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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
---------------------------
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
OHIO 34-1462198
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO,)
INCORPORATION OR ORGANIZATION)
1127 EUCLID AVENUE, SUITE 650, STATLER OFFICE TOWER 44115-1601
- --------------------------------------------------- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 241-2555
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, PAR VALUE $0.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PAR VALUE
------------------------------
(TITLE OF CLASS)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR PAST YES X NO
----- -----
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [ X ]
Revenues for the year ended December 31, 1996 $44,804,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1997 was $47,269,000.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 18, 1997 was 15,971,203.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for use at the 1997 Annual Meeting
of Shareholders are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
PhoneTel Technologies, Inc. (the "Company") was incorporated under the
laws of the State of Ohio on December 24, 1984. The Company operates in the
telecommunications industry which encompasses the installation and operation, in
and on property owned by others, of public pay telephones on a revenue sharing
basis, and the sale of operator assisted long distance services. 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.
The Company owns, operates, services and maintains a system of 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 enters
into 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 Company has grown its revenue base from 2,350 installed public pay
telephones at December 31, 1993 to 25,029 installed public pay telephones at
December 31, 1996, and to 41,313 installed public pay telephones at March 7,
1997. This growth was principally achieved through acquisitions and to a lesser
extent through new phone installations resulting from the Company's internal
sales and marketing efforts.
The Company's objective is to grow through additional acquisitions and
internally, thereby achieving economies of scale while implementing cost
savings. Company management 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. When acquisitions are
integrated, the Company typically can operate the public pay telephones at a
lower cost 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.
The Company actively seeks to install new public pay telephones and has
enhanced its internal 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 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. 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 Operator Service Providers ("OSPs"), principally Intellicall Operator
Services, Inc (together with Intellicall, Inc. "Intellicall").
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 Bell Operating Companies ("BOCs") and other Local
Exchange Carriers ("LECs"), smart telephones, in concert with the Company's
management information systems, enable the Company to continuously determine
each telephone's operability and need for service as well as its readiness for
collection of coin revenues. 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.
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 maintain accurate
records of telephone activity which can be verified by customers, as well as
respond quickly to equipment malfunctions. The Company's standard of performance
is to repair malfunctions within 24 hours of their occurrence.
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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
2.5 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 monopoly break-up, the United States was divided
into geographic areas known as Local Access Transport Areas ("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.
Under 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.
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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.
ACQUISITIONS
The following table summarizes the Company's acquisitions:
<TABLE>
<CAPTION>
Number of
Date of Installed Public Primary
Company Acquired Acquisition Pay Telephones Areas Served
- ---------------- ----------- -------------- ------------
<S> <C> <C> <C>
Miscellaneous Acquisitions in 1997 February 1997 300 Texas; Oklahoma; North Carolina
January 1997 391
Texas Coinphone January 14, 1997 1,250 Texas
("Texas Coinphone")
Cherokee Communications, Inc. January 1, 1997 13,949 Texas; New Mexico; Colorado;
("Cherokee") Utah; Montana
Amtel Communications Services September 13, 1996 6,872 California; Washington;
("Amtel") Oregon; Colorado
Payphones of America, Inc. August 1, 1996 3,115 Missouri; Illinois;
("POA") Virginia; Florida
International Pay Phones March 15, 1996 2,101 North Carolina;
("IPP") South Carolina; Tennessee
Paramount Communications Systems, Inc. March 15, 1996 2,528 Florida
("Paramount")
Public Telephone Corporation October 16, 1995 1,200 Illinois; Michigan
("Public")
World Communications, Inc. September 22, 1995 3,237 Missouri; Illinois; Florida
("World")
Alpha Pay Phones - IV L.P. March 25, 1994 2,155 Texas
("Alpha") -------
Total installed public pay telephones acquired 37,098
=======
Total installed public pay telephones at March 7, 1997 41,313
=======
PENDING ACQUISITIONS
Communications Central, Inc. 26,000
("CCI") =======
</TABLE>
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On March 14, 1997, the Company signed a definitive merger agreement
with CCI pursuant to which the Company will acquire 6,054,556 shares of CCI's
issued and outstanding common stock and 1,137,282 outstanding options and
warrants for $12.85 per share in cash. The transaction, including debt to be
assumed or refinanced and excluding related fees, is valued at approximately
$165,000. The tender offer is conditioned upon, among other things, 75% of the
outstanding CCI shares, on a fully diluted basis, having been tendered and the
receipt by the Company of financing sufficient to enable it to consummate the
transaction. CCI operates a network of approximately 26,000 installed public
pay telephones and inmate telephones. Pursuant to the merger agreement, the
Company deposited $5,000 into escrow.
PRODUCTS AND SERVICES
The Company's primary business is to obtain contracts, either through
acquisitions or internal growth from location providers, and 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.
The term of a location agreement generally ranges from three to ten
years and provides for the automatic renewal ("evergreen") 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.
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 generally 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.
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
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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 SUPPLIERS
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.
SALES AND MARKETING
The Company utilizes its internal sales force and independent sales
representatives to market its products and services. The internal sales force
receives salaries plus incentive compensation 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 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 management 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 Group, Inc. ("DeBartolo"). The Company
derived approximately 18%, 15% and 5% of its total revenue for the years ended
December 31, 1994, 1995 and 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 DeBartolo will continue to decline. Other than DeBartolo,
no single customer generated 5% or more of the Company's total revenue for the
years ended December 31, 1994, 1995 or 1996.
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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.
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 certified and have tariffs
filed. The procedure and length of time for the process varies from state to
state. Until recently, in many states only local telephone companies were
permitted to process local and/or intraLATA operator assisted calls. The Company
has obtained the requisite regulatory approvals to provide public pay telephone
service in all states in which it provides such services and complies with
applicable state regulations governing such services.
The recently enacted Section 276 of the Telecommunications Act gives
the FCC authority to adopt rules affecting intrastate telephone services and to
preempt state rules and regulations inconsistent with those adopted by the FCC.
As discussed in more detail below, 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
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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.
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 cannot be determined at
this time.
In September 1996, the FCC adopted rules which implement the public pay
telephone provisions of Section 276 of the Telecommunications Act. Key elements
of the rulemaking include:
(a) Compensation. Currently independent public pay telephone providers
are not compensated on a per-call basis for toll-free calls, such as "800"
calls and debit card calls, both domestic and international. The new FCC
rules establish a three-phase compensation plan to ensure that public pay
telephone providers are fairly compensated for all calls originating from
public pay telephones, with the exception of emergency calls and
telecommunications relay service calls for hearing-disabled individuals.
For the period from November 6, 1996 through October 6, 1997, the $6.00
flat fee per telephone per month will be replaced by an interim $45.85 flat
fee per telephone per month (which was established by the FCC by
multiplying $0.35 per call by the estimated industry average of 131 access
code calls and "800" calls per pay telephone per month). In October 1997,
the flat fee will be replaced by a per-call compensation mechanism. From
October 1997 to October 1998, the per-call payment shall be $0.35;
thereafter, the per-call rate shall be equal to the local coin call rate
for each location, which rate will be determined by the marketplace, not by
regulation. Obtaining fair compensation for these dial-around calls is
particularly important since the use of access codes to reach a preferred
long distance carrier has recently gained significant exposure and customer
acceptance, because of marketing campaigns of the larger interexchange
carriers, such as AT&T's "1-800-CALLATT" and MCI's "1-800-COLLECT." BOCs
are not permitted to receive compensation for dial-around calls until they
have complied with the Computer III non-structural safeguards and have
ceased subsidizing their public pay telephone operations (see below).
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The Section 276 requirement that public pay telephone operators receive
fair compensation for all public pay telephone calls also applies to local
coin drop calls. To implement the requirement, the new FCC rules mandate a
two phase transition to market-based rates for local coin drop calls.
During the first year-long phase, states may continue to set the local coin
rate in the same manner as they currently do, but they are also free to
adopt market-based rates at any time during this one-year period. In
addition, states are required during this period to review and remove, if
necessary, those state regulations, such as entry and exit restrictions,
that affect public pay telephone competition and are inconsistent with the
Telecommunications Act and the new FCC rules. In the second phase, which
will begin in October 1997, the market will be allowed to set the rate for
local coin calls in each state, unless the state can demonstrate to the
satisfaction of the FCC that there are market failures within the state
that would not allow market-based rates.
(b) BOC subsidization. BOCs and other LECs have traditionally included
a public pay telephone cost element in determining the access charges
imposed upon carriers to terminate long distance calls. Section 276 and the
new FCC rules require LECs to eliminate these and other subsidies, to
reduce their interstate access charges, to operate their public pay
telephones as detariffed customer premises equipment and to provide
independent public pay telephone providers all functionalities used by the
LEC in its own delivery of public pay telephone service. In contrast to the
past, when the LEC imposed a subscriber line charge on public pay telephone
providers but not on its own public pay telephones, the FCC now requires
that any subscriber line charge and tariffed network services charges apply
equally to both LEC and independent public pay telephones.
(c) Non-structural safeguards. The FCC adopted certain non-structural
safeguards in its Computer III inquiry which were designed to prevent BOCs
from using their incumbent market power in an anti-competitive manner.
These safeguards generally allow the BOCs to provide certain services on an
integrated basis (i.e., directly rather than through a separate subsidiary)
provided that BOCs (i) allow nondiscriminatory access to their network
features and functionalities; (ii) restrict use of customer proprietary
network information; (iii) subscribe to certain network information
disclosure rules; (iv) do not discriminate in the provision, installation,
and maintenance of services and reporting and (v) adopt certain cost
accounting safeguards. In its rulemaking, the FCC applied these safeguards
to the provision of public pay telephone services by the BOCs, and found
that further non-structural safeguards were unnecessary. The FCC also
decided to reclassify BOC public pay telephone service as a "nonregulated
activity" so that costs from public pay telephone activities would be
separated from regulated non-public pay telephone accounts. Consistent with
this approach, in a rulemaking initiated in July 1996 to implement certain
accounting safeguards under the Telecommunications Act, the FCC proposed to
apply accounting safeguards identical to those adopted in Computer III to
prevent the subsidization of BOC public pay telephone services by
non-public pay telephone revenues.
(d) InterLATA presubscription. In the past BOCs were not permitted to
compete in the interLATA marketplace. Section 276 permits BOCs to negotiate
with location providers and select interLATA long distance service
providers for their public pay telephones, unless the FCC determines that
it is not in the public's interest. In its rulemaking, the FCC concluded
that a BOC should be permitted to negotiate for the right to select the
interLATA carrier serving its public pay telephones, but not until its plan
to comply with the Computer III non-structural safeguards has been approved
by the FCC.
(e) IntraLATA presubscription. Until recently, in almost every state
only the LEC has been able to be "presubscribed" to a telephone for local
and intraLATA toll calls, including at a public pay telephone.
"Presubscription" refers to an arrangement whereby a call is automatically
connected to a pre-selected carrier, unless another carrier's access code
is dialed. According to the FCC, intraLATA presubscription has been ordered
to become available in eighteen states. Section 276 provides that all
public pay telephone service providers have the right to "negotiate with
the location provider on the location provider's selecting and contracting
with, and subject to the terms of any agreement with the location provider,
to select and contract with, the carriers that carry intraLATA calls from
their payphones." The FCC's new rules give all public pay telephone service
providers (including BOCs and independent providers such as the Company)
the right to negotiate with location providers concerning the intraLATA
carrier.
9
<PAGE> 10
(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.
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 449 employees on February 28, 1997. 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.
10
<PAGE> 11
ITEM 2. 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 $13,933. The lease is scheduled to terminate in
December 1997. The monthly rent increased to $15,200 in 1997. The lease also
provides the Company five, one year renewal options. The Company maintains 40
regional service facilities, some of which are located in the homes of the
technicians. The Company considers its facilities adequate for its purposes.
ITEM 3. 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, financial condition, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1996, no
matters were submitted to a vote of the Company's shareholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Effective November 14, 1996, the Company's Common Stock, $0.01 par
value ("Common Stock"), was listed on the American Stock Exchange ("AMEX") under
the symbol "PHN". The Common Stock was formerly quoted on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "PNTL". The following table sets forth on a
per share basis, for the periods indicated, the high and low sales prices of the
Common Stock as reported by Nasdaq or the AMEX, as applicable. The high and low
bid sales prices have been adjusted to reflect the one for six reverse stock
split which became effective on December 26, 1995.
<TABLE>
<CAPTION>
Price Range
High Low
---- ---
<S> <C> <C>
1994:
First Quarter......................................... $20 1/4 $14 1/4
Second Quarter........................................ 15 3/4 8 5/8
Third Quarter......................................... 9 3/8 6
Fourth Quarter........................................ 11 1/4 6 3/4
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
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
1997:
On March 17, 1997..................................... 3 5/8 3 3/8
</TABLE>
11
<PAGE> 12
As of February 28, 1997, there were 400 shareholders of record.
DIVIDEND POLICY ON COMMON STOCK
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 notes issued pursuant to the Company Debt Offering (as defined
herein) completed on December 18, 1996. In addition, the Company cannot pay any
dividends on its Common Stock unless dividends are paid to the holders of the
Series A Preferred (as defined herein) 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 (as defined herein) 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 (as defined herein) which are only entitled to receive
dividends payable in kind), 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.
SALES AND ISSUANCES OF COMMON STOCK
Sales and issuances of the Company's Common Stock during 1994, 1995 and
1996 was as follows:
<TABLE>
<CAPTION>
Number of Average
Common Price Per
Shares Share
---------- --------
<S> <C> <C>
1994: Exercise of warrants and options 87,931 $ 6.29
Private sales 136,111 10.84
Issued for services 8,389 9.12
Issued for financing costs 5,278 18.89
----------
Total issuances of Common Stock in 1994 237,709
==========
1995: 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 interest 26,065 4.51
Issued to third party creditors upon conversion of debt
and accrued interest 4,166 4.80
Exercise of stock options 8,333 4.20
Other issuances 13,193 5.20
----------
Total issuances of Common Stock in 1995 1,333,192
==========
1996: Issued in connection with acquisitions 2,860,608 2.81
Exercise of Nominal Value Warrants 1,035,137 0.01
Conversion of 10% Non-voting Preferred 884,214 6.00
Company Equity Offering 6,750,000 2.71
Issued to an executive upon conversion of
debt and accrued interest 99,119 2.50
Other issuances 4,400 4.69
----------
Total issuances of Common Stock in 1996 11,633,478
==========
</TABLE>
12
<PAGE> 13
PREFERRED STOCK
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 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.
The Company's 10% Cumulative Non-Voting Redeemable Preferred Stock ("10%
Non-Voting Preferred") was issued in connection with the acquisition of World.
On June 27, 1996, the shareholders of the Company approved conversion rights to
the 10% Non-voting preferred. On June 28, 1996, the Company converted the
outstanding shares of 10% Non-voting Preferred into 884,214 shares of Common
Stock. No dividends were ever declared on the 10% Non-voting Preferred.
The Company's 10% Cumulative Redeemable Preferred Stock ("10% Cumulative
Preferred") was issued to a significant customer in 1992. No dividends were paid
on the 10% Cumulative Preferred in 1994 or 1995 and all outstanding shares of
the 10% Cumulative Preferred were redeemed on March 15, 1996.
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 $30,000 and $36,000 in 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Effective November 6, 1996, pursuant to recently promulgated
FCC regulations, the Company started to derive additional revenues from access
it provides callers to any carrier other than the presubscribed carrier
(commonly referred to as "dial-around" access). As of November 6, 1996, the
Company has begun accruing gross dial-around revenues at the mandated rate of
$45.85 per telephone per month, as compared with the flat fee of $6.00 per
telephone per month in place prior to November 6, 1996. Commencing October 7,
1997 and ending October 6, 1998, the $45.85 per telephone per month rate will
change to a rate of $0.35 per call. Thereafter, the dial-around rate will be at
a per-call rate equal to the local coin call rate. Additionally, the states are
required 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
13
<PAGE> 14
the term of the agreements with the respective location providers, (iii)
telecommunication and validation fees, and (iv) 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.
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 Form 10-KSB, expressed as a percentage of total revenues.
Certain of the following information for the years ended December 31, 1994 and
1995 has been reclassified to conform to the presentation for the year ended
December 31, 1996 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 had no
impact on total revenues or total expenses as previously reported.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues:
Coin calls ..................................... 53.1% 64.8% 58.5%
Non-coin telecommunication services ............ 45.2 34.5 39.4
Other .......................................... 1.7 0.7 2.1
------ ------ ------
Total revenues ................................. 100.0 100.0 100.0
------ ------ ------
Operating expenses:
Line and transmission charges .................. 26.1 27.5 24.9
Telecommunication and validation fees .......... 8.8 6.7 12.5
Location commissions ........................... 21.4 18.5 13.6
Field operations ............................... 22.5 26.4 19.5
Selling, general and administrative
expenses ..................................... 15.4 14.2 9.7
Depreciation and amortization .................. 14.1 23.4 28.6
Other unusual charges and
contractual settlements ..................... - 11.6 13.6
------ ------ ------
Total operating expenses ....................... 108.3 128.3 122.4
------ ------ ------
Loss from operations................................. (8.3) (28.3) (22.4)
------ ------ ------
Other income (expense):
Interest expense - related parties ............. - - (11.7)
Interest expense - others ...................... (2.4) (4.5) (3.3)
Interest income ................................ - 0.2 0.4
------ ------ ------
Total other income (expense) ................... (2.4) (4.3) (14.6)
------ ------ ------
Loss before extraordinary item ...................... (10.7) (32.6) (37.0)
Extraordinary item .................................. - - (22.5)
------ ------ ------
Net loss ............................................ (10.7)% (32.6)% (59.5)%
====== ====== ======
EBITDA .............................................. 5.8% 6.8% 19.8%
====== ====== ======
</TABLE>
14
<PAGE> 15
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues increased $26,086,000, or 139.4%, from
$18,718,000 for the year ended December 31, 1995 to $44,804,000 for the year
ended December 31, 1996. This increase is attributable primarily to an increase
in the number of installed public pay telephones, which increased by 15,571, or
164.6%, from 9,458 at December 31, 1995 to 25,029 at December 31, 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.
As of March 7, 1997 the number of installed public pay telephones was 41,313.
Revenues from coin calls increased $14,082,000, or 116.1%, from
$12,130,000 for the year ended December 31, 1995 to $26,212,000 for the year
ended December 31, 1996. Non-coin telecommunication services increased
$11,191,000, or 173.3%, from $6,458,000 for the year ended December 31, 1995 to
$17,649,000 for the year ended December 31, 1996. The increases were primarily
due to the acquisition and installation of public pay telephones producing
additional revenues, the increase in the dial-around compensation rate 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 $813,000, or 625.4%, from $130,000 for the
year ended December 31, 1995 to $943,000 for the year ended December 31, 1996.
This increase was primarily due to the prorata recognition of the $1,200,000
signing bonus received from Intellicall upon execution of the Company's new
operator services agreement on March 15, 1996. The Company is recognizing the
signing bonus over a 12 month period.
Operating Expenses. Total operating expenses increased $30,812,000, or
128.3%, from $24,007,000 for the year ended December 31, 1995 to $54,819,000 for
the year ended December 31, 1996. Operating expenses represented 128.3% of total
revenues for the year ended December 31, 1995 and 122.4% of total revenues for
the year ended December 31, 1996, a decrease of 5.9%. The percentage decrease
was due to a reduction in other unusual charges and contractual settlements and
selling, general and administrative expenses ("SG&A") offset in part by higher
depreciation and amortization as a result of recent acquisitions and higher
unusual charges and contractual settlements.
Line and transmission charges increased $6,004,000, or 116.6%, from
$5,149,000 for the year ended December 31, 1995 to $11,153,000 for the year
ended December 31, 1996. Line and transmission charges represented 27.5% of
total revenues for the year ended December 31, 1995 and 24.9% of total revenues
for the year ended December 31, 1996, a decrease of 2.6%. The dollar increase in
line and transmission charges was, in part, due to additional public pay
telephones acquired from 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 as compared to
those in 1995.
Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services), increased $4,350,000, or
345.8%, from $1,258,000 for the year ended December 31, 1995 to $5,608,000 for
the year ended December 31, 1996. Telecommunication and validation fees
represented 6.7% of total revenues for the year ended December 31, 1995 and
12.5% of total revenues for the year ended December 31, 1996, an increase of
5.8%. The increase was primarily the result of the increase in the number of
installed public pay telephones and the outsourcing of operator services in
1996.
Location commissions increased $2,604,000, or 75.1%, from $3,468,000
for the year ended December 31, 1995 to $6,072,000 for the year ended December
31, 1996. Location commissions represented 18.5% of total revenues for the year
ended December 31, 1995 and 13.6% of total revenues for the year ended December
31, 1996, a decrease of 5.0%. The dollar increase is due to location agreements
from public pay telephones acquired in the
15
<PAGE> 16
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.
Field operations (consisting of principally of personnel costs, rents
and utilities of the regional service facilities, and repair and maintenance of
the public pay telephones), increased $3,799,000, or 77.0%, from $4,934,000 for
the year ended December 31, 1995 to $8,733,000 for the year ended December 31,
1996. Field operations represented 26.4% of total revenues for the year ended
December 31, 1995 and 19.5% of total revenues for the year ended December 31,
1996, a decrease of 6.9%. The dollar increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable 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 and other operations areas and leveraging the Company's
existing field technicians.
SG&A expenses increased $1,736,000, or 65.6%, from $2,645,000 for the
year ended December 31, 1995 to $4,381,000 for the year ended December 31, 1996.
SG&A represented 14.2% of total revenues for the year ended December 31, 1995
and 9.7% of total revenues for the year ended December 31, 1996, a decrease of
4.5%. 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.
