other than cash, to be determined by the Board of Directors in good faith
and which determination shall be conclusive and evidenced by a board
resolution), (i) no Default or Event of Default (and no event that, after
notice or lapse of time, or both, would become an "event of default"
under the terms of any Indebtedness of the Company or its Subsidiaries)
shall have occurred and be continuing or would occur as a consequence
thereof, (ii) the Company could incur at least $1.00 of additional
Indebtedness pursuant to the provisions of Section 4.07(a) and (iii) the
aggregate amount of all Restricted Payments made after the Issue Date
shall not exceed the sum of (a) 50% of cumulative Consolidated Net Income
of the Company (or, in the case such cumulative Consolidated Net Income
shall be negative, less 100% of such deficit) since the end of the fiscal
quarter in which the Issue Date occurs through the last day of the most
recent fiscal quarter, plus (b) the aggregate amount of all net cash
proceeds received after the Issue Date by the Company (but excluding the
net cash proceeds received by the Company from the Concurrent Offering)
from the issuance and sale (other than to a Subsidiary of the Company) of
Capital Stock of the Company (other than Disqualified Stock) and the
principal amount of Indebtedness of the Company or any Subsidiary
Guarantor that had been converted into or exchanged for Capital Stock of
the Company and, in either case, to the extent that such proceeds are not
used to redeem, repurchase, retire or otherwise acquire Capital Stock or
any Indebtedness of the Company or any of its Subsidiaries pursuant to
clause (ii) of Section 4.05(b), plus (c) in the case of the disposition
or repayment of any Investment for cash, which Investment constituted a
Restricted Payment made after the Issue Date, an amount equal to the
lesser of the return of capital with respect to such Investment and the
cost of such Investment, in either case, reduced (but not below zero) by
the excess, if any, of the cost of the disposition of such Investment
over the gain, if any, realized by the Company or such Subsidiary in
respect of such disposition.
(b) The provisions of Section 4.05(a) will not prohibit,
so long as there is no Default or Event of Default continuing, the
following actions (collectively, "Permitted Payments"):
(i) the payment of any dividend within 60 days after the
date of declaration thereof, if at such declaration date such
payment would have been permitted under this Indenture, and such
payment shall be deemed to have been paid on such date of
declaration for purposes of clause (iii) of Section 4.05(a);
(ii) the redemption, repurchase, retirement, defeasance
or other acquisition of any Capital Stock or any Indebtedness of
the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the
Company) of Capital Stock of the Company (other than any
Disqualified Stock);
(iii) the repurchase, redemption or other repayment of
any Subordinated Debt of the Company or a Subsidiary Guarantor in
exchange for, by conversion into or solely out of the proceeds of
the substantially concurrent sale (other than to a Subsidiary of
the Company) of Subordinated Debt of the Company or such
Subsidiary Guarantor with a Weighted Average Life to Maturity
equal to or greater than the then remaining Weighted Average Life
to Maturity of the Subordinated Debt repurchased, redeemed or
repaid;
(iv) the redemption, repurchase, retirement, defeasance
or other acquisition of Capital Stock of the Company or any
options or stock appreciation rights related to Capital Stock of
the Company held by officers or employees (or their estates or
beneficiaries of estates) upon death, disability, retirement or
termination of employment; provided that the amount of Permitted
Payments made under this clause (iv) shall not exceed $1 million
per annum;
(v) any redemption of the Company's 14% Cumulative
Redeemable Convertible Preferred Stock (i) having an aggregate
stated value of $5.5 million out of the proceeds of the issuance
of the Notes or the Concurrent Offering or (ii) at its stated
maturity out of the proceeds of a concurrent issuance of Capital
Stock (other than Disqualified Stock); and
(vi) Restricted Investments received as consideration in
connection with an Asset Sale made in compliance with the
Indenture.
(c) In computing the amount of Restricted Payments for
purposes of Section 4.05(a)(iii), Restricted Payments made under Sections
4.05(b)(iv) and 4.05(b)(vi) shall be included and Restricted Payments
made under Sections 4.05(b)(i), 4.05(b)(ii), 4.05(b)(iii) and Section
4.05(b)(v) shall be excluded.
SECTION 4.06. Corporate Existence.
The Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate
existence and the corporate, partnership or other existence of each of
its Subsidiaries in accordance with the respective organizational
documents of each of its Subsidiaries and the rights (charter and
statutory), licenses and franchises of the Company and each of its
Subsidiaries; provided, however, that the Company shall not be required
to preserve any such right, license or franchise, or the corporate,
partnership or other existence of any of its Subsidiaries, if the Board
of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and its
Subsidiaries taken as a whole, and that the loss thereof is not adverse
in any material respect to the Holders.
SECTION 4.07. Limitation on Incurrence of Indebtedness.
(a) The Company will not, and will not permit any of its
Subsidiaries to, issue, create, incur, assume or directly or indirectly
guarantee or in any other manner become directly or indirectly liable for
("Incur") any Indebtedness (including Acquired Debt), except for
Permitted Indebtedness, unless at the time of and immediately after
giving pro forma effect to such incurrence, the Consolidated Fixed Charge
Coverage Ratio of the Company and its Subsidiaries would be greater than
(x) 1.5 to 1.0 if the Indebtedness is incurred prior to December 31,
1997, (y) 2.25 to 1.0 if the Indebtedness is Incurred prior to December
31, 1998 or (z) 2.5 to 1.0 if the Indebtedness is incurred on or after
December 31, 1998.
(b) Section 4.07(a) will not apply to the Incurrence of
any of the following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company Incurred under the Credit
Facility in an aggregate principal amount at any time outstanding
not to exceed the sum of (1) 80% of the net amount of accounts
receivable (as determined under GAAP) of the Company and the
Subsidiaries plus (2) an amount equal to $1,300 multiplied by the
number of Eligible Pay Telephones, in each case as determined in
good faith by the Company at the time of each incurrence of
Indebtedness under the Credit Facility; provided that in no event
shall the aggregate principal amount of Indebtedness outstanding
at any one time under the Credit Facility permitted pursuant to
this clause (i) exceed $25 million less the aggregate amount of
any other principal payments thereunder constituting permanent
reductions of such Indebtedness pursuant to and in accordance
with the covenant described under Section 4.13; and provided,
further, that in no event shall the aggregate principal amount of
Indebtedness outstanding at any one time under the Credit
Facility pursuant to this Section 4.07(b)(i) which was Incurred
for working capital purposes exceed $15 million;
(ii) Indebtedness of the Company under the Notes and the
Indenture and of any Subsidiary Guarantor represented by a
Subsidiary Guarantee and other Indebtedness of the Company and
the Subsidiary Guarantors outstanding on the Issue Date;
(iii) Indebtedness owed by any Subsidiary of the Company
to the Company or to a Subsidiary Guarantor, or owed by the
Company to any Subsidiary Guarantor; provided that any such
Indebtedness shall be held by a Person which is either the
Company or a Subsidiary Guarantor and provided, further, that (A)
any such Indebtedness of a Subsidiary of the Company shall not be
subordinated to any other Indebtedness of such Subsidiary and (B)
any such Indebtedness owed to a Subsidiary Guarantor shall be
unsecured and shall be subordinated to the payment when due of
the Notes and, provided, further, that an incurrence of
additional Indebtedness which is not permitted under this clause
(iii) shall be deemed to have occurred upon either (a) the
transfer or other disposition of any such Indebtedness to a
Person other than the Company or a Subsidiary of the Company or
(b) the sale, lease, transfer or other disposition of shares of
Capital Stock (including by consolidation or merger) of any such
Subsidiary of the Company to a Person other than the Company or a
Subsidiary Guarantor such that such Subsidiary ceases to be a
Subsidiary Guarantor;
(iv) Indebtedness of the Company or any Subsidiary
Guarantor consisting of guarantees of any Indebtedness of the
Company or any Subsidiary Guarantor which Indebtedness has been
Incurred in accordance with the provisions of the Indenture;
(v) Indebtedness arising with respect to Interest Rate
Agreement Obligations Incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indenture to
be outstanding; provided, however, that the notional principal
amount of such Interest Rate Agreement Obligation does not exceed
the principal amount of the Indebtedness to which such Interest
Rate Agreement Obligation relates; and
(vi) Indebtedness of the Company or a Subsidiary of the
Company incurred in connection with or given in exchange for the
renewal, extension, substitution, refunding, defeasance,
refinancing or replacement of any Indebtedness permitted to be
incurred or outstanding under the Consolidated Fixed Charge
Coverage Ratio of the first paragraph of this covenant or
pursuant to clause (ii) above ("Refinancing Indebtedness");
provided that (a) the principal amount of such Refinancing
Indebtedness shall not exceed the principal amount of the
Indebtedness so renewed, extended, substituted, refunded,
defeased, refinanced or replaced (plus the premiums or other
payments paid in connection therewith (which shall not exceed the
stated amount of any premium or other payments required to be
paid in connection with such a refinancing pursuant to the terms
of the Indebtedness being renewed, extended, substituted,
refunded, defeased, refinanced or replaced) and the expenses
incurred in connection therewith); (b) the Refinancing
Indebtedness shall have a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of the
Indebtedness being renewed, extended, substituted, refunded,
defeased, refinanced or replaced; and (c) such Refinancing
Indebtedness shall not rank senior to, and shall be at least as
subordinated, in right of payment to the Notes or the Subsidiary
Guarantees, as the case may be, as the Indebtedness being
renewed, extended, substituted, refunded, defeased, refinanced or
replaced.
SECTION 4.08. Taxes.
The Company shall, and shall cause each of its
Subsidiaries to, pay prior to delinquency all taxes, assessments and
governmental levies the failure of which to pay could reasonably be
expected to result in a material adverse effect on the condition
(financial or otherwise), business or results of operations of the
Company and its Subsidiaries taken as a whole, except for those taxes
contested in good faith by appropriate proceedings.
SECTION 4.09. Limitation on Dividends and Other
Payment Restrictions Affecting Subsidiaries.
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary of the Company to (i) pay dividends or make any
other distributions to the Company or any other Subsidiary of the Company
on its Capital Stock or with respect to any other interest or
participation in, or measured by, its profits, or pay any Indebtedness
owed to the Company or any other Subsidiary of the Company, (ii) make
loans or advances to the Company or any other Subsidiary of the Company,
or (iii) transfer any of its properties or assets to the Company or any
other Subsidiary of the Company (collectively, "Payment Restrictions"),
except for such encumbrances or restrictions existing under or by reason
of (a) the Credit Facility as in effect on the Issue Date and any
amendments, restatements, renewals, replacements or refinancings thereof;
provided that such amendments, restatements, renewals, replacements or
refinancings are no more restrictive in the aggregate with respect to
such dividend and other payment restrictions than those contained in the
Credit Facility immediately prior to any such amendment, restatement,
renewal, replacement or refinancing, (b) applicable law, (c) any
instrument governing Indebtedness or Capital Stock of an Acquired Person
acquired by the Company or any of its Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness was
incurred in connection with such acquisition); provided that such
restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Acquired Person, (d) customary
non-assignment provisions in leases entered into in the ordinary course
of business and consistent with past practices, (e) Purchase Money
Indebtedness for property acquired in the ordinary course of business
that only impose restrictions on the property so acquired, (f) an
agreement for the sale or disposition of the Capital Stock or assets of
such Subsidiary; provided that such restriction is only applicable to
such Subsidiary or assets, as applicable, and such sale or disposition
otherwise is permitted under the covenant described under Section 4.13;
and provided, further, that such restriction or encumbrance shall be
effective only for a period from the execution and delivery of such
agreement through a termination date not later than 270 days after such
execution and delivery, (g) Refinancing Indebtedness permitted under this
Indenture; provided that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive in the
aggregate than those contained in the agreements governing the
Indebtedness being refinanced immediately prior to such refinancing, (h)
any agreement in effect on the Issue Date and (i) provisions in security
agreements relating to secured Indebtedness of a Subsidiary to the extent
such provisions restrict the transfer of the property that is the subject
of such security agreements.
SECTION 4.10. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, the
City of New York, an office or an agency (which may be an office of any
Agent) where Notes may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company in respect
of the Notes and this Indenture may be served. The Company will give
prompt written notice to the Trustee of any change in the location of
such office or agency. If at any time the Company shall fail to furnish
the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office.
The Company may also from time to time designate one or
more other offices or agencies where the Notes may be presented or
surrendered for any or all such purposes and may from time to time
rescind such designations; provided, however, that no such designation or
rescission shall in any matter relieve the Company of its obligations to
maintain an office or agency in the Borough of Manhattan, the City of New
York, for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office
of the Trustee as one such office or agency of the Company in accordance
with Section 2.03.
SECTION 4.11. Change of Control.
(a) In the event of a Change of Control, the Company will
make an offer to purchase all of the then outstanding Notes at a purchase
price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest to the date of purchase, in accordance
with the terms set forth below in Section 4.11(b)-(e) (a "Change of
Control Offer").
(b) Within 30 days following the occurrence of any Change
of Control, the Company shall mail to each Holder at such Holder's
registered address a notice stating: (i) that a Change of Control has
occurred and that such Holder has the right to require the Company to
repurchase all or a portion (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes at a purchase price in cash equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase (the "Change of Control Purchase Date"),
which shall be a Business Day, specified in such notice, that is not
earlier than 30 days or later than 60 days from the date such notice is
mailed, (ii) the amount of accrued and unpaid interest as of the Change
of Control Purchase Date, (iii) that any Note not tendered will continue
to accrue interest, (iv) that, unless the Company defaults in the payment
of the purchase price for the Notes payable pursuant to the Change of
Control Offer, any Notes accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest on and after the Change of
Control Purchase Date, (v) that Holders electing to tender any Note or
portion thereof will be required to surrender their Note, with a form
entitled "Option of Holder to Elect Purchase" completed, to the Paying
Agent at the address specified in the notice prior to the close of
business on the Business Day preceding the Change of Control Purchase
Date, provided, that, Holders electing to tender only a portion of any
Note must tender a principal amount of $1,000 or integral multiples
thereof; (vi) that Holders will be entitled to withdraw their election to
tender Notes if the Paying Agent receives, not later than the close of
business on the third Business Day preceding the Change of Control
Purchase Date, a telegram, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of Notes delivered for
purchase, and a statement that such Holder is withdrawing his election to
have such Notes purchased; and (vii) that, subject to Section 2.15,
Holders whose Notes are accepted for payment in part will be issued new
Notes equal in principal amount to the unpurchased portion of Notes
surrendered, provided, that, only Notes in a principal amount of $1,000
or integral multiples thereof will be accepted for payment in part.
