<PAGE> 1
UNITED STATES 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 (Fee required)
For the fiscal year ended June 30, 1996
Transition report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (No fee required)
For the transition period from to
Commission File Number: 0-24138
UNITED PAYPHONE SERVICES, INC.
(Name of Small Business Issuer in its Charter)
Nevada
88-0232816
State or Other Jurisdiction of (I.R.S. EmployeIdentification No.)
Incorporation or Organization
1725 West Third Street- Tempe. Arizona 85281
(Address of Principal Executive Offices) (Zip Code)
(602) 829-8777
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
Class A Warrants
Class B Warrants
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 the past 90 days.
Yes X No
Check here if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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
<PAGE> 2
The issuer's revenues for the year ended June 30, 1996, were $2,127,574.
The aggregate market value of the voting stock held by non-affiliates
(approximately 1,775,034 shares as of September 27, 1996) based upon the
average of the bid and asked prices of such stock as of September 27, 1996, as
reported on the Electronic Bulletin Board, was $1,109,396.
The number of shares of Common Stock of the issuer outstanding as of September
27, 1996, was 5,277,099.
Transitional Small Business Disclosure Format (check one): Yes No X
Documents Incorporated by Reference:
Certain exhibits required to be filed herewith are incorporated by reference
from the issuer's registration statement on Form 10-SB (Commission File No.
0-24138) filed with the Commission on May 13, 1994. Also incorporated by
reference into this Form 10-KSB are certain exhibits filed with the Company's
1994 Annual Report on Form 10-KSB, the exhibits filed with the Company's
Registration Statement on Form SB-2 (Commission File Number 33-85884) filed
with the Commission on October 24, 1994, and the exhibits filed with the
Company's Current Report on Form 8-K filed with the Commission on April 12,
1995.
<PAGE> 3
TABLE OF CONTENTS
Page No.
PART I
Item 1. Description of Business . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 7
Item 4. Submission of Matters to a Vote of Security Holders . . . 9
PART II
Item 5. Market Price of and Dividends on the Registrant's
Common Equity and Other Stockholder Matters . . . . . . . . 9
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . 13
Item 8. Changes in and Disagreements With Accountants . . . . . . 13
Item 9. Directors, Executive Officers, Promoters and
Control Persons . . . . . . . . . . . . . . . . . . . . . 13
PART III
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . 15
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 17
Item 12. Certain Relationships and Related Transactions . . . . . 19
Item 13. Exhibits List and Reports on Form 8-K . . . . . . . . . . 20
<PAGE> 4
PART I
Item 1. Description of Business.
Glossary of Terms
For purposes of this Form 10-KSB, the following terms shall be as defined as
follows:
FCC is the Federal Communications Commission.
InterLATA calls are telephone calls between local access and transport areas.
LEC is a local exchange carrier, which is a company providing local telephone
services (for instance, in the Company's area of operations, U.S. West)
Non-coin calls are calling card, credit card, collect and third-party billed
calls.
OSP means an operator services provider, such as AT&T or Sprint.
Property Owners are the owners of the locations, such as convenience
stores, service stations, grocery stores, hotels, shopping centers, truck
stops, and airports, at which public pay telephones are installed.
General
United Payphone Services, Inc. (the " Company") was incorporated in the State
of Nevada on July 24, 1987, under the name "KTA Corporation." On September
25, 1989, the Company changed its name to United Payphone Services, Inc. The
Company is in the business of operating, servicing and maintaining a system of
privately-owned (non-LEC) public pay telephones located in the State of
Arizona. The Company currently generates revenues from coin calls and
non-coin calls made from its approximately 890 pay telephones. Approximately
510 of these telephones are located in the metropolitan Phoenix area,
approximately 280 of these telephones are located in the metropolitan Tucson
area, and the remainder of the Company's telephones are located in other areas
of Arizona. All of these pay telephones, in addition to approximately 70
telephones which are currently unused, are owned by the Company. The pay
telephones are generally installed in locations where the demand for pay
telephone service is heaviest, such as convenience stores, service stations,
hotels, shopping centers, and restaurants. The Company does business in the
State of Arizona under the name "U.S. Payphone, Inc."