Depreciation and amortization increased $8,417,000 or 192.0%, from
$4,383,049 for the year ended December 31, 1995 to $12,800,000 for the year
ended December 31, 1996. Depreciation and amortization represented 23.4% of
total revenues for the year ended December 31, 1995 and 28.6% of total revenues
for the year ended December 31, 1996, an increase of 5.2%. 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.
Other unusual charges and contractual settlements increased $3,902,000,
or 179.8% from $2,170,000 for the year ended December 31, 1995 to $6,072,000 for
the year ended December 31, 1996. For the year ended December 31, 1996, other
unusual charges and contractual settlements consists primarily of: (i) the
settlement of contractual obligations under certain employment contracts,
$342,000; (ii) the settlement of other contractual obligations, $211,000; (iii)
the write-off of certain 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, $1,002,000; (iv) losses recognized on the early
pay-off of obligations under capital leases and other debt concurrent with the
debt restructurings completed on March 15 and December 18, 1996, $631,000; and
(v) the estimated fair market value of the Nominal Value Warrants (as defined
herein) issued pursuant to the debt restructuring completed on March 15, 1996,
$3,886,000. Other unusual charges and contractual settlements represented 11.6%
of total revenues for the year ended December 31, 1995, and 13.6% of total
revenues for the year ended December 31, 1996, an increase of 2.0%.
Other income (expense). Other income (expense) is comprised of interest
incurred on debt with related parties and others, and interest income. Total
other (expense) income increased $5,736,000, or 698.7%, from a net expense of
$821,000 for the year ended December 31, 1995 to a net expense of $6,557,000 for
the year ended December 31, 1996. Other (expense) income represented 4.4% of
total revenues for the year ended December 31, 1995 and 14.6% of total revenues
for the year ended December 31, 1996, an increase of 10.2%. The dollar and
percentage increases were due to the financing obtained for the acquisitions
completed in 1996, and to a lesser extent the refinancing obtained in December
1996. Related party interest expense was $5,235,000 for the year ended December
31, 1996, representing 11.7% of total revenues. Included in related party
interest expense was non-cash interest expense of $1,605,000, or 3.6% of total
revenues for the year ended December 31, 1996, representing the accretion of the
debt under the Credit Agreement (as defined herein) to its maturity amount.
16
<PAGE> 17
Extraordinary item. The Company recorded extraordinary losses of
$10,077,000, representing 22.5% of total revenues for the year ended December
31, 1996. The extraordinary loss related to non-recurring costs that were
incurred in connection with the restructuring of the Company's long-term debt on
March 15, 1996 and December 18, 1996.
EBITDA. EBITDA (income before interest income, interest expense,
depreciation, amortization, other unusual charges and contractual settlements,
and the extraordinary losses on debt restructuring) increased $7,593,000, or
600.7%, from $1,264,000 for the year ended December 31, 1995 to $8,857,000 for
the year ended December 31, 1996. EBITDA represented 6.8% of total revenues for
the year ended December 31, 1995 and 19.8% for the year ended December 31, 1996,
an increase of 13.0%. EBITDA is not intended to represent an alternative to
operating income (as defined 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 defined 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.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased $2,852,000, or 18.0%, from
$15,866,000 for the year ended December 31, 1994 to $18,718,000 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
1995 and attributable to the acquisitions completed in 1995. In addition,
revenues improved as a result of the continuation of the $0.75 Long Distance
Call Program.
Revenues from coin calls increased $3,709,000, or 44.0%, from
$8,421,000 for the year ended December 31, 1994 to $12,130,000 for the year
ended December 31, 1995. The increase was due primarily to the 1995
Acquisitions. Non-coin telecommunication services decreased $718,000, or 10.0%,
from $7,176,000 for the year ended December 31, 1994 to $6,458,000 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. 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 $299,000.
Other revenues decreased $139,000, or 51.7%, from $269,000 for the year
ended December 31, 1994 to $130,000 for the year ended December 31, 1995. This
decrease resulted from a reduction in the reselling of public pay telephones and
supplies.
Operating Expenses. Total operating expenses increased $6,827,000, or
39.7%, from $17,180,000 for the year ended December 31, 1994 to $24,007,000 for
the year ended December 31, 1995. Operating expenses represented 108.3% of total
revenues for the year ended December 31, 1994 and 128.3% of total revenues for
the year ended December 31, 1995, an increase of 20.0%. The increase was due to
an increase in other unusual charges and contractual settlements, line and
transmission charges, field operations, and depreciation and amortization
primarily resulting from the acquisitions of World and Public Telephone.
Line and transmission charges increased $1,014,000, or 24.5%, from
$4,135,000 for the year ended December 31, 1994 to $5,149,000 for the year ended
December 31, 1995. Line and transmission charges represented 26.1% of total
revenues for the year ended December 31, 1994 and 27.5% of total revenues for
the year ended December 31, 1995, an increase of 1.4%. 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 reduced billing, collection and operator service costs.
17
<PAGE> 18
Telecommunication and validation fees decreased $132,000, or 9.5%, from
$1,390,000 for the year ended December 31, 1994 to $1,258,000 for the year ended
December 31, 1995. Telecommunication and validation fees represented 8.8% of
total revenues for the year ended December 31, 1994 and 6.7% of total revenues
for the year ended December 31, 1995, a decrease of 2.1%. The decrease was
primarily the result of a reduction in expense associated with uncollectible
accounts.
Location commissions increased $77,000, or 2.3%, from $3,391,000 for
the year ended December 31, 1994 to $3,468,000 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, a decrease of 2.9%. The decrease in location commissions as a
percentage of total revenues is due to lower location commissions for those
public pay telephones acquired in 1995.
Field operations increased $1,369,000, or 38.4%, from $3,565,000 for
the year ended December 31, 1994 to $4,934,000 for the year ended December 31,
1995. Field operations represented 22.5% of total revenues for the year ended
December 31, 1994 and 26.4% of total revenues for the year ended December 31,
1995, an increase of 3.9%. The increase was the result of higher personnel
costs, rent, utilities and service related expenses attributable to the
acquisitions completed in 1995, the increase in the Company's public pay
telephone base, and the additional personnel to accommodate the increased
business.
SG&A expenses increased $182,000, or 7.4%, from $2,463,000 for the year
ended December 31, 1994 to $2,645,000 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 15.4% of total revenues
for the year ended December 31, 1994 and 14.2% of total revenues for the year
ended December 31, 1995, a decrease of 1.2%.
Depreciation and amortization increased $2,147,000, or 96.0%, from
$2,236,000 for the year ended December 31, 1994 to $4,383,000 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, an increase of 9.3%. The increase was
primarily due to the acquisitions completed in 1995 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.
Other unusual charges and contractual settlements consists primarily
of: (i) the settlement of contractual obligations under certain employment
contracts, $1,316,000; (ii) the settlement of other contractual obligations,
$162,000; and (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, $692,000. Other unusual charges
and contractual settlements represented 11.6% of total revenues for the year
ended December 31, 1995.
Other income (expense). Other (expense) increased $449,000, or 115.7%,
from $388,000 for the year ended December 31, 1994 to $837,000 for the year
ended December 31, 1995. Interest expense 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, an increase of 2.1%. The increase in interest expense 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
phone equipment to accommodate the expansion of its public pay telephone base.
EBITDA. EBITDA increased $342,000, or 37.1%, from $922,000 for the year
ended December 31, 1994 to $1,264,000 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.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating activities during
the fiscal years ended December 31, 1994, 1995 and 1996 were $2,380,000,
($580,000) and ($269,000), 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 current liabilities, offset by the
issuance of the Nominal Value Warrants (as defined herein), depreciation and
amortization, accretion of debt, and the non-cash portion of the loss associated
with the debt restructuring.
Cash used in investing activities during the fiscal years ended
December 31, 1994, 1995 and 1996 were $3,214,000, $2,354,000 and $63,062,000,
respectively. Cash used in investing activities consisted primarily of payments
to acquire companies (including the Cherokee acquisition deposit of $37,109,790
at December 31, 1996) 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, 1994, 1995 and 1996 were $1,229,000, $3,168,000 and $109,056,000,
respectively, which consisted primarily of net proceeds from the Company Debt
Offering and the Company Equity Offering offset by redemptions and repurchases
of preferred and common stock and repayments of debt.
Credit Agreement. On March 15, 1996, the Company entered into a Credit
Agreement (the "Credit Agreement"), with ING (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 $30,531,000 pursuant to the Credit
Agreement. During the second quarter of 1996, the Company borrowed an additional
$1,693,000 pursuant to the Credit Agreement. The initial borrowings under the
Credit Agreement were used to complete the Paramount and IPP acquisitions, to
repay $8,503,000 of outstanding debt and $3,174,000 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.
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. ING and Cerberus may separately exercise their warrants without any
action of the other party.
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 $8,777,000 and used $5,950,000 of the proceeds to complete the
Amtel and POA acquisitions. The remainder of the proceeds were used for working
capital and payment of certain related acquisition expenses. On November 22,
1996, the Lenders amended the Credit Agreement to permit the incurrence of
additional borrowings of up to $2.0 million to fund the deposits required in
connection with the Cherokee and the Texas Coinphone acquisitions and for
working capital purposes, thereby increasing the maximum borrowings available
under the Credit Agreement to $43,000,000.
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 realized an extraordinary loss of $9,810,000 consisting primarily of
the write-off of the remaining value assigned to the Series A Preferred warrants
and related unamortized deferred financing costs.
19
<PAGE> 20
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 the public of $3.00 per share, for net proceeds to the
Company therefrom of $18,295,000 and (ii) the sale of $125,000,000 aggregate
principal amount of its Senior Notes due 2006 (the "Notes" or the "Company Debt
Offering"), for net proceeds to the Company therefrom of $119,149,000. 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 exercised
their Over-Allotment Option on January 29, 1997.
The Notes are general unsecured obligations of the Company limited in
aggregate principal amount to $125,000,000 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 $75,000,000 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.
The Company used the net proceeds from the Company Equity Offering to
repay approximately $8.0 million of debt outstanding under the Credit Agreement
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
Cherokee and Texas Coinphone 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.
Other. The redemption price for the 10% Preferred, 8% Preferred and
7% Preferred consisted of cash payments aggregating $1,117,000 and 34,436
shares of 14% Preferred. In the aggregate, $6,475,000 of the
20
<PAGE> 21
Company's outstanding obligations, including portions of the purchase price for
the IPP and Paramount acquisitions, was liquidated by issuing 107,918 shares of
14% Preferred. The $2,002,000 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.
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 "Item 12 Certain Relationships and
Related Transactions." The warrants expire on March 13, 2001. An independent
valuation company has estimated the fair value market of the Nominal Value
Warrants to be $4,975,000, using the Black-Scholes valuation model, of which
$3,886,000 (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.
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.
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 24 months.
IMPACT OF 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.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are set forth in Item 13 of
this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no resignation or dismissal of the registrant's accountants
during the two most recent fiscal years.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The description of the directors of the Registrant is incorporated herein
by reference to the section of the definitive Proxy Statement for the 1997
Annual Meeting of Shareholders (the "Proxy Statement"), entitled "Election of
Directors", which Proxy Statement is expected to be filed in April, 1997.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders entitled "Executive
Compensation", which Proxy Statement is expected to be filed in April, 1997.
21
<PAGE> 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section of the definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders entitled "Security
Ownership of Certain Beneficial Owners and Management", which Proxy Statement is
expected to be filed in April, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders entitled "Executive
Compensation-Certain Transactions", which Proxy Statement is expected to be
filed in April, 1997.
PART IV
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
--------------------
<S> <C>
Report of Independent Accountants......................................................................F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996...........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996...................................................................F-3
Statement of Changes in Mandatorily Redeemable Preferred Stock for the Years Ended
December 31, 1994, 1995 and 1996...................................................................F-4
Consolidated Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996...................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996......................................................................................F-7
Notes to Financial Statements for the Years Ended
December 31, 1994, 1995 and 1996...................................................................F-9
</TABLE>
2. 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 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)*
22
<PAGE> 23
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). (18)*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the Notes
registered hereby. (18)*
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)*
23
<PAGE> 24
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)*
24
<PAGE> 25
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 Waldschutz 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 Waldschutz 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 Steven 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
25
<PAGE> 26
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)*
26
<PAGE> 27
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, invidually. (16)*
10.78 Amendment dated as of December 31, 1996 to the Cherokee Merger
Agreement. (17)*
27
<PAGE> 28
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)*
10.80 Agreement and Plan of Merger by and among PhoneTel Technologies, Inc.,
PhoneTel Acquisition Corp. and Communications Central Inc. dated as of
March 14, 1997.
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27 Financial Data Schedule
-----------------
* 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.
(18) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-15611), filed
with the Securities and Exchange Commission on December 13, 1996.
28
<PAGE> 29
(B) REPORT ON FORM 8-K
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1996.
(C) EXHIBITS
The response to this portion of Item 13 is submitted as a separate
section of this report.
29
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
March 7, 1997, except as to Note 14,
which is as of March 18, 1997
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, changes in mandatorily redeemable
preferred stock, changes in non-mandatorily redeemable preferred stock, common
stock and other 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, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, 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
Price Waterhouse LLP
Cleveland, Ohio
F - 1
<PAGE> 31
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31
-------------------------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash $713 $46,438
Accounts receivable, net of allowance for doubtful accounts
of $40 and $92, respectively 902 3,749
Other current assets 186 283
------- --------
Total current assets 1,801 50,470
Property and equipment, net 14,099 19,243
Intangible assets, net 11,592 52,144
Other assets 475 283
Acquisition deposits 950 520
Restricted cash equivalents - 37,110
------- --------
$28,917 $159,770
======= ========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt $1,010 $1,009
Obligations under capital leases 289 138
Accounts payable 2,894 5,003
Accrued expenses:
Location commissions 672 1,767
Personal property and sales tax 104 1,071
Interest 166 774
Salaries, wages and benefits 401 574
Other 145 531
Other unusual charges and contractual settlements 962 112
------- --------
Total current liabilities 6,643 10,979
Long-term debt 9,319 125,274
Obligations under capital leases 3,244 104
Commitments and contingencies - -
14% Cumulative Preferred Stock Mandatorily Redeemable
(redemption amount $7,223 due June 30, 2000) - 6,708
Non-mandatorily Redeemable Preferred Stock, Common Stock
and Other Shareholders' Equity 9,711 16,705
------- --------
$28,917 $159,770
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 2
<PAGE> 32
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Coin calls $8,421 $12,130 $26,212
Non-coin telecommunication services 7,176 6,458 17,649
Other 269 130 943
------ ------ ------
15,866 18,718 44,804
------ ------ ------
COSTS AND EXPENSES:
Line and transmission charges 4,135 5,149 11,153
Telecommunication and validation fees 1,390 1,258 5,608
Location commissions 3,391 3,468 6,072
Field operations 3,565 4,934 8,733
Selling, general and administrative 2,463 2,645 4,381
Depreciation and amortization 2,236 4,383 12,800
Other unusual charges and contractual settlements - 2,170 6,072
------ ------ ------
17,180 24,007 54,819
------ ------ ------
Loss from operations (1,314) (5,289) (10,015)
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense - related parties - - (5,235)
Interest expense - others (388) (837) (1,504)
Interest income 7 16 182
------ ------ ------
(381) (821) (6,557)
------ ------ ------
Loss before extraordinary item (1,695) (6,110) (16,572)
Extraordinary item:
Loss on early extinguishment of debt - - (10,077)
------ ------ ------
NET LOSS ($1,695) ($6,110) ($26,649)
======= ======= ========
Earnings per share calculation:
Preferred dividend payable in kind - - (337)
Preferred dividend payable in cash (292) (310) -
Accretion of 14% Preferred to its redemption value - - (102)
Premium on redemption of 10%, 8% and 7% Preferred - - (2,002)
------ ------ ------
Net loss applicable to common shareholders ($1,987) ($6,420) ($29,090)
========= ========= =========
Net loss per common share ($1.35) ($3.29) ($5.29)
========= ========= =========
Weighted average number of shares 1,470,188 1,950,561 5,494,011
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE> 33
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
14% CUMULATIVE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
Balance, beginning of year - - - - - -
Redemption of 7%, 8% and
10% Preferred - - - - 34,436 $2,066
Conversion of debt - - - - 59,695 3,581
Acquisitions (Note 2) - - - - 13,787 622
Dividends payable-in-kind - - - - 12,469 337
Accretion of carrying value
to amount payable at
redemption on June 30, 2000 - - - - - 102
------- ------ ------ ------ ------- ------
Balance, end of year - - - - 120,387 $6,708
======= ====== ====== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements
F -4
<PAGE> 34
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------- --------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
7 % CUMULATIVE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK
Balance, beginning of year 2,500 $200 2,500 $200 2,500 $200
Redemption - - - - (2,500) (200)
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year 2,500 200 2,500 200 - -
========= ----------- =========== ----------- ========== ----------
8 % CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance, beginning of year 12,200 981 12,200 981 12,200 981
Redemption - - - - (12,200) (981)
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year 12,200 981 12,200 981 - -
========= ----------- =========== ----------- ========== ----------
10 % CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance, beginning of year 1,496 - 1,496 - 1,496 -
Redemption - - - - (1,496) -
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year 1,496 - 1,496 - - -
========= ------------ =========== ----------- ========== ----------
10 % CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance, beginning of year - - - - 530,534 5,305
Acquisitions (Note 2) - - 530,534 5,305 - -
Conversion - - - - (530,534) (5,305)
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year - - 530,534 5,305 - -
========= ------------ =========== ----------- ========== ----------
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance, beginning of year - - - - - -
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year - - - - - -
========= ----------- =========== ----------- ========== ----------
COMMON STOCK
Balance, beginning of year 1,284,449 13 1,522,158 15 2,855,350 29
Private sales of stock 136,111 1 472,056 5 - -
Company Equity Offering (Note - - - - 6,750,000 68
10)
Exercise of warrants and options 87,931 1 8,333 - 1,035,137 10
Acquisitions (Note 2) - - 731,189 8 2,860,608 28
Conversion of 10% Non-voting
Preferred - - - - 884,214 9
Other issuances of stock 13,667 - 121,614 1 103,519 1
--------- ------------ ----------- ----------- ---------- ----------
Balance, end of year 1,522,158 15 2,855,350 29 14,488,828 145
========= ============ =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 5
<PAGE> 35
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year $6,552 $8,755 $16,650
Company Equity Offering, net (Note 10) - - 18,228
Private sales of stock 1,474 2,010 -
Exercise of warrants and options 552 35 -
Acquisitions (Note 2) - 4,918 8,010
Warrants issued with debt - 349 6,412
Conversion of 10% Non-voting
Preferred - - 5,296
Issuance of Nominal
Value Warrants - - 4,241
Other issuances of stock 177 583 267
------ ------ -------
Balance, end of year 8,755 16,650 59,104
------ ------ -------
Redeemable Preferred Stock
ACCUMULATED DEFICIT
Balance, beginning of year (5,557) (7,304) (13,454)
Net loss (1,695) (6,110) (26,649)
Dividends:
Paid on 7% and 8% Preferred (52) (40) -
Payable in-kind on 14%
Preferred and accretion - - (439)
Redemption of stock:
7%, 8% and 10% Preferred - - (2,002)
------ ------ -------
Balance, end of year (7,304) (13,454) (42,544)
------ ------ -------
TOTAL NON-MANDATORILY
REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY $2,647 $9,711 $16,705
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 6
4
<PAGE> 36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($1,695) ($6,110) ($26,649)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 2,236 4,383 12,800
Amortization of deferred revenues - - (900)
Issuance of Nominal Value Warrants - - 3,886
Stock in lieu of cash payments 76 529 21
Accretion of related party debt - - 1,605
Loss on debt restructuring - - 9,628
Other non-cash charges - 354 156
Changes in current assets and current liabilities,
net of assets acquired 1,763 264 (816)
------ ------ -------
2,380 (580) (269)
------ ------ -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (Note 2) (2,334) (672) (22,576)
Restricted funds - - (37,110)
Acquisition deposits - (950) (520)
Purchases of property and equipment (301) (237) (2,851)
Deferred revenues - signing bonus - - 1,200
Purchases of intangible assets (364) (427) (907)
Other deferred charges (215) (68) (298)
------ ------ -------
(3,214) (2,354) (63,062)
------ ------ -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 7
<PAGE> 37
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances $1,400 $3,133 $43,000
Net proceeds from Company Debt Offering (Note 6) - - 119,149
Net proceeds from issuances of preferred and Common
Stock 1,576 1,932 -
Net proceeds from Company Equity Offering (Note 10) - - 18,295
Proceeds from shareholder debt - - 835
Principal payments on borrowings (2,203) (1,891) (66,205)
Dividends paid (22) (40) -
Debt financing costs (75) - (4,911)
Redemption of 10% and 8% Preferred - - (1,117)
Proceeds from warrant and option exercises 553 34 10
------ ------ --------
1,229 3,168 109,056
------ ------ --------
Increase in cash 395 234 45,725
Cash, beginning of period 84 479 713
---- ---- --------
Cash, end of period $479 $713 $46,438
==== ==== =======
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year $385 $674 $4,465
==== ==== ======
NON-CASH TRANSACTIONS:
Acquisitions (Note 2):
Amtel Communications - - $5,421
Payphones of America - - 13,918
International Pay Phones - $150 3,536
Paramount Communications - - 1,064
World Communications - 14,935 -
Public Telephone - 4,853 -
Alpha Pay Phones $3,300 - -
Common Stock issued for services 76 529 21
Common Stock issued in payment of debt and interest - 138 248
Common Stock issued for financing costs 100 - -
------ ------ -------
$3,476 $20,605 $24,208
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 8
<PAGE> 38
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT FOR INSTALLED PUBLIC
PAY TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhoneTel Technologies, Inc. and Subsidiaries (the "Company") operate in
the telecommunications industry, specializing in the business segment that
includes the installation and operation of public pay telephones on a revenue
sharing basis and offering operator assisted long distance services. At December
31, 1995 and 1996, the Company operated 9,458 and 25,029 installed public pay
telephones, respectively. 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.
CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
RESTRICTED CASH EQUIVALENTS
Restricted cash equivalents represent a portion of the net proceeds
realized from the Company's Debt Offering completed on December 18, 1996, which,
pursuant to the terms of the Company's Debt Offering, were restricted to certain
transactions. The funds were used to complete the acquisition of Cherokee
Communications, Inc. on January 1, 1997 (Note 2).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost or, if acquired through a
business combination, at the amount established by purchase price allocation.
The Company also capitalizes certain costs related to installing telephones and
depreciates those costs over the estimated useful 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 placed in service.
F - 9
<PAGE> 39
INTANGIBLE ASSETS
Intangible assets include costs incurred in the installation of public
pay telephones or in the acquisition of installed public pay telephones through
a business combination ("location contract"), non-compete agreements, costs
associated with obtaining operating certification in various states and deferred
financing costs. Intangible assets are amortized over the estimated economic
life of the respective location contracts, the term of the respective
non-compete or financing agreement, 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 to be generated by the Company's
assets, grouped by Company operating district (including any salvage values,
less estimated cash outflows including debt service) is less than the related
assets' carrying value. Impairment is measured based on the difference between
the present value of the discounted expected future cash flows and the assets'
carrying value. No impairment was recorded in 1995 or 1996.
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". The adoption of the Statement, which was required for the Company in 1996,
did not have a significant impact on the Company.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted long distance
services, and compensation for dial-around calls 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 outstanding plus shares that would have been outstanding
assuming exercise of dilutive stock options and warrants using the treasury
stock method.
Fully diluted earnings per share amounts are determined in the same
manner as primary earnings per share except that the period-end stock price is
used and the number of shares is increased assuming conversion of the 7%
Cumulative Convertible Redeemable Preferred ("7% Preferred") in 1994 and 1995
and the 14% Cumulative Redeemable Preferred ("14% Preferred") in 1996. Because
the Company has a net loss, the impact of the assumed exercise of the stock
options and warrants and the assumed conversion of the 7% Preferred and 14%
Preferred is anti-dilutive and therefore is not included in the determination of
the weighted average shares outstanding.
The weighted average number of common shares outstanding in all periods
has been adjusted to reflect the one for six (1:6) reverse stock split which was
effective December 26, 1995.
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 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.
F - 10
<PAGE> 40
RECLASSIFICATIONS
Certain amounts relating to 1994 and 1995 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a
variety of factors. Where available, fair values represent quoted market prices
for identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates reflecting varying degrees of risk.
Accordingly, the fair values may not represent actual values of the financial
instruments that could have been realized as of December 31, 1995 and 1996, or
that will be realized in the future. At December 31, 1995 and 1996, the
difference between the estimated fair values of financial instruments and their
carrying values was not material.
2. ACQUISITIONS AND MERGERS
TEXAS COINPHONE - JANUARY 14, 1997 ("TEXAS COINPHONE")
The Company acquired 1,250 installed public pay telephones, parts and
supplies inventories, and certain other assets for $3,660 and incurred related
acquisition expenses of approximately $50.
CHEROKEE COMMUNICATIONS, INC. - JANUARY 1, 1997 ("CHEROKEE")
The Company acquired 13,949 public pay telephones, of which 726 were
under contract waiting to be installed, for a purchase price consisting of:
$53,848 for the installed and uninstalled public pay telephones; $1,250 for
non-competition agreements; contingent consideration (aggregating $6,000)
payable $3,000 on January 3, 1998 if rate guidelines are not implemented in 1997
and $3,000 on January 3, 1999 if rate guidelines are not implemented in 1998;
and incurred related acquisition expenses of approximately $1,125. Additionally,
the Company acquired outstanding accounts receivable, prepaid expenses, deposits
and coin in the installed pay telephones aggregating $5,888, and assumed
accounts payable, accrued expenses, and vehicle debt aggregating $3,408.
AMTEL COMMUNICATIONS SERVICES - SEPTEMBER 13, 1996 ("AMTEL")
The Company acquired 6,872 installed public pay telephones and
inventory consisting of approximately 728 public pay telephones and related
parts. Amtel's assets were acquired for a purchase price consisting of $7,000
and 2,162,163 shares of Common Stock (valued by an independent consultant at
$2.15 per share, or $4,638). Additionally, the Company incurred approximately
$783 in related acquisition expenses.
PAY PHONES OF AMERICA, INC. - AUGUST 1, 1996 ("POA")
The Company acquired 3,115 installed public pay telephones for a
purchase price consisting of: $500; 166,666 shares of Common Stock (valued by an
independent consultant at $1.87 per share, or $312); assumption of $7,783 in
capital lease obligations; $3,634 in notes payable to the sellers; the
assumption of $1,779 in current liabilities and other debt; and two five-year
non-competition and consulting agreements for an aggregate value of $360.
Additionally, the Company incurred approximately $50 in related acquisition
expenses.
F - 11
<PAGE> 41
INTERNATIONAL PAY PHONES, INC. OF SOUTH CAROLINA ("IPP SC") AND
INTERNATIONAL PAYPHONES, INC. OF TENNESSEE ("IPP TN") - MARCH 15, 1996
(REFERRED TO AS "IPP")
The Company acquired 2,101 installed public pay telephones for a
purchase price consisting of: $4,829; 555,589 shares of Common Stock (valued at
$4.51 per share, or $2,506); 5,453 shares of 14% Preferred, valued at $246;
117,785 warrants to purchase shares of Common Stock at a nominal exercise price
("Nominal Value Warrants"), valued at $139; $57 for three five year non-compete
agreements; and the assumption of approximately $588 in liabilities.
PARAMOUNT COMMUNICATIONS, INC. - MARCH 15, 1996 ("PARAMOUNT")
The Company acquired 2,528 installed public pay telephones for a
purchase price consisting of: $10,397; 8,333 shares of 14% Preferred, valued at
$376; 179,996 Nominal Value Warrants, valued at $443; the assumption of $245 in
liabilities; and included a five year consulting and non-compete agreement,
valued at $50.
PUBLIC TELEPHONE CORPORATION - OCTOBER 16, 1995 ("PUBLIC TELEPHONE")
The Company acquired 1,200 installed public pay telephones for a
purchase price consisting of 304,879 shares of Common Stock (valued at $6.75 per
share, or $2,058) and the assumption of $2,795 in liabilities. In connection
with the acquisition, the Company entered into two five year non-compete
agreements.
WORLD COMMUNICATIONS, INC. - SEPTEMBER 22, 1995 ("WORLD")
The Company acquired 3,237 installed public pay telephones for a
purchase price consisting of: 402,500 shares of Common Stock (valued at $6.75
per share, or $2,717); 530,534 shares of 10% Non-voting Redeemable Preferred
Stock ("10% Non-voting Preferred"), valued at $5,305, which were converted to
884,214 shares of Common Stock on June 28, 1996; and the assumption of $6,913 in
liabilities.
ALPHA PAY PHONES IV L.P. - MARCH 25, 1994 ("ALPHA")
The Company acquired 2,155 installed public pay telephones for a
purchase price consisting of: $2,300; a $1,100 note payable to the sellers; and
the assumption of $2,200 in liabilities.
PURCHASE PRICE ACCOUNTING
The Company recorded each of the above acquisitions as purchases and
has included the results of the acquired entities in the statements of
operations from the respective dates of acquisition. The difference between the
total purchase price and the current assets and liabilities assumed has been
allocated to property and equipment, location contracts and non-compete
agreements based on the relative fair values involved, fair values of location
contracts being determined using discounted cash flows over the remaining
estimated economic lives of the acquired location contracts. The amount of
location contracts recorded for each acquisition and the estimated economic life
of the acquired location contracts are as follows: Texas Coinphone $ 3,143, 101
months; Cherokee $43,976, 113 months; Amtel $10,136, 99 months; POA $12,054, 103
months; IPP $6,959, 97 months; Paramount $10,116, 109 months; Public Telephone
$1,404, 103 months; World $7,156, 103 months; and Alpha $3,041, 60 months.
F - 12
<PAGE> 42
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data for the years ended December 31, 1994, 1995 and
1996, as though the Alpha acquisition had occurred at the beginning of 1994, the
World and Public Telephone acquisitions had occurred at the beginning of 1994
and 1995, and the IPP, Paramount, POA and Amtel acquisitions had occurred at the
beginning of 1995 and 1996:
<TABLE>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total revenues.................................. $ 27,139 $ 59,515 $ 61,923
Loss before extraordinary item.................. (4,772) (15,364) (15,882)
Net loss........................................ (4,772) (15,364) (25,959)
Net loss applicable to common
shareholders.................................. (5,594) (16,018) (28,401)
Net loss per common share....................... ($2.57) ($2.99) ($4.13)
</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, 1995 or 1996, or of future
results. The pro forma statement of operations data includes adjustments related
to depreciation of property and equipment, amortization of intangible assets,
interest expense on borrowings used to finance the acquisitions and the weighted
average number of common shares outstanding after giving effect to the
acquisitions and excludes the assets and results of operations not acquired.
3. ACCOUNTS RECEIVABLE
At December 31, 1995 and 1996, accounts receivable included $322 and
$2,646, respectively, arising from dial-around compensation. Effective November
6, 1996, pursuant to the rules and regulations promulgated by the FCC under
Section 276 of the Telecommunications Act, the Company will receive $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 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) and thereafter, at a per- call rate equal to the local
coin rate for "dial-around" calls. A dial-around call occurs when a non-coin
call is placed from the Company's public pay telephones which utilizes any
carrier other than the presubscribed carrier (the Company's dedicated provider
of long distance and operator calls). Such receivables are received quarterly in
arrears.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consisted of the following:
Estimated December 31,
Useful Lives ------------
(in years) 1995 1996
---------- ---- ----
<S> <C> <C> <C>
Telephone boards, enclosures and cases 3-7 $ 16,387 $ 25,784
Furniture, fixtures and other equipment 3-5 989 1,751
Leasehold improvements 2-5 232 249
---------------- ----------------
17,608 27,784
Less - accumulated depreciation ( 3,509) ( 8,541)
---------------- ----------------
$ 14,099 $ 19,243
================ ================
</TABLE>
F - 13
<PAGE> 43
Depreciation expense, including amortization of assets under capital
leases, was $1,179, $1,846 and $5,032 for the years ended December 31, 1994,
1995 and 1996, respectively.
Effective January 1, 1997, the Company changed the estimated useful life
of new telephones to ten years. The impact on depreciation for 1997 is not
expected to be material.
5. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Intangible assets consisted of the following:
December 31
Amortization -----------
Period 1995 1996
-------------- -------------- -----------
<S> <C> <C> <C>
Location contracts (Note 2) 60-113 months $ 13,403 $ 53,862
Deferred financing costs 120 months - 5,851
Non-compete agreements 24-60 months 1,514 2,099
State operating certifications 60 months 467 524
-------------- ------------
15,384 62,336
Less: accumulated amortization ( 3,792) ( 10,192)
-------------- ------------
$ 11,592 $ 52,144
============== =============
</TABLE>
Amortization of intangible assets amounted to $1,057, $2,537 and $7,767
for the years ended December 31, 1994, 1995 and 1996, respectively.
During the fourth quarter of 1996, the Company performed a study of its
location contracts acquired in business combinations. The Company determined
that the economic life (economic life includes the estimated effect of the
operation of the evergreen contract provisions, net of non-renewals) of a
contract is greater than the remaining life based on contractual terms at the
time of acquisition. Generally, location contracts are written such that they
are "evergreen" and, accordingly, will automatically renew unless canceled by
the location provider. The Company determined that the average remaining
contractually determined life for a location contract ranged from 30 months to
36 months for its acquisitions. Based on the study performed, which analyzed
historical renewal rates and contract terms, the economic life of acquired
location contracts were determined to range from 60 months to 113 months. The
Company adjusted its amortization periods for the acquired location contracts as
of October 1, 1996. This adjustment had the effect of decreasing amortization
and the net loss in the fourth quarter by approximately $663 or $0.12 per share.
In addition, the results of operations in 1997 and 1998 will be improved by
approximately $2,645 each year as a result of utilizing the longer location
contract life.
F - 14
<PAGE> 44
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consisted of the following:
December 31
-----------
1995 1996
------------ --------
<S> <C> <C>
Note payable to two third party investors. The principal due
at the contractual maturity of April 1997 was $1,200. $ 906 -
Notes payable to bank. 2,340 -
Notes payable to former shareholders of World. 625 -
Notes payable to a service provider. 1,402 -
Notes payable to sellers of Alpha. 501 -
Notes payable to former shareholders of Public Telephone. 293 -
Notes payable other. 854
Senior notes due December 15, 2006 with interest at 12%
payable semiannually. - $ 125,000
Notes payable to directors and shareholders at an interest
rate ranging from 9% to 13.25%, $1,733 repaid on March 15, 1996 and
$337 converted into 124,747 shares
of Common Stock on January 2, 1997. 1,733 508
Term notes payable to vendor in monthly installments
ranging from $31 to $47 including interest at rates varying from
10% to 13.75% secured by interest in underlying phones. On March
15, 1996, the Company repaid $225, refinanced the remaining balance
owed at 15% interest and the vendor
released its security interest in the goods sold. 1,066 190
Other notes payable due in monthly installments of up to $8
(aggregating $19) with interest rates ranging from
6.9% to 10.4%. 609 585
------------ ----------------
10,329 126,283
Less current maturities ( 1,010) (1,009)
------------ ----------------
$ 9,319 $ 125,274
=========== ================
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
Amount
------
<S> <C>
1997 $ 1,009
1998 198
1999 71
2000 5
2001 -
---------------
$ 1,283
===============
</TABLE>
SENIOR 12% NOTES
On December 18, 1996, the Company completed a public debt offering of
$125,000 aggregate principal amount 12% Senior Notes, due 2006, with interest
payable semiannually on June 15 and December 15. The net proceeds of $119,149
were used to complete the Cherokee and Texas Coinphone acquisitions in January
1997, and to repay the outstanding indebtedness under the Credit Agreement,
certain capitalized lease obligations and the Sellers' notes incurred in the
acquisition of POA. The remaining proceeds are available for general corporate
purposes and working capital. The Senior 12% Notes contain covenants which,
among other things, limit the Company's ability to incur additional indebtedness
or pay dividends and which require the Company, in the event of a change in
control of the Company, to offer to purchase the Senior 12% Notes for 101% of
their aggregate outstanding principal value plus accrued and unpaid interest.
F - 15
<PAGE> 45
CREDIT FACILITY REPAID ON DECEMBER 18, 1996
In a transaction consummated on March 15, 1996, the Company borrowed
$30,531 (out of a total credit facility ("Credit Facility") commitment of
$37,250) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively know as the "Lenders"). 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 at March 15, 1996, redeem the 10% Preferred, 7% Preferred and
8% Preferred and to pay related transaction fees. In connection with the
repayments, the Company recorded an extraordinary loss of $267, or $0.05 per
share. All of the Company's installed phones were pledged as collateral to the
Credit Facility. 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. The Company then
borrowed an additional $8,777 and used $5,950 of the proceeds to complete the
Amtel and POA acquisitions and the remaining proceeds for working capital and
payment of certain related acquisition expenses. Subsequently, the Credit
Facility was further amended to $43,000. The Company repaid the Credit Facility
on December 18, 1996 and recognized an extraordinary loss of $9,810, or $1.79
per share, consisting primarily of the write-off of the remaining unamortized
value assigned to the Nominal Value Warrants and related unamortized deferred
financing costs.
The majority of the Credit Facility ($29,000) was convertible into Series B
Preferred at the ratio of 833 shares for each $100 in outstanding debt and
interest. Concurrent with the repayment of the Credit facility on December 18,
1996, the Series B Preferred was canceled. 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 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 Lender's Warrants, such
fair value being determined using the Black-Scholes valuation model.
On March 15, 1996, concurrent with the consummation of the Credit
Facility, the Company redeemed the 10%, 8% and 7% Preferred through cash
payments of $1,117 and the issuance of 34,434 shares of 14% Preferred. In the
aggregate, $6,475 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 $2,002 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.
7. 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:
1997 $ 606
1998 213
1999 79
2000 25
2001 13
Rent expense under all operating leases was $335, $364 and $474 for the
years ended December 31, 1994, 1995 and 1996, respectively.
F - 16
<PAGE> 46
CAPITAL LEASES
During 1995 and 1996, as part of the acquisitions of World, Public
Telephone, IPP and POA, the Company assumed capital lease obligations. Leased
assets include installed public pay telephones, office equipment and vehicles.
As of December 31, 1996, the Company had paid off all capital leases secured by
installed public pay telephones.
<TABLE>
<CAPTION>
Assets recorded under capital leases are as follows:
December 31
-----------
1995 1996
--------------- ----------
<S> <C> <C>
Telephone boards, enclosures and cases $ 9,429 $ -
Office equipment 170 721
---------------- -----------
9,599 721
Less accumulated amortization (617) (272)
---------------- -----------
$ 8,982 $ 449
=============== ==========
</TABLE>
The Company repaid $11,149 of the outstanding obligations under capital
leases during 1996. Following are maturities of capital lease obligations for
each of the next five years:
<TABLE>
<S> <C>
1997 $ 138
1998 86
1999 15
2000 3
2001 -
-------------
$ 242
=============
</TABLE>
8. INCOME TAXES
No provisions for income tax were required and no income taxes were paid
for the years ended December 31, 1994, 1995 or 1996 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) are as follows:
<TABLE>
December 31,
1995 1996
---- ----
<S> <C> <C>
Federal net operating loss carryforward $ 7,206 $ 25,174
Depreciation and amortization 1,291 9,517
Bad debts 31 68
Other 6 5
-------------- -----------
Gross deferred tax assets 8,534 34,764
Accruals (117) (350)
Deferred sales commissions (255) (30)
Valuation allowance on deferred tax assets (8,162) (34,384)
-------------- ------------
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
utilizing the Company's Common Stock and the Company Equity Offering (Note 10),
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.
F - 17
<PAGE> 47
9. PREFERRED STOCK MANDATORILY REDEEMABLE
<TABLE>
<CAPTION>
Preferred stock mandatorily redeemable consisted of the following:
December 31
-----------
1995 1996
------------- ---------
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock ($60 stated value
- 200,000 shares authorized; 107,918 shares issued and outstanding;
cumulative dividends issuable of 12,469 shares, valued at $337;
mandatory redemption amount of $7,223 due June 30, 2000) - $6,708
</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 year ended December 31, 1996, the carrying value of
the 14% Preferred was increased by $102 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.
10. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
Non-mandatorily Redeemable Preferred Stock, Common Stock and Other
Shareholders' Equity consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------
1995 1996
------------- ---------
<S> <C> <C>
10% Cumulative Non-voting Redeemable Preferred Stock
($10 stated value - 550,000 shares authorized;
530,534 shares issued and outstanding at
December 31, 1995. $ 5,305 -
10% Cumulative Redeemable Preferred Stock
($1,000 stated value - 3,880 shares authorized;
1,496 shares issued and outstanding at
December 31, 1995. - -
8% Cumulative Redeemable Preferred Stock
($100 stated value - 16,000 shares authorized;
12,200 shares issued and outstanding at
December 31, 1995. 981 -
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value - 2,500 shares authorized, issued
and outstanding at December 31, 1995. 200
Series A Special Convertible Preferred Stock
($0.20 par value, $0.20 stated value - 250,000
shares authorized; no shares issued) - -
Common Stock
($0.01 par value - 50,000,000 shares authorized;
2,855,350 and 14,488,828 shares issued and
outstanding at December 31, 1995 and 1996, respectively). 29 $ 145
Additional paid-in capital 16,650 59,104
Accumulated deficit ( 13,454) ( 42,544)
--------- -----------
$ 9,711 $ 16,705
========= ===========
</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.
F - 18
<PAGE> 48
On March 15, 1996, concurrent with entering into the Credit Facility,
the Company redeemed the 10%, 8% and 7% Preferred for cash payments aggregating
$1,117 and 34,436 shares of 14% Preferred. In the aggregate, $6,269 of the
Company's outstanding obligations, including portions of the purchase price for
the IPP and Paramount acquisitions, was liquidated by issuing 107,918 shares of
14% Preferred. The $2,002 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, 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%, 8% and 7% Preferred, and conversion of
certain related party debt of the Company to the 14% Preferred. The Nominal
Value Warrants expire on March 13, 2001. An independent actuary estimated the
fair market value of the Nominal Value Warrants to be $4,975, using the
Black-Scholes valuation method, of which $3,886 (the amount attributable to the
Nominal Value Warrants provided to related parties in connection with the
redemption of the 10%, 8% and 7% Preferred shares and conversion of certain
debt) was recorded as an other expense in the Company's statement of operations.
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.
COMPANY EQUITY OFFERING
On December 18, 1996, the Company sold 6,750,000 shares of Common Stock
at the price of $3.00 per share or $18,295 net of offering expenses. On January
29, 1997, the Company issued an additional 1,012,500 shares of Common Stock and
received net proceeds of $2.79 per share or $2,824.
COMMON STOCK SHARES RESERVED FOR POSSIBLE ISSUANCE
As of December 31, 1996, the Company had reserved 9,456,295 shares of
Common Stock for issuance under the following scenarios: (i) exercise of
warrants to purchase 204,824 shares of Series A Preferred Stock, immediately
convertible into 4,096,480 shares of Common Stock; (ii) conversion of 120,387
shares of 14% Preferred into 1,203,871 shares of Common Stock; (iii) exercise of
983,805 Nominal Value Warrants; (iv) exercise of 1,128,309 warrants; (v) the
exercise of 1,031,330 stock options; and (vi) 1,012,500 shares pursuant to the
Underwriters' over-allotment option which was exercised on January 29, 1997.