(c) The Company shall furnish to the Trustee, at least
seven Business Days before notice of the corresponding Change of Control
Offer is to be mailed to Holders, an Officers' Certificate setting forth
that the Change of Control Offer is being made pursuant to Section 4.11,
the Change of Control Purchase Date, the maximum principal amount of
Notes the Company is offering to purchase pursuant to such Change of
Control Offer, the purchase price for such Notes and the amount of
accrued and unpaid interest on such Notes as of the Change of Control
Purchase Date.
The Company will also provide the Trustee a copy of the
notice sent to holders pursuant to Section 4.11(b) and any additional
information that the Trustee reasonably requests in connection with any
Change of Control Offer.
(d) On the Change of Control Purchase Date, the Company
will (i) accept for payment all Notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent the aggregate purchase price of all Notes or portions thereof
accepted for payment and any accrued and unpaid interest on such Notes as
of the Change of Control Purchase Date, and (iii) deliver or cause to be
delivered to the Trustee all Notes tendered pursuant to the Change of
Control Offer, together with an Officers' Certificate stating the Notes
or portions thereof being purchased by the Company. If less than all
Notes tendered pursuant to the Change of Control Offer are to be
purchased by the Company for any reason consistent with this Indenture,
the Trustee, on behalf of the Company, shall select the outstanding Notes
to be purchased by the Company in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on such an exchange, the Trustee
on behalf of the Company, shall select the outstanding Notes to be
purchased, on a pro rata basis, by lot or by such method as the Trustee
deems fair and appropriate; provided that Notes purchased in part shall
only be purchased in integral multiples of $1,000. The Paying Agent shall
promptly mail to each Holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Notes plus any
accrued and unpaid interest thereon, and the Company shall execute and
issue and the Trustee shall promptly authenticate and mail to such Holder
of Notes accepted for payment in part a new Note equal in principal
amount to any unpurchased portion of the Notes, and any Note not accepted
for payment in whole or in part for any reason consistent with this
Indenture shall be promptly returned to the Holder of such Note. On and
after a Change of Control Purchase Date, interest will cease to accrue on
the Notes or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The Company will
announce the results of the Change of Control Offer to Holders of the
Notes on or as soon as practicable after the Change of Control Purchase
Date.
(e) The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the Exchange
Act, and all other applicable securities laws and regulations in
connection with any Change of Control Offer.
SECTION 4.12. Special Offer upon Failure To Consummate Cherokee Acquisition.
(a) In the event the Cherokee Acquisition is not
consummated prior to the Special Offer Notice Date, the Company will be
obligated to make an offer to purchase up to $35 million aggregate
principal amount of Notes at a price equal to 101% of such principal
amount, plus accrued and unpaid interest to the date of purchase, in
accordance with the terms set forth below in Section 4.12(b)-(e) (a
"Special Offer").
(b) On the Special Offer Notice Date, the Company shall
mail to each Holder, at such Holder's registered address, a notice
stating: (i) that the Cherokee Acquisition has not occurred and the
Company is offering to purchase $35 million aggregate principal amount of
Notes at a purchase price (the "Special Offer Price") in cash equal to
101% of the aggregate principal amount thereof plus accrued and unpaid
interest to the date of purchase (the "Special Offer Purchase Date"),
which shall be a Business Day, specified in such notice, that is not
earlier than 30 days or later than 60 days (such 60th day or, if not a
Business Day, the immediately preceding Business Day being referred to as
the "Final Special Offer Purchase Date") from the date such notice is
mailed, (ii) the amount of accrued and unpaid interest as of the
specified Special Offer Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that unless the Company defaults
in the payment of the purchase price for the Notes payable pursuant to
the Special Offer, any Notes accepted for payment pursuant to the Special
Offer shall cease to accrue interest on and after the Special Offer
Purchase Date, (v) that Holders electing to tender any Note or portion
thereof will be required to surrender their Note with a form entitled
"Option of Holder to Elect Purchase" completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the
Business Day preceding the Special Offer Purchase Date, provided, that,
Holders electing to tender only a portion of any Note must tender a
principal amount of $1,000 or integral multiples thereof; (vi) that
Holders will be entitled to withdraw their election to tender Notes if
the Paying Agent receives, not later than the close of business on the
third Business Day preceding the Special Offer Purchase Date, a telegram,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of Notes delivered for purchase, and a statement
that such Holder is withdrawing his election to have such Notes
purchased; and (vii) that, subject to Section 2.15, Holders whose Notes
are accepted for payment in part will be issued new Notes equal in
principal amount to the unpurchased portion of Notes surrendered,
provided, that, only Notes in principal amount of $1,000 or integral
multiples thereof will be accepted for payment in part.
(c) The Company shall furnish to the Trustee, at least
seven Business Days before notice of the corresponding Special Offer is
to be mailed to Holders, an Officers' Certificate setting forth (i) that,
if the Cherokee Acquisition is not consummated prior to the Special Offer
Notice Date, the Special Offer will be made pursuant to Section 4.12,
(ii) the Special Offer Purchase Date, (iii) that the Company is offering
to purchase $35 million principal amount of Notes pursuant to such
Special Offer, (iv) the Special Offer Purchase Price for such Notes and
(v) the amount of accrued and unpaid interest on such Notes as of the
Special Offer Purchase Date.
The Company will also provide the Trustee with a copy of
the notice sent to holders pursuant to Section 4.12(b) and additional
information that the Trustee reasonably requests in connection with any
Special Offer.
(d) On the Special Offer Purchase Date, the Company will
(i) accept for payment $35 million aggregate principal amount of Notes or
such lesser amount as is tendered pursuant to the Special Offer and (ii)
deliver or cause to be delivered to the Trustee all Notes tendered
pursuant to the Special Offer, together with an Officers' Certificate
stating the Notes or portions thereof being purchased by the Company, and
the Trustee will apply the Trust Funds to the purchase of such Notes. If
less than all Notes tendered pursuant to the Special Offer are accepted
for payment by the Company for any reason consistent with the Indenture,
selection of the Notes to be purchased by the Company shall be in
compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not
so listed, on a pro rata basis, by lot or by such method as the Trustee
shall deem fair and appropriate; provided that Notes accepted for payment
in part shall only be purchased in integral multiples of $1,000. The
Paying Agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for
such Notes plus any accrued and unpaid interest thereon, and, subject to
Section 2.15, the Company shall execute and issue and the Trustee shall
promptly authenticate and mail to such holder of Notes accepted for
payment in part a new Note equal in principal amount to any unpurchased
portion of the Notes, and any Note not accepted for payment in whole or
in part for any reason consistent with this Indenture shall be promptly
returned to the holder of such Note. On and after the Special Offer
Purchase Date, interest will cease to accrue on the Notes or portions
thereof accepted for payment, unless the Company defaults in the payment
of the purchase price therefor. The Company will announce the results of
the Special Offer to Holders of the Notes on or as soon as practicable
after the Special Offer Purchase Date.
(e) The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the Exchange
Act, and all other applicable securities laws and regulations in
connection with any Special Offer.
SECTION 4.13. Limitation on Asset Sales.
(a) The Company will not, and will not permit any of its
Subsidiaries to, make any Asset Sale unless (i) the Company or such
Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the fair market value (determined by
the Board of Directors in good faith, which determination shall be
evidenced by a board resolution) of the assets or other property sold or
disposed of in the Asset Sale, and (ii) at least 75% of such
consideration is in the form of cash or Cash Equivalents; provided that
for purposes of this covenant "cash" shall include the amount of any
liabilities (other than liabilities that are by their terms subordinated
to the Notes or any Subsidiary Guarantee) of the Company or such
Subsidiary (as shown on the Company's or such Subsidiary's most recent
balance sheet or in the notes thereto) that are assumed by the transferee
of any such assets or other property in such Asset Sale (and excluding
any liabilities that are incurred in connection with or in anticipation
of such Asset Sale), but only to the extent that such assumption is
effected on a basis under which there is no further recourse to the
Company or any of its Subsidiaries with respect to such liabilities.
(b) Within 270 days after any Asset Sale, the Company may
elect to apply or cause to be applied the Net Proceeds from such Asset
Sale to (a) repay amounts outstanding under the Credit Facility, and
permanently reduce the commitments or amounts available to be borrowed
thereunder by the same amount, (b) repay amounts outstanding under Other
Senior Debt that is secured by the asset being sold, to the extent
repayment is required by the terms of the agreement governing the same,
(c) use no more than the Other Senior Debt Pro Rata Share of such Net
Cash Proceeds to repay amounts outstanding under Other Senior Debt and/or
(d) make an investment in, or acquire assets directly or reasonably
related to, the business of the Company and its Subsidiaries existing on
the Issue Date. Pending the final application of any such Net Proceeds,
the Company may temporarily reduce amounts outstanding under the Credit
Facility or temporarily invest such Net Proceeds in any manner permitted
by this Indenture. Any Net Proceeds from an Asset Sale not applied or
invested as provided in the first sentence of this paragraph within 270
days of such Asset Sale will be deemed to constitute "Excess Proceeds" on
the 271st day after such Asset Sale.
(c) Not later than 10 Business Days after any date (an
"Asset Sale Offer Trigger Date") that the aggregate amount of Excess
Proceeds exceeds $10,000,000, the Company shall commence an offer to
purchase the maximum principal amount of Notes that may be purchased out
of all such Excess Proceeds (an "Asset Sale Offer") at a price in cash
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase (the "Asset Sale Offer Purchase Date").
The offer to purchase shall remain open for a minimum of 20 business days
or such longer period as is required by law. To the extent that any
Excess Proceeds remain after completion of an Asset Sale Offer, the
Company may use the remaining amount for general corporate purposes and
such amount shall no longer constitute "Excess Proceeds."
(d) Within 10 Business Days following any Asset Sale Offer
Trigger Date, the Company shall mail to each holder of Notes at such
holder's registered address a notice stating: (i) that an Asset Sale
Offer Trigger Date has occurred and that the Company is offering to
purchase the maximum principal amount of Notes that may be purchased out
of the Excess Proceeds at an offer price in cash equal to 100% of the
principal amount thereof, plus accrued and unpaid interest to the Asset
Sale Offer Purchase Date, which shall be a Business Day, specified in
such notice, that is not earlier than 30 days or later than 60 days from
the date such notice is mailed, (ii) the amount of accrued and unpaid
interest as of the Asset Sale Offer Purchase Date, (iii) that any Note
not tendered will continue to accrue interest, (iv) that, unless the
Company defaults in the payment of the purchase price for the Notes
payable pursuant to the Asset Sale Offer, any Notes accepted for payment
pursuant to the Asset Sale Offer shall cease to accrue interest on and
after the Asset Sale Offer Purchase Date, (v) that Holders electing to
tender any Note or portion thereof will be required to surrender their
Note, with a form entitled "Option of Holder to Elect Purchase"
completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day preceding the Asset
Sale Offer Purchase Date; provided that Holders electing to tender only a
portion of any Note must tender a principal amount of $1,000 or integral
multiples thereof; (vi) that Holders will be entitled to withdraw their
election to tender Notes if the Paying Agent receives, not later than the
close of business on the third Business Day preceding the Asset Sale
Offer Purchase Date, a telegram, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of Notes delivered for
purchase, and a statement that such Holder is withdrawing his election to
have such Notes purchased; and (vii) that, subject to Section 2.15,
Holders whose Notes are accepted for payment in part will be issued new
Notes equal in principal amount to the unpurchased portion of Notes
surrendered; provided that only Notes in a principal amount of $1,000 or
integral multiples thereof will be accepted for payment in part.
(e) The Company shall furnish to the Trustee, at least
seven Business Days before notice of the corresponding Asset Sale Offer
is to be mailed to Holders, an Officers' Certificate setting forth that
the Asset Sale Offer is being made pursuant to Section 4.13, the Asset
Sale Offer Purchase Date, the maximum principal amount of Notes the
Company is offering to purchase pursuant to such Asset Sale Offer, the
purchase price for such Notes and the amount of accrued and unpaid
interest on such Notes as of the Asset Sale Offer Purchase Date.
The Company will also provide the Trustee a copy of the
notice sent to holders pursuant to Section 4.13(d) and any additional
information that the Trustee reasonably requests in connection with any
Asset Sale Offer.
(f) On the Asset Sale Offer Purchase Date, the Company
will (i) accept for payment the maximum principal amount of Notes or
portions thereof tendered pursuant to the Asset Sale Offer that can be
purchased out of Excess Proceeds from such Asset Sale, (ii) deposit with
the Paying Agent the aggregate purchase price of all Notes or portions
thereof accepted for payment and any accrued and unpaid interest on such
Notes as of the Asset Sale Offer Purchase Date, and (iii) deliver or
cause to be delivered to the Trustee all Notes tendered pursuant to the
Asset Sale Offer, together with an Officers' Certificate stating the
Notes or portions thereof being purchased by the Company. If less than
all Notes tendered pursuant to the Asset Sale Offer are to be purchased
by the Company for any reason consistent with this Indenture, the
Trustee, on behalf of the Company, shall select the outstanding Notes to
be purchased by the Company in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on such an exchange, the Trustee
on behalf of the Company, shall select the outstanding Notes to be
purchased, on a pro rata basis, by lot or by such method as the Trustee
deems fair and appropriate; provided that Notes purchased in part shall
only be purchased in integral multiples of $1,000. The Paying Agent shall
promptly mail to each holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Notes plus any
accrued and unpaid interest thereon, and, subject to Section 2.15, the
Company shall execute and issue and the Trustee shall promptly
authenticate and mail to such Holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of
the Notes, and any Note not accepted for payment in whole or in part
shall be promptly returned to the Holder of such Note. On and after an
Asset Sale Offer Purchase Date, interest will cease to accrue on the
Notes or portions thereof accepted for payment, unless the Company
defaults in the payment of the purchase price therefor. The Company will
announce the results of the Asset Sale Offer to Holders on or as soon as
practicable after the Asset Sale Offer Purchase Date.