Prior to December 1994, the Company's operations were located in Las Vegas,
Nevada. In December 1994, the Company sold all of its pay telephone location
contracts in Las Vegas, Nevada to unrelated third parties. The Company
retained all of its pay telephone equipment as part of this sale. After
completing this sale, the Company relocated its pay telephone equipment in
Arizona. The foregoing sale was consummated because the Company believed its
competitors in Las Vegas engaged in unreasonable methods of competition and
that the Company would be forced to continue to engage in costly litigation to
compete in the Las Vegas market.
<PAGE> 5
In September 1996, the Company completed the sale of 305,500 Units pursuant to
an SB-2 Registration Statement and Prospectus dated February 8, 1996. The
Company realized gross proceeds of $458,250 from the offering (before
deduction of expenses associated with the offering). Each Unit sold in such
offering consisted of two shares of Common Stock, one Class A Warrant and one
Class B Warrant. Each Class A Warrant entitles the holder thereof to
purchase one share of Common Stock at an exercise price of $1.25 at any time
prior to February 8, 1998, and each Class B Warrant entitles the holder
thereof to purchase one share of Common Stock at an exercise price of $1.3125
at any time prior to February 8, 1999. The Class A Warrants and the Class B
Warrants may be redeemed by the Company during a 30-day period on not less
than 30 days' prior written notice at a redemption price of $.01 per Warrant,
provided that the closing price of the Common Stock exceeds (i) $1.2375 per
share of Common Stock with respect to redemption of the Class A Warrants, and
(ii) $1.44375 per share of Common Stock with respect to redemption of the
Class B Warrants, for 20 consecutive business days within any period of 30
consecutive business days ending within 10 days preceding the notice of
redemption.
Industry Background
In 1984, a ruling by the U.S. District Court for the District of Columbia in
the well-documented Bell System antitrust divestiture case, United States v.
American Telephone & Telegraph Company, created various business opportunities
in the telecommunications industry. In 1985, the FCC and most of the state
public service commissions followed this initiative by authorizing the
connection of competitive or privately owned public pay telephones to the
public switched network. Prior to that time, the Bell System and other
monopoly LECs owned all public telephones in the United States.
Prior to 1987, coin calls were the sole source of revenue for independent
public pay telephone companies. Long distance calling card and collect calls
from these pay telephones were handled exclusively by AT&T. All revenue,
except the coins deposited in public pay telephones, went to AT&T rather than
to the owner of the public pay telephone. Beginning in 1987, a competitive
operator service system developed which allowed OSP's to offer independent
public pay telephone companies commissions for directing operator assisted or
calling card calls to them.
The Company's Coin Call Revenues
The Company's pay telephones generate coin revenues from interstate and
intrastate long distance calls and local calls. For the fiscal years ended
June 30, 1996 and 1995, the Company's total coin revenues represented
approximately 66.0% and 65.7%, respectively, of the Company's total revenues.
The Company estimates that 80-85% of its gross coin revenues for the fiscal
year ended June 30, 1996 were derived from local calls. The fact that "busy"
and non-connect calls are part of the Company's billing system, but generate
no revenues, prevents the Company from calculating exact figures for local
calls. The Company charges the same rates for local coin calls as the LEC's
charge. The LEC's typically charge $0.25 for a local coin call in Arizona.
<PAGE> 6
The Company's Non-Coin Call Revenues
In April 1994, the Company entered into a week-to-week agreement with Unitec,
Inc. ("Ul") pursuant to which UI provides operator and long-distance service
for all calls made from all of the Company's pay telephones. The Company
receives a percentage of the revenue from all non-coin telephone calls placed
from the Company's pay telephones which are billed by UI. These amounts are
paid each week by Ul. The agreement with Ul may be terminated at any time by
either party. The Company is not required to send a minimum number of
billable interstate or intrastate minutes to Ul. For the years ended June
30, 1996 and 1995, the Company generated approximately 34.0% and 34.3%,
respectively, of its total revenues from non-coin telephone calls.
Site Selection
The Company attempts to locate its pay telephones where there is a
demonstrated high demand for public pay telephone service based upon high foot
traffic or a reason for a patron to stop, such as at a truck stop. Each
location is evaluated by the Company's local manager for suitability based
upon the past personal experience of the manager in the pay telephone
business. Generally, each such manager must have worked for the Company for
at least three years performing technical and installation services related to
the pay telephones before becoming a manager. In addition, managers must be
familiar with all aspects of the pay telephone business, including
installation, service and maintenance, collections, and computer support. If
available from the LEC, the performance history of each potential location is
obtained by the prospective Property Owner and is evaluated by the Company's
manager. If such performance history is not available, locations are
generally selected based upon the experience of the manager in the geographic
area of the proposed new location. If a pay telephone fails to perform as
anticipated within three to six months, it is generally removed and placed in
a new location.