Substantially all of the shares reserved for future issuance were registered on
January 24, 1997.
PREFERRED STOCK DIVIDENDS
On December 31, 1994 and 1995, the Company had dividends in arrears
payable to preferred shareholders in the aggregate amount of $546 and $827,
respectively. On March 15, 1996, the 10%, 8% and 7% Preferred and dividends in
arrears were either paid or converted to 14% Preferred.
SALES AND ISSUANCES OF COMMON STOCK
Sales to directors, creditors and affiliates of the Company during 1995
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 reflected the
impact on quoted market value of issuing unregistered shares.
On December 31, 1996, the Company converted $248 of debt owed to a
related party into 99,119 shares of Common Stock or $2.50 per share,
representing the market price of the Common Stock on the day the Company's Board
of Directors approved the conversion.
F - 19
<PAGE> 49
STOCK WARRANT ACTIVITY
<TABLE>
<CAPTION>
Stock warrant activity during 1994, 1995 and 1996 was as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1993 59,050 $ 8.50
Granted:
To officers of the Company 24,705 6.00
To lenders 63,523 11.12
-----------
Total Granted 88,228 9.68
Exercised (35,000) 7.54
Canceled - -
-----------
BALANCE, DECEMBER 31, 1994 112,278 9.73
Granted:
To the Company's investment advisor 166,666 6.00
To officers of the Company 47,582 5.74
To lenders 277,876 5.71
-----------
Total Granted 492,124 5.81
Exercised - -
Canceled (24,051) 9.90
------------
BALANCE, DECEMBER 31, 1995 580,351 6.40
Granted:
Nominal Value Warrants 2,018,942 0.01
Pursuant to anti-dilution provisions 322,958 2.37
To vendors 400,000 6.00
-----------
Total Granted 2,741,900 1.16
Exercised (1,035,137) 0.01
Canceled (175,000) 6.00
------------
BALANCE, DECEMBER 31, 1996 2,112,114 $ 2.40
===========
</TABLE>
The estimated fair value of the warrants on the date of 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 based on the relative fair values of the warrants and the related debt
on the grant date. The difference between the recorded value and the face value
of the debt has been recorded as an adjustment to interest expense using the
interest method. 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 employees, officers, directors and others, and generally are
exercisable immediately upon issuance, have terms of three to five years and are
issued with exercise prices at or sightly below quoted market value of the
Company's Common Stock on the date of grant. At December 31, 1995 and 1996,
435,243 options and 1,021,330 options, respectively, were exercisable.
F - 20
<PAGE> 50
<TABLE>
<CAPTION>
Stock option activity during 1994, 1995 and 1996 was as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1993 416,306 $ 6.62
Granted:
To the Company's directors for services 49,259 10.67
To the Company's investment advisors 31,833 15.22
To lenders 16,666 10.20
-----------
Total Granted 97,758 12.07
Exercised ( 52,930) 5.47
Canceled ( 24,999) 8.87
-----------
BALANCE, DECEMBER 31, 1994 436,135 7.85
Granted:
To officers of the Company 159,165 6.00
To employees of the Company 9,208 6.00
-----------
Total Granted 168,373 6.00
Exercised ( 8,334) 4.20
Canceled ( 124,410) 10.49
-----------
BALANCE, DECEMBER 31, 1995 471,764 6.56
Granted:
Contractual settlement with former executive 5,000 6.00
Pursuant to anti-dilution provisions 556,898 2.11
-----------
Total Granted 561,898 2.14
Exercised - -
Canceled ( 12,332) 6.00
-----------
BALANCE, DECEMBER 31, 1996 1,021,330 $ 2.98
===========
</TABLE>
STOCK BASED COMPENSATION
Under SFAS No. 123 "Accounting for Stock-Based Compensation," the fair
value of each option and warrant granted is estimated on the grant date using
the Black-Scholes option pricing model. The following assumptions were made in
estimating fair value: (i) dividend yield of 0%; (ii) risk-free interest rates
of 6.29% for 1995 and 6.20% for 1996; expected life equal to the period of time
remaining in which the options or warrants can be exercised; and expected
volatility of 76% in 1995 and 99% in 1996. Compensation cost charged to
operations was $42 in 1995 and $0 in 1996. Had compensation cost been determined
on the basis of fair value pursuant to SFAS No. 123, net loss and the loss per
share would have increased as follows:
<TABLE>
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported $(6,110) $(26,649)
Pro forma (7,680) (29,930)
Loss per share:
As reported (3.29) (5.29)
Pro forma (3.94) (5.45)
</TABLE>
Weighted average fair value of options and warrants granted during:
1995 $ 3.63
1996 $ 1.76
F - 21
<PAGE> 51
The following is a summary of the status of options and warrants
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Remaining Weighted Average
Range Number Contractual Life Exercise Price
----- ------ ---------------- --------------
<S> <C> <C> <C>
$ 0.00 - $0.01 983,805 4.2 years $ 0.01
1.06 - 2.75 1,459,776 4.1 years 2.22
4.50 - 6.00 596,365 2.5 years 5.92
7.50 - 9.00 22,499 1.0 years 7.85
12.75 - 19.50 70,999 0.9 years 16.51
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
SEVERANCE AGREEMENTS
During 1996, the Company settled the amounts owed under Separation
Agreements with three 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 631,627 shares of the Company's Common Stock at $1.20 to $5.31
per share.
CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion all
such outstanding matters of which the Company has knowledge, have been reflected
in the financial statements and are covered by insurance or will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
12. MAJOR CUSTOMER
One customer accounted for 18%, 15% and 5% of the Company's total
revenues for the years ended December 31, 1994, 1995 and 1996, respectively.
13. OTHER REVENUES AND OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS
Other revenues in 1996 includes $900 of income relating to amortization
of deferred revenue received as a result of signing a services agreement with an
operator service provider.
<TABLE>
<CAPTION>
Other unusual charges and contractual settlements is compromised of:
December 31
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Settlement of employee contractual obligations - $ 1,316 $ 342
Other contractual settlements - 162 211
Ordinary loss on early repayment of debt - - 631
Nominal Value Warrants - - 3,886
Changes to the operations of the Company - 692 1,002
----- ------ ------
$ - $ 2,170 $ 6,072
======= ======= =======
</TABLE>
F - 22
<PAGE> 52
14. SUBSEQUENT EVENTS
On March 14, 1997, the Company signed a definitive merger agreement
with Communications Central, Inc. ("CCI") pursuant to which the Company will
acquire 6,054,556 shares of CCI's issued and outstanding common stock and
1,137,282 outstanding options and warrants for $12.85 per share in cash. The
transaction, including debt to be assumed or refinanced and excluding related
fees, is valued at approximately $165,000. The tender offer is conditioned upon,
among other things, 75% of the outstanding CCI shares, on a fully diluted basis,
being tendered and the receipt by the Company of financing sufficient to enable
it to consummate the transaction. CCI operates a network of approximately 26,000
installed public pay telephones and inmate telephones. Pursuant to the merger
agreement, the Company deposited $5,000 into escrow which is refundable in the
event that 50.1% of CCI's outstanding shares, on a fully diluted basis, are not
tendered.
F - 23
<PAGE> 53
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHONETEL TECHNOLOGIES, INC.
March 19, 1997 By: /s/ Peter G. Graf
-----------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, March 19, 1997
- ---------------------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Richard Kebert Chief Financial Officer and March 19, 1997
- ---------------------------------- Treasurer
Richard Kebert
/s/ Nickey B. Maxey Director and March 19, 1997
- ---------------------------------- Vice Chairman
Nickey B. Maxey
/s/ Stuart Hollander Director March 19, 1997
- ----------------------------------
Stuart Hollander
/s/ Joseph Abrams Director March 19, 1997
- ----------------------------------
Joseph Abrams
/s/ George Henry Director March 19, 1997
- ----------------------------------
George Henry
/s/ Aron Katzman Director March 19, 1997
- ----------------------------------
Aron Katzman
/s/ Steven Richman Director March 19, 1997
- ----------------------------------
Steven Richman
</TABLE>
<PAGE> 54
EXHIBIT INDEX
-------------
10.80 Agreement and Plan of Merger by and among PhoneTel Technologies, Inc.,
PhoneTel Acquisition Corp. and Communications Central Inc. dated as of
March 14, 1997
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.80
AGREEMENT AND PLAN OF MERGER
by and among
PHONETEL TECHNOLOGIES, INC.,
PHONETEL ACQUISITION CORP.
and
COMMUNICATIONS CENTRAL INC.
dated as of
March 14, 1997
<PAGE> 2
Index of Defined Terms
----------------------
<TABLE>
<CAPTION>
Defined Term Section No.
- ------------ -----------
<S> <C>
Agreement....................................................................................Recitals
Acquisition Proposal...........................................................................5.4(a)
Appointment Date..................................................................................5.1
Articles of Incorporation......................................................................1.2(a)
Average Net Revenue..............................................................................3.20
Balance Sheet.................................................................................3.10(a)
By-laws........................................................................................1.4(b)
Certificates...................................................................................2.2(b)
Closing...........................................................................................1.6
Closing Date......................................................................................1.6
Code...........................................................................................3.9(a)
Common Stock...................................................................................1.1(a)
Company......................................................................................Recitals
Company Agreements................................................................................3.4
Company Disclosure Schedule.......................................................................III
Company Material Adverse Effect................................................................3.1(a)
Company SEC Documents.............................................................................3.5
Company Surviving Corporation..................................................................1.4(b)
Confidentiality Agreement......................................................................5.2(a)
Copyrights....................................................................................3.11(c)
Dissenting Shareholders........................................................................2.1(c)
D&O Insurance..................................................................................5.8(b)
Effective Time....................................................................................1.5
Employment Agreement.............................................................................5.10
Encumbrances...................................................................................3.2(b)
Environmental Claim...........................................................................3.15(g)
Environmental Laws............................................................................3.15(g)
ERISA..........................................................................................3.9(a)
ERISA Affiliate................................................................................3.9(a)
Escrow Agent.....................................................................................1.10
Escrow Amount....................................................................................1.10
Exchange Act...................................................................................1.1(a)
Executive........................................................................................5.10
Financial Statements..............................................................................3.5
Financing Condition............................................................................1.1(a)
fully diluted basis............................................................................1.1(a)
GAAP..............................................................................................3.5
GBCC...........................................................................................1.2(a)
Governmental Entity...............................................................................3.4
Hazardous Materials...........................................................................3.15(g)
HSR Act........................................................................................1.1(a)
Indemnified Party..............................................................................5.8(a)
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Independent Directors..........................................................................1.3(c)
Intellectual Property.........................................................................3.11(c)
Licenses......................................................................................3.11(c)
Merger............................................................................................1.4
Merger Consideration...........................................................................2.1(c)
Minimum Condition..............................................................................1.1(a)
Offer..........................................................................................1.1(a)
Offer Documents................................................................................1.1(b)
Offer Price....................................................................................1.1(a)
Offer to Purchase..............................................................................1.1(a)
Options...........................................................................................2.4
Parent.......................................................................................Recitals
Patents.......................................................................................3.11(c)
Paying Agent...................................................................................2.2(a)
PBGC...........................................................................................3.9(b)
PCBs..........................................................................................3.15(e)
Plans..........................................................................................3.9(a)
Preferred Stock................................................................................3.2(a)
Proxy Statement................................................................................1.8(a)
Purchaser....................................................................................Recitals
Purchaser Common Stock............................................................................2.1
Purchaser Surviving Corporation................................................................1.4(a)
Rights ..........................................................................................3.18
Rights Agreement.................................................................................3.18
Schedule 14D-1.................................................................................1.1(b)
Schedule 14D-9.................................................................................1.2(b)
SEC............................................................................................1.1(b)
Secretary of State................................................................................1.5
Securities Act....................................................................................3.5
Shares.........................................................................................1.1(a)
Special Meeting................................................................................1.8(a)
Stock Option Plans................................................................................2.4
Subsidiary.....................................................................................3.1(a)
Superior Proposal..............................................................................5.4(b)
Surviving Corporation..........................................................................1.4(a)
Tax...........................................................................................3.10(k)
Taxes.........................................................................................3.10(k)
Tax Return....................................................................................3.10(k)
Termination Fee................................................................................8.1(b)
Title IV Plan..................................................................................3.9(a)
Trademarks....................................................................................3.11(c)
Transactions...................................................................................1.2(a)
Voting Debt....................................................................................3.2(a)
Warrants..........................................................................................2.4
</TABLE>
<PAGE> 4
Table of Contents
<TABLE>
<CAPTION>
Page
----
ARTICLE I
THE OFFER AND MERGER
<S> <C> <C>
Section 1.1 The Offer................................................................ 1
Section 1.2 Company Actions.......................................................... 4
Section 1.3 Directors................................................................ 6
Section 1.4 The Merger............................................................... 8
Section 1.5 Effective Time........................................................... 10
Section 1.6 Closing.................................................................. 10
Section 1.7 Directors and Officers of the
Surviving Corporation............................................... 10
Section 1.8 Shareholders' Meeting.................................................... 10
Section 1.9 Merger Without Meeting of Shareholders................................... 11
Section 1.10 Escrow................................................................... 12
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 Conversion of Capital Stock.............................................. 12
Section 2.2 Exchange of Certificates................................................. 13
Section 2.3 Dissenters' Rights....................................................... 15
Section 2.4 Options and Warrants..................................................... 15
ARTICLE III
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
Section 3.1 Organization............................................................. 17
Section 3.2 Capitalization........................................................... 17
Section 3.3 Authorization; Validity of Agreement;
Company Action...................................................... 19
Section 3.4 Consents and Approvals; No Violations.................................... 19
Section 3.5 SEC Reports and Financial Statements..................................... 20
Section 3.6 Absence of Certain Changes............................................... 21
Section 3.7 No Undisclosed Liabilities............................................... 21
Section 3.8 Litigation............................................................... 21
Section 3.9 Employee Benefit Plans................................................... 22
Section 3.10 Tax Matters; Government Benefits......................................... 24
Section 3.11 Intellectual Property.................................................... 27
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 3.12 Employment Matters....................................................... 28
Section 3.13 Compliance with Laws..................................................... 28
Section 3.14 Vote Required............................................................ 29
Section 3.15 Environmental Laws....................................................... 29
Section 3.16 Information in Proxy Statement........................................... 31
Section 3.17 Opinion of Financial Advisor............................................. 32
Section 3.18 Rights Agreement......................................................... 32
Section 3.19 Phones................................................................... 32
Section 3.20 Average Net Revenue...................................................... 32
Section 3.21 Brokers or Finders....................................................... 33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
Section 4.1 Organization............................................................. 33
Section 4.2 Authorization; Validity of Agreement;
Necessary Action.................................................... 33
Section 4.3 Consents and Approvals; No Violations.................................... 34
Section 4.4 Information in Proxy Statement........................................... 34
Section 4.5 Financing................................................................ 35
ARTICLE V
COVENANTS
Section 5.1 Interim Operations of the Company........................................ 35
Section 5.2 Access; Confidentiality.................................................. 37
Section 5.3 Consents and Approvals................................................... 38
Section 5.4 No Solicitation.......................................................... 39
Section 5.5 Additional Agreements.................................................... 41
Section 5.6 Publicity................................................................ 41
Section 5.7 Notification of Certain Matters.......................................... 41
Section 5.8 Directors' and Officers' Insurance and
Indemnification..................................................... 42
Section 5.9 Purchaser Compliance..................................................... 43
Section 5.10 Severance Arrangements................................................... 43
Section 5.11 Financing................................................................ 43
Section 5.12 Additional Employee Covenants............................................ 43
Section 5.13 Senior Credit Refinancing................................................ 44
</TABLE>
ii
<PAGE> 6
<TABLE>
<CAPTION>
<S> <C>
ARTICLE VI
CONDITIONS TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation
to Effect the Merger................................................ 44
Section 6.2 Condition to Parent's and the
Purchaser's Obligations to Effect
the Merger.......................................................... 45
ARTICLE VII
TERMINATION
Section 7.1 Termination.............................................................. 45
Section 7.2 Effect of Termination.................................................... 47
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Fees and Expenses........................................................ 47
Section 8.2 Amendment and Modification............................................... 48
Section 8.3 Non-survival of Representations and
Warranties.......................................................... 48
Section 8.4 Notices.................................................................. 49
Section 8.5 Interpretation........................................................... 50
Section 8.6 Counterparts............................................................. 50
Section 8.7 Entire Agreement; No Third Party Benficiaries............................ 50
Section 8.8 Severability............................................................. 50
Section 8.9 Governing Law............................................................ 51
Section 8.10 Assignment............................................................... 51
ANNEX A Conditions of the Offer................................................................. A-1
EXHIBIT A Escrow Agreement
</TABLE>
iii
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter referred to as this
"Agreement"), dated as of March 14, 1997, by and among PhoneTel Technologies,
Inc., an Ohio corporation ("Parent"), PhoneTel Acquisition Corp., a Georgia
corporation and a wholly owned subsidiary of Parent (the "Purchaser"), and
Communications Central Inc., a Georgia corporation (the "Company").
WHEREAS, the Board of Directors of each of Parent, the
Purchaser and the Company has approved, and deems it advisable and in the best
interests of its respective shareholders to consummate, the acquisition of the
Company by Parent upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the
mutual representations, warranties, covenants and agreements set forth herein,
the parties hereto agree as follows:
ARTICLE I
THE OFFER AND MERGER
Section 1.1 THE OFFER.
(a) As promptly as practicable (but in no event later than
five business days after the public announcement of the execution hereof), the
Purchaser shall commence (within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) a tender offer (the
"Offer") for all of the outstanding shares (the "Shares") of common stock, $.01
par value per share (the "Common Stock"), of the Company (including the related
Rights (as defined in Section 3.18 of this Agreement)) at a price of $12.85 per
Share, net to the seller in cash (such price, or any such higher price per Share
as may be paid in the Offer, being referred to herein as the "Offer Price"),
subject to (i) there being validly tendered and not withdrawn prior to the
expiration of the Offer, that number of Shares which represents at least
seventy-five percent (75%) of the Shares outstanding on a fully diluted basis
(the "Minimum
<PAGE> 8
Condition"), (ii) the receipt by Parent of financing sufficient in amount to
enable it and the Purchaser to consummate the Offer and the Merger (as
hereinafter defined) and to refinance certain indebtedness for borrowed money of
the Company and to pay related fees and expenses (the "Financing Condition") and
(iii) the other conditions set forth in Annex A hereto, and shall consummate the
Offer in accordance with its terms. As used herein, "fully diluted basis" takes
into account issued and outstanding Shares and Shares subject to issuance under
outstanding stock options and warrants. The obligations of the Purchaser to
accept for payment and to pay for any Shares validly tendered on or prior to the
expiration of the Offer and not withdrawn shall be subject only to the Minimum
Condition, the Financing Condition and the other conditions set forth in Annex A
hereto. The Offer shall be made by means of an offer to purchase (the "Offer to
Purchase") containing the terms set forth in this Agreement, the Minimum
Condition, the Financing Condition and the other conditions set forth in Annex A
hereto. The Purchaser shall not amend or waive the Minimum Condition and shall
not decrease the Offer Price or decrease the number of Shares sought, or amend
any other condition of the Offer in any manner adverse to the holders of the
Shares without the written consent of the Company; provided, however, that if on
the initial scheduled expiration date of the Offer, which shall be twenty
business days after the date the Offer is commenced, all conditions to the Offer
shall not have been satisfied or waived, the Purchaser may, from time to time,
in its sole discretion, extend the expiration date for one or more periods
totalling not more than thirty days. Notwithstanding the foregoing, (i) Parent
or the Purchaser can waive, in writing, the Minimum Condition without the
written consent of the Company in the event that at least 50.1% of the Shares
outstanding on a fully diluted basis are validly tendered and not withdrawn on
or prior to the expiration of the Offer and (ii) the Purchaser may extend the
initial expiration date or any extension thereof, as the Purchaser reasonably
deems necessary to comply with any legal or regulatory requirements, including
but not limited to, the termination or expiration of any applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). The Purchaser shall, on the terms and subject to the
prior satisfaction or waiver of the conditions of the Offer, accept for payment
and pay for Shares tendered as
2
<PAGE> 9
soon as it is legally permitted to do so under applicable law; provided,
however, that if, immediately prior to the initial expiration date of the Offer
(as it may be extended), the Shares tendered and not withdrawn pursuant to the
Offer equal more than seventy-five percent (75%) of the outstanding Shares, but
less than 90% of the outstanding Shares, the Purchaser may extend the Offer for
a period not to exceed twenty business days, notwithstanding that all conditions
to the Offer are satisfied as of such expiration date of the Offer.
Notwithstanding the foregoing, the Offer may not be extended beyond the date of
termination of this Agreement pursuant to Article VII hereof.