(g) The Company will comply with the applicable tender
offer rules, including the requirements of Rule 14e-1 under the Exchange
Act, and all other applicable securities laws and regulations in
connection with any Asset Sale Offer.
SECTION 4.14. Limitation on Issuance and Sale of
Preferred Stock of Subsidiaries.
The Company (a) will not, and will not permit any
Subsidiary of the Company to, transfer, convey, sell or otherwise dispose
of any shares of Preferred Stock of such Subsidiary or any other
Subsidiary (other than to the Company or a Subsidiary Guarantor) and (b)
will not permit any Subsidiary of the Company to issue shares of its
Preferred Stock, or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, its Preferred Stock to
any person other than to the Company or a Subsidiary Guarantor.
SECTION 4.15. Future Subsidiary Guarantors.
The Company shall cause each Subsidiary of the Company
formed or acquired after the Issue Date to issue a Subsidiary Guarantee
and execute and deliver an indenture supplemental to this Indenture as a
Subsidiary Guarantor.
SECTION 4.16. Maintenance of Properties.
The Company will cause all properties used in the conduct
of its business or the business of any Subsidiary of the Company to be
maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company advantageously conducted
at all times; provided, however, that nothing in this Section shall
prevent the Company or any Subsidiary of the Company from (i)
discontinuing the operation or maintenance of any of such properties if
such discontinuance is, as determined by the Board of Directors in good
faith, desirable in the conduct of the business of the Company or of any
of its Subsidiaries, (ii) making an Asset Sale that complies with Section
4.13 or (iii) entering into a transaction permitted by Section 5.01 or
10.01(e), as applicable.
SECTION 4.17. Maintenance of Insurance.
The Company shall, and shall cause each of its
Subsidiaries to, keep at all times all of their properties which are of
an insurable nature insured against loss or damage with insurers believed
by the Company to be responsible to the extent that property of similar
character usually is so insured by corporations similarly situated and
owning like properties in accordance with good business practice.
SECTION 4.18. Deposit of Trust Funds with Trustee
Pending Consummation of Cherokee Acquisition.
(a) On the Issue Date, the Company shall deliver to the
Trustee one or more checks for an aggregate amount of $37,076,700 which
amount consists of $35 million plus an additional amount sufficient to
consummate the Special Offer on May 16, 1997 (the "Final Special Offer
Purchase Date") at the Special Offer Price, and the Trustee shall
promptly deposit such check or checks into the Collateral Account (as
defined in Section 4.18(b)).
(b) The Company shall maintain with the Trustee, an
account (the "Collateral Account") designated "Marine Midland Bank, as
Trustee," which account shall be under the sole dominion and control of
the Trustee. Amounts on deposit in the Collateral Account shall be held
as cash or shall be invested and reinvested from time to time, as
directed in writing by the Company, in Cash Equivalents, which shall be
held in the Collateral Account. Any income, including any interest or
capital gains received with respect to the balance from time to time
standing to the credit of the Collateral Account, shall remain, or be
deposited, in the Collateral Account. The Trustee shall have the power to
sell or liquidate the investments in the Collateral Account whenever the
Trustee shall be required pursuant to Section 4.18(d) to release all or
any portion of the amounts in the Collateral Account to permit the
consummation of the Cherokee Acquisition or to employ such amounts to
effect a Special Offer with respect to of the Notes. Subject to Article
VII hereof, the Trustee, solely in its individual capacity, hereby waives
any rights it may have in such individual capacity to the Collateral
Account and all rights and interest therein, including, without
limitation, any such rights arising through counterclaim, defense,
recoupment, charge, lien or right of set-off. The Trustee shall not have
any liability for any loss suffered as a result of any investment made as
provided above, any liquidation of any such investment prior to its
maturity, or the failure of any authorized person of the Company to give
the Trustee written instruction to invest or reinvest the amounts in the
Collateral Account or any earnings thereon.
(c) In order to secure the full and punctual payment and
performance of the Company's obligation to offer to purchase Notes in the
event the Cherokee Acquisition is not consummated on or prior to the
Special Offer Notice Date, the Company hereby grants to the Trustee, for
the benefit of the Holders, a continuing security interest in and to all
checks described in Section 4.18(a), the Collateral Account and all Cash
and Cash Equivalents held therein and credited thereto (such amounts
collectively, the "Trust Funds"), whether now owned or existing or
hereafter acquired or arising. The Trustee shall have no obligation to
file any financing statement or otherwise take any action to maintain or
perfect any such security interest.
(d) The Trustee shall hold the Trust Funds, for the
benefit of the Holders, until the earliest to occur of:
(A) (x) the date of consummation of the Cherokee
Acquisition as specified in an Officers' Certificate from the
Company to the Trustee (1) stating that the Cherokee Acquisition
is to be consummated on a date specified therein, which shall be
at least two Business Days (or such shorter period as the Company
and the Trustee shall mutually agree) after the date of such
Officers' Certificate, (2) stating that such consummation will
be, in all material respects, in accordance with the terms and
conditions described in the Prospectus, and (3) requesting the
Trustee to release the Trust Funds on the date of such
consummation to the order of the Company or its assignee for
application to the concurrent consummation of the Cherokee
Acquisition; and (y) receipt by the Trustee of an Opinion of
Counsel to the effect that all conditions precedent described in
the preceding clause (x) have been satisfied; or
(B) the Special Offer Purchase Date, as specified in an
Officers' Certificate from the Company to the Trustee in
accordance with Section 4.12(c).
(e) On the date of consummation of the Cherokee
Acquisition, and following such acquisition, the Holders' security
interest in the Collateral Account shall terminate and the Trustee shall
release the Trust Funds in immediately available funds to the order of
the Company or its assigns, as specified in the Officers' Certificate
delivered pursuant to Section 4.18(d)(A).
(f) On the Special Offer Purchase Date as specified in an
Officers' Certificate delivered pursuant to Section 4.12(c), the Trustee
shall apply the Trust Funds in accordance with Section 4.12(d) and the
Holders' security interest in the Collateral Account shall terminate on
and as of such Special Offer Purchase Date.
(g) Any amounts remaining in the Collateral Account on the
Special Offer Purchase Date after application of the Trust Funds as
specified in Section 4.18(f) shall be paid by the Trustee to the Company.
(h) The Company will comply with Sections 314(b) and
314(d) of the TIA, as applicable, including, without limitation,
providing an Opinion of Counsel with respect to Section 3.14(b) and the
certificates or opinions of counsel with respect to Section 3.14(d), in
connection with the deposit and release of the Trust Funds.
SECTION 4.19. Limitation on Transactions with Interested Persons.
The Company will not, and will not permit any of its
Subsidiaries to, directly or indirectly, enter into or suffer to exist
any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company or any beneficial owner of
five percent or more of any class of Capital Stock of the Company or any
Subsidiary of the Company or any officer or director of the foregoing
(each, an "Interested Person") unless (i) such transaction or series of
transactions is on terms that are no less favorable to the Company or
such Subsidiary, as the case may be, than would be available in a
comparable transaction in arm's-length dealings with an unrelated third
party, and (ii) (a) with respect to any transaction or series of
transactions involving aggregate payments in excess of $100,000, the
Company delivers an Officers' Certificate to the Trustee certifying that
such transaction or series of related transactions complies with clause
(i) above and such transaction or series of related transactions has been
approved by a majority of the members of the Board of Directors of the
Company (and approved by a majority of the Independent Directors or, in
the event there is only one Independent Director, by such Independent
Director), and (b) with respect to any transaction or series of
transactions involving aggregate payments in excess of $2 million, the
Company delivers to the Trustee an opinion to the effect that such
transaction or series of transactions is fair to the Company or such
Subsidiary from a financial point of view issued by an investment banking
firm of national standing. Notwithstanding the foregoing, this provision
will not apply to (i) employment agreements or compensation or employee
benefit arrangements with (including, without limitation, any stock
options granted to) any officer, director or employee of the Company
entered into in the ordinary course of business (including customary
benefits thereunder), (ii) any transaction entered into by or among the
Company or any Subsidiary Guarantor and one or more Subsidiary
Guarantors, (iii) transactions pursuant to agreements existing on the
Issue Date, including, without limitation, the Credit Facility and (iv)
loans or advances to officers of the Company for bona fide business
purposes of the Company in the ordinary course of business not in the
excess of $500,000 in the aggregate at any one time outstanding.
SECTION 4.20. Limitation on Lines of Business.
The Company will not, and will not permit any Subsidiary
of the Company to, engage in or conduct any business other than the
ownership and operation of public pay telephones and lines of business
integral or ancillary thereto; provided, that, the primary business of
the Company and its Subsidiaries shall continue to be the ownership and
operation of public pay telephones.
SECTION 4.21. Limitation on Liens.
The Company will not, and will not permit any Subsidiary
of the Company to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign
or convey any right to receive income therefrom to secure any
Indebtedness unless simultaneously therewith (a) if the Lien is created
by the Company, the Notes and (b) if the Lien is created by a Subsidiary
of the Company, the Subsidiary Guarantees are, in each case, secured
equally and ratably, in the case of Liens securing Indebtedness that is
not Subordinated Debt, and on a senior priority basis, in the case of
Liens securing Subordinated Debt.
ARTICLE V
SUCCESSORS
SECTION 5.01. Merger, Consolidation and Sale of Assets.
(a) The Company shall not consolidate or merge with or
into (whether or not the Company is the Surviving Person), or, directly
or indirectly through one or more Subsidiaries, sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
Person or Persons (other than a Subsidiary Guarantor) unless (i) the
Surviving Person is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii)
the Surviving Person (if other than the Company) assumes all the
obligations of the Company under this Indenture and the Notes pursuant to
a supplemental indenture in a form reasonably satisfactory to the
Trustee; (iii) at the time of and immediately after such Disposition, no
Default or Event of Default shall have occurred and be continuing; and
(iv) the Surviving Person will (A) have Consolidated Net Worth
(immediately after giving effect to the Disposition on a pro forma basis)
equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction, and (B) at the time of such
Disposition and after giving pro forma effect thereto, the Surviving
Person would be permitted to issue at least $1.00 of additional
Indebtedness pursuant to Section 4.07(a).
(b) Prior to the consummation of any proposed Disposition,
merger or consolidation of the Company or a Subsidiary Guarantor or the
sale of all or substantially all of the assets of the Company or a
Subsidiary Guarantor (other than a Disposition by the Company to a
Subsidiary Guarantee or by a Subsidiary Guarantor to the Company or
another Subsidiary Guarantor or a merger or consolidation of a Subsidiary
Guarantor with, and involving only, the Company or another Subsidiary
Guarantor), the Company shall deliver to the Trustee an Officers'
Certificate stating that such transaction complies with Article V or
Section 10.01(e), as the case may be, of this Indenture and an Opinion of
Counsel stating that such transaction and the supplemental indenture, if
required, comply with Article V or Section 10.01(e), as the case may be,
of this Indenture.
SECTION 5.02. Surviving Person Substituted.
In the event of any transaction (other than a lease)
described in and complying with the conditions listed in Section 5.01(a)
in which the Company or the Subsidiary Guarantor, as the case may be, is
not the Surviving Person and the Surviving Person is to assume all the
obligations of the Company or the Subsidiary Guarantor under the Notes,
the Subsidiary Guarantee, as applicable, and this Indenture pursuant to a
supplemental indenture, such Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of, the Company
or the Subsidiary Guarantor, and the Company or the Subsidiary Guarantor
would be discharged from its obligations under this Indenture, the Notes
or its Subsidiary Guarantee, as the case may be, provided, that solely
for the purpose of calculating amounts described in clause (iii) of
Section 4.05(a), any such Surviving Person shall only be deemed to have
succeeded to and be substituted for the Company with respect to the
period subsequent to the effective time of such transaction (and the
Company (before giving effect to such transaction) shall be deemed to be
the "Company" for such purposes for all prior periods).
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default.