The Company has focused its efforts on securing accounts with small local
businesses rather than with larger national accounts with the belief that the
loss of a single large national account could have a material adverse change
on the Company's operations. The Company utilizes a sales force in securing
locations for its pay telephones. This sales force is composed of one
full-time and two part-time salespersons who are compensated solely by
commissions generated from their sales. The Company generally allows its
salespersons to take a draw against future commissions earned.
The Company's pay telephones are installed pursuant to agreements with
Property Owners. Most of these agreements are written. Each of the
agreements has a specified term, generally for five years. Each agreement
provides for a revenue sharing arrangement between the Company and the
particular Property Owner, which is generally a percentage of either the gross
or net coin and non-coin revenue generated from the use of the pay
telephones. The percentage of revenue paid to the Property Owner is generally
fixed for the period of the agreement. The agreements typically allow the
Company to terminate the agreement in the event the telephone fails to
generate at least $200 per month in profit; the agreements are typically not
terminable by the Property Owner.
The Company is obligated to service, clean, and maintain the pay telephone
equipment installed pursuant to the placement agreements. Ownership of the
pay telephone equipment remains with the Company, and the Company is obligated
to maintain insurance on the pay telephone equipment.
<PAGE> 7
Service and Maintenance
The Company maintains a staff of eight telephone technicians located in the
various areas in which the Company's pay telephones are located. The software
system used with the telephones enables the Company via modem to diagnose the
vital functions of the telephones and to count the coins in the pay telephones
on a daily basis. Such software programs are obtained from the manufacturers
of the pay telephones by means of a license granted to the Company to use the
software with such pay telephones. In addition, the Company owns a software
system which enables the Company to compute the commissions due to each
Property Owner based upon actual collections.
The Company's pay telephones are polled via modem on a daily basis for
potential operational problems and for coin counts. This routine allows the
Company to respond quickly to any suspected problems at its pay telephones and
to collect the coins on a scheduled basis. Generally, the Company is able to
determine possible problems at its pay telephones before the telephone users
report the problems to the Company. As a result of the Company's computer
system, the Company's telephones are usually repaired within 24 hours. This
system also enables the Company to reduce the number of visits required to
maintain the operation of and collect the coins from each pay telephone.
Based upon the results of the polling of each of the telephones each night,
the Company can determine which of the telephones requires collection or
service. The Company's service technicians are authorized to remove the coin
boxes from the pay telephones. Upon removing the sealed coin box from the pay
telephone, the technician is unaware of the number of coins in the coin box,
while management, through use of the pay telephone software system, has an
accurate count of the coins. Once the coin boxes are returned to the office
of the Company, the coin boxes are opened by the office manager and the coins
are counted. The amount in each coin box is recorded and compared with the
information provided by the software system. The Company reconciles variances
at each telephone on a regular basis.
Vandalism has had a negligible effect upon the operations or profitability of
the Company's pay telephones. Management estimates that approximately one
percent of the Company's pay telephone equipment is vandalized on a weekly
basis. Such vandalism usually consists of damage to the handsets. If
vandalism at a particular location persists, management usually will relocate
the pay telephones to a more secure location at the same site or will stake
out the location to catch the vandals. The Company has rarely been forced to
completely remove a pay telephone because of vandalism.
The Company believes that unauthorized use of the Company's long-distance
service by so-called "hackers" has been substantially eliminated and had an
immaterial effect on the Company's results of operations in the fiscal year
ended June 30, 1996. If a hacker charges an unauthorized long distance
telephone call to one of the Company's pay telephones, the Company can notify
the long distance carrier and receive credit for such call. Management
estimates that its current arrangements with its long distance carrier
prevents approximately 90 percent of such unauthorized calls from being
placed; management also estimates that it is able to identify almost all of
the remaining unauthorized long distance calls by hackers and receive credit
back from the long distance carrier.
Equipment
The Company considers its pay telephone equipment to be based upon the latest
technology. Approximately 85-90% of the pay telephones currently operated by
the Company were manufactured by GTE and approximately 10-15% were
manufactured by Protel. Although most of the pay telephones were purchased
approximately seven years ago, they have been updated on a regular basis with
new electronics from the manufacturers approximately every 6-12 months. In
addition to the pay telephone equipment, the Company purchases other equipment
required for its business, including vans for installers, maintenance and
various repair equipment.