(b) As soon as practicable on the date the Offer is commenced,
Parent and the Purchaser shall file with the United States Securities and
Exchange Commission (the "SEC") a Tender Offer Statement on Schedule 14D-1 with
respect to the Offer (together with all amendments and supplements thereto and
including the exhibits thereto, the "Schedule 14D-1"). The Schedule 14D-1 will
include, as exhibits, the Offer to Purchase and a form of letter of transmittal
and summary advertisement (collectively, together with any amendments and
supplements thereto, the "Offer Documents"). Parent represents and warrants to
the Company that the Offer Documents will comply in all material respects with
the provisions of applicable federal securities laws and, on the date filed with
the SEC and on the date first published, sent or given to the Company's
shareholders, shall not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading, except that no representation is made by Parent or
the Purchaser with respect to information furnished by the Company to Parent or
the Purchaser, in writing, expressly for inclusion in the Offer Documents. The
Company represents and warrants to Parent and the Purchaser that the information
supplied by the Company to Parent or the Purchaser, in writing, expressly for
inclusion in the Offer Documents and Parent represents and warrants to the
Company that the information supplied by Parent or the Purchaser to the Company,
in writing, expressly for inclusion in the Schedule 14D-9 (as hereinafter
defined) will not contain any untrue statement of a material fact or omit to
state any material fact required
3
<PAGE> 10
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) Each of Parent and the Purchaser will take all steps
necessary to cause the Offer Documents to be filed with the SEC and to be
disseminated to holders of the Shares, in each case as and to the extent
required by applicable federal securities laws. Each of Parent and the
Purchaser, on the one hand, and the Company, on the other hand, will promptly
correct any information provided by it for use in the Offer Documents if and to
the extent that it shall have become false or misleading in any material respect
and Parent will take all steps necessary to cause the Offer Documents as so
corrected to be filed with the SEC and to be disseminated to holders of the
Shares, in each case as and to the extent required by applicable federal
securities laws. The Company and its counsel shall be given the opportunity to
review the Schedule 14D-1 before it is filed with the SEC. In addition, Parent
and the Purchaser will provide the Company and its counsel, in writing, with any
comments, whether written or oral, Parent, the Purchaser or their counsel may
receive from time to time from the SEC or its staff with respect to the Offer
Documents promptly after the receipt of such comments.
Section 1.2 COMPANY ACTIONS.
(a) The Company hereby approves of and consents to the Offer
and represents and warrants that its Board of Directors, at a meeting duly
called and held, has (i) unanimously determined that each of this Agreement, the
Offer and the Merger (as defined in Section 1.4 hereof) are fair to and in the
best interests of the shareholders of the Company, (ii) approved this Agreement
and the transactions contemplated hereby, including the Offer and the Merger
(collectively, the "Transactions"), and such approval constitutes approval of
the Offer, this Agreement and the Transactions, including the Merger, for
purposes of Section 14-2-1111 and Section 14-2-1132 of the Georgia Business
Corporation Code (the "GBCC") and Article VII of the Company's Amended and
Restated Articles of Incorporation (the "Articles of Incorporation"), such that
the provisions of Section 14-2-1111 and the restrictions contained in Section
14-2-1132 of the GBCC and Article VII of the Company's Articles of Incorpo-
4
<PAGE> 11
ration will not apply to the Transactions, and (iii) resolved to recommend that
the shareholders of the Company accept the Offer, tender their Shares thereunder
to the Purchaser and approve and adopt this Agreement and the Merger; provided,
that such recommendation may be withdrawn, modified or amended if, in the
opinion of the Board of Directors, only after receipt of advice from outside
legal counsel, failure to withdraw, modify or amend such recommendation would
result in the Board of Directors violating its fiduciary duties to the Company's
shareholders under applicable law. The Company represents and warrants that the
actions set forth in this Section 1.2(a) and all other actions it has taken in
connection therewith are sufficient to render the relevant provisions of such
Section 14-2-1111 and the restrictions contained in Section 14-2-1132 of the
GBCC and Article VII of the Company's Articles of Incorporation inapplicable to
the Offer and the Merger.
(b) As soon as practicable on the date the Offer is commenced,
the Company shall file with the SEC a Solicitation/Recommendation Statement on
Schedule 14D-9 (together with all amendments and supplements thereto and
including the exhibits thereto, the "Schedule 14D-9") which shall, subject to
the provisions of Section 5.4(b) hereof, contain the recommendation referred to
in clause (iii) of Section 1.2(a) hereof. The Company represents and warrants to
Parent and the Purchaser that the Schedule 14D-9 will comply in all material
respects with the provisions of applicable federal securities laws and, on the
date filed with the SEC and on the date first published, sent or given to the
Company's shareholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information furnished by Parent or the
Purchaser, in writing, expressly for inclusion in the Schedule 14D-9. The
Company further agrees to take all steps necessary to cause the Schedule 14D-9
to be filed with the SEC and to be disseminated to holders of the Shares, in
each case as and to the extent required by applicable federal securities laws.
Each of the Company, on the one hand, and Parent and the Purchaser, on the other
hand, agrees promptly to correct any information provided by it for use in the
Schedule 14D-9
5
<PAGE> 12
if and to the extent that it shall have become false and misleading in any
material respect and the Company further agrees to take all steps necessary to
cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be
disseminated to holders of the Shares, in each case as and to the extent
required by applicable federal securities laws. Parent and its counsel shall be
given the opportunity to review the Schedule 14D-9 before it is filed with the
SEC. In addition, the Company agrees to provide Parent, the Purchaser and their
counsel, in writing, with any comments, whether written or oral, that the
Company or its counsel may receive from time to time from the SEC or its staff
with respect to the Schedule 14D-9 promptly after the receipt of such comments
or other communications.
(c) In connection with the Offer, the Company will promptly
furnish or cause to be furnished to the Purchaser mailing labels, security
position listings and any available listing, or computer file containing the
names and addresses of all record holders of the Shares as of a recent date, and
shall furnish the Purchaser with such additional information (including, but not
limited to, updated lists of holders of the Shares and their addresses, mailing
labels and lists of security positions) and assistance as the Purchaser or its
agents may reasonably request in communicating the Offer to the record and
beneficial holders of the Shares. Except for such steps as are necessary to
disseminate the Offer Documents, Parent and the Purchaser shall hold in
confidence the information contained in any of such labels and lists and the
additional information referred to in the preceding sentence, will use such
information only in connection with the Offer, and, if this Agreement is
terminated, will upon request of the Company deliver or cause to be delivered to
the Company all copies of such information then in its possession or the
possession of its agents or representatives.
Section 1.3 DIRECTORS.
(a) Promptly upon the purchase of and payment for Shares by
the Purchaser which represent at least a majority of the outstanding Shares,
Parent shall be entitled to designate such number of directors, rounded up to
the next whole number, on the Board of Directors of the Company as is equal to
the product of the total number of
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directors on such Board (giving effect to the directors designated by Parent
pursuant to this sentence) multiplied by the percentage that the number of
Shares so accepted for payment bears to the total number of Shares then
outstanding. In furtherance thereof, the Company shall, upon the request of
Parent, use its best reasonable efforts promptly either to increase the size of
its Board of Directors, including amending the By-Laws of the Company if
necessary to so increase the size of the Company's Board of Directors, or secure
the resignations of such number of its incumbent directors, or both, as is
necessary to enable Parent's designees to be so elected to the Company's Board
of Directors, and shall take all actions available to the Company to cause
Parent's designees to be so elected. At such time, the Company shall, if
requested by Parent, also cause persons designated by Parent to constitute at
least the same percentage (rounded up to the next whole number) as is on the
Company's Board of Directors of (i) each committee of the Company's Board of
Directors, (ii) each board of directors (or similar body) of each Subsidiary (as
defined in Section 3.1 hereof) of the Company and (iii) each committee (or
similar body) of each such board.
(b) The Company shall promptly take all actions required
pursuant to Section 14(f) of the Exchange Act and Rule 14f-l promulgated
thereunder in order to fulfill its obligations under Section 1.3(a) hereof,
including mailing to shareholders the information required by such Section 14(f)
and Rule 14f-1 as is necessary to enable Parent's designees to be elected to the
Company's Board of Directors. Parent or the Purchaser shall supply the Company
and be solely responsible for any information with respect to either of them and
their nominees, officers, directors and affiliates required by such Section
14(f) and Rule 14f-1. The provisions of this Section 1.3(b) are in addition to
and shall not limit any rights which the Purchaser, Parent or any of their
affiliates may have as a holder or beneficial owner of Shares as a matter of law
with respect to the election of directors or otherwise.
(c) In the event that Parent's designees are elected to the
Company's Board of Directors, until the Effective Time (as defined in Section
1.5 hereof), the Company's Board of Directors shall have at least three
directors who are directors on the date hereof and who
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would constitute Continuing Directors for purposes of Article VII of the
Company's Articles of Incorporation (the "Independent Directors"), provided
that, in such event, if the number of Independent Directors shall be reduced
below three for any reason whatsoever, any remaining Independent Directors (or
Independent Director, if there is only one remaining) shall be entitled to
designate persons to fill such vacancies who shall be deemed to be Independent
Directors for purposes of this Agreement or, if no Independent Director then
remains, the other directors shall designate three persons to fill such
vacancies who shall not be shareholders, affiliates or associates of Parent or
the Purchaser and such persons shall be deemed to be Independent Directors for
purposes of this Agreement. Notwithstanding anything in this Agreement to the
contrary, in the event that Parent's designees are elected to the Company's
Board of Directors, after the acceptance for payment of Shares pursuant to the
Offer and prior to the Effective Time (as hereinafter defined), the affirmative
vote of a majority of the Independent Directors shall be required to (a) amend
or terminate this Agreement by the Company, (b) exercise or waive any of the
Company's rights, benefits or remedies hereunder, or (c) take any other action
by the Company's Board of Directors under or in connection with this Agreement.
Section 1.4 THE MERGER. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time, the Company and the
Purchaser shall consummate a merger (the "Merger") as set forth below.
(a) In the event that Parent, the Purchaser and any other
Subsidiaries of Parent shall acquire in the aggregate at least 90% of the Shares
of the Company, pursuant to the Offer or otherwise, then, at the election of
Parent, pursuant to the Merger (i) the Company shall be merged with and into the
Purchaser and the separate corporate existence of the Company shall thereupon
cease, (ii) the Purchaser shall be the successor or surviving corporation in the
Merger (sometimes hereinafter referred to as the "Purchaser Surviving
Corporation" or the "Surviving Corporation") and shall continue to be governed
by the laws of the State of Georgia, and (iii) all the rights, privileges,
immunities, powers and franchises of the Company shall vest in the Purchaser
Surviving Corporation and, except as otherwise provided for in this
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Agreement, all obligations, duties, debts and liabilities of the Company shall
be the obligations, duties, debts and liabilities of the Purchaser Surviving
Corporation.
(b) Except in the event Section 1.4(a) above applies, then,
pursuant to the Merger (i) the Purchaser shall be merged with and into the
Company and the separate corporate existence of the Purchaser shall cease, (ii)
the Company shall be the successor or surviving corporation in the Merger
(sometimes hereinafter referred to as the "Company Surviving Corporation" or the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Georgia, and (iii) the separate corporate existence of the Company with
all its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger, except as set forth in this Section 1.4(b). Pursuant
to the Merger, (x) the Articles of Incorporation shall be amended in its
entirety to read as the Articles of Incorporation of the Purchaser, in effect
immediately prior to the Effective Time, except that Article FIRST thereof shall
read as follows: "FIRST: The name of the corporation is Communications Central
Inc." and, as so amended, shall be the Articles of Incorporation of the Company
Surviving Corporation until thereafter amended as provided by law and such
Articles of Incorporation, except that if the Purchaser shall acquire less than
seventy-five percent of the outstanding Shares pursuant to the Offer or
otherwise, the Articles of Incorporation of the Company, as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Company Surviving Corporation until thereafter amended as provided by law
and such Articles of Incorporation, and (y) the By-Laws of the Purchaser (the
"By-laws"), as in effect immediately prior to the Effective Time, shall be the
By-laws of the Company Surviving Corporation until thereafter amended as
provided by law, by the Articles of Incorporation of the Company Surviving
Corporation or by such By-laws, except that if the Purchaser shall acquire less
than seventy-five percent of the outstanding Shares pursuant to the Offer, the
By-laws of the Company, as in effect immediately prior to the Effective Time
shall be the By-laws of the Company Surviving Corporation until thereafter
amended as provided by law, by the Articles of Incorporation
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of the Company Surviving Corporation or by such By-laws. The Merger shall have
the effects specified in the GBCC.
Section 1.5 EFFECTIVE TIME. Parent, the Purchaser and the
Company will cause a Certificate of Merger to be executed and filed on the
Closing Date (as defined in Section 1.6 hereof) (or on such other date as Parent
and the Company may agree) with the Secretary of State of Georgia (the
"Secretary of State") as provided in the GBCC. The Merger shall become effective
on the date on which the Certificate of Merger is duly filed with the Secretary
of State or such time as is agreed upon by the parties and specified in the
Certificate of Merger, and such time is hereinafter referred to as the
"Effective Time."
Section 1.6 CLOSING. The closing of the Merger (the "Closing")
shall take place at 10:00 a.m. on the second business day after satisfaction or
waiver of all of the conditions set forth in Article VI hereof, or such other
date as may be agreed to by the parties in writing (the "Closing Date"), at the
office of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York,
New York, unless another place is agreed to in writing by the parties hereto.
Section 1.7 DIRECTORS AND OFFICERS OF THE SURVIVING
CORPORATION. The directors and officers of the Purchaser at the Effective Time
shall, from and after the Effective Time, be the directors and officers,
respectively, of the Surviving Corporation until their successors shall have
been duly elected or appointed or qualified or until their earlier death,
resignation or removal in accordance with the Articles of Incorporation and the
By-laws of the Surviving Corporation.
Section 1.8 SHAREHOLDERS' MEETING.
(a) If required by applicable law in order to consummate the
Merger, the Company, acting through its Board of Directors, shall, in accordance
with applicable law and subject to the fiduciary duties of the Board of
Directors:
(i) duly call, give notice of, convene and hold a
special meeting of its shareholders (the "Special Meeting") as promptly
as practicable fol-
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lowing the acceptance for payment and purchase of Shares by the
Purchaser pursuant to the Offer for the purpose of considering and
taking action upon the approval of the Merger and the adoption of this
Agreement;
(ii) prepare and file with the SEC a preliminary proxy
or information statement relating to the Merger and this Agreement and
use its best efforts (x) to obtain and furnish the information required
to be included by the SEC in the Proxy Statement (as hereinafter
defined) and, after consultation with Parent, to respond promptly to
any comments made by the SEC with respect to the preliminary proxy or
information statement and cause a definitive proxy or information
statement, including any amendment or supplement thereto (the "Proxy
Statement") to be mailed to its shareholders, provided that no
amendment or supplement to the Proxy Statement will be made by the
Company without consultation with Parent and its counsel and (y) to
obtain the necessary approvals of the Merger and this Agreement by its
shareholders; and
(iii) include in the Proxy Statement the recommendation
of the Board of Directors that shareholders of the Company vote in
favor of the approval of the Merger and the adoption of this Agreement.
(b) Parent shall vote, or cause to be voted, all of the Shares
then owned by it, the Purchaser or any of its other Subsidiaries and affiliates
in favor of the approval of the Merger and the approval and adoption of this
Agreement.
Section 1.9 MERGER WITHOUT MEETING OF SHAREHOLDERS.
Notwithstanding Section 1.8 hereof, in the event that Parent, the Purchaser and
any other Subsidiaries of Parent shall acquire in the aggregate at least 90% of
the outstanding Shares of the Company, pursuant to the Offer or otherwise, the
parties hereto shall, at the request of Parent and subject to Article VI hereof,
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after such acquisition, without a meeting of
shareholders of the Company, in accordance with Section 14-2-1104 of the GBCC.
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Section 1.10 ESCROW. Simultaneously herewith, Parent, the
Company and First Union National Bank of Georgia, a national banking
association, as escrow agent (the "Escrow Agent"), are entering into an Escrow
Agreement in the form attached hereto as Exhibit A, and Parent is depositing
$5,000,000 (the "Escrow Amount") with the Escrow Agent, to be held and disposed
of by the Escrow Agent pursuant to the Escrow Agreement. In the event that the
Merger Agreement is terminated solely due to the failure of either (i) the
Minimum Condition (provided at least 50.1% of the Shares outstanding on a fully
diluted basis have been validly tendered and not withdrawn) and neither Parent
nor the Purchaser has waived the Minimum Condition, or (ii) the Financing
Condition (unless the failure of such Financing Condition is due solely to the
failure of the Company to satisfy its obligations under Sections 5.11 and 5.13
hereof), then the Company shall be entitled to receive the entire Escrow
Amount, as liquidated damages, and neither the Company nor Parent nor the
Purchaser shall have any other rights or remedies in respect of this Agreement.
Delivery of funds by the Escrow Agent to the applicable parties shall be made
pursuant to the terms of the Escrow Agreement.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective
Time, by virtue of the Merger and without any action on the part of the holders
of any Shares or holders of common stock, par value $.01 per share, of the
Purchaser (the "Purchaser Common Stock"):
(a) THE PURCHASER COMMON STOCK. Each issued and outstanding
share of the Purchaser Common Stock shall be converted into and become one fully
paid and nonassessable share of common stock of the Company Surviving
Corporation or shall remain outstanding and constitute one fully paid and
non-assessable share of the Purchaser Surviving Corporation, as the case may be,
and shall constitute the only outstanding shares of capital stock of the
Surviving Corporation.
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(b) CANCELLATION OF TREASURY STOCK AND PARENT-OWNED STOCK. All
Shares that are owned by the Company as treasury stock and any Shares owned by
Parent, the Purchaser or any other wholly owned Subsidiary of Parent shall be
cancelled and retired and shall cease to exist and no consideration shall be
delivered in exchange therefor.
(c) EXCHANGE OF SHARES. Each issued and outstanding Share
(other than Shares to be cancelled in accordance with Section 2.1(b) above and
any Shares which are held by shareholders exercising appraisal rights pursuant
to Article 13 of the GBCC ("Dissenting Shareholders")) shall be converted into
the right to receive the Offer Price, payable to the holder thereof, without
interest (the "Merger Consideration"), upon surrender of the certificate
formerly representing such Share in the manner provided in Section 2.2 hereof.
All such Shares, when so converted, shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration
therefor upon the surrender of such certificate in accordance with Section 2.2
hereof, without interest, or the right, if any, to receive payment from the
Surviving Corporation of the "fair value" of such Shares as determined in
accordance with Article 13 of the GBCC.
Section 2.2 EXCHANGE OF CERTIFICATES.
(a) PAYING AGENT. Parent shall designate a bank or trust
company reasonably acceptable to the Company to act as agent for the holders of
the Shares in connection with the Merger (the "Paying Agent") to receive in
trust the funds to which holders of the Shares shall become entitled pursuant to
Section 2.1(c) above. Such funds shall be invested by the Paying Agent as
directed by Parent or the Surviving Corporation.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable
after the Effective Time, the Paying Agent shall mail to each holder of record
of a certificate or certificates, which immediately prior to the Effective Time
represented outstanding Shares (the "Certificates"), whose Shares were converted
pursuant to
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Section 2.1 hereof into the right to receive the Merger Consideration (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent and shall be in such form and have such other
provisions as Parent and the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for payment of the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly executed,
the holder of such Certificate shall be entitled to receive in exchange therefor
the Merger Consideration for each Share formerly represented by such Certificate
and the Certificate so surrendered shall forthwith be cancelled. If payment of
the Merger Consideration is to be made to a person other than the person in
whose name the surrendered Certificate is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly endorsed or shall
be otherwise in proper form for transfer and that the person requesting such
payment shall have paid any transfer and other taxes required by reason of the
payment of the Merger Consideration to a person other than the registered holder
of the Certificate surrendered or shall have established to the satisfaction of
the Surviving Corporation that such tax either has been paid or is not
applicable. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive the Merger Consideration in cash as contemplated by
this Section 2.2.
(c) TRANSFER BOOKS; NO FURTHER OWNERSHIP RIGHTS IN THE SHARES.
At the Effective Time, the stock transfer books of the Company shall be closed
and thereafter there shall be no further registration of transfers of the Shares
on the records of the Company. From and after the Effective Time, the holders of
Certificates evidencing ownership of the Shares outstanding immediately prior to
the Effective Time shall cease to have any rights with respect to such Shares,
except as otherwise provided for herein or by applicable law. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be cancelled and exchanged as provided in this Article II.
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(d) TERMINATION OF FUND; NO LIABILITY. At any time following
six months after the Effective Time, the Surviving Corporation shall be entitled
to require the Paying Agent to deliver to it any funds (including any interest
received with respect thereto) which had been made available to the Paying Agent
and which had not been disbursed to holders of Certificates, and thereafter such
holders shall be entitled to look to the Surviving Corporation (subject to
abandoned property, escheat or other similar laws) only as general creditors
thereof with respect to the Merger Consideration payable upon due surrender of
their Certificates, without any interest thereon. Notwithstanding the foregoing,
neither the Surviving Corporation nor the Paying Agent shall be liable to any
holder of a Certificate for Merger Consideration delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
Section 2.3 DISSENTERS' RIGHTS. If any Dissenting Shareholder
shall demand to be paid the fair value of such holder's Shares, as provided in
Article 13 of the GBCC, the Company shall give Parent notice thereof and Parent
shall have the right to participate in all negotiations and proceedings with
respect to any such demands. Neither the Company nor the Surviving Corporation
shall, except with the prior written consent of Parent, voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
payment. If any Dissenting Shareholder shall fail to perfect or shall have
effectively withdrawn or lost the right to dissent, the Shares held by such
Dissenting Shareholder shall thereupon be treated as though such Shares had been
converted into the Merger Consideration pursuant to Section 2.1 hereof.