(a) Each of the following constitutes an "Event of
Default":
(i) a default for 30 days in the payment when due of
interest on any Note (whether or not prohibited by the
subordination provisions of this Indenture);
(ii) a default in the payment when due of principal on
any Note (whether or not prohibited by the subordination
provisions of this Indenture), whether upon maturity,
acceleration, optional or mandatory redemption, required
repurchase or otherwise;
(iii) failure to perform or comply with any covenant,
agreement or warranty in this Indenture (other than the defaults
specified in clauses (i) and (ii) above) which failure continues
for 30 days after written notice thereof has been given to the
Company by the Trustee or to the Company and the Trustee by the
Holders of at least 25% in aggregate principal amount of the then
outstanding Notes;
(iv) except as permitted by this Indenture, any
Subsidiary Guarantee shall for any reason cease to be, or be
asserted in writing by any Subsidiary Guarantor or the Company
not to be, in full force and effect and enforceable in accordance
with its terms;
(v) the occurrence of one or more defaults under any
agreements, indentures or instruments under which the Company or
any Subsidiary of the Company then has outstanding Indebtedness
in excess of $5 million in the aggregate and, if not already
matured at its final maturity in accordance with its terms, such
Indebtedness shall have been accelerated;
(vi) one or more judgments, orders or decrees for the
payment of money in excess of $5 million either individually or
in the aggregate shall be entered against the Company or any
Subsidiary of the Company or any of their respective properties
and which judgments, orders or decrees are not paid, discharged,
bonded or stayed for a period of 60 days after their entry;
(vii) any holder or holders of at least $5 million in
aggregate principal amount of Indebtedness of the Company or any
Subsidiary of the Company after a default under such
Indebtedness, (a) shall notify the Company or the Trustee of the
intended sale or disposition of any assets of the Company or any
Subsidiary of the Company with an aggregate fair market value (as
determined in good faith by the Board of Directors, which
determination shall be evidenced by a board resolution),
individually or in the aggregate, of at least $5 million that
have been pledged to or for the benefit of such holder or holders
to secure such Indebtedness or (b) shall commence proceedings, or
take any action (including by way of set-off), to retain in
satisfaction of such Indebtedness or to collect on, seize,
dispose of or apply in satisfaction of such Indebtedness, such
assets of the Company or any Subsidiary of the Company (including
funds on deposit or held pursuant to lock-box and other similar
arrangements);
(viii) there shall have been the entry by a court of
competent jurisdiction of (a) a decree or order for relief in
respect of the Company or any Subsidiary of the Company in an
involuntary case or proceeding under any applicable Bankruptcy
Law or (b) a decree or order adjudging the Company or any
Subsidiary of the Company bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Subsidiary of the Company under any
applicable federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Subsidiary of the Company
or of any substantial part of their respective properties, or
ordering the winding up or liquidation of their affairs, and any
such decree or order for relief shall continue to be in effect,
or any such other decree or order shall be unstayed and in
effect, for a period of 60 days; or
(ix) (a) the Company or any Subsidiary of the Company
commences a voluntary case or proceeding under any applicable
Bankruptcy Law or any other case or proceeding to be adjudicated
bankrupt or insolvent, (b) the Company or any Subsidiary of the
Company consents to the entry of a decree or order for relief in
respect of the Company or such Subsidiary of the Company in an
involuntary case or proceeding under any applicable Bankruptcy
Law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, (c) the Company or any Subsidiary of
the Company files a petition or answer or consent seeking
reorganization or relief under any applicable federal or state
law, (d) the Company or any Subsidiary of the Company (x)
consents to the filing of such petition or the appointment of or
taking possession by, a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the
Company or such Subsidiary of the Company or of any substantial
part of their respective property, (y) makes an assignment for
the benefit of creditors or (z) admits in writing its inability
to pay its debts generally as they become due or (e) the Company
or any Subsidiary of the Company takes any corporate action in
furtherance of any such actions in this paragraph (ix).
(b) Any notice of default delivered to the Company by the
Trustee or by Holders of Notes with a copy to the Trustee must specify
the Default, demand that it be remedied and state that the notice is a
"Notice of Default."
SECTION 6.02. Acceleration.
If any Event of Default (other than an Event of Default
specified under Section 6.01(a)(viii) or (ix) with respect to the Company
or any Subsidiary Guarantor) occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may, and the Trustee at the request of such Holders
shall, declare all the Notes to be due and payable immediately. In the
case of an Event of Default arising from the events specified in Sections
6.01(a)(viii) or (ix) with respect to the Company or any Subsidiary
Guarantor, the principal of, premium, if any, and any accrued and unpaid
interest on all outstanding Notes shall ipso facto become immediately due
and payable without further action or notice.
SECTION 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the
Trustee may pursue any available remedy to collect the payment of
principal of, or premium, if any, or interest on, the Notes or to enforce
the performance of any provision of the Notes or this Indenture. The
Trustee may maintain a proceeding even if it does not possess any of the
Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 6.04. Waiver of Past Defaults.
The Holders of a majority in aggregate principal amount of
the Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under this Indenture except (i) a continuing
Default or Event of Default in the payment of the principal of, or
premium, if any, or interest on, the Notes (which may only be waived with
the consent of each Holder of Notes affected), or (ii) in respect of a
covenant or provision which under this Indenture cannot be modified or
amended without the consent of each Holder of Notes affected. Subject to
certain limitations, holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from holders of the Notes notice
of any continuing Default or Event of Default (except a Default or Event
of Default relating to the payment of principal, premium or interest) if
it determines that withholding notice is in their interest.
SECTION 6.05. Control by Majority of Holders.
Subject to Section 7.01(e), the Holders of a majority in
aggregate principal amount of the then outstanding Notes may direct the
time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on it
by this Indenture. However, the Trustee may (i) refuse to follow any
direction that conflicts with law or this Indenture, that the Trustee
determines may be unduly prejudicial to the rights of other Holders, or
would involve the Trustee in personal liability or (ii) take any
additional actions deemed proper by the Trustee that is not inconsistent
with such direction.
SECTION 6.06. Limitation of Suits by Holders.
A Holder may pursue a remedy with respect to this
Indenture or the Notes only if: (1) the Holder gives to the Trustee
notice of a continuing Event of Default; (2) the Holders of at least 25%
in principal amount of the then outstanding Notes make a request to the
Trustee to pursue the remedy; (3) such Holder or Holders offer to the
Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense; (4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and (5)
during such 60-day period the Holders of a majority in aggregate
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request. A Holder may not use this
Indenture to prejudice the rights of another Holder or to obtain a
preference or priority over another Holder. Holders of the Notes may not
enforce this Indenture, except as provided herein.
SECTION 6.07. Rights of Holders To Receive Payment.
Notwithstanding any other provision of this Indenture, the
right of any Holder to receive payment of principal of, and premium, if
any, and interest on, a Note, on or after a respective due date expressed
in the Note, or to bring suit for the enforcement of any such payment on
or after such respective date, shall not be impaired or affected without
the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a)(i) or
(a)(ii) occurs and is continuing, the Trustee is authorized to recover
judgment in its own name and as trustee of an express trust against the
Company for (i) the principal, premium, if any, and interest remaining
unpaid on the Notes, (ii) interest on overdue principal and premium, if
any, and, to the extent lawful, interest, and (iii) such further amount
as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel ("Trustee Expenses").
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers
or documents as may be necessary or advisable to have the claims of the
Trustee (including any claim for Trustee Expenses and for amounts due
under Section 7.07) and the Holders allowed in any Insolvency or
Liquidation Proceeding relative to the Company (or any other obligor upon
the Notes), its creditors or its property and shall be entitled and
empowered to collect, receive and distribute to Holders any money or
other property payable or deliverable on any such claims and each Holder
authorizes any Custodian in any such Insolvency or Liquidation Proceeding
to make such payments to the Trustee, and if the Trustee shall consent to
the making of such payments directly to the Holders any such Custodian is
hereby authorized to make such payments directly to the Holders, and to
pay to the Trustee any amount due to it hereunder for Trustee Expenses,
and any other amounts due the Trustee under Section 7.07; provided,
however, that the Trustee shall not be authorized to (i) consent to,
accept or adopt on behalf of any Holder any plan of reorganization,
arrangement, adjustment or composition affecting the Notes or the rights
of any Holder, or (ii) vote in respect of the claim of any Holder in any
such Insolvency or Liquidation Proceeding. To the extent that the payment
of any such Trustee Expenses, and any other amounts due the Trustee under
Section 7.07 out of the estate in any such proceeding, shall be denied
for any reason, payment of the same shall be secured by a Lien on, and
shall be paid out of, any and all distributions, dividends, money,
securities and other properties which the Holders may be entitled to
receive in such proceeding, whether in liquidation or under any plan of
reorganization or arrangement or otherwise.
SECTION 6.10. Priorities.
If the Trustee collects any money pursuant to this Article
VI, it shall pay out the money in the following order:
First: to the Trustee for Trustee Expenses for amounts
due under Section 7.07;
Second: to Holders for amounts due and unpaid on the
Notes for principal, premium, if any, and
interest, ratably, without preference or priority
of any kind, according to the amounts due and
payable on the Notes for principal, premium, if
any, and interest, respectively; and
Third: to the Company or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders.
SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy
under this Indenture or in any suit against the Trustee for any action
taken or omitted by it as a Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to
pay the costs of the suit, and the court in its discretion may assess
reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section 6.11 does
not apply to a suit by the Trustee, a suit by a Holder pursuant to
Section 6.07, or a suit by Holders of more than 10% in principal amount
of the then outstanding Notes.
ARTICLE VII
TRUSTEE
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default occurs (and has not been cured)
the Trustee shall (i) exercise the rights and powers vested in it by this
Indenture, and (ii) use the same degree of care and skill in exercising
such rights and powers as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs. The Trustee shall not be
charged with knowledge of any default or Event of Default unless either
(1) a Trust Officer of the Trustee shall have actual knowledge of such
default or Event of Default or (2) written notice of such default or
Event of Default shall have been given to the Trustee by any Holder or by
the Company or any obligor on the Notes.
(b) Except during the continuance of an Event of Default:
(i) the Trustee's duties shall be determined solely by the express
provisions of this Indenture and the Trustee need perform only those
duties that are specifically set forth in this Indenture and no others,
and no implied covenants or obligations shall be read into this Indenture
against the Trustee; and (ii) in the absence of bad faith on its part,
the Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether they conform to this Indenture's
requirements.
(c) The Trustee shall not be relieved from liability for
its own negligent action, its own negligent failure to act, or its own
willful misconduct, except, that: (i) this Section 7.01(c) does not limit
the effect of Section 7.01(b); (ii) the Trustee shall not be liable for
any error of judgment made in good faith by a Trust Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and (iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction it receives pursuant to Section 6.02, 6.04 or 6.05.
(d) Every provision of this Indenture that in any way
relates to the Trustee shall be subject to this Section 7.01.
(e) No provision of this Indenture shall require the
Trustee to expend or risk its own funds or incur any liability. The
Trustee shall be under no obligation to exercise any of its rights and
powers under this Indenture at the request of any Holders unless such
Holders shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any
money received by it except as it may agree in writing with the Company.
Except as specified in Section 4.18 with respect to the Trust Funds,
money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
(a) The Trustee may rely, and shall be fully protected in
acting or refraining from acting, on any document it believes in good
faith to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in any
such document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matter as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney.
(b) Before the Trustee acts or refrains from acting, it
may require an Officers' Certificate or an Opinion of Counsel, or both.
The Trustee shall not be liable for any action it takes or omits to take
in good faith in reliance on such Officers' Certificate or Opinion of
Counsel; provided that such action or omission does not constitute gross
negligence. The Trustee may consult with counsel and advice of such
counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it under this Indenture in good faith and in reliance on such
advice or opinion.
(c) The Trustee may act through its attorneys and agents
and shall not be responsible for the misconduct or negligence of any
agent appointed with due care.
(d) The Trustee shall not be liable for any action it
takes or omits in good faith that it believes to be authorized or within
its rights or powers.
(e) Unless otherwise specifically provided in this
Indenture, any demand, request, direction or notice from the Company
shall be sufficient if signed by an Officer of the Company.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may
become the owner or pledgee of Notes and may otherwise deal with the
Company or any of its Affiliates with the same rights it would have if it
were not Trustee. However, if the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the
Commission for permission to continue as Trustee, or resign. Each Agent
shall have the same rights as the Trustee under this Section 7.03.
SECTION 7.04. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture, the
Notes or the Prospectus; it shall not be accountable for the Company's
use of the proceeds from the Notes or for any money paid to the Company
or upon the Company's direction under any provisions of this Indenture;
it shall not be responsible for the use or application of any money that
any Paying Agent other than the Trustee receives; and, it shall not be
responsible for any statement or recital in this Indenture or any
statement in the Notes or any other document executed in connection with
the sale of the Notes or pursuant to this Indenture other than its
certificate of authentication.
SECTION 7.05. Notice to Holders of Defaults and Events of Default.
If a Default or Event of Default occurs and is continuing
and if it is known to the Trustee, the Trustee shall mail to Holders a
notice of the Default or Event of Default within 90 days after it occurs.
Except in the case of a Default or Event of Default in payment on any
Note (including any failure to redeem Notes called for redemption or any
failure to purchase Notes tendered pursuant to an Offer that are required
to be purchased by the terms of this Indenture), the Trustee may withhold
the notice if and so long as the board of directors, the executive
committee or a committee of its Trust Officers determines in good faith
that withholding such notice is in the Holders' interests.
SECTION 7.06. Reports by Trustee to Holders.
On or before June 15 in each year following the date
hereof, so long as any Notes are outstanding hereunder, the Trustee shall
mail to Holders a brief report dated as of such reporting date that
complies with Section 313(a) of the TIA (but if no event described in
Section 313(a) of the TIA has occurred within the twelve months preceding
the reporting date, no report need be transmitted). The Trustee also
shall comply with Section 313(b)(2) of the TIA. The Trustee shall also
transmit by mail all reports as required by Section 313(c) of the TIA.
Within 90 days after any Special Offer, or after the
consummation of the Cherokee Acquisition, if applicable, the Trustee
shall mail to Holders a brief report with respect to the release of the
Trust Funds that complies with Section 313(b) of the TIA.
A copy of each report at the time of its mailing to
Holders shall be filed with the Commission and each stock exchange, if
any, on which the Notes are listed. The Company shall notify the Trustee
when the Notes are listed on any stock exchange.
SECTION 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time
reasonable compensation for its services hereunder, as mutually agreed
upon by the Company and the Trustee. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust.
The Company shall reimburse the Trustee upon request for all reasonable
disbursements, advances and expenses it incurs or makes in addition to
the compensation for its services. Such expenses shall include the
reasonable compensation, disbursements and expenses of the Trustee's
agents and counsel.
The Company shall indemnify the Trustee and each of its
directors, officers, employees, agents, representatives and counsel
against any and all losses, liabilities or expenses the Trustee incurs
arising out of or in connection with the acceptance or administration of
its duties under this Indenture, including, without limitation, the
reasonable costs and expenses of defending itself against any claim in
liability in connection with the exercise or performance of any of its
rights, powers or duties under this Indenture, except as set forth below.
The Trustee shall notify the Company promptly of any claim for which it
may seek indemnity; provided, however, that failure by the Trustee to
provide the Company with any such notice shall not relieve the Company of
any of its obligations under this Section 7.07. The Trustee shall
cooperate in the defense of any such claim. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of
such counsel. The Company need not pay for any settlement made without
its consent, which consent shall not be unreasonably withheld.
The Company's obligations under this Section 7.07 shall
survive the resignation or removal of the Trustee, satisfaction and
discharge of this Indenture or termination of this Indenture. The Company
need not reimburse any expense or indemnify against any loss or liability
the Trustee incurs as a result of its negligence or willful misconduct.