The Company's pay telephones use microprocessors that provide voice
synthesized calling instructions and the capability to detect and count coins
deposited during each call. These intelligent telephones also provide
information to the caller at certain intervals regarding the time remaining on
each call and the need for an additional deposit.
<PAGE> 8
Regulation
General
The Company's operations are significantly influenced by the regulation of pay
telephone services. Authority for regulation for these services is currently
vested in the FCC and the various state public service commissions, including
the Arizona Corporation Commission. Regulatory jurisdiction is determined in
part by the interstate or intrastate character of the subject service, and the
degree of regulatory oversight exercised varies from state to state. While
most matters affecting the Company's operations fall within the administrative
purview of these regulatory agencies, state and federal legislatures and the
federal district court administering the AT&T divestiture decree have
authority to regulate aspects of the Company's operations.
Arizona Corporation Commission Regulatory Proceedings
The Company's public payphone service are subject to regulation by the Arizona
Corporation Commission (the "ACC"). In May 1995, in response to
administrative rules promulgated by the ACC, the Company filed an application
for a certificate of convenience and necessity ("CC&N") to allow the Company
to provide public payphone services to end-users (customers) in Arizona. The
ACC also required the Company to file a request to have the Company's tariff,
or rates charged for various services, approved by the ACC. The Company's
application for a CC&N has not yet been approved or disapproved by the ACC,
and there may be no assurance when the ACC will rule on the Company's
application for a CC&N. However, based on information currently available to
it, the Company believes that the tariff requested by the Company will be
denied by the ACC, and that the ACC will require the Company to operate under
a tariff which provides for significantly lesser rates and surcharges than
those currently charged by the Company. In that event, the Company's revenues
and ability to operate profitably would be materially adversely affected. See
"Item 6-Management's Discussion and Analysis or Plan or Operations-Results of
Operations for the Fiscal Years Ended June 30, 1996 and 1995." The Company
is, however, presently unable to determine when the ACC will rule on its
application for a CC&N or the Company's tariff request, or the decision to be
rendered by the ACC.
The Company also currently utilizes an operator services provider which is
designated as an "Alternative Operator Services" provider ("AOS") under
applicable ACC regulations. There are approximately 20 AOS providers
currently operating in Arizona. The Company's AOS provider has, in response
to administrative rules promulgated by the ACC, filed an application for a
CC&N in order to provide operator services in Arizona. The Company's AOS
provider was also required to file a tariff request with the ACC. The ACC has
not yet acted on the application for a CC&N or the tariff application of the
Company's AOS provider, and there may be no assurance as to when the ACC will
do so or the decision to be rendered by the ACC. However, in the event the
application for a CC&N of the Company's current AOS provider is denied or the
tariff which has been requested by that entity is modified in an adverse
fashion, the Company would be forced to attempt to contract with another AOS
provider. There may be no assurance that the Company would be successful in
contracting with another operator services provider, or the tariff under which
the operator services provider would be operating. The Company's revenues and
ability to operate profitably could be materially adversely affected if either
(i) the Company is unable to contract with another AOS provider, or (ii) the
tariff under which such AOS provider is operating provides for lesser rates
and surcharges for operator services than are currently charged by the AOS
provider currently utilized by the Company. See "Item 6-Management's
Discussion and Analysis or Plan of Operation-Results of Operations for the
Years Ended June 30, 1996 and 1995."
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Federal Regulation
The Company's public payphone services are subject to federal regulation,
including but not limited to regulation by the FCC. In October 1990, Congress
adopted the Telephone Operator Consumer Services Improvement Act of 1990 (the
"Act") which established various requirements for "call aggregators" such as
the Company. Pursuant to this Act, aggregators must (a) post information on
or near the telephone which identifies the operator services provider
servicing that telephone, informs the consumer of the right to obtain access
to another carrier and includes the telephone number of the consumer affairs
division of the FCC, and (b) permit customers to use "950" and "800" numbers
and pay no more for calls made using any access code than aggregators charge
for "0+" calls, that is, calls that are made by entering a "0" followed by a
long distance number. The Company believes that it is in substantial
compliance with the Act.