Section 2.4 OPTIONS AND WARRANTS. At the Effective Time, each
holder of a then outstanding option (collectively, the "Options") or warrant
(collectively, the "Warrants") to purchase Shares granted by the Company,
whether or not then exercisable, shall in settlement thereof, receive for each
Share subject to such Option or Warrant an amount (subject to any applicable
withholding tax) in cash equal to the difference between the Offer Price and the
per Share exercise price of such Option or Warrant to the extent such difference
is a positive number. Prior to the Effective Time, the Company shall use its
best efforts to obtain all necessary consents or
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releases from holders of Options or Warrants, to the extent required by the
terms of the plans or agreements governing such Options or Warrants, as the case
may be, or pursuant to the terms of any Option or Warrant granted thereunder,
and take all such other lawful action as may be necessary to give effect to the
transactions contemplated by this Section 2.4 (except for such action that may
require the approval of the Company's shareholders). Except as otherwise agreed
to by Parent or the Purchaser and the Company, the Company shall take all action
necessary to ensure that (i) the Company's 1991 Stock Option Plan, 1993 Stock
Option Plan, as amended and restated as of October 11, 1995, and the Stock
Option Plan for Directors (collectively, the "Stock Option Plans") shall have
been terminated as of the Effective Time and the provisions in any other plan,
program or arrangement providing for the issuance or grant of any other interest
in respect of the capital stock of the Company or any Subsidiary thereof, shall
be cancelled as of the Effective Time, and (ii) following the Effective Time,
(a) no participant in any Stock Option Plan or other plans, programs or
arrangements shall have any right thereunder to acquire equity securities of the
Company, the Surviving Corporation or any Subsidiary thereof and all such plans
have been terminated, and (b) the Company will not be bound by any convertible
security, option, warrant, right or agreement which would entitle any person to
own any capital stock of the Company, the Surviving Corporation or any
Subsidiary thereof.
ARTICLE III
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
Except as disclosed in the schedule attached to this Agreement
setting forth exceptions to the Company's representations and warranties set
forth herein (the "Company Disclosure Schedule"), the Company represents and
warrants to Parent and the Purchaser as set forth below. The Company Disclosure
Schedule will be arranged in sections corresponding to sections of this
Agreement to be modified thereby.
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Section 3.1 ORGANIZATION. (a) Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
and has all requisite corporate power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted, except where the failure to be so
organized, existing and in good standing or to have such power, authority, and
governmental approvals would not, individually or in the aggregate, have a
Company Material Adverse Effect (as defined below). As used in this Agreement,
the term "Subsidiary" shall mean all corporations or other entities in which the
Company or the Parent, as the case may be, owns a majority of the issued and
outstanding capital stock or similar interests. As used in this Agreement,
"Company Material Adverse Effect" with reference to any events, changes or
effects, shall mean that such events, changes or effects are materially adverse
to the Company and its Subsidiaries, taken as a whole.
(b) The Company and each of its Subsidiaries is duly qualified
or licensed to do business and in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the failure to be so duly qualified or licensed and in good standing would not
individually or in the aggregate have a Company Material Adverse Effect. Except
as disclosed in Section 3.1 of the Company Disclosure Schedule, the Company does
not own any equity interest in any corporation or other entity.
Section 3.2 CAPITALIZATION. (a) The authorized capital stock
of the Company consists of 50,000,000 shares of Common Stock and 2,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"). As
of the date hereof, (i) 6,054,556 Shares are issued and outstanding, (ii) none
of the Shares are issued and held in the treasury of the Company, (iii) none of
the Preferred Stock is issued and outstanding, and (iv) 1,137,282 Shares are
reserved for issuance upon the exercise of outstanding Warrants or Options.
Section 3.2(a) of the Company Disclosure Schedule discloses the number of shares
subject to each outstanding Option and Warrant and the exercise price thereof.
All the out-
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standing shares of the Company's capital stock are, and all Shares which may be
issued pursuant to the exercise of outstanding Options or Warrants will be, when
issued in accordance with the respective terms thereof, duly authorized, validly
issued, fully paid and non-assessable. There are no bonds, debentures, notes or
other indebtedness having general voting rights (or convertible into securities
having such rights) ("Voting Debt") of the Company or any of its Subsidiaries
issued and outstanding. Except as set forth above and except for the
transactions contemplated by this Agreement, as of the date hereof, (i) there
are no shares of capital stock of the Company authorized, issued or outstanding,
(ii) there are no existing options, warrants, calls, pre-emptive rights,
subscriptions or other rights, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of the Company or
any of its Subsidiaries, obligating the Company or any of its Subsidiaries to
issue, transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company or any
of its Subsidiaries or securities convertible into or exchangeable for such
shares or equity interests, or obligating the Company or any of its Subsidiaries
to grant, extend or enter into any such option, warrant, call, subscription or
other right, agreement, arrangement or commitment and (iii) except as disclosed
in Section 3.2(a) of the Company Disclosure Schedule, there are no outstanding
contractual obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any Shares, or the capital stock of the Company or
of any Subsidiary or affiliate of the Company or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or any other entity.
(b) Except as disclosed in Section 3.2(b) of the Company
Disclosure Schedule, all of the outstanding shares of capital stock of each of
its Subsidiaries are owned beneficially and of record by the Company or one of
its Subsidiaries, directly or indirectly, and all such shares have been validly
issued and are fully paid and nonassessable and are owned by either the Company
or one of its Subsidiaries free and clear of all liens, charges, claims or
encumbrances ("Encumbrances").
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(c) There are no voting trusts or other agreements or
understandings to which the Company or any of its Subsidiaries is a party with
respect to the voting of the capital stock of the Company or any of the
Subsidiaries.
Section 3.3 AUTHORIZATION; VALIDITY OF AGREEMENT; COMPANY
ACTION. The Company has full corporate power and authority to execute and
deliver this Agreement and to consummate the Transactions. The execution,
delivery and performance by the Company of this Agreement, and the consummation
by it of the Transactions, have been unanimously approved and duly authorized by
its Board of Directors and no other corporate action on the part of the Company
is necessary to authorize the execution and delivery by the Company of this
Agreement and the consummation by it of the Transactions, except that
consummation of the Merger may require approval of the Company's shareholders as
contemplated by Section 1.8 hereof. This Agreement has been duly executed and
delivered by the Company and, assuming due and valid authorization, execution
and delivery hereof by Parent and the Purchaser, is a valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization, or other laws affecting creditors'
rights generally or by the availability of equitable remedies generally.
Section 3.4 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for
the filings disclosed in Section 3.4 of the Company Disclosure Schedule and the
filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act and the HSR Act,
none of the execution, delivery or performance of this Agreement by the Company,
the consummation of the Transactions or compliance by the Company with any of
the provisions hereof will (i) conflict with or result in any breach of any
provision of the Articles of Incorporation, the By-laws or similar
organizational documents of the Company or any of its Subsidiaries, (ii) require
any filing with, or permit, authorization, consent or approval of, any court,
arbitral tribunal, administrative agency or commission or other governmental or
regulatory authority or agency (a "Governmental Entity"), (iii) result in a
violation or
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breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company or any of its Subsidiaries is a
party or by which any of them or any of their properties or assets may be bound
(the "Company Agreements") or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to the Company, any of its Subsidiaries
or any of their properties or assets, excluding from the foregoing clauses (ii),
(iii) and (iv) such violations, breaches or defaults which would not,
individually or in the aggregate, have a Company Material Adverse Effect or have
a material adverse effect on the ability of the Company to consummate the
Transactions. Section 3.4 of the Company Disclosure Schedule sets forth a list
of all third party consents and approvals required to be obtained in connection
with this Agreement under the Company Agreements prior to the consummation of
the Transactions.
Section 3.5 SEC REPORTS AND FINANCIAL STATEMENTS. The Company
has filed with the SEC, and has heretofore made available to Parent, true and
complete copies of all forms, reports, schedules, statements and other documents
required to be filed by it since January 1, 1995 under the Exchange Act or the
Securities Act of 1933, as amended (the "Securities Act") (as such documents
have been amended since the time of their filing, collectively, the "Company SEC
Documents"). As of their respective dates, the Company SEC Documents, including,
without limitation, any financial statements or schedules included therein (a)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading and (b) complied in all material respects with the applicable
requirements of the Exchange Act and the Securities Act, as the case may be, and
the applicable rules and regulations of the SEC thereunder. None of the
Company's Subsidiaries is required to file any forms, reports or other documents
with the SEC. The financial statements of the Company included in the Company
SEC Documents (the "Financial Statements") have been prepared from, and are in
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accordance with, the books and records of the Company and its consolidated
Subsidiaries, comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position and the consolidated results of
operations and cash flows (and changes in financial position, if any) of the
Company and its consolidated Subsidiaries as of the times and for the periods
referred to therein.
Section 3.6 ABSENCE OF CERTAIN CHANGES. Except as disclosed in
Section 3.6 of the Company Disclosure Schedule or in the Company SEC Documents
filed prior to the date hereof, since December 31, 1996, the Company and its
Subsidiaries have conducted their respective businesses only in the ordinary and
usual course and (i) there have not occurred any events or changes (including
the incurrence of any liabilities of any nature, whether or not accrued,
contingent or otherwise) having, individually or in the aggregate, a Company
Material Adverse Effect and (ii) the Company has not taken any action which
would have been prohibited under Section 5.1 hereof.
Section 3.7 NO UNDISCLOSED LIABILITIES. Except (a) as
disclosed in the Financial Statements and (b) for liabilities and obligations
(i) incurred in the ordinary course of business and consistent with past
practice since December 31, 1996, (ii) pursuant to the terms of this Agreement,
(iii) as disclosed in Section 3.7 of the Company Disclosure Schedule, or (iv) as
disclosed in Section 3.8 of the Company Disclosure Schedule, neither the Company
nor any of its Subsidiaries has any liabilities or obligations of any nature,
whether or not accrued, contingent or otherwise.
Section 3.8 LITIGATION. Except as disclosed in Section 3.8 of
the Company Disclosure Schedule, as of the date hereof, there are no suits,
claims, actions, proceedings, including, without limitation, arbitration
proceedings or alternative dispute resolution proceedings, or investigations
pending or, to the knowledge of the Company, threatened against the Company or
any of its
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Subsidiaries before any Governmental Entity that, either individually or in the
aggregate, would be reasonably likely to have a Company Material Adverse Effect.
Section 3.9 EMPLOYEE BENEFIT PLANS.
(a) Section 3.9(a) of the Company Disclosure Schedule contains
a true and complete list of each deferred compensation and each incentive
compensation, stock purchase, stock option and other equity compensation plan,
program, agreement or arrangement; each severance or termination pay, medical,
surgical, hospitalization, life insurance and other "welfare" plan, fund or
program (within the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")); each profit-sharing, stock bonus or
other "pension" plan, fund or program (within the meaning of section 3(2) of
ERISA); each employment, termination or severance agreement; and each other
employee benefit plan, fund, program, agreement or arrangement, in each case,
that is sponsored, maintained or contributed to or required to be contributed to
by the Company or by any trade or business, whether or not incorporated (an
"ERISA Affiliate"), that together with the Company would be deemed a "single
employer" within the meaning of section 4001(b) of ERISA, or to which the
Company or an ERISA Affiliate is party, whether written or oral, for the benefit
of any employee or former employee of the Company or any Subsidiary (the
"Plans"). Each of the Plans that is subject to section 302 or Title IV of ERISA
or section 412 of the Internal Revenue Code of 1986, as amended (the "Code") is
hereinafter referred to in this Section 3.9 as a "Title IV Plan." Neither the
Company, any Subsidiary nor any ERISA Affiliate has any commitment or formal
plan, whether legally binding or not, to create any additional employee benefit
plan or modify or change any existing Plan that would affect any employee or
former employee of the Company or any Subsidiary.
(b) No liability under Title IV or section 302 of ERISA has
been incurred by the Company or any ERISA Affiliate that has not been satisfied
in full, and no condition exists that presents a material risk to the Company or
any ERISA Affiliate of incurring any such liability, other than liability for
premiums due the Pension Benefit Guaranty Corporation ("PBGC") (which premiums
have been paid when due).
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(c) [Reserved.]
(d) With respect to each Title IV Plan, the present value of
accrued benefits under such Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by such Plan's
actuary with respect to such Plan did not exceed, as of its latest valuation
date, the then current value of the assets of such Plan allocable to such
accrued benefits.
(e) No Title IV Plan is a "multiemployer pension plan," as
defined in section 3(37) of ERISA, nor is any Title IV Plan a plan described in
section 4063(a) of ERISA. Neither the Company nor any ERISA Affiliate has made
or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are
respectively defined in sections 4203 and 4205 of ERISA (or any liability
resulting therefrom has been satisfied in full).
(f) Each Plan has been operated and administered in accordance
with its terms and applicable law, including but not limited to ERISA and the
Code.
(g) Each Plan intended to be "qualified" within the meaning of
section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service with respect to the qualified status of such Plan
under the Code, including all amendments to the Code effected by the Tax Reform
Act of 1986 and subsequent legislation, and nothing has occurred since the
issuance of such letter which could reasonably be expected to cause the loss of
the tax-qualified status of such Plan and the related trust maintained
thereunder. Each Plan intended to satisfy the requirements of Section 501(c)(9)
has satisfied such requirements.
(h) No Plan provides medical, surgical, hospitalization, death
or similar benefits (whether or not insured) for employees or former employees
of the Company or any Subsidiary for periods extending beyond their retirement
or other termination of service, other than (i) coverage mandated by applicable
law, (ii) death benefits under any "pension plan," or (iii) benefits the full
cost of which is borne by the current or former employee (or his or her
beneficiary).
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(i) Except as disclosed in Section 3.9(i) of the Company
Disclosure Schedule or as set forth in Section 5.10 of this Agreement, the
consummation of the transactions contemplated by this Agreement will not, either
alone or in combination with another event, except as expressly provided in
Section 2.4 of this Agreement, (a) entitle any current or former employee or
officer of the Company or any ERISA Affiliate to severance pay, unemployment
compensation or any other payment, or (b) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or
officer.
(j) There are no pending, threatened or anticipated claims by
or on behalf of any Plan, by any employee or beneficiary covered under any such
Plan, or otherwise involving any such Plan (other than routine claims for
benefits) which could have a material adverse effect upon the Plans or have a
Company Material Adverse Effect.
(k) Notwithstanding anything in this Section 3.9 to the
contrary, the representations and warranties set forth in Sections 3.9(c), (f),
and (j) hereof shall not be deemed to be breached unless such breaches, either
individually or in the aggregate, would have a Company Material Adverse Effect.
Section 3.10 TAX MATTERS; GOVERNMENT BENEFITS.
(a) Except as disclosed in Section 3.10(a) of the Company
Disclosure Schedule, the Company and each of its Subsidiaries have duly filed
(or there has been filed on its behalf) all Tax Returns (as hereinafter defined)
that are required to be filed and have duly paid or caused to be duly paid in
full or made provision in accordance with GAAP (or there has been paid or
provision has been made on their behalf) for the payment of all Taxes (as
hereinafter defined) shown due on such Tax Returns. All such Tax Returns are
correct and complete in all material respects and accurately reflect all
liability for Taxes for the periods covered thereby. All Taxes owed and due by
the Company and each of its Subsidiaries for results of operations through June
30, 1996 (whether or not shown on any Tax Return) have been paid or have been
adequately reflected on the Company's balance sheet as of June 30, 1996 included
in the Financial Statements (the "Balance Sheet"). Since June 30, 1996,
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the Company has not incurred liability for any Taxes other than in the ordinary
course of business. Neither the Company nor any of its Subsidiaries has received
written notice of any claim made by an authority in a jurisdiction where neither
the Company nor any of its Subsidiaries file Tax Returns, that the Company is or
may be subject to taxation by that jurisdiction.
(b) Except as disclosed in Section 3.10(b) of the Company
Disclosure Schedule, there are no liens for Taxes upon any property or assets of
the Company or any of its Subsidiaries except for liens for Taxes not yet due.
(c) The federal income Tax Returns of the Company and its
Subsidiaries have been examined by the Internal Revenue Service (or the
applicable statutes of limitation for the assessment of federal income Taxes for
such periods have expired) for all periods through and including June 30, 1992,
and, except as disclosed in Section 3.10(c) of the Company Disclosure Schedule,
no deficiencies were asserted as a result of such examinations that have not
been resolved or fully paid. Neither the Company nor any of its Subsidiaries has
waived any statute of limitations in any jurisdiction in respect of Taxes or Tax
Returns or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(d) The deductibility of compensation paid by the Company or
any of its Subsidiaries will not be limited by Section 162(m) of the Code.
(e) Except as disclosed in Section 3.10(e) of the Company
Disclosure Schedule, no federal, state, local or foreign audits, examinations or
other administrative proceedings have been commenced or, to the Company's
knowledge, are threatened with regard to any Taxes or Tax Returns of the Company
or of any of its Subsidiaries. No written notification has been received by the
Company or by any of its Subsidiaries that such an audit, examination or other
proceeding is pending or threatened with respect to any Taxes due from or with
respect to or attributable to the Company or any of its Subsidiaries or any Tax
Return filed by or with respect to the Company or any of its Subsidiaries. To
the Company's knowledge, there is no dispute or claim concerning any Tax
liability
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of the Company, or any of its Subsidiaries either claimed or raised by any
taxing authority in writing.
(f) Except as disclosed in Section 3.10(f) of the Company
Disclosure Schedule, no power of attorney granted by either the Company or any
of its Subsidiaries is currently in force.
(g) Except as disclosed in Section 3.10(g) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any agreement, plan, contract or arrangement that could result, separately or
in the aggregate, in a payment of any "excess parachute payments" within the
meaning of section 280G of the Code.
(h) Except as disclosed in Section 3.10(h) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries has filed a
consent pursuant to section 341(f) of the Code (or any predecessor provision)
concerning collapsible corporations, or agreed to have section 341(f)(2) of the
Code apply to any disposition of a "subsection (f) asset" (as such term is
defined in section 341(f)(4) of the Code) owned by the Company or any of its
Subsidiaries.
(i) Except as disclosed in Section 3.10(i) of the Company
Disclosure Schedule, neither the Company nor any of its Subsidiaries is a party
to any tax sharing, tax indemnity or other agreement or arrangement with any
entity not included in the Company's consolidated financial statements most
recently filed by the Company with the SEC.
(j) Except as disclosed in Section 3.10(j) of the Company
Disclosure Schedule, none of the Company or any of its Subsidiaries has been a
member of any affiliated group within the meaning of section 1504(a) of the
Code, or any similar affiliated or consolidated group for tax purposes under
state, local or foreign law (other than a group the common parent of which is
the Company), or has any liability for Taxes of any person (other than the
Company and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or successor,
by contract or otherwise.
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(k) As used in this Agreement, the following terms shall have
the following meanings:
(i) "Tax" or "Taxes" shall mean all taxes, charges,
fees, duties, levies, penalties or other assessments imposed by any
federal, state, local or foreign governmental authority, including, but
not limited to, income, gross receipts, excise, property, sales, gain,
use, license, custom duty, unemployment, capital stock, transfer,
franchise, payroll, withholding, social security, minimum estimated,
and other taxes, and shall include interest, penalties or additions
attributable thereto; and
(ii) "Tax Return" shall mean any return, declaration,
report, claim for refund, or information return or statement relating
to Taxes, including any schedule or attachment thereto, and including
any amendment thereof.
Section 3.11 INTELLECTUAL PROPERTY.
(a) Except as disclosed in Section 3.11(a) of the Company
Disclosure Schedule, the Company and its Subsidiaries own or have adequate
rights to use all items of Intellectual Property (as defined below) necessary to
conduct the business of the Company and its Subsidiaries as presently conducted
or as currently proposed to be conducted, free and clear of all Encumbrances
(other than Encumbrances which, individually or in the aggregate, would not have
a Company Material Adverse Effect).
(b) To the knowledge of the Company, the conduct of the
Company's and its Subsidiaries' business and the Intellectual Property owned or
used by the Company and its Subsidiaries, do not infringe any Intellectual
Property rights or any other proprietary right of any person other than
infringements which, individually or in the aggregate, would not have a Company
Material Adverse Effect. The Company and its Subsidiaries have received no
notice of any allegations or threats that the Company's and its Subsidiaries'
use of any of the Intellectual Property infringes upon or is in conflict with
any Intellectual Property or proprietary rights of any third party other than
infringements or conflicts which individually or in the aggregate would not have
a Company Material Adverse Effect.
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(c) As used in this Agreement, "Intellectual Property" means
all of the following: (i) U.S. and foreign registered and unregistered
trademarks, trade dress, service marks, logos, trade names, corporate names and
all registrations and applications to register the same (the "Trademarks"); (ii)
issued U.S. and foreign patents and pending patent applications, patent
disclosures, and any and all divisions, continuations, continuations-in-part,
reissues, reexaminations, and extension thereof, any counterparts claiming
priority therefrom, utility models, patents of importation/confirmation,
certificates of invention and like statutory rights (the "Patents"); (iii) U.S.
and foreign registered and unregistered copyrights (including, but not limited
to, those in computer software and databases), rights of publicity and all
registrations and applications to register the same (the "Copyrights"); (iv) all
categories of trade secrets as defined in the Uniform Trade Secrets Act
including, but not limited to, business information; and (v) all licenses and
agreements pursuant to which the Company has acquired rights in or to any
Trademarks, Patents, or Copyrights, or licenses and agreements pursuant to which
the Company has licensed or transferred the right to use any of the foregoing
("Licenses").
Section 3.12 EMPLOYMENT MATTERS. To the knowledge of the
Company, no key employee disclosed in Section 3.12 of the Company Disclosure
Schedule has any plans to terminate such employee's employment with the Company
or any of its Subsidiaries as a result of the Transactions or otherwise. Neither
the Company nor any of its Subsidiaries has experienced any strikes, collective
labor grievances, other collective bargaining disputes or claims of unfair labor
practices in the last five years. To the Company's knowledge, there is no
organizational effort presently being made or threatened by or on behalf of any
labor union with respect to employees of the Company and its Subsidiaries.