To secure payment of the Company's obligations under this
Section 7.07, the Trustee shall have a Lien prior to the Notes on all
money or property the Trustee holds or collects, except the Trust Funds
and any other funds from time to time held in trust or as security to pay
principal of, and premium, if any, and interest on, particular Notes.
Such Lien shall survive the resignation or removal of the Trustee, the
satisfaction and discharge of this Indenture or the termination of this
Indenture.
When the Trustee incurs expenses or renders services after
an Event of Default specified in Section 6.01(a)(viii) or (ix) occurs,
the expenses and the compensation for the services (including the fees
and expenses of its agents and counsel) are intended to constitute
administrative expenses under any Bankruptcy Law without any need to
demonstrate substantial contribution under Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of
a successor Trustee shall become effective only upon the successor
Trustee's acceptance of appointment as provided in this Section 7.08.
The Trustee may resign and be discharged from the trust
hereby created by so notifying the Company. The Holders of a majority in
aggregate principal amount of the then outstanding Notes may remove the
Trustee by so notifying the Trustee and the Company. The Company may
remove the Trustee if: (i) the Trustee fails to comply with Section 7.10;
(ii) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(iii) a Custodian or public officer takes charge of the Trustee or its
property; or (iv) the Trustee becomes incapable of performing the
services of the Trustee hereunder.
If the Trustee resigns or is removed or if a vacancy
exists in the office of Trustee for any reason, the Company shall
promptly appoint a successor Trustee; provided that the Holders of a
majority in aggregate principal amount of the then outstanding Notes may
appoint a successor Trustee to replace any successor Trustee appointed by
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee,
the Company or the Holders of at least 10% in principal amount of the
then outstanding Notes may petition any court of competent jurisdiction
for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Holder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of
its appointment to the retiring Trustee and to the Company. Thereupon,
the resignation or removal of the retiring Trustee shall become effective
and the successor Trustee shall have all the rights, powers and duties of
the Trustee under this Indenture. The successor Trustee shall mail a
notice of its appointment to Holders. The retiring Trustee shall promptly
transfer all property it holds as Trustee to the successor Trustee;
provided that all sums owing to the retiring Trustee hereunder have been
paid. Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue for the
retiring Trustee's benefit with respect to expenses and liabilities
relating to the retiring Trustee's activities prior to being replaced.
SECTION 7.09. Successor Trustee by Merger, Etc.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to
another corporation, the successor corporation without any further act
shall be the successor Trustee.
SECTION 7.10. Eligibility; Disqualification.
The Trustee shall at all times (i) be a corporation
organized and doing business under the laws of the United States of
America, of any state thereof, or the District of Columbia authorized
under such laws to exercise corporate trust powers, (ii) be subject to
supervision or examination by federal or state authority, (iii) have a
combined capital and surplus of at least $100 million as set forth in its
most recently published annual report of condition, and (iv) satisfy the
requirements of Sections 310(a)(1),(2) and (5) of the TIA. The Trustee is
subject to Section 310(b) of the TIA.
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee is subject to Section 311(a) of the TIA,
excluding any creditor relationship listed in Section 311(b) of the TIA.
A Trustee who has resigned or been removed shall be subject to Section
311(a) of the TIA to the extent indicated therein.
ARTICLE VIII
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Notes; Defeasance.
(a) Subject to Sections 8.01(c), 8.02 and 8.06, this
Indenture shall cease to be of any further effect as to all outstanding
Notes and Subsidiary Guarantees after (i) either (a) all Notes heretofore
authenticated and delivered (other than Notes replaced pursuant to
Section 2.07) have been delivered to the Trustee for cancellation or (b)
all Notes not previously delivered for cancellation have become due and
payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee an amount in United States dollars sufficient
to pay and discharge the entire indebtedness on such Notes not previously
delivered to the Trustee for cancellation, for the principal of, premium,
if any, and interest to the date of repayment, (ii) the Company has paid
or caused to be paid all other sums payable under this Indenture and
(iii) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that all conditions precedent
under this Indenture relating to the satisfaction and discharge of this
Indenture have been complied with.
(b) Subject to Sections 8.01(c), 8.02, and 8.06, the
Company at any time may terminate (i) all its obligations under this
Indenture and the Notes ("Legal Defeasance Option"), or (ii) its
obligations under Sections 4.02, 4.03, 4.05, 4.06, 4.07, 4.08, 4.09,
4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 and Article V ("Covenant
Defeasance Option"). The Company may exercise its Legal Defeasance Option
notwithstanding its prior exercise of its Covenant Defeasance Option.
If the Company exercises its Legal Defeasance Option,
payment of the Notes may not be accelerated because of an Event of
Default. If the Company exercises its Covenant Defeasance Option, payment
of the Notes may not be accelerated because of an Event of Default
specified in Section 6.01(a)(iii).
Upon satisfaction of the conditions set forth in Section
8.02 and upon the Company's request (and at the Company's expense), the
Trustee shall acknowledge in writing the discharge of those obligations
that the Company has terminated.
(c) Notwithstanding Sections 8.01(a) and (b), the
Company's obligations under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01,
4.04, 4.10, 7.07, 7.08, 8.04, 8.05, and 8.06, and the obligations of the
Trustee and the Paying Agent under Section 8.04 shall survive until the
Notes have been paid in full. Thereafter, the Company's obligations under
Sections 7.07 and 8.05 and the obligations of the Company, Trustee and
Paying Agent under Section 8.04 shall survive.
SECTION 8.02. Conditions to Defeasance.
In order to exercise either its Legal Defeasance Option
and give effect thereto ("Legal Defeasance") or its Covenant Defeasance
Option and give effect thereto ("Covenant Defeasance"), (i) the Company
shall irrevocably deposit with the Trustee, as trust funds in trust, for
the benefit of the Holders, cash in United States dollars, U.S.
Government Obligations, or a combination thereof, maturing as to
principal and interest in such amounts as will be sufficient, without
consideration of any reinvestment of such interest, in the opinion of a
nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, to pay and discharge the
principal of, premium, if any, and interest on the outstanding Notes on
the stated maturity of such principal or installment of principal or
interest; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this Indenture, there
has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an Opinion of Counsel
confirming that the Holders will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) and (ix) under Section 6.01 are concerned, at any time
during the period ending on the 91st day after the date of deposit; (v)
such Legal Defeasance or Covenant Defeasance shall not result in a breach
or violation of, or constitute a Default under, this Indenture or any
other material agreement or instrument to which the Company is a party or
by which it is bound; (vi) the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that (A) the trust funds will
not be subject to any rights of holders of Indebtedness of the Company or
any Subsidiary Guarantor, including, without limitation, those arising
under this Indenture, after the 91st day following the deposit and (B)
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of the Notes over the other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; (viii) no event or
condition shall exist that would prevent the Company from making payments
of the principal of, premium, if any, and interest on the Notes on the
date of such deposit or at any time ending on the 91st day after the date
of such deposit; and (ix) the Company shall have delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the Legal Defeasance
or the Covenant Defeasance, as the case may be, have been complied with.
SECTION 8.03. Application of Trust Money.
The Trustee or Paying Agent shall hold in trust money
and/or U.S. Government Obligations deposited with it pursuant to this
Article VIII. The Trustee or Paying Agent shall apply the deposited money
and the money from U.S. Government Obligations in accordance with this
Indenture to the payment of principal of, and premium, if any, and
interest on, the Notes.
SECTION 8.04. Repayment to Company.
After the Notes have been paid in full, the Trustee and
the Paying Agent shall promptly turn over to the Company any excess money
or securities held by them upon the written direction of the Company.
Any money deposited with the Trustee or a Paying Agent
pursuant to this Article VIII for the payment of the principal of,
premium, if any, or interest on, any Note that remains unclaimed for two
years after becoming due and payable shall be paid to the Company on its
request; and the Holder of such Note shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such money
shall cease; provided, however, that the Trustee or such Paying Agent,
before being required to make any such repayment, shall at the expense of
the Company cause to be published once, in The New York Times and The
Wall Street Journal (national edition), notice that such money remains
unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the
Company.
SECTION 8.05. Indemnity for U.S. Government Obligations.
The Company shall pay and shall indemnify the Trustee and
any Paying Agent against any tax, fee or other charge imposed on or
assessed against cash and/or U.S. Government Obligations deposited with
it pursuant to Section 4.18 or this Article VIII or imposed on or
assessed against the principal and interest received on such cash and/or
U.S. Government Obligations.
SECTION 8.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any
money or U.S. Government Obligations in accordance with this Article VIII
by reason of any legal proceeding or by reason of any order or judgment
of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under
this Indenture and the Notes shall be revived and reinstated as though no
deposit had occurred pursuant to this Article VIII until such time as the
Trustee or Paying Agent is permitted to apply all such money or U.S.
Government Obligations in accordance with this Article VIII; provided,
however, that if the Company has made any payment of principal of, or
premium, if any, or interest on, any Notes because of the reinstatement
of its obligations under this Indenture and the Notes, the Company shall
be subrogated to the Holders' rights to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS
SECTION 9.01. Amendments and Supplements Permitted
Without Consent of Holders.
(a) Notwithstanding Section 9.02, the Company, the
Subsidiary Guarantors and the Trustee may amend or supplement this
Indenture or the Notes without the consent of any Holder to: (i) cure any
ambiguity, defect or inconsistency; (ii) provide for uncertificated Notes
in addition to or in place of certificated Notes; (iii) provide for the
assumption of the Company's obligations to the Holders in the event of
any Disposition involving the Company that is permitted under Article V
in which the Company is not the Surviving Person; (iv) make any change
that would provide any additional rights or benefits to Holders or does
not adversely affect the interests of any Holder; (v) comply with the
requirements of the Commission in order to effect or maintain the
qualification of this Indenture under the TIA; or (vi) add additional
Subsidiary Guarantors pursuant to Section 4.15.
(b) Upon the Company's request, after receipt by the
Trustee of a resolution of the Board of Directors authorizing the
execution of any amended or supplemental indenture, the Trustee shall
join with the Company and the Subsidiary Guarantors in the execution of
any amended or supplemental indenture authorized or permitted by the
terms of this Indenture and to make any future appropriate agreements and
stipulations that may be contained in any such amended or supplemental
indenture, but the Trustee shall not be obligated to enter into an
amended or supplemental indenture that affects its own rights, duties, or
immunities under this Indenture or otherwise.
SECTION 9.02. Amendments and Supplements Requiring
Consent of Holders.
(a) Except as otherwise provided in Sections 6.04, 9.01(a)
and 9.02(c), this Indenture and the Notes may be amended or supplemented
with the written consent of the Holders of at least a majority in
aggregate principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for
the Notes), and any existing Default or Event of Default or compliance
with any provision of this Indenture or the Notes may be waived with the
consent of Holders of at least a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for the Notes).
(b) Upon the Company's request and after receipt by the
Trustee of a resolution of the Board of Directors authorizing the
execution of any supplemental indenture, evidence of the Holders'
consent, and the documents described in Section 9.06, the Trustee shall
join with the Company and the Subsidiary Guarantors in the execution of
such amended or supplemental indenture unless such amended or
supplemental indenture affects the Trustee's own rights, duties, or
immunities under this Indenture or otherwise, in which case the Trustee
may in its discretion, but not be obligated to, enter into such amended
or supplemental indenture.
(c) No such modification or amendment may, without the
consent of the Holder of each outstanding Note affected thereby: (i)
change the stated maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate
of interest thereon or any premium payable upon the redemption thereof,
or change the coin or currency or the manner in which the principal of
any Note or any premium or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment after the
stated maturity thereof (or, in the case of redemption, on or after the
redemption date); (ii) extend the time for payment of interest on the
Notes; (iii) alter the redemption provisions in the Notes or this
Indenture in a manner adverse to any Holder of the Notes; (iv) amend,
change or modify the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or modify any
of the provisions or definitions with respect thereto; (v) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any amended or supplemental indenture or the
consent of whose holders is required for any waiver of compliance with
any provision of this Indenture or any Default hereunder and the
consequences provided for hereunder; (vi) modify any of the provisions of
this Indenture relating to any amended or supplemental indentures
requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of any covenant, except to increase
the percentage of outstanding Notes required for such actions or to
provide that any other provision of this Indenture cannot be modified or
waived without the consent of the Holder of each Note affected thereby;
(vii) except as otherwise permitted under Section 5.01, consent to the
assignment or transfer by the Company of any of its rights and
obligations under this Indenture; (viii) alter the ranking of the Notes
or the Subsidiary Guarantees in a manner adverse to holders of the Notes;
or (ix) amend, change or modify the obligation of the Company to make and
consummate a Special Offer or any of the definitions related thereto in a
manner adverse to any holder of Notes.
(d) It shall not be necessary for the consent of the
Holders under this Section 9.02 to approve the particular form of any
proposed amendment or waiver, but it shall be sufficient if such consent
approves the substance thereof. After an amendment, supplement or waiver
under this Section 9.02 becomes effective, the Company shall mail to each
Holder affected thereby a notice briefly describing the amendment,
supplement or waiver. Any failure of the Company to mail such notice, or
any defect therein, shall not, however, in any way impair or affect the
validity of any such amended or supplemental indenture or waiver.
SECTION 9.03. Compliance with TIA.
Every amendment or supplement to this Indenture or the
Notes shall be set forth in an amended supplemental indenture that
complies with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
(a) Until an amendment, supplement or waiver becomes
effective, a consent to it by a Holder is a continuing consent by the
Holder and every subsequent Holder of a Note or portion of a Note that
evidences the same Indebtedness as the consenting Holder's Note, even if
notation of the consent is not made on any Note. However, any such Holder
or subsequent Holder may revoke the consent as to his or her Note or
portion of a Note if the Trustee receives the notice of revocation before
the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Notes
have consented to the amendment or waiver.