Under the Act, each user of the Company's pay telephones has the right to
access any long distance operator service company to make a non-coin InterLATA
call from the Company's pay telephones. Prior to 1992, the Company received
no commission or revenue if the user of the Company's pay telephones accessed
an operator service provider other than the operator service provider selected
by the Company. However, since 1992, the FCC has required operator service
providers to compensate public pay telephone providers for interstate calls
placed through pay telephones, including those used by the Company. The
Company received approximately $26,000 in compensation during the fiscal year
ended June 30, 1996 from operator service providers for interstate calls
placed through the Company's telephones.
In 1991, the FCC introduced a proposal to mandate a new system for routing
"0+" calls called Billed Party Preference ("BPP"). Currently, "0+" calls are
sent through the operator service provider to which the Property Owner or pay
telephone provider presubscribes. Under BPP, calls would be routed
automatically to the operator service provider preferred by the party being
billed for the call. The FCC believes that BPP would provide three principal
benefits. First, the FCC believes BPP would make operator services more "user
friendly" by allowing "0+" callers to make all of their operator-assisted
calls with the operator service provider with which the billed party had
chosen to do business at the rates offered by such operator service provider.
Second, the FCC believes that BPP would force operator service providers to
refocus their competitive efforts towards serving customers rather than
serving aggregators. Finally, the FCC believes that BPP would eliminated
certain AT&T advantages in the operator services market by allowing AT&T
competitors to offer end users the same "0+" access as AT&T. On the other
hand, the FCC has noted that BPP is an expensive technology.
The FCC has solicited and received comments on its BPP proposal. The FCC is
reviewing these comments and is expected to reach a decision concerning its
BPP proposal in the foreseeable future; however, no date for such decision has
been set. The Company is unable to determine whether BPP will be adopted and,
if so, what the precise BPP regulations will entail. However, adoption of any
BPP regulation under which "0+" calls would be routed automatically to the
operator services provider preferred by the party being billed for the call
would likely have a material adverse impact on the Company's results of
operations and could threaten the Company's ability to continue its public
payphone operations. See "Item 6-Management's Discussion and Analysis or Plan
of Operation-Results of Operations for the Years Ended June 30, 1996 and
1995."
<PAGE> 10
Competition
The market for public payphone services in Arizona is fragmented but very
competitive due principally to the large number of providers of public
payphone services in Arizona. The Company competes with U.S. West, one of the
LEC's which operates in Arizona, as well as with at least 75 other independent
providers of public payphone services. These independent providers include
Pacific Communications, Advanced Payphone and National Brands, all of which
(in addition to U.S. West) have considerably greater financial and other
resources than the Company.
In addition to those factors described in "--Regulation" above, the
Company believes that the principal competitive factor in the public payphone
industry is the ability to place public telephones in desirable, profitable
locations, which in turn is dependent on (a) the ability to locate desirable
payphone locations, (b) the ability to pay competitive signing or other
bonuses to Property Owners, (c) the ability to pay competitive commission
rates to Property Owners, and (d) the level of service provided to the
Property Owner. The Company believes that it is at a competitive disadvantage
compared to U.S. West and the independent providers of public payphone
services which are larger and have more resources than the Company with
respect to all of the competitive factors described above.
Employees
As of September 27, 1996, the Company had 12 full-time employees, four of whom
were executive, management, administrative, accounting or clerical personnel,
and eight of whom were installers, maintenance and repair personnel and coin
collectors. In addition, the Company uses from one to three commissioned
sales persons who are independent contractors.
Patents and Trademarks.
The Company does not own any patents or trademark rights.
Item 2. Description of Property.
The Company currently leases office and repair facilities in two different
locations. The following is a summary of the facilities leased by the
Company:
<TABLE>
<S> <C>
Tempe, AZ Size: approximately 6,400 square feet of office and warehouse space
Rent: approximately $2,900 per month
Term: Lease expires on April 30, 1999
Tucson, AZ Size: approximately 1,440 square feet of office and warehouse space
Rent: approximately $850 per month
Term: Lease expires on March 31, 1997
</TABLE>
<PAGE> 11
Item 3. Legal Proceedings.
Except as described below, neither the Company nor any of its properties is a
party to any material pending legal proceedings or government actions (except
as set forth below), including any material bankruptcy, receivership, or
similar proceedings. Except as set forth below, management of the Company
does not believe that there are any material proceedings to which any
director, officer or affiliate of the Company, any owner of record of
beneficially of more than five percent of the Common Stock of the Company, or
any associate of any such director, officer, affiliate of the Company, or
security holder is a party adverse to the Company or has a material interest
adverse to the Company.