Section 3.13 COMPLIANCE WITH LAWS. The Company and its
Subsidiaries are in compliance with, and have not violated any applicable law,
rule or regulation of any United States federal, state, local, or foreign
government or agency thereof which affects the business, properties or assets of
the Company and its Subsidiaries, and no notice, charge, claim, action or
assertion has been received by the Company or any of its Subsidiaries
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or has been filed, commenced or, to the Company's knowledge, threatened against
the Company or any of its Subsidiaries alleging any such violation, except for
any matter otherwise covered by this sentence which would not have, individually
or in the aggregate, a Company Material Adverse Effect. All licenses, permits
and approvals required under such laws, rules and regulations are in full force
and effect except where the failure to be in full force and effect would not
have a Company Material Adverse Effect.
Section 3.14 VOTE REQUIRED. The affirmative vote of the
holders of a majority of the outstanding Shares in favor of the Merger is the
only vote of the holders of any class or series of the Company's capital stock
which may be necessary to approve this Agreement and the Transactions.
Section 3.15 ENVIRONMENTAL LAWS.
(a) Except as disclosed in Section 3.15(a) of the Company
Disclosure Schedule, to the knowledge of the Company, the Company and its
Subsidiaries are in compliance with all applicable Environmental Laws (as
defined below) (which compliance includes, without limitation, the possession by
the Company and its Subsidiaries of all permits and other governmental
authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof), except where failure to be in compliance,
either individually or in the aggregate, would not have a Company Material
Adverse Effect.
(b) Except as disclosed in Section 3.15(b) of the Company
Disclosure Schedule, to the knowledge of the Company, there is no Environmental
Claim (as defined below) pending or, to the Company's knowledge, threatened
against the Company or any of the Subsidiaries or, to the Company's knowledge,
against any person or entity whose liability for any Environmental Claim the
Company or any of its Subsidiaries has or may have retained or assumed either
contractually or by operation of law which Environmental Claim would have,
either individually or in the aggregate, a Company Material Adverse Effect.
(c) Except as disclosed in Section 3.15(c) of the Company
Disclosure Schedule, to the knowledge of the Company, there are no past or
present actions, activi-
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ties, circumstances, conditions, events or incidents, including, without
limitation, the release or presence of any Hazardous Material (as defined
below), which could form the basis of any Environmental Claim against the
Company or any of its Subsidiaries, or to the Company's knowledge, against any
person or entity whose liability for any Environmental Claim the Company or any
of its Subsidiaries has or may have retained or assumed either contractually or
by operation of law, which Environmental Claim would have, either individually
or in the aggregate, a Company Material Adverse Effect.
(d) Except as disclosed in Section 3.15(d) of the Company
Disclosure Schedule, to the knowledge of the Company, the Company and its
Subsidiaries have not, and to the Company's knowledge, no other person has,
placed, stored, deposited, discharged, buried, dumped or disposed of Hazardous
Materials or any other wastes produced by, or resulting from, any business,
commercial or industrial activities, operations or processes, on, beneath or
adjacent to any property currently or formerly owned, operated or leased by the
Company or any of its Subsidiaries, except (x) for inventories of such
substances to be used, and wastes generated therefrom, in the ordinary course of
business of the Company and its Subsidiaries, or (y) which would not, either
individually or in the aggregate, have a Company Material Adverse Effect.
(e) Without in any way limiting the generality of the
foregoing, except as disclosed in Section 3.15(e) of the Company Disclosure
Schedule, to the knowledge of the Company, none of the properties owned,
operated or leased by the Company or any of its Subsidiaries contain any:
underground storage tanks; asbestos; polychlorinated biphenyls ("PCBs");
underground injection wells; radioactive materials; or septic tanks or waste
disposal pits in which process wastewater or any Hazardous Materials have been
discharged or disposed the existence of which, individually or in the aggregate,
could reasonably be expected to have a Company Material Adverse Effect.
(f) The Company has made available to Parent for review copies
of all environmental reports or studies in its possession.
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(g) For purposes of this Agreement, (i) "Environmental Laws"
means all federal, state, local and foreign laws and regulations relating to
pollution or protection of human health or the environment, including, without
limitation, laws relating to releases or threatened releases of Hazardous
Materials or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, release, disposal, transport or handling of Hazardous
Materials and all laws and regulations with regard to recordkeeping,
notification, disclosure and reporting requirements respecting Hazardous
Materials; (ii) "Environmental Claim" means any claim, action, cause of action,
investigation or notice (written or oral) by any person or entity alleging
potential liability (including, without limitation, potential liability for
investigatory costs, Cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (a) the presence, or Release, of any
Hazardous Materials at any location, whether or not owned, leased or operated by
the Company or any of its Subsidiaries, or (b) circumstances forming the basis
of any violation, or alleged violation, of any Environmental Law; (iii)
"Hazardous Materials" means all substances defined as Hazardous Substances,
Oils, Pollutants or Contaminants in the National Oil and Hazardous Substances
Pollution Contingency Plan, 40 C.F.R. ss. 300.5, or defined as such by, or
regulated as such under, any Environmental Law.
Section 3.16 INFORMATION IN PROXY STATEMENT. The Proxy
Statement, if any (or any amendment thereof or supplement thereto), will not, at
the date mailed to Company shareholders and at the time of the meeting of
Company shareholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading, except
that no representation is made by the Company with respect to statements made
therein based on information supplied in writing by Parent or the Purchaser for
inclusion in the Proxy Statement. The Proxy Statement will comply in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
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Section 3.17 OPINION OF FINANCIAL ADVISOR. The Company has
received the opinion of J.C. Bradford & Co., dated the date hereof, to the
effect that, as of such date, the consideration to be received in the Offer and
the Merger by the Company's shareholders is fair to the Company's shareholders
from a financial point of view, a copy of which opinion has been delivered to
Parent and the Purchaser.
Section 3.18 RIGHTS AGREEMENT. The Company has taken all
action which may be necessary under the Shareholder Rights Agreement dated as of
July 25, 1995 between the Company and First Union National Bank of North
Carolina, as Rights Agent (the "Rights Agreement"), so that the execution of
this Agreement and any amendments hereto by the parties hereto and the
consummation of the transactions contemplated hereby shall not cause (i) Parent
and/or the Purchaser to become an Acquiring Person (as defined in the Rights
Agreement), (ii) a Distribution Date, a Stock Acquisition Date or a Triggering
Event (as such terms are defined in the Rights Agreement) to occur, irrespective
of the number of Shares acquired pursuant to the Offer and (iii) the Rights
Agreement is otherwise inapplicable to this Agreement and the transactions
contemplated hereby, including the Offer and the Merger. The Company has
furnished to Parent a true and complete copy of Amendment No. 1 to the Rights
Agreement, which is in full force and effect.
Section 3.19 PHONES. Except as disclosed in Section 3.19 of
the Company Disclosure Schedule, the Company has good and marketable title, free
of all Encumbrances, to at least 20,000 pay telephones and at least 5,800 prison
phones in operation, subject to enforceable site location agreements and
generating income for the Company. The average term of such site location
agreements for each telephone (excluding prison phones) is at least 40 months
and the average term of such site location agreements for each prison phone is
at least 28 months.
Section 3.20 AVERAGE NET REVENUE. As of the date hereof and as
of the Closing, the Average Net Revenue shall be at least $90 per pay telephone
(excluding prison phones) and $145 per prison phone in operation as of the date
of this Agreement. For purposes of this Agreement, "Average Net Revenue" for
such pay telephones
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shall mean the average of the monthly gross revenues minus telephone bills and
commissions (assuming dial-around compensation is based on the state of the law
existing prior to September 20, 1996) for the 18 months prior to the date of
this Agreement. Average Net Revenue from operator service providers shall only
include revenues received by the Company from such providers.
Section 3.21 BROKERS OR FINDERS. The Company represents, as to
itself and its Subsidiaries and affiliates, that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to any
brokers' or finder's fee or any other commission or similar fee from the Company
or any of its Subsidiaries in connection with any of the transactions
contemplated by this Agreement except for J.C. Bradford & Co., whose fees are
set forth in the engagement letter attached as Section 3.21 of the Company
Disclosure Schedule.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
Parent and the Purchaser represent and warrant to the Company
as set forth below.
Section 4.1 ORGANIZATION. Parent is a corporation duly
organized, validly existing and in good standing under the laws of Ohio and the
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of Georgia.
Section 4.2 AUTHORIZATION; VALIDITY OF AGREEMENT; NECESSARY
ACTION. Each of Parent and the Purchaser has full corporate power and authority
to execute and deliver this Agreement and to consummate the Transactions. The
execution, delivery and performance by Parent and the Purchaser of this
Agreement and the consummation of the Transactions have been duly authorized by
the Boards of Directors of Parent and the Purchaser and by Parent as the sole
shareholder of the Purchaser and no other corporate action on the part of Parent
and the Purchaser is necessary to authorize the execution and delivery by Parent
and the Purchaser of this Agreement and the consummation of the Transactions.
This Agreement
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has been duly executed and delivered by Parent and the Purchaser and, assuming
due and valid authorization, execution and delivery hereof by the Company, is a
valid and binding obligation of each of Parent and the Purchaser enforceable
against each of them in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, moratorium, reorganization,
or other laws affecting creditors' rights generally or by the availability of
equitable remedies generally.
Section 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS. Except for
the filings, permits, authorizations, consents and approvals as may be required
under, and other applicable requirements of, the Exchange Act and the HSR Act,
none of the execution, delivery or performance of this Agreement by Parent or
the Purchaser, the consummation by Parent or the Purchaser of the Transactions
or compliance by Parent or the Purchaser with any of the provisions hereof will
(i) conflict with or result in any breach of any provision of the Articles of
Incorporation or Code of Regulations of Parent or the Articles of Incorporation
or By-Laws of the Purchaser, (ii) require any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (iii) result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which Parent, or any of its Subsidiaries or the
Purchaser is a party or by which any of them or any of their respective
properties or assets may be bound, or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Parent, any of its
Subsidiaries or any of their properties or assets, excluding from the foregoing
clauses (ii), (iii) and (iv) such violations, breaches or defaults which would
not, individually or in the aggregate, have a material adverse effect on the
ability of Parent and the Purchaser to consummate the Transactions.
Section 4.4 INFORMATION IN PROXY STATEMENT. None of the
information supplied by Parent or the Purchaser in writing specifically for
inclusion or incorporation by reference in the Proxy Statement, if any, will,
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at the date mailed to shareholders and at the time of the meeting of
shareholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
Section 4.5 FINANCING. Parent has received a highly confident
letter for the funds sufficient to finance the transactions contemplated herein
and has made available to the Company a true and correct copy of such letter.
ARTICLE V
COVENANTS
Section 5.1 INTERIM OPERATIONS OF THE COMPANY. The Company
covenants and agrees that, except (i) as expressly contemplated by this
Agreement or (ii) as agreed in writing by Parent, after the date hereof, and
prior to the time the designees of Parent have been elected to, and shall
constitute a majority of, the Board of Directors of the Company pursuant to
Section 1.3 hereof (the "Appointment Date"):
(a) the business of the Company and its Subsidiaries shall be
conducted only in the ordinary and usual course and, to the extent consistent
therewith, each of the Company and its Subsidiaries shall use its best efforts
to preserve its business organization intact and maintain its existing relations
with customers, suppliers, employees, creditors and business partners;
(b) the Company will not, directly or indirectly, (i) except
upon exercise of Warrants or Options or other rights to purchase shares of
Common Stock outstanding on the date hereof, issue, sell, transfer or pledge or
agree to sell, transfer or pledge any treasury stock of the Company or any
capital stock of any of its Subsidiaries beneficially owned by it, (ii) amend
its Articles of Incorporation or By-laws or similar organizational documents; or
(iii) split, combine or reclassify the outstanding Shares or any outstanding
capital stock of any of the Subsidiaries of the Company;
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(c) neither the Company nor any of its Subsidiaries shall: (i)
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock; (ii) issue, sell, pledge,
dispose of or encumber any additional shares of, or securities convertible into
or exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of capital stock of any class of the Company or its
Subsidiaries, other than Shares reserved for issuance on the date hereof
pursuant to the exercise of Warrants or Options outstanding on the date hereof;
(iii) transfer, lease, license, sell or dispose of any assets, or incur any
indebtedness or other liability other than in the ordinary course of business,
or mortgage, pledge or encumber any assets or modify any indebtedness; or (iv)
redeem, purchase or otherwise acquire, directly or indirectly, any of its
capital stock;
(d) neither the Company nor any of its Subsidiaries shall: (i)
grant any increase in the compensation payable or to become payable by the
Company or any of its Subsidiaries to any of its executive officers or (ii)(A)
adopt any new, or (B) amend or otherwise increase, or accelerate the payment or
vesting of the amounts payable or to become payable under any existing bonus,
incentive compensation, deferred compensation, severance, profit sharing, stock
option, stock purchase, insurance, pension, retirement or other employee benefit
plan, agreement or arrangement; or (iii) enter into any employment or severance
agreement with or, except in accordance with the existing written policies of
the Company, grant any severance or termination pay to any officer, director or
employee of the Company or any of its Subsidiaries;
(e) neither the Company nor any of its Subsidiaries shall
permit any insurance policy naming it as a beneficiary or a loss payable payee
to be cancelled or terminated without notice to Parent;
(f) neither the Company nor any of its Subsidiaries shall
enter into any contract or transaction relating to the purchase of assets other
than in the ordinary course of business;
(g) neither the Company nor any of its Subsidiaries shall
change any of the accounting methods used by it unless required by GAAP, neither
the Company nor any
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of its Subsidiaries shall make any material Tax election, change any material
Tax election already made, adopt any material Tax accounting method, change any
material Tax accounting method unless required by GAAP, enter into any closing
agreement, settle any Tax claim or assessment or consent to any Tax claim or
assessment or any waiver of the statute of limitations for any such claim or
assessment; and
(h) neither the Company nor any of its Subsidiaries will enter
into any agreement with respect to the foregoing or take any action with the
intent of causing any of the conditions to the Offer set forth in Annex A not to
be satisfied.
Section 5.2 ACCESS; CONFIDENTIALITY. (a) Upon reasonable
notice, the Company shall (and shall cause each of its Subsidiaries to) afford
to the officers, employees, accountants, counsel, financing sources and other
representatives of Parent, access, during normal business hours during the
period prior to the Appointment Date, to all its properties, books, contracts,
commitments and records and, during such period, the Company shall (and shall
cause each of its Subsidiaries to) furnish promptly to Parent (a) a copy of each
report, schedule, registration statement and other document filed or received by
it during such period pursuant to the requirements of federal securities laws
and (b) all other information concerning its business, properties and personnel
as Parent may reasonably request, including without limitation, true and
complete copies of each Plan of the Company or of any of its Subsidiaries and
any amendments thereto (or if any Plan is not a written Plan, a description
thereof), any related trust or other funding vehicle, any summary plan
description under ERISA or the Code and the most recent determination letter
received from the Internal Revenue Service with respect to each such Plan
intended to qualify under Section 401 of the Code. Access shall include the
right to conduct such environmental studies and tests as Parent, in its
reasonable discretion, shall deem appropriate; provided, however, that such
studies and tests must be performed prior to April 15, 1997 and must be
performed in such a way as not to disrupt materially the Company's business.
After the Appointment Date, the Company shall provide Parent and such persons as
Parent shall designate with all such information, at such time as Parent shall
request.
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Unless otherwise required by law and until the Appointment Date, Parent and the
Purchaser will hold any such information which is non-public in confidence in
accordance with, and will otherwise abide by, the provisions of the
Confidentiality Agreement between the Company and Parent dated July 25, 1996
(the "Confidentiality Agreement").
(b) Following the execution of this Agreement, Parent and the
Company shall cooperate with each other and make all reasonable efforts to
minimize any disruption to the business which may result from the announcement
of the Transactions.
Section 5.3 CONSENTS AND APPROVALS. (a) Each of the Company,
Parent and the Purchaser shall take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on it with respect
to this Agreement and the Transactions (which actions shall include, without
limitation, furnishing all information required under the HSR Act and in
connection with approvals of or filings with any other Governmental Entity) and
will promptly cooperate with and furnish information to each other in connection
with any such requirements imposed upon any of them or any of their Subsidiaries
in connection with this Agreement and the Transactions. Each of the Company,
Parent and the Purchaser shall, and shall cause its Subsidiaries to, take all
reasonable actions necessary to obtain (and will cooperate with each other in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any Governmental Entity or other public or private third party required to
be obtained or made by Parent, the Purchaser, the Company or any of their
Subsidiaries in connection with the Transactions or the taking of any action
contemplated thereby or by this Agreement.
(b) The Company and Parent shall take all reasonable actions
necessary to file as soon as practicable notifications under the HSR Act and to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other Governmental Entity in connection with antitrust matters.
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Section 5.4 NO SOLICITATION. (a) Neither the Company nor any
of its Subsidiaries shall (and the Company and its Subsidiaries shall cause
their respective officers, directors, employees, representatives and agents,
including, but not limited to, investment bankers, attorneys and accountants,
not to), directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, person or other entity or group (other than Parent or
any of its affiliates or representatives) concerning any proposal or offer to
acquire all or a substantial part of the business and properties of the Company
or any of its Subsidiaries or any capital stock of the Company or any of its
Subsidiaries, whether by merger, tender offer, exchange offer, sale of assets or
similar transactions involving the Company or any Subsidiary, division or
operating or principal business unit of the Company (an "Acquisition Proposal"),
except that nothing contained in this Section 5.4 or any other provision hereof
shall prohibit the Company or the Company's Board of Directors from (i) taking
and disclosing to the Company's shareholders a position with respect to a tender
or exchange offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act, or (ii) making such disclosure to the Company's
shareholders as, in the good faith judgment of the Board of Directors, after
receiving advice from outside counsel, is required under applicable law;
provided that, except as permitted by this Section 5.4, neither the Board of
Directors of the Company nor any committee thereof shall (x) approve or
recommend or propose to approve or recommend any Acquisition Proposal, (y) enter
into any agreement with respect to any Acquisition Proposal, or (z) withdraw or
modify, or propose to withdraw or modify, in a manner adverse to Parent or the
Purchaser, the approval or recommendation by such Board of Directors or any such
committee of the Offer, this Agreement or the Merger. The Company will
immediately cease any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing.
(b) Notwithstanding the foregoing, prior to the acceptance of
Shares pursuant to the Offer, the Company may furnish information concerning its
business, properties or assets to any corporation, partnership, person or other
entity or group pursuant to appropriate
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confidentiality agreements, and may negotiate and participate in discussions and
negotiations with such entity or group concerning an Acquisition Proposal if (x)
such entity or group has on an unsolicited basis submitted a bona fide written
proposal to the Company relating to any such transaction which the Board of
Directors determines in good faith, after receiving advice from a nationally
recognized investment banking firm, represents a superior transaction to the
Offer and the Merger and which the Board of Directors determines in good faith
can be fully financed and (y) in the opinion of the Board of Directors of the
Company, only after receipt of advice from outside legal counsel to the Company,
the failure to provide such information or access or to engage in such
discussions or negotiations could reasonably be expected to cause the Board of
Directors to violate its fiduciary duties to the Company's shareholders under
applicable law (an Acquisition Proposal which satisfies clauses (x) and (y)
being referred to herein as a "Superior Proposal"). The Company shall within one
business day following receipt of a Superior Proposal notify Parent of the
receipt of the same. The Company shall promptly provide to Parent any material
non-public information regarding the Company provided to any other party which
was not previously provided to Parent. At any time after two business days
following notification to Parent of the Company's intent to do so (which
notification shall include the identity of the bidder and the material terms and
conditions of the proposal) and if the Company has otherwise complied with the
terms of this Section 5.4(b), the Board of Directors may withdraw or modify its
approval or recommendation of the Offer.
(c) In the event of a Superior Proposal which (i) is to be
paid entirely in cash and (ii) is not subject to any financing condition or
contingency, the Company may enter into an agreement with respect to such
Superior Proposal no sooner than four days after giving Parent written notice of
its intention to enter into such agreement; provided that the Purchaser or
Parent has not, prior to the expiration of such four-day period, advised the
Company of its intention to raise the Offer Price to match such Superior
Proposal and has waived the Financing Condition (unless the sole reason for the
Financing Condition not to be waived is the failure of the Company to satisfy
its obligations under Sections 5.11 and 5.13 hereof). Upon expiration of such
four-day period without such
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action by the Purchaser or Parent, the Company may enter into an agreement with
respect to such Superior Proposal (with the bidder and on terms no less
favorable than those specified in such notification), provided it shall
concurrently with entering into such agreement pay or cause to be paid to Parent
the amount specified in Section 8.1(b) hereof.
Section 5.5 ADDITIONAL AGREEMENTS. Subject to the terms and
conditions herein provided, each of the parties hereto shall use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, or to remove any injunctions or other impediments or delays, legal
or otherwise, to achieve the satisfaction of the Minimum Condition, the
Financing Condition and all conditions set forth in Annex A attached hereto and
Article VI hereof, and to consummate and make effective the Merger and the other
transactions contemplated by this Agreement. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the officers and directors of the Company, Parent
and the Purchaser shall use all reasonable efforts to take, or cause to be
taken, all such necessary actions.
Section 5.6 PUBLICITY. The initial press release with respect
to the execution of this Agreement shall be a joint press release acceptable to
Parent and the Company. Thereafter, so long as this Agreement is in effect,
neither the Company, Parent nor any of their respective affiliates shall issue
or cause the publication of any press release or other announcement with respect
to the Merger, this Agreement or the other Transactions without the prior
consultation of the other party, except as such party believes, after receiving
the advice of outside counsel, may be required by law or by any listing
agreement with a national securities exchange or trading market.