(b) The Company may, but shall not be obligated to, fix a
record date for the purpose of determining the Holders of Notes entitled
to consent to any amendment or waiver. If a record date is fixed, then
notwithstanding the provisions of the immediately preceding paragraph,
those Persons who were Holders of Notes at such record date (or their
duly designated proxies), and only those Persons, shall be entitled to
consent to such amendment or waiver or to revoke any consent previously
given, whether or not such Persons continue to be Holders of Notes after
such record date. No consent shall be valid or effective for more than 90
days after such record date unless consents from Holders of the principal
amount of Notes required hereunder for such amendment or waiver to be
effective shall have also been given and not revoked within such 90-day
period.
(c) After an amendment or waiver becomes effective it
shall bind every Holder, unless it is of the type described in Section
9.02(c), in which case the amendment or waiver shall only bind each
Holder that consented to it and every subsequent Holder of a Note that
evidences the same debt as the consenting Holder's Note.
SECTION 9.05. Notation on or Exchange of Notes.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall
authenticate new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.06. Trustee Protected.
The Trustee shall sign any amendment or supplemental
indenture authorized pursuant to this Article IX if the amendment does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may, but need not, sign it. In signing
such amendment or supplemental indenture, the Trustee shall be entitled
to receive and, subject to Section 7.01, shall be fully protected in
relying upon, an Officers' Certificate and Opinion of Counsel pursuant to
Sections 11.04 and 11.05 as conclusive evidence that such amendment or
supplemental indenture is authorized or permitted by this Indenture, that
it is not inconsistent herewith, and that it will be valid and binding
upon the Company in accordance with its terms.
ARTICLE X
SUBSIDIARY GUARANTEES
SECTION 10.01. Subsidiary Guarantees.
(a) Each Subsidiary Guarantor hereby, jointly and
severally, unconditionally guarantees, on a senior unsecured basis, to
each Holder of a Note authenticated and delivered by the Trustee that:
(i) the principal of, premium, if any, and interest on the Notes will be
promptly paid in full when due, whether at maturity, by acceleration,
redemption or otherwise, and interest on the overdue principal of and
interest on the Notes, if any, to the extent lawful, and all other
Obligations of the Company to the Holders or the Trustee under this
Indenture and the Notes will be promptly paid in full, all in accordance
with the terms of this Indenture and the Notes; and (ii) in case of any
extension of time of payment or renewal of any Notes or any of such other
Obligations, that the Notes will be promptly paid in full when due in
accordance with the terms of such extension or renewal, whether at stated
maturity, by acceleration or otherwise. In the event that the Company
fails to pay any amount guaranteed by the Subsidiary Guarantors for any
reason whatsoever, the Subsidiary Guarantors will be jointly and
severally obligated to pay such amount immediately. The Subsidiary
Guarantors hereby further agree that their Obligations under this
Indenture and the Notes shall be unconditional and absolute, regardless
of the validity, legality or enforceability of this Indenture or the
Notes, the absence of any action to enforce this Indenture or the Notes,
any waiver or consent by any Holder with respect to any provisions of
this Indenture or the Notes, any modification or amendment of, or
supplement to, this Indenture or the Notes, the recovery of any judgment
against the Company or any action to enforce any such judgment, or any
other circumstance that might otherwise constitute a legal or equitable
discharge or defense of a Subsidiary Guarantor. Each Subsidiary Guarantor
hereby waives diligence, presentment, demand of payment, filing of claims
with a court in the event of insolvency or bankruptcy of the Company, any
right to require a proceeding first against the Company, protest, notice
and all demands whatsoever and covenants that its Subsidiary Guarantee of
the Company's Obligations under this Indenture and the Notes will not be
discharged except by complete performance by the Company or another
Guarantor of such Obligations. If any Holder or the Trustee is required
by any court or otherwise to return to the Company, any Subsidiary
Guarantor or a Custodian of the Company or a Subsidiary Guarantor any
amount paid by the Company or any Subsidiary Guarantor to the Trustee or
such Holder, the Subsidiary Guarantee of the Company's Obligations under
this Indenture and the Notes by each Subsidiary Guarantor shall, to the
extent previously discharged as a result of any such payment, be
immediately reinstated and be in full force and effect. Each Subsidiary
Guarantor hereby acknowledges and agrees that, as between the Subsidiary
Guarantors, on the one hand, and the Holders and the Trustee, on the
other hand, (x) the maturity of the Company's Obligations under this
Indenture and the Notes may be accelerated as provided in Article VI for
purposes of the Subsidiary Guarantees notwithstanding any stay,
injunction or other prohibition preventing such acceleration, and (y) in
the event of any declaration of acceleration of the Company's Obligations
under this Indenture and the Notes as provided in Article VI, such
Obligations (whether or not due and payable) shall forthwith become due
and payable by the Subsidiary Guarantors for the purpose of the
Subsidiary Guarantees.
(b) Each Subsidiary Guarantor hereby waives all rights of
subrogation, contribution, reimbursement and indemnity, and all other
rights, that such Subsidiary Guarantor would have against the Company at
any time as a result of any payment in respect of its Subsidiary
Guarantee (whether contractual, under section 509 of the Bankruptcy Code,
or otherwise).
(c) Each Subsidiary Guarantor that makes or is required to
make any payment in respect of its Subsidiary Guarantee shall be entitled
to seek contribution from the other Subsidiary Guarantors to the extent
permitted by applicable law; provided that each Subsidiary Guarantor
agrees that any such claim for contribution that such Subsidiary
Guarantor may have against any other Subsidiary Guarantor shall be
subrogated to the prior payment in full in cash of all Obligations owed
to Holders under or in respect of the Notes.
(d) Upon the sale or disposition (whether by merger, stock
purchase, asset sale or otherwise) of a Subsidiary Guarantor (or
substantially all of its assets) to an entity which is not a Subsidiary
of the Company, which is otherwise in compliance with this Indenture,
such Subsidiary Guarantor shall be deemed released from all its
obligations under its Subsidiary Guarantee; provided that any such
termination shall occur only to the extent that all obligations of such
Subsidiary Guarantor under all of its guarantees of, and under all of its
pledges of assets or other security interests which secure, other
Indebtedness of the Company shall also terminate upon such release, sale
or transfer.
(e) Each Subsidiary Guarantor may consolidate with or
merge into or sell its assets to the Company or another Subsidiary
Guarantor without limitation. A Subsidiary Guarantor may consolidate with
or merge into or sell its assets to a corporation other than the Company
or another Subsidiary Guarantor (whether or not affiliated with such
Subsidiary Guarantor, but subject to the provisions described in Section
10.01(d)), provided that (a) if the Surviving Person is not the
Subsidiary Guarantor, the Surviving Person agrees to assume such
Subsidiary Guarantor's obligations under its Subsidiary Guarantee and all
its obligations under this Indenture and (b) such transaction does not
(i) violate any covenants set forth in this Indenture or (ii) result in a
Default or Event of Default under this Indenture immediately thereafter
that is continuing.
SECTION 10.02. Trustee To Include Paying Agents.
In case at any time any Paying Agent other than the
Trustee shall have been appointed by the Company, the term "Trustee" as
used in this Article X shall (unless the context shall otherwise require)
be construed as extending to and including such Paying Agent within its
meaning as fully and for all intents and purposes as if such Paying Agent
were named in this Article X in place of the Trustee.
SECTION 10.03. Limits on Subsidiary Guarantees.
Each Subsidiary Guarantor, and by its acceptance hereof
each Holder, hereby confirms that it is the intention of all such parties
that the guarantee by each Subsidiary Guarantor pursuant to its
Subsidiary Guarantee not constitute a fraudulent transfer or conveyance
for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance
Act, the Uniform Fraudulent Transfer Act or any similar Federal or state
law. To effectuate the foregoing intention, the Holders and each
Subsidiary Guarantor hereby irrevocably agree that the obligations of
each Subsidiary Guarantor under the Subsidiary Guarantees shall be
limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of each Subsidiary Guarantor, result in
the obligations of each Subsidiary Guarantor under the Subsidiary
Guarantees not constituting such fraudulent transfer or conveyance.
SECTION 10.04. Execution of Subsidiary Guarantee.
To evidence its Subsidiary Guarantee set forth in this
Article X, each Subsidiary Guarantor hereby agrees to execute the
Subsidiary Guarantee in substantially the form included in Exhibit A,
which shall be endorsed on each Note ordered to be authenticated and
delivered by the Trustee. Each Subsidiary Guarantor hereby agrees that
its Subsidiary Guarantee set forth in this Article X shall remain in full
force and effect notwithstanding any failure to endorse on each Note a
notation of such Subsidiary Guarantee. Each such Subsidiary Guarantee
shall be signed on behalf of each Subsidiary Guarantor by an Officer (who
shall have been duly authorized by all requisite corporate actions), and
the delivery of such Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of such Subsidiary
Guarantee on behalf of such Subsidiary Guarantor. Such signatures upon
the Subsidiary Guarantee may be by manual or facsimile signature of such
Officer and may be imprinted or otherwise reproduced on the Subsidiary
Guarantee, and in case any such Officer who shall have signed the
Subsidiary Guarantee shall cease to be such Officer before the Note on
which such Subsidiary Guarantee is endorsed shall have been authenticated
and delivered by the Trustee or disposed of by the Company, such Note
nevertheless may be authenticated and delivered or disposed of as though
the person who signed the Subsidiary Guarantee had not ceased to be such
Officer of the Subsidiary Guarantor.
SECTION 10.05. Stay, Extension and Usury Laws.
Each Subsidiary Guarantor covenants (to the extent that it
may lawfully do so) that it will not at any time insist upon, plead, or
in any manner whatsoever claim or take the benefit or advantage of, any
stay, extension or usury law wherever enacted, now or at any time
hereafter in force, that would prohibit or forgive each Subsidiary
Guarantor from performing its Subsidiary Guarantee as contemplated herein
or which might affect the covenants or the performance of this Indenture
and Notes; and each such Subsidiary Guarantor (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any
such law, and covenants that it will not, by resort to any such law,
hinder, delay or impede the execution of any power granted to the Trustee
pursuant to this Indenture, but will suffer and permit the execution of
every such power as though no such law has been enacted.
SECTION 10.06. Payment.
A payment on account of or with respect to any Subsidiary
Guarantee shall include, without limitation, any direct or indirect
payment of principal, premium or interest with respect to or in
connection with any optional redemption or purchase provisions, any
direct or indirect payment payable by reason of any other Indebtedness or
Obligation being subordinated to the Subsidiary Guarantees, and any
direct or indirect payment or recovery on any claim as a Holder relating
to or arising out of this Indenture or any Subsidiary Guarantee, or the
issuance of any Subsidiary Guarantee, or the transactions contemplated by
this Indenture or referred to herein.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act Controls.
If any provisions of this Indenture limits, qualifies, or
conflicts with the duties imposed by operation of Section 318(c) of the
TIA, the imposed duties shall control.
SECTION 11.02. Notices.
Any notice or communication by the Company, any Subsidiary
Guarantor or the Trustee to the other is duly given if in writing and
delivered in person, mailed by registered or certified mail, postage
prepaid, return receipt requested or delivered by telecopier or overnight
air courier guaranteeing next day delivery to the other's address:
If to the Company or to any Subsidiary Guarantor:
PhoneTel Technologies, Inc.
1127 Euclid Avenue
Suite 650
Cleveland, Ohio 44115-1601
Attention: Tammy Martin
Telephone: (216) 623-2588
Facsimile: (216) 623-2578
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Stephen Banker
Telephone: (212) 735-3000
Facsimile: (212) 735-2000
If to the Trustee:
Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration Department
Facsimile: (212) 658-6425
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered
by hand, if personally delivered; the date receipt is acknowledged, if
mailed by registered or certified mail; when confirmation is received, if
telecopied; and the next Business Day after timely delivery to the
courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first-class mail to his or her address shown on the register maintained
by the Registrar. Failure to mail a notice or communication to a Holder
or any defect in it shall not affect its sufficiency with respect to
other Holders. If a notice or communication is mailed in the manner
provided above within the time prescribed, it is duly given, whether or
not the addressee receives it. If the Company mails a notice or
communication to Holders, it shall mail a copy to the Trustee and each
Agent at the same time.
SECTION 11.03. Communication by Holders with Other Holders.
Holders may communicate pursuant to Section 312(b) of the
TIA with other Holders with respect to their rights under this Indenture
or the Notes. The Company, the Trustee, the Registrar and any other
Person shall have the protection of Section 312(c) of the TIA.
SECTION 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the
Trustee to take any action under this Indenture, the Company shall
furnish to the Trustee: (a) an Officers' Certificate (which shall include
the statements set forth in Section 11.05) stating that, in the opinion
of the signers, all conditions precedent and covenants, if any, provided
for in this Indenture relating to the proposed action have been complied
with; and (b) an Opinion of Counsel (which shall include the statements
set forth in Section 11.05) stating that, in the opinion of such counsel,
all such conditions precedent provided for in this Indenture relating to
the proposed action have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance
with a condition or covenant provided for in this Indenture (other than a
certificate provided pursuant to Section 314(a)(4) of the TIA) shall
include: (1) a statement that the Person making such certificate or
opinion has read such covenant or condition; (2) a brief statement as to
the nature and scope of the examination or investigation upon which the
statements or opinions contained in such certificate or opinion are
based; (3) a statement that, in the opinion of such Person, he has made
such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and (4) a statement as to whether, in
such Person's opinion, such condition or covenant has been complied with.
SECTION 11.06. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at
a meeting of Holders. The Registrar or Paying Agent may make reasonable
rules and set reasonable requirements for its functions.
SECTION 11.07. Legal Holidays.
If a payment date is a Legal Holiday, payment may be made
at that place on the next succeeding day that is not a Legal Holiday, and
no interest shall accrue for the intervening period.
SECTION 11.08. No Recourse Against Others.
No director, officer, employee, incorporator or
stockholder of the Company or any Subsidiary Guarantor shall have any
liability for any obligation of the Company or any Subsidiary Guarantor
under this Indenture, the Notes or the Subsidiary Guarantees. Each Holder
by accepting a Note (including Subsidiary Guarantees) waives and releases
such Persons from all such liability and such waiver and release is part
of the consideration for the issuance of the Notes.
SECTION 11.09. Counterparts.