Sales Tax Appeal
In March 1993, the Arizona Department of Revenue issued an Arizona transaction
privilege (sales) tax deficiency assessment in the amount of $73,680 against
the Company with respect to coin revenues received in operating private pay
telephones in the State of Arizona during the audit period from January 1,
1990, through January 31, 1993. A timely protest was filed with the
Department seeking abatement of the entire assessment. The principal issue in
the Company's controversy is the taxability of its coin revenues under the
telecommunications classification. It is the Company's position that the
operation of private pay telephones does not constitute telecommunications
because the pay telephones do not transmit signals.
At the first administrative hearing on the above issue, the administrative
hearing officer for the Department ruled in favor of the Company, determining
that the operation of the pay telephones did not constitute intrastate
telecommunication services. Upon review, the Director of the Arizona
Department of Revenue reversed that decision, thereby upholding the
assessments. The case is now pending before the Arizona State Board of Tax
Appeals. The Company has taken a reserve of approximately $132,000 to cover
potential sales taxes owed by the Company in the event that the Company is
unsuccessful in its appeal. This reserve does not include any reserve to
cover potential sales taxes which may be due and owing for the fiscal year
ended June 30, 1996. See the Company's Financial Statements attached hereto,
including but not limited to the Company's Balance Sheets at June 30, 1996 and
1995, respectively, and Note 5 thereto.
Federal Grand Jury Investigation
On or about September 21, 1995, the Company received a subpoena to
produce certain corporate records in connection with a grand jury
investigation before the United States District Court, District of Nevada,
(Case Number 94-2175). The Company has been informed by the government that
the government is investigating whether payments were wrongfully made by the
Company at the direction of Michael Swan, the Company's former Chief Executive
Officer and a former director of the Company, to certain brokers and/or
broker/dealers during the period from approximately January 1, 1991 through
December 31, 1994. The Company has not been definitively informed by the
government that Mr. Swan is a target of the investigation; however, based on
information available to it, the Company believes that Mr. Swan is a target of
the investigation. The government informed the Company on August 21, 1996
that Mr. and Mrs. Westfere, the Company's current Chief Executive Officer and
Secretary/Treasurer, are neither subjects or targets of the grand jury
investigation, and the government has not contacted any other current officers
or employees concerning the investigation. The government has not informed
the Company as to the relief, if any, to be sought by the government. The
Company has complied with the Subpoena and continues to cooperate with the
government's investigation. The Company is presently unable to assess the
potential liability, if any, to the Company as a result of the activities
which are the subject of the above investigation.
<PAGE> 12
Mr. Swan resigned as an officer and a director of the Company in April
1995. Concurrently with Mr. Swan's resignation, the Company and Mr. Swan
entered into a Consulting Agreement pursuant to which Mr. Swan was to serve as
a financial consultant and advisor to the Company in return for the Company's
payment of a monthly consulting fee of $5,000 to Mr. Swan and the Company's
reimbursement of Mr. Swan's reasonable business expenses on behalf of the
Company. The Consulting Agreement had a term of three years commencing in
April 1995. Mr. Swan also received options to purchase 250,000 shares of the
Company's Common Stock at the then-current market price of the Company's
Common Stock. On October 3, 1996, the Company and Mr. Swan entered into a
Severance Agreement, pursuant to which: (a) the Consulting Agreement was
terminated; (b) Swan is expressly prohibited from performing any services for
the Company, or from representing himself to be an agent or representative of
the Company, without the prior written consent of the Company's Chief
Executive Officer; and (c) the Company agreed to pay Mr. Swan $5,000 per month
through the original term of the Consulting Agreement (April 1998). The
Company may terminate the Severance Agreement in the event (i) Swan breaches
the Severance Agreement, (ii) Swan is convicted of a felony involving or
related to Swan's previous employment with the Company or services provided by
Swan for the benefit of or related to the Company, or (iii) of Swan's death.
See also "Item 12-Certain Relationships and Related Transactions." The
Severance Agreement is filed as Exhibit 10.5 hereto.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year ended
June 30, 1996, to a vote of the Company's security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is currently traded in the over-the-counter market
and is quoted on the OTC Bulletin Board. According to information provided to
the Company, during the fiscal year ended June 30, 1996, only 236,800 shares
of the Company's Common Stock were traded on the Bulletin Board. The Company
therefore believes that there is no established public trading market for the
Company's Common Stock. The Company also believes that there are only five
market makers which currently make a market in the Company's Common Stock.