Section 5.7 NOTIFICATION OF CERTAIN MATTERS. The Company shall
give prompt notice to Parent and Parent shall give prompt notice to the Company,
of (i) the occurrence or non-occurrence of any event the occurrence or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or
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inaccurate in any material respect at or prior to the Effective Time and (ii)
any material failure of the Company, Parent or the Purchaser, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this Section 5.7 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
Section 5.8 DIRECTORS' AND OFFICERS' INSURANCE AND
INDEMNIFICATION. (a) For six years after the Effective Time, the Surviving
Corporation (or any successor to the Surviving Corporation) shall indemnify,
defend and hold harmless the present and former officers and directors of the
Company and its Subsidiaries, and persons who become any of the foregoing prior
to the Effective Time (each an "Indemnified Party") against all losses, claims,
damages, liabilities, costs, fees and expenses (including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided that any such settlement is effected with
the written consent of the Parent or the Surviving Corporation which consent
shall not unreasonably be withheld)) arising out of actions or omissions
occurring at or prior to the Effective Time to the full extent permissible under
applicable Georgia law, the terms of the Company's Articles of Incorporation or
the By-laws, as in effect at the date hereof; provided that, in the event any
claim or claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
disposition of any and all such claims.
(b) Parent or the Surviving Corporation shall maintain the
Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of not less than six years after the Effective Time;
provided, that the Parent may substitute therefor policies of substantially
equivalent coverage and amounts containing terms no less favorable to such
former directors or officers; provided, further, if the existing D&O Insurance
expires, is terminated or cancelled during such period, Parent or the Surviving
Corporation will use all reasonable efforts to obtain substantially similar D&O
Insurance; provided, further, however, that in no event shall Parent be required
to pay aggregate premiums for insur-
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ance under this Section 5.8(b) in excess of $103,250; and provided, further,
that if the Parent or the Surviving Corporation is unable to obtain the amount
of insurance required by this Section 5.8(b) for such aggregate premium, Parent
or the Surviving Corporation shall obtain as much insurance as can be obtained
for an annual premium not in excess of $103,250.
Section 5.9 PURCHASER COMPLIANCE. Parent shall cause the
Purchaser to comply with all of its obligations under or related to this
Agreement.
Section 5.10 SEVERANCE ARRANGEMENTS. Parent shall cause the
Surviving Corporation to honor the severance arrangements set forth in the
Employment Agreement dated as of November 6, 1995 (the "Employment Agreement")
by and between Communications Central of Georgia, Inc., a Georgia corporation
and wholly owned Subsidiary of the Company and Rodger L. Johnson (the
"Executive"), except to the extent modified or superseded by any separate
agreement which may be entered into by the Executive and Parent or the Purchaser
or any of their respective Subsidiaries.
Section 5.11 FINANCING. Parent shall endeavor in good faith to
secure funds sufficient for Parent and the Purchaser to consummate the
transactions contemplated hereby. The Company shall provide such assistance as
Parent may reasonably request in connection with securing such funds, including,
without limitation, using its reasonable best efforts to (a) make available on a
timely basis such financial information of the Company and its Subsidiaries as
may reasonably be required in connection with any such financing, (b) obtain
"cold comfort" letters and updates thereof from the Company's independent
certified public accountants and opinion letters from the Company's attorneys,
with such letters to be in customary form and to cover matters of the type
customarily covered by accountants and attorneys in such transactions, and (c)
make available representatives of the Company and its accountants and attorneys
in connection with any such financing, including for purposes of due diligence
and marketing efforts related thereto.
Section 5.12 ADDITIONAL EMPLOYEE COVENANTS. The Company shall,
within five business days of the date hereof, deliver to Parent covenants not to
compete in a
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form reasonably satisfactory to Parent for each of Mark Noyd, Ann Galloway and
Robert Bowling.
Section 5.13 SENIOR CREDIT REFINANCING. At the request of
Parent, the Company shall take all action reasonably necessary to assist Parent
and the Purchaser in refinancing the Company's senior secured credit facility
upon the purchase of and payment for Shares by the Purchaser pursuant to the
Offer, including without limitation (i) borrowing such replacement
indebtedness obtained by Parent or the Purchaser from Parent or the Purchaser,
(ii) providing subsidiary guarantees of such indebtedness to Parent or the
Purchaser; (iii) pledging the Company's assets as security for such
indebtedness; and (iv) arranging for releases of liens which secure prior
indebtedness against the Company's assets.
ARTICLE VI
CONDITIONS TO THE MERGER
Section 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER. The respective obligation of each party to effect the Merger shall
be subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any and all of which may be waived in whole or in part
jointly by the Company and Parent to the extent permitted by applicable law:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been
approved and adopted by the requisite vote of the holders of the Shares, if
required by applicable law in order to consummate the Merger;
(b) STATUTES; COURT ORDERS. No statute, rule or regulation
shall have been enacted or promulgated by any governmental authority which
prohibits the consummation of the Merger; and there shall be no order or
injunction of a court of competent jurisdiction in effect precluding
consummation of the Merger;
(c) PURCHASE OF SHARES IN OFFER. Parent, the Purchaser or
their affiliates shall have purchased Shares pursuant to the Offer, except that
this condition shall not apply if Parent, the Purchaser or their affiliates
shall have failed to purchase Shares pursuant to the
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Offer in breach of their obligations under this Agreement; and
(d) HSR APPROVAL. The applicable waiting period under the HSR
Act shall have expired or been terminated.
Section 6.2 CONDITION TO PARENT'S AND THE PURCHASER'S
OBLIGATIONS TO EFFECT THE MERGER. The obligations of Parent and the Purchaser to
consummate the Merger are further subject to the fulfillment of the condition
that all actions contemplated by Section 2.4 hereof shall have been taken, which
may be waived in whole or in part by Parent and the Purchaser.
ARTICLE VII
TERMINATION
Section 7.1 TERMINATION. This Agreement may be terminated and
the Transactions contemplated herein may be abandoned at any time prior to the
Effective Time, whether before or after shareholder approval thereof:
(a) By the mutual written consent of Parent
and the Company; or
(b) By either of the Company or Parent:
(i) if (x) the Offer shall have expired without any
Shares being purchased therein or (y) the Purchaser shall not have
accepted for payment all Shares tendered pursuant to the Offer by May
19, 1997; provided, however, that the right to terminate this Agreement
under this Section 7.1(b)(i) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of Parent or the Purchaser, as
the case may be, to purchase the Shares pursuant to the Offer on or
prior to such date; or
(ii) if any Governmental Entity shall have issued an
order, decree or ruling or taken any other action (which order, decree,
ruling or other action the parties hereto shall use their reasonable
ef-
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forts to lift), which permanently restrains, enjoins or otherwise
prohibits the acceptance for payment of, or payment for, Shares
pursuant to the Offer or the Merger and such order, decree, ruling or
other action shall have become final and non-appealable; or
(c) By the Company:
(i) if Parent, the Purchaser or any of their affiliates
shall have failed to commence the Offer on or prior to five business
days following the date of the initial public announcement of the
Offer; provided, that the Company may not terminate this Agreement
pursuant to this Section 7.1(c)(i) if the Company is at such time in
breach of its obligations under this Agreement such as to cause a
Company Material Adverse Effect; or
(ii) if Parent or the Purchaser shall have breached in
any material respect any of their respective representations,
warranties, covenants or other agreements contained in this Agreement,
which breach cannot be or has not been cured, in all material respects,
within 30 days after the giving of written notice to Parent or the
Purchaser, as applicable; or
(iii) in connection with entering into a definitive
agreement in accordance with Section 5.4(c) hereof, provided it has
complied with all provisions thereof, including the notice provisions
therein, and that it makes simultaneous payment of the amount
specified in Section 8.1(b) hereof; or
(d) By Parent:
(i) if, due to an occurrence, not involving a breach by
Parent or the Purchaser of their obligations hereunder, which makes it
impossible to satisfy any of the conditions set forth in Annex A
hereto, Parent, the Purchaser, or any of their affiliates shall have
failed to commence the Offer on or prior to five business days
following the date of the initial public announcement of the Offer;
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(ii) if prior to the purchase of Shares pursuant to the
Offer, the Company shall have breached any representation, warranty,
covenant or other agreement contained in this Agreement which (A) would
give rise to the failure of a condition set forth in paragraph (f) or
(g) of Annex A hereto and (B) cannot be or has not been cured, in all
material respects, within 30 days after the giving of written notice to
the Company; or
(iii) upon the occurrence of any event set
forth in paragraph (e) of Annex A hereto.
Section 7.2 EFFECT OF TERMINATION. In the event of the
termination of this Agreement pursuant to its terms, written notice thereof
shall forthwith be given to the other party or parties specifying the provision
hereof pursuant to which such termination is made, and this Agreement shall
forthwith become null and void, and there shall be no liability on the part of
the Purchaser, Parent or the Company except (A) for fraud or for breach of this
Agreement prior to such termination and (B) as set forth in the last sentence of
Section 5.2(a) and Sections 7.2 and 8.1 hereof.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 FEES AND EXPENSES. (a) Except as contemplated by
this Agreement, including Sections 8.1(b) and (c) hereof, all costs and expenses
incurred in connection with this Agreement and the consummation of the
Transactions shall be paid by the party incurring such expenses.
(b) If (i) Parent terminates this Agreement pursuant to
Section 7.1(d)(iii) hereof, (ii) the Company terminates this Agreement pursuant
to Section 7.1(c)(iii) hereof, or (iii) either the Company or Parent terminates
this Agreement pursuant to Section 7.1(b)(i) and prior thereto there shall have
been publicly announced another Acquisition Proposal or an event set forth in
paragraph (h) of Annex A shall have occurred, the Company shall pay to Parent,
an amount equal to the greater of $2,000,000 (the "Termination Fee"), or an
amount equal to Parent's
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actual, reasonable and reasonably documented out-of-pocket fees and expenses
incurred by Parent and the Purchaser in connection with the Offer, the Merger,
this Agreement, the consummation of the Transactions and the financing therefor,
which shall be payable in same day funds, provided that in no event shall the
Company be obligated to pay any such fees and expenses in excess of $2,500,000.
The Termination Fee or Parent's good faith estimate of its expenses, as the case
may be, shall be paid concurrently with any such termination, together with
delivery of a written acknowledgement by the Company of its obligation to
reimburse Parent for its actual expenses in excess of such estimated expenses
payment.
(c) If the Company terminates this Agreement pursuant to (i)
Section 7.1(b) and the sole reason for the Purchaser's failure to purchase
Shares in the Offer is the Parent's failure to satisfy the Financing Condition
(except if the sole reason for Parent's failure to satisfy the Financing
Condition is the failure of the Company to satisfy its obligations under
Sections 5.11 and 5.13 hereof), or (ii) Section 7.1(c) hereof, then Parent
shall pay to the Company an amount equal to the Company's reasonable legal fees
and expenses incurred, as of the date of such termination, with respect to this
Agreement and the Transactions.
Section 8.2 AMENDMENT AND MODIFICATION. Subject to
applicable law, this Agreement may be amended, modified and supplemented in any
and all respects, whether before or after any vote of the shareholders of the
Company contemplated hereby, by written agreement of the parties hereto, by
action taken by their respective Boards of Directors (which in the case of the
Company shall include approvals as contemplated in Section 1.2(a)), at any time
prior to the Closing Date with respect to any of the terms contained herein;
provided, however, that after the approval of this Agreement by the shareholders
of the Company, no such amendment, modification or supplement shall reduce the
amount or change the form of the Merger Consideration.
Section 8.3 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
None of the representations and warranties in this Agreement or in any schedule,
instrument or other document delivered pursuant to this Agreement shall survive
the Effective Time.
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Section 8.4 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or sent by an overnight courier service, such as
Federal Express, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or the Purchaser, to:
PhoneTel Technologies, Inc.
650 Statler Office Building
1127 Euclid Avenue
Suite 650
Cleveland, Ohio 44115-1601
Attention: Chairman
Telephone No.: (216) 241-2555
Telecopy No.: (216) 241-2574
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Stephen M Banker, Esq.
Telephone No.: (212) 735-2760
Telecopy No.: (212) 735-2000
(b) and, if to the Company, to:
Communications Central Inc.
1150 Northmeadow Parkway
Suite 118
Roswell, Georgia 30076
Attention: President
Telephone No.: (770) 442-7300
Telecopy No.: (770) 751-9082
with a copy to:
Hunton & Williams
600 Peachtree Street, N.E.
Suite 4100
Atlanta, Georgia 30308
Attention: J. Stephen Hufford, Esq.
Telephone No.: (404) 888-4048
Telecopy No.: (404) 888-4190
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Section 8.5 INTERPRETATION. When a reference is made in this
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. Whenever the words "include", "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation." As used in this Agreement, the term "affiliates"
shall have the meaning set forth in Rule 12b-2 of the Exchange Act.
Section 8.6 COUNTERPARTS. This Agreement may be executed in
two or more counterparts, each of which shall be considered one and the same
agreement and shall become effective when two or more counterparts have been
signed by each of the parties and delivered to the other parties.
Section 8.7 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.
This Agreement, the Escrow Agreement and the Confidentiality Agreement
(including the documents and the instruments referred to herein and therein)
constitute the entire agreement and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and thereof. This Agreement and the Escrow Agreement are
not intended to confer upon any person other than the parties hereto or thereto
any rights or remedies hereunder or thereunder.
Section 8.8 SEVERABILITY. Any term or provision of this
Agreement that is held by a court of competent jurisdiction or other authority
to be invalid, void or unenforceable in any situation in any jurisdiction shall
not affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction. If the final judgment of a
court of competent jurisdiction or other authority declares that any term or
provision hereof is invalid, void or unenforceable, the parties agree that the
court asking such determination shall have the power to reduce the scope,
duration, area or applicability of the term or provision, to delete specific
words or phrases, or to replace any invalid, void or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to express-
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ing the intention of the invalid or unenforceable term or provision.
Section 8.9 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Georgia without giving
effect to the principles of conflicts of law thereof.
Section 8.10 ASSIGNMENT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written content of the other parties, except that the Purchaser may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to Parent or to any direct or indirect wholly owned Subsidiary of
Parent. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
51
<PAGE> 58
IN WITNESS WHEREOF, Parent, the Purchaser and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PHONETEL TECHNOLOGIES, INC.
By /s/ Peter Graf
--------------------------------
Name: Peter Graf
Title: Chairman
PHONETEL ACQUISITION CORP.
By /s/ Peter Graf
--------------------------------
Name: Peter Graf
Title: Chairman
COMMUNICATIONS CENTRAL INC.
By /s/ Rodger L. Johnson
--------------------------------
Name: Rodger L. Johnson
Title: President and Chief Executive Officer
52
<PAGE> 59
ANNEX A
Certain Conditions of the Offer. Notwithstanding any other
provisions of the Offer, and in addition to (and not in limitation of) the
Purchaser's rights to extend and amend the Offer at any time in its sole
discretion (subject to the provisions of the Merger Agreement), the Purchaser
shall not be required to accept for payment or, subject to any applicable rules
and regulations of the SEC, including Rule 14e-l(c) under the Exchange Act
(relating to the Purchaser's obligation to pay for or return tendered Shares
promptly after termination or withdrawal of the Offer), pay for, and may delay
the acceptance for payment of or, subject to the restriction referred to above,
the payment for, any tendered Shares, and may terminate or amend the Offer as to
any Shares not then paid for, if (i) any applicable waiting period under the HSR
Act has not expired or terminated, (ii) the Minimum Condition has not been
satisfied, or (iii) at any time on or after the date of the Merger Agreement and
before the time of acceptance for payment for any such Shares, any of the
following events shall occur or shall be determined by the Purchaser, in its
judgment reasonably exercised, to have occurred:
(a) there shall be threatened or pending any suit, action or
proceeding by any Governmental Entity against the Purchaser, Parent, the Company
or any Subsidiary of the Company (i) seeking to prohibit or impose any material
limitations on Parent's or the Purchaser's ownership or operation (or that of
any of their respective Subsidiaries or affiliates) of all or a material portion
of their or the Company's businesses or assets, or to compel Parent or the
Purchaser or their respective Subsidiaries and affiliates to dispose of or hold
separate any material portion of the business or assets of the Company or Parent
and their respective Subsidiaries, in each case taken as a whole, (ii)
challenging the acquisition by Parent or the Purchaser of any Shares under the
Offer, seeking to restrain or prohibit the making or consummation of the Offer
or the Merger or the performance of any of the other transactions contemplated
by the Merger Agreement, or seeking to obtain from the Company, Parent or the
Purchaser any damages that are material in relation to the Company and its
Subsidiaries taken as a whole, (iii) seeking to impose material limi-
A-1
<PAGE> 60
tations on the ability of the Purchaser, or render the Purchaser unable, to
accept for payment, pay for or purchase some or all of the Shares pursuant to
the Offer and the Merger, (iv) seeking to impose material limitations on the
ability of the Purchaser or Parent effectively to exercise full rights of
ownership of the Shares, including, without limitation, the right to vote the
Shares purchased by it on all matters properly presented to the Company's
shareholders, or (v) which otherwise is reasonably likely to have a Company
Material Adverse Effect;
(b) there shall be any statute, rule, regulation, judgment,
order or injunction enacted, entered, enforced, promulgated, or deemed
applicable, pursuant to an authoritative interpretation by or on behalf of a
Government Entity, to the Offer or the Merger, or any other action shall be
taken by any Governmental Entity, other than the application to the Offer or the
Merger of applicable waiting periods under HSR Act, that is reasonably likely to
result, directly or indirectly, in any of the consequences referred to in
clauses (i) through (v) of paragraph (a) above;
(c) there shall have occurred (i) any general suspension of
trading in, or limitation on prices for, securities on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ Stock Market for a period in
excess of 24 hours (excluding suspensions or limitations resulting solely from
physical damage or interference with such exchanges not related to market
conditions), (ii) any decline in either the Dow Jones Industrial Average or the
Standard & Poor's Index of 400 Industrial Companies or in the New York Stock
Exchange Composite Index in excess of 15% measured from the close of business on
the trading day next preceding the date of the Merger Agreement, (iii) a
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States (whether or not mandatory), (iv) a commencement of a
war, armed hostilities or other international or national calamity directly or
indirectly involving the United States, (v) any limitation (whether or not
mandatory) by any United States governmental authority on the extension of
credit generally by banks or other financial institutions, (vi) a change in
general financial, bank or capital market conditions which materially and
adversely affects the ability of financial institu-
A-2
<PAGE> 61
tions in the United States to extend credit or syndicate loans or (vii) in the
case of any of the foregoing existing at the time of the commencement of the
Offer, a material acceleration or worsening thereof;
(d) there shall have occurred any events after the date of the
Merger Agreement which, either individually or in the aggregate, would have a
Company Material Adverse Effect;
(e) the Board of Directors of the Company or any committee
thereof shall have withdrawn or modified in a manner adverse to Parent or the
Purchaser its approval or recommendation of the Offer, the Merger or the Merger
Agreement, or approved or recommended any Acquisition Proposal;
(f) the representations and warranties of the Company set
forth in the Merger Agreement shall not be true and correct, in each case (i) as
of the date referred to in any representation or warranty which addresses
matters as of a particular date, or (ii) as to all other representations and
warranties, as of the date of the Merger Agreement and as of the scheduled
expiration of the Offer, unless the inaccuracies (without giving effect to any
materiality or material adverse effect qualifications or materiality exceptions
contained therein) under such representations and warranties, taking all the
inaccuracies under all such representations and warranties together in their
entirety, would not, individually or in the aggregate, result in a Company
Material Adverse Effect;
(g) the Company shall have failed to perform any obligation or
to comply with any agreement or covenant to be performed or complied with by it
under the Merger Agreement other than any failure which would not have, either
individually or in the aggregate, a Company Material Adverse Effect;
(h) any person acquires beneficial ownership (as defined in
Rule 13d-3 promulgated under the Exchange Act), of at least 20% of the
outstanding Common Stock of the Company;
(i) the Merger Agreement shall have been terminated in
accordance with its terms; or
A-3
<PAGE> 62
(j) Parent shall not have satisfied the Financing Condition.
The foregoing conditions are for the sole benefit of Parent
and the Purchaser, may be asserted by Parent or the Purchaser regardless of the
circumstances giving rise to such condition (including any action or inaction by
Parent or the Purchaser not in violation of the Merger Agreement) and may be
waived by Parent or the Purchaser in whole or in part at any time and from time
to time in the sole discretion of Parent or the Purchaser, subject in each case
to the terms of the Merger Agreement. The failure by Parent or the Purchaser at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
A-4
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PHONETEL TECHNOLOGIES, INC.
The following are wholly-owned subsidiaries of PhoneTel Technologies, Inc.
Public Telephone Corporation
World Communications, Inc. and its subsidiary - Northern
Florida Telephone Corporation
Paramount Communication Systems, Inc.
Pay Phones of America, Inc.
Cherokee Communications, Inc.
PhoneTel Acquisition Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the year
ended December 31, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,438
<SECURITIES> 0
<RECEIVABLES> 3,841
<ALLOWANCES> (92)
<INVENTORY> 0
<CURRENT-ASSETS> 50,470
<PP&E> 27,784
<DEPRECIATION> (8,541)
<TOTAL-ASSETS> 159,770
<CURRENT-LIABILITIES> 10,979
<BONDS> 125,378
<COMMON> 145
6,708
0
<OTHER-SE> 16,560
<TOTAL-LIABILITY-AND-EQUITY> 159,770
<SALES> 0
<TOTAL-REVENUES> 44,804
<CGS> 0
<TOTAL-COSTS> (54,819)
<OTHER-EXPENSES> 182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,739)
<INCOME-PRETAX> (16,572)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,572)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,077)
<CHANGES> 0
<NET-INCOME> (26,649)
<EPS-PRIMARY> (5.29)
<EPS-DILUTED> (5.29)
</TABLE>