This Indenture may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
SECTION 11.10. Initial Appointments, Compliance Certificates.
The Company initially appoints the Trustee as Paying
Agent, Registrar and authenticating agent. The first compliance
certificate to be delivered by the Company to the Trustee pursuant to
Section 4.03 shall be for the fiscal year ending on December 31, 1996.
SECTION 11.11. Governing Law.
The laws of the State of New York shall govern this
Indenture and the Notes, without regard to the conflict of laws
provisions thereof.
SECTION 11.12. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another
indenture, loan or debt agreement of the Company or any of its
Subsidiaries, and no other indenture, loan or debt agreement may be used
to interpret this Indenture.
SECTION 11.13. Successors.
All agreements of the Company in this Indenture and the
Notes shall bind any successor of the Company. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 11.14. Severability.
If any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 11.15. No Recourse Against Others.
No director, officer, employee, incorporator, or
stockholder of the Company shall have any liability for any obligations
of the Company under the Indenture or the Notes. Each Holder by accepting
a Note waives and releases such persons from all such liability, and such
waiver and release is part of the consideration for the issuance of the
Notes.
SECTION 11.16. Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table, and headings
of the Articles and Sections of this Indenture have been inserted for
convenience of reference only, are not to be considered a part of this
Indenture, and shall in no way modify or restrict any of the terms or
provisions of this Indenture.
SIGNATURES
THE COMPANY:
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter Graf
Name: Peter Graf
Title: Chairman
THE SUBSIDIARY GUARANTORS:
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
PARAMOUNT COMMUNICATION SYSTEMS, INC.
NORTHERN FLORIDA TELEPHONE CORPORATION
PAYPHONES OF AMERICA, INC.
PHONETEL CCI, INC.
For each of the above:
By: /s/ Peter Graf
Name: Peter Graf
Title: Chairman
MARINE MIDLAND BANK,
as Trustee
By: /s/ Marcia Markowski
Name: Marcia Markowski
Title: Corporate Trust Officer
Schedule I
Subsidiary Guarantors Existing on the Issue Date
Name of Subsidiary Jurisdiction of Incorporation
1. Public Telephone Corporation Indiana
2. World Communications, Inc. Missouri
3. Paramount Communication
Systems, Inc. Florida
4. Northern Florida Telephone
Corporation Florida
5. Payphones of America, Inc. Ohio
6. PhoneTel CCI, Inc. Texas
[FORM OF NOTE]
EXHIBIT A
(Face of Note)
CUSIP No. 71921HAA7
PHONETEL TECHNOLOGIES, INC.
12% Senior Note due 2006
No. 001 $125,000,000
PhoneTel Technologies, Inc., an Ohio corporation
(hereinafter called the "Company," which term includes any successor
entity under the Indenture hereinafter referred to), for value received,
hereby promises to pay to CEDE & CO. or registered assigns, the principal
sum of One Hundred and Twenty-Five Million Dollars on December 15, 2006.
Interest Payment Dates: June 15, and December 15,
commencing June 15, 1997.
Record Dates: June 1 and December 1.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for
all purposes have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Note to be
signed manually or by facsimile by its duly authorized officers.
Dated: December 18, 1996
PHONETEL TECHNOLOGIES, INC.
By:
Name:
Title:
By:
Name:
Title:
CERTIFICATE OF AUTHENTICATION
This is one of the 12% Senior Notes due 2006 referred to in the within
mentioned Indenture.
MARINE MIDLAND BANK, as Trustee
By: ______________________
Authorized Signatory
(Back of Note)
12% SENIOR NOTE DUE 2006
1. Interest. PhoneTel Technologies, Inc. (the "Company")
promises to pay interest on the principal amount of this Note at the rate
and in the manner specified below. Interest on this Note will accrue at
12% per annum from the date this Note is issued until maturity and will
be payable semiannually in cash on June 15 and December 15 of each year,
or if any such day is not a Business Day on the next succeeding Business
Day (each an "Interest Payment Date"). Interest on this Note will accrue
from the most recent date on which interest has been paid or, if no
interest has been paid, from the date of original issuance; provided that
the first Interest Payment Date shall be June 15, 1997. The Company shall
pay interest on overdue principal and premium, if any, from time to time
on demand at the rate of 2% per annum in excess of the interest rate then
in effect and shall pay interest on overdue installments of interest
(without regard to any applicable grace periods) from time to time on
demand at the same rate to the extent lawful. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company will pay interest on
this Note (except defaulted interest) to the Person who is the registered
Holder of this Note at the close of business on the record date for the
next Interest Payment Date even if such Note is cancelled after such
record date and on or before such Interest Payment Date. Holders must
surrender Notes to a Paying Agent to collect principal payments on such
Notes. The Company will pay principal, premium, if any, and interest in
money of the United States that at the time of payment is legal tender
for payment of public and private debts. However, the Company may pay
principal, premium, if any, and interest by check payable in such money,
and any such check may be mailed to a Holder's registered address and, in
the case of a Global Note, may pay principal, premium, if any, and
interest by wire transfer of immediately available funds to the account
specified by the Holder thereof.
3. Paying Agent and Registrar. Marine Midland Bank (the
"Trustee") will initially act as the Paying Agent and Registrar. The
Company may appoint additional paying agents or co-registrars, and change
the Paying Agent, any additional paying agent, the Registrar or any
co-registrar without prior notice to any Holder. The Company or any of
its Affiliates may act in any such capacity.
4. Indenture. The Company issued the Notes under an
Indenture, dated as of December 18, 1996 (the "Indenture"), by and among
the Company, as issuer of the Notes, each Subsidiary of the Company
existing on the Issue Date as set forth in Schedule I to the Indenture
and each of the Company's Subsidiaries which becomes a guarantor of the
Notes in compliance with the provisions set forth under Section 4.15 of
the Indenture and executes a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the Indenture as guarantors
of the Company's obligations under the Indenture and the Notes (each a
"Subsidiary Guarantor") and the Trustee. The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (15 U.S. Code ss.ss.
77aaa-77bbbb) as in effect on the date of the original issuance of the
Notes (the "Trust Indenture Act"). The Notes are subject to, and
qualified by, all such terms, certain of which are summarized herein, and
Holders are referred to the Indenture and the Trust Indenture Act for a
statement of such terms (all capitalized terms not defined herein shall
have the meanings assigned them in the Indenture). The Notes are
unsecured general obligations of the Company limited to $125,000,000 in
aggregate principal amount.
5. Redemption Provisions. The Notes are not redeemable at
the Company's option prior to December 15, 2001. On and after such date,
the Notes will be subject to redemption at the option of the Company, in
whole or in part, at the redemption prices (expressed as percentages of
the principal amount of the Notes) set forth below, plus accrued and
unpaid interest to the date of redemption, if redeemed during the
twelve-month period beginning on December 15 of the years indicated
below:
Year Percentage
2001......................................... 106.0%
2002......................................... 104.0%
2003......................................... 102.0%
2004 and thereafter.......................... 100.0%
Notwithstanding the foregoing, at any time prior to
December 15, 1999, the Company, at its option, may redeem from time to
time up to 40% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more Equity Offerings, other
than the Concurrent Offering, at a redemption price equal to 112% of the
principal amount thereof, together with accrued and unpaid interest to
the date of redemption; provided, however, that at least $75 million in
aggregate principal amount of the Notes remains outstanding immediately
after any such redemption.
6. Mandatory Offers.
(a) Within 30 days after any Change of Control, 10
Business Days following any Asset Sale Trigger Date, or on the Special
Offer Notice Date, as the case may be, the Company shall mail a notice to
each Holder stating a number of items as set forth in Sections 4.11 (with
respect to Change of Control Offers) or 4.12 (with respect to a Special
Offer) or 4.13 (with respect to Asset Sale Offers) of the Indenture.
(b) Holders may tender all or, subject to Section 8 below,
any portion of their Notes in an Offer by completing the form below
entitled "OPTION OF HOLDER TO ELECT PURCHASE."
(c) Promptly after consummation of an Offer, (i) the
Paying Agent shall mail to each Holder of Notes or portions thereof
accepted for payment an amount equal to the purchase price for, plus any
accrued and unpaid interest on, such Notes, (ii) with respect to any
tendered Note not accepted for payment in whole or in part, the Trustee
shall return such Note to the Holder thereof, and (iii) with respect to
any Note accepted for payment in part, the Trustee shall authenticate and
mail to each such Holder a new Note equal in principal amount to the
unpurchased portion of the tendered Note.
(d) The Company will (i) announce the results of the Offer
to Holders on or as soon as practicable after the applicable purchase
date, and (ii) comply with the applicable tender offer rules, including
the requirements of Rule 14e-1 under the Securities Exchange Act of 1934,
as amended, and all other applicable securities laws and regulations in
connection with any Offer.
7. Notice of Redemption. At least 30 days but not more
than 60 days before any redemption date, the Company shall mail by first
class mail a notice of redemption to each Holder of Notes or portions
thereof that are to be redeemed.
8. Notes to Be Redeemed or Purchased. The Notes may be
redeemed or purchased in part, but only in whole multiples of $1,000
unless all Notes held by a Holder are to be redeemed or purchased. On and
after any date on which Notes are redeemed or purchased, interest ceases
to accrue on the Notes or portions thereof called for redemption or
accepted for purchase on such date.
9. Denominations, Transfer, Exchange. The Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples thereof. The transfer of Notes may be registered and Notes may
be exchanged as provided in the Indenture. Holders seeking to transfer or
exchange their Notes may be required, among other things, to furnish
appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture.
Neither the Company nor the Registrar shall be required to
issue, register the transfer of or exchange any Note (i) during a period
beginning at the opening of business 15 days before the day of the
mailing of notice of any redemption from the Company and ending at the
close of business on the day the notice of redemption is sent to Holders,
(ii) selected for redemption, in whole or in part, except the unredeemed
portion of any Note being redeemed in part may be transferred or
exchanged, and (iii) during any Change of Control Offer or Special Offer
or Asset Sale Offer if such Note is tendered pursuant to such Change of
Control Offer or Special Offer or Asset Sale Offer and not withdrawn.
10. Persons Deemed Owners. The registered holder of a Note
may be treated as its owner for all purposes.
11. Amendments and Waivers.
(a) Subject to certain exceptions, the Indenture and the
Notes may be amended or supplemented with the written consent of the
Holders of at least a majority in aggregate principal amount of the then
outstanding Notes, and any existing Default or Event of Default or
compliance with any provision of the Indenture or the Notes may be waived
with the consent of the Holders of at least a majority in principal
amount of the then outstanding Notes.
(b) Notwithstanding Section 11(a) above, the Company and
the Trustee may amend or supplement the Indenture or the Notes without
the consent of any Holder to: cure any ambiguity, defect or
inconsistency; provide for uncertificated Notes in addition to or in
place of certificated Notes; provide for the assumption of the Company's
obligations to the Holders in the event of any Disposition involving the
Company that is permitted under Article V and in which the Company is not
the Surviving Person; make any change that would provide any additional
rights or benefits to Holders or not adversely affect the interests of
any Holder; comply with the requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust
Indenture Act; or provide for additional Subsidiary Guarantors.
(c) Certain provisions of the Indenture cannot be amended,
supplemented or waived without the consent of each Holder of Notes
affected.
12. Defaults and Remedies. Events of Default include:
default for 30 days in the payment when due of interest on the Notes;
default in the payment when due of principal on the Notes; failure to
perform or comply with certain covenants, agreements or warranties in the
Indenture which failure continues for 30 days after receipt of notice
from the Trustee or Holders of at least 25% of the outstanding Notes;
defaults under and acceleration prior to maturity, or failure to pay at
maturity, of certain other Indebtedness; except as permitted under the
Indenture, any Subsidiary Guarantee shall cease for any reason to be in
full force and effect; certain judgments that remain undischarged for a
period of 60 days after their entry; dispositions by holders of certain
Indebtedness following a default under such Indebtedness of assets of the
Company or any Subsidiary pledged to secure such Indebtedness and certain
events of bankruptcy or insolvency involving the Company or any
Subsidiary. If an Event of Default occurs and is continuing, the Trustee
or the Holders of at least 25% in principal amount of the Notes may
declare all outstanding Notes to be due and payable immediately in an
amount equal to the principal amount of and premium on, if any, such
Notes, plus any accrued and unpaid interest; provided, however, that in
the case of an Event of Default arising from certain events of bankruptcy
or insolvency involving the Company or any Subsidiary Guarantor, the
principal amount of and premium on, if any, and any accrued and unpaid
interest on, the Notes becomes due and payable immediately without
further action or notice. Subject to certain exceptions, Holders of a
majority in aggregate principal amount of the then outstanding Notes may
direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power
conferred on it by the Indenture; provided that the Trustee may refuse to
follow any direction that conflicts with law or the Indenture, that the
Trustee determines may be unduly prejudicial to the rights of other
Holders, or would involve the Trustee in personal liability. The Trustee
may withhold from Holders notice of any continuing default (except a
payment Default) if it determines that such withholding is in their
interests.
13. Subsidiary Guarantees. Payment of principal, premium,
if any, and interest (including interest on overdue principal and overdue
interest, to the extent lawful) on the Notes and all other Obligations of
the Company to the Holders or the Trustee under the Indenture and the
Notes is, jointly and severally, unconditionally guaranteed by each of
the Subsidiary Guarantors pursuant to and subject to the terms of Article
X of the Indenture.
14. Trustee Dealings with Company. The Trustee in its
individual or any other capacity may become the owner or pledgee of Notes
and may otherwise deal with the Company or any of its Affiliates with the
same rights it would have if it were not Trustee.
15. No Recourse Against Others. No director, officer,
employee, incorporator or stockholder of the Company shall have any
liability for any obligation of the Company under the Indenture or the
Notes. Each Holder by accepting a Note waives and releases such Persons
from all such liability, and such waiver and release is part of the
consideration for the issuance of the Notes.