The table below sets forth for the periods indicated the high and low bid
quotations for the Company's Common Stock. These quotations reflect
inter-dealer prices, without retail markup, mark-down, or commission and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter High Low
<S> <C> <C> <C>
Fiscal year ended
June 30, 1995 First $1.00 $0.50
Second $1.00 $0.75
Third $0.75 $0.50
Fourth $0.75 $0.50
Fiscal year ended $.75 $0.50
June 30, 1996
Second $.63 $0.50
Third $.69 $0.50
Fourth $.82 $0.50
</TABLE>
<PAGE> 13
As of September 27, 1996, there were approximately 579 holders of record of
the Company's Common Stock as reported to the Company by its transfer agent.
No cash dividends have been declared or paid to date on the Company's Common
Stock. As of September 27, 1996, the Company had outstanding 727 shares of
its Series A 6% Preferred Stock which had preference on any dividends paid.
The Company paid a total of $24,088 in accrued dividends on its Series A 6%
Preferred Stock in the fiscal year ended June 30, 1996, and the Company has an
additional $84,468 in accrued but unpaid dividends on its Series A 6%
Preferred Stock for the fiscal year ended June 30, 1996. Additionally, the
Company has issued to the holder of the Series A 6% Preferred Stock a
Promissory Note in the principal amount of $113,760 in satisfaction of
dividends which accrued during the fiscal year ended June 30, 1995. Nevada
law restricts the funds from which dividends may legally be paid. The
Company anticipates that dividends for the foreseeable future, if any, will be
limited to dividends necessary to satisfy the Company's obligations under the
issued and outstanding shares of the Company's Series A 6% Preferred Stock,
and that no dividends will be paid on the Company's Common Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Results of Operations
Results of Operations for the Years Ended June 30, 1996 and 1995
The Company had a net loss of $92,529 in the fiscal year ended June 30,
1996, compared to a net loss of $190,163 in the fiscal year ended June 30,
1995. The Company had a net loss attributable to its Common Stock (which
gives effect to dividends accrued during such fiscal year on the Company's
issued and outstanding Series A 6% Preferred Stock) of $201,585 during the
fiscal year ended June 30, 1996, compared to a net loss attributable to its
Common Stock (which gives effect to dividends accrued during such fiscal year
on the Company's issued and outstanding Series A 6% Preferred Stock) of
$299,441 in the fiscal year ended June 30, 1995.
The Company's gross revenues increased to $2,127,574 in the fiscal year
ended June 30, 1996, compared to $2,074,244 in the comparable prior period, an
increase of 2.5% over the comparable prior period. The Company's cost of
sales increased by 3.6% , or to $988,876, for the year ended June 30, 1996
from $954,385 for the year ended June 30, 1995. As a result of the foregoing,
the Company's gross profit margins were 53.5% and 54.0% for the years ended
June 30, 1996 and 1995, respectively. The Company believes that this slight
reduction in gross profit and gross profit margin resulted largely from the
decrease in operator service revenues. The Company had miscellaneous income
of $48,499 in the year ended June 30, 1996, compared to $12,095 in the year
ended June 30, 1995. The Company's miscellaneous income includes
approximately $42,000 in income recognized from a reserve previously taken to
cover potential charges owed to AT&T.
<PAGE> 14
The Company's selling, general and administrative expenses decreased by
7.1% to $1,286,296 for the fiscal year ended June 30, 1996, compared to
$1,384,225 in the fiscal year ended June 30, 1995. This decrease was
attributable to a reduction in depreciation and amortization charges to
$319,518 in the current year from $438,331 in the comparable prior period as a
result of the full depreciation and amortization of a portion of the Company's
fixed assets. This was offset by an increase of 2.2% in the Company's general
and administrative expenses to $966,778 in the current year from $945,894 in
the comparable prior period as a result of expenses incurred in connection
with the Company's SB-2 stock offering. The Company had a gain on the sale of
equipment of $3,625 and $58,117 in the fiscal years ended June 30, 1996 and
1995, respectively; the gain in the comparable prior period resulted from the
sale of the Company's Las Vegas pay telephone location contracts in December
1994.