16. Successor Substituted. Upon the merger, consolidation
or other business combination involving the Company or one or more
Subsidiary Guarantors of the Company, or upon the sale, assignment,
transfer, conveyance or other disposition of all or substantially all of
the Company's or a Subsidiary Guarantor's properties and assets, the
Surviving Person (if other than the Company or a Subsidiary Guarantor, as
the case may be) resulting from such disposition shall assume all of the
obligations of the Company or the Subsidiary Guarantor under the Notes or
the Subsidiary Guarantee, as applicable, and the Indenture and shall
succeed to, and be substituted for, and may exercise every right and
power of, the Company or the Subsidiary Guarantor under the Indenture
with the same effect as if such Surviving Person had been named as the
Company or a Subsidiary Guarantor in the Indenture.
17. Governing Law. This Note shall be governed by and
construed in accordance with the laws of the State of New York, without
regard to the conflict of laws provisions thereof.
18. Authentication. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
19. Abbreviations. Customary abbreviations may be used in
the name of a Holder or an assignee, such as TEN COM (= tenants in
common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants
with right of survivorship and not as tenants in common), CUST (=
Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
20. CUSIP Numbers. Pursuant to a recommendation
promulgated by the Committee on Uniform Note Identification Procedures,
the Company has caused CUSIP numbers to be printed on the Notes and has
directed the Trustee to use CUSIP numbers in notices of redemption as a
convenience to Holders. No representation is made as to the accuracy of
such numbers either as printed on the Notes or as contained in any notice
of redemption and reliance may be placed only on the other identification
numbers printed on the securities.
The Company will furnish to any Holder upon written
request and without charge a copy of the Indenture, which has in it the
text of this Note in larger type. Request may be made to: PhoneTel
Technologies, Inc., 1127 Euclid Avenue, Suite 650, Cleveland, Ohio
44115-1601, Attention: Secretary.
ASSIGNMENT FORM
To assign this Note, fill in the form below:
FOR VALUE RECEIVED the undersigned hereby sell(s),
assigns(s) and transfer(s) unto
Please insert social security or other identifying number
of assignee
Please print or typewrite name and address including
zip code of assignee
the within Note and all rights thereunder, hereby irrevocably
constituting and appointing ___________________________ to transfer
said Note on the books of the Company.
The Agent may substitute another to act for him.
Date: ______________ Your Signature:
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee*:
- --------
* The Holder's signature must be guaranteed by an eligible
guarantor that is a member of one of the following recognized
signature guarantee programs: (A) The SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM; (B) The NEW YORK STOCK EXCHANGE MEDALLION
SIGNATURE PROGRAM; or (C) The STOCK EXCHANGES MEDALLION PROGRAM.
EXHIBIT A-1
FORM OF NOTATION ON NOTE
RELATING TO GUARANTEE
Each Subsidiary Guarantor, jointly and severally,
unconditionally guarantees, to the extent set forth in the Indenture and
subject to the provisions of the Indenture that: (i) the principal of,
premium, if any, and interest on the Notes will be promptly paid in full
when due, whether at maturity, by acceleration, redemption or otherwise,
and interest on the overdue principal of and interest on the Notes, if
any, to the extent lawful, and all other Obligations of the Company to
the Holders or the Trustee under the Indenture and the Notes will be
promptly paid in full, all in accordance with the terms of the Indenture
and the Notes; and (ii) in case of any extension of time of payment or
renewal of any Notes or any of such other Obligations, that the Notes
will be promptly paid in full when due in accordance with the terms of
such extension or renewal, whether at stated maturity, by acceleration or
otherwise.
The obligations of each Subsidiary Guarantor to the
Holders of Notes and the Trustee pursuant to this guarantee and the
Indenture are set forth in Article X of the Indenture, to which reference
is hereby made.
Subsidiary Guarantors:
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
PARAMOUNT COMMUNICATION SYSTEMS INC.
NORTHERN FLORIDA TELEPHONE CORPORATION
PAYPHONES OF AMERICA, INC.
PHONETEL CCI, INC.
For each of the above:
By:______________________________
Name:
Title:
OPTION OF HOLDER TO ELECT PURCHASE
If you elect to have this Note purchased by the Company
pursuant to Section 4.11 of the Indenture, check the box:
If you elect to have this Note purchased by the Company
pursuant to Section 4.12 of the Indenture, check the box:
If you elect to have this Note purchased by the Company
pursuant to Section 4.13 of the Indenture, check the box:
If you elect to have only part of this Note purchased by
the Company pursuant to Section 4.11 or 4.12 or 4.13 of the Indenture,
state the amount (multiples of $1,000 only):
$----------------
Date: _________________ Your Signature: ________________________
(Sign exactly as your name appears
on the other side of this Note)
Signature Guarantee:*_____________________________
- --------
* The Holder's signature must be guaranteed by an eligible
guarantor that is a member of one of the following recognized
signature guarantee programs: (A) The SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM; (B) The NEW YORK STOCK EXCHANGE MEDALLION
SIGNATURE PROGRAM; or (C) The STOCK EXCHANGES MEDALLION PROGRAM.
EXHIBIT B
FORM OF LEGEND FOR BOOK-ENTRY NOTES
Any Global Note authenticated and delivered hereunder
shall bear a legend in substantially the following form:
THIS SECURITY IS A GLOBAL NOTE WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY OR A SUCCESSOR
DEPOSITARY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR
ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A
TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A
NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY) MAY BE
REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
SCHEDULE OF EXCHANGES
The following exchanges of a part of this Global Notes for
Physical Note have been made:
<TABLE>
<S> <C> <C> <C> <C>
Amount of increase Principal Amount of Signature of
Amount of decrease in Principal this Global Note authorized officer
Date of in Principal Amount Amount of this following such of Trustee or Note
Exchange of this Global Note Global Note decrease (or increase) Custodian
- -------- ------------------- ------------------ ---------------------- ------------------
</TABLE>
EXHIBIT 5.1
January 24, 1997
PhoneTel Technologies, Inc.
1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
Re: PhoneTel Technologies, Inc.
Registration Statement on Form SB-2
(No. 333-16055)
Ladies and Gentlemen:
I am Executive Vice President, Chief Administrative Officer,
General Counsel and Secretary of PhoneTel Technologies, Inc., an Ohio
corporation (the "Company"). I am providing the opinions set forth herein
in connection with the preparation of a registration statement on Form
SB-2 (No. 333-16055), which was filed by the Company with the Securities
and Exchange Commission (the "Commission") on November 13, 1996 and
Amendment No. 1 thereto, which is being filed with the Commission on the
date hereof (such Registration Statement, as so amended, being here-
inafter referred to as the "Registration Statement").
The Registration Statement relates to the registration under the
Securities Act of 1933, as amended (the "Act"), of the offer and sale
from time to time of up to 13,304,263 shares (the "Shares") of Common
Stock, par value $.01 per share (the "Common Stock"), by the Selling
Shareholders (as such term is defined in the Registration Statement). Of
the Shares being registered, (a) 4,445,943 shares are outstanding on the
date hereof (the "Outstanding Shares"), (b) 8,293,801 shares (the "Under-
lying Shares") are issuable upon (i) the exercise of options or
warrants, (ii) conversion of the Company's 14% Cumulative Redeemable
Convertible Common Stock (the "14% Preferred") and the Company's Series A
Special Convertible Preferred Stock (the "Series A Preferred") and
(iii) 564,519 shares (the "Anti-Dilution Shares") are issuable upon the
occurrence of certain transactions involving the Common Stock to certain
Selling Shareholders as a result of contractual anti-dilution rights
provided by the Company to such Selling Shareholders.
This opinion is being furnished in accordance with the
requirements of Item 601(b)(5) of Regulation S-B under the Act.
In connection with this opinion, I have examined originals or
copies, certified or otherwise identified to my satisfaction, of (i) the
Registration Statement; (ii) the Company's Articles of Incorporation, as
in effect as of the issue dates of the Outstanding Shares being regis-
tered pursuant to the Registration Statement and as of the date hereof;
(iii) the Company's Amended and Restated Code of Government Regulations,
as in effect as of the issue dates of the Outstanding Shares being
registered pursuant to the Registration Statement and as of the date
hereof; (iv) the resolutions of the Board of Directors of the Company
relating to among other things, the registration of the Shares under
the Act; (v) the form of a specimen certificate representing the Shares;
and (vi) such other documents as I have deemed necessary or appropriate
as a basis for the opinions set forth below. I have also examined
originals or copies, certified or otherwise identified to my
satisfaction, of such records of the Company and such agreements,
certificates of public officials, certificates of officers or other
representatives of the Company and others, and such other documents,
certificates and records as I have deemed necessary or appropriate as a
basis for the opinions set forth herein.
In my examination, I have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of
all documents submitted to me as originals, the conformity to original
documents of all documents submitted to me as certified, conformed or
photostatic copies and the authenticity of the originals of such latter
documents. In making my examination of documents executed by parties
other than the Company, I have assumed that such parties had the power,
corporate or other, to enter into and perform all obligations thereunder
and have also assumed the due authorization by all requisite action,
corporate or other, and the execution and delivery by such parties of
such documents and the validity and binding effect thereof. As to any
facts material to the opinions expressed herein which I have not
independently established or verified, I have relied upon oral or written
statements and representations of officers and other representatives of
the Company and others.
I am admitted to practice law in the State of Ohio and I do not
purport to be an expert on any law other than the laws of the State of
Ohio and the laws of the United States of America. I do not express any
opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, I am of the opinion
that:
1. The Outstanding Shares have been duly authorized and validly
issued, and are fully paid and nonassessable.
2. Assuming the conformity of the certificates representing the
Underlying Shares to the form of specimen certificate representing the
Common Stock examined by me and the due execution and delivery of such
certificates, the Underlying Shares have been duly authorized by
requisite corporate action by the Company, and when issued, delivered and
paid for in accordance with the terms of the options, warrants, 14%
Preferred or Series A Preferred that are exercisable, convertible or
exchangeable into the Shares, as the case may be, the Underlying Shares
will be validly issued, fully paid and nonassessable.
3. Assuming the conformity of the certificates representing the
Anti-Dilution Shares to the form of specimen certificate representing the
Common Stock examined by me and the due execution and delivery of such
certificates, the Anti-Dilution Shares have been duly authorized by
requisite corporate action by the Company, and when issued, delivered and
paid for in accordance with the terms of the specific contracts entered
into by the Company providing anti-dilution rights to certain Selling
Shareholders, the Anti-Dilution Shares will be validly issued, fully paid
and nonassessable.
I hereby consent to the use of my name in the Registration
Statement under the caption "Legal Matters" and to the filing of this
opinion as an Exhibit to the Registration Statement. I further consent to
the incorporation of this opinion by reference as an exhibit to any
registration statement relating to the offering which is filed pursuant
to Rule 462(b) of the Rules and Regulations under the Act and to the use
of my name under the caption "Legal Matters" in the prospectus included
in or incorporated by reference in any such registration statement. In
giving such consent, I do not admit that I come within the category of
persons whose consent is required under Section 7 of the Act or the rules
and regulations of the Commission thereunder.
Very truly yours,
/s/ Tammy L. Martin
Tammy L. Martin, Esquire
Executive Vice President,
Chief Administrative Officer,
General Counsel and Secretary of
PhoneTel Technologies, Inc.
EXHIBIT 21.1
SUBSIDIARIES OF PHONETEL TECHNOLOGIES, INC.
The following are the direct and indirect wholly-owned
subsidiaries of PhoneTel Technologies, Inc.:
Name Jurisdiction of
Incorporation
* World Communications, Inc. Missouri
* Northern Florida Telephone Florida
Corporation
* Paramount Communication Florida
Systems, Inc.
* Payphones of America, Inc. Ohio
* Public Telephone Corporation Indiana
* Cherokee Communications, Inc. Texas
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Amendment No. 1 to the Registration Statement on Form SB-
2 (No. 333-16055) 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
January 23, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Amendment No. 1 to the Registration Statement on Form SB-
2 (No. 333-16055) 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
January 23, 1997
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
August 23, 1996 relating to the financial statements of Amtel
Communications, Inc. and Combined Companies, which appears in
such Prospectus. We also consent to the references to us under
the headings "Experts" in such Prospectus.
/s/ HARLAN & BOETTGER
San Diego, California
January 24, 1997
Exhibit 23.4
The Board of Directors
Paramount Communications Systems, Inc.:
We consent to the use of our report included in the prospectus
constituting part of this registration statement on Form SB-2 of
our report dated March 10, 1995, with respect to the balance
sheet of Paramount Communications Systems, Inc. as of December
31, 1994, and the related statements of income, shareholders'
equity, and cash flows for the year then ended, and to the
reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
January 23, 1997
Exhibit 23.5
January 23, 1997
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 (no. 333-16055) of my audit report dated
April 24, 1996 relating to the financial statements of
International Payphones, Inc. (a Tennessee Corporation) as of and
for the years ended December 31, 1995 and 1994.
I also consent to the reference to our firm as "experts" in
accounting and auditing.
Sincerely yours,
/s/ Ernest M. Sewell, CPA
Ernest M. Sewell, CPA
Exhibit 23.6
Consent of Independent Public Accountants
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
January 17, 1996, and May 21, 1996, relating to the financial
statements of International Pay Phones, Inc., which appears in
such Prospectus. We also consent to the references to us under
the headings "Experts" in such Prospectus.
/s/ MILLER SHERRILL BLAKE CPA PA
MILLER SHERRILL BLAKE CPA PA
January 24, 1997
Exhibit 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part
of this Registration Statement on Form SB-2 of our reports dated
January 30, 1996 and October 16, 1996 relating to the financial
statements of December 31, 1995 and 1994 and June 30, 1996 and
1995, respectively, which appear in such Prospectus. We also
consent to the references to us under the headings "Experts" in
such Prospectus.
/s/ KERBER, ECK & BRAECKEL LLP
St. Louis, Missouri
January 23, 1997
Exhibit 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of PhoneTel
Technologies, Inc. on Form SB-2 of our report dated December 20,
1996, relating to the financial statements of Cherokee
Communications, Inc., appearing in the Prospectus, which is
included in this Registration Statement.
We also consent to the reference to us under the heading
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
January 23, 1997