The Company issued 727 shares of its Series A 6% Preferred Stock to
Teletek in June 1994 in consideration for cash advances and the settlement of
certain litigation involving the Company. The above shares require the
Company to pay a cumulative annual dividend equal to 6% of the face value of
the Preferred Stock ($1,817,591), plus accrued and unpaid dividends, until
redeemed or converted. The Company paid $24,088 in accrued dividends during
the fiscal year ended June 30, 1996, and the Company has an additional $84,468
in accrued but unpaid dividends on the Series A 6% Preferred Stock for the
fiscal year ended June 30, 1996. Additionally, the Company has issued to the
holder of the Series A 6% Preferred Stock a Promissory Note in the principal
amount of $113,760 in satisfaction of the Company's obligations with respect
to accrued and unpaid dividends on the Series A 6% Preferred Stock for the
fiscal year ended June 30, 1995.
The Company's future results of operations will be materially affected by
(i) whether an FCC bill party preference (or similar rules) are adopted, (ii)
the decisions rendered by the ACC concerning the Company's application for a
CC&N and tariff request, and (iii) the decisions rendered by the ACC
concerning the applications for CC&N's and tariff requests by the AOS
providers servicing the State of Arizona, including the AOS provider currently
utilized by the Company. In the event that the Company continues its payphone
operations and none of the above adversely affects such operations, the
Company anticipates that in the fiscal year ending June 30, 1997: (i) its
gross revenues will increase by approximately 5% over the comparable prior
period due to a slight expansion of the Company's pay telephone base; (ii) its
selling, general and administrative expenses will likely decrease by
approximately $75,000-$125,000, or 6-10%, from the comparable prior period,
due largely to a decrease in the Company's depreciation and amortization
charges; (iii) the Company will have a net profit of $10,000-$75,000; and (iv)
the Company will have a net loss attributable to its Common Stock of
$35,000-$100,000 (which gives effect to dividends accrued on its outstanding
Series A 6% Preferred Stock during such period). The foregoing is a
forward-looking statement within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and is subject to the safe harbors created thereby. Actual
results could differ materially because of the following factors: the FCC's
adoption of a bill party preference (or similar rules); the ACC's decisions on
the applications for a CC&N and tariff request by the Company and its
competitors; the ACC's decisions on the applications for a CC&N and tariff
requests by the AOS providers operating in the State of Arizona; the adoption
of other regulatory measures not currently anticipated by the Company; the
Company's sale of all or a portion of its pay telephone assets; the Company's
entrance into one or more new lines of business; the continued employment of
key management; a change in control of the Company due to the conversion by
Teletek, Inc. of its Series A 6% Preferred Stock or other events; the
potential decrease in dividends payable on the Company's Series A 6% Preferred
Stock as a result of the potential conversion of such stock into Common Stock;
the Company's ability to locate its pay telephones in profitable locations
pursuant to contracts with Property Owners which are on terms favorable to the
Company; increased competition for the Company's services; and a material
adverse change in economic conditions in general or in Arizona in particular.
The Company is exploring various potential business combinations which could
involve the sale of all or a portion of the Company's pay telephone assets and
the Company's use of the proceeds received from such sale to enter a new line
of business. The Company has not entered into any agreement with respect to
the foregoing, and there may be no assurance that the Company will enter into
any such agreement. See "Item 1-Description of Business-Regulation."
<PAGE> 15
Results of Operations for the Fiscal Years Ended June 30, 1995 and 1994
The Company had a net loss of $190,113 in the fiscal year ended June 30,
1996, compared to a net loss of $745,958 in the fiscal year ended June 30,
1995. The Company had a net loss attributable to its Common Stock (which
gives effect to dividends accrued on the Company's outstanding Series A 6%
Preferred Stock during the applicable period) of $299,441 in the fiscal year
ended June 30, 1995, compared to a net loss attributable to its Common Stock
(which gives effect to dividends accrued on the Company's outstanding Series A
6% Preferred Stock during the applicable period) of $750,319 in the fiscal
year ended June 30, 1994.
The Company's gross revenues increased by 16.1% to $2,074,244 in the
fiscal year ended June 30, 1995, compared to $1,786,217 in the fiscal year
ended June 30, 1994. The Company's cost of sales decreased by 1.2% to
$954,385 in the fiscal year ended June 30, 1995, compared to $965,798 in the
comparable prior period. As a result of the foregoing, the Company's gross
profit margin increased to 54.0% in the fiscal year ended June 30, 1995 from
46.% in the comparable prior period. The Company believes that the increase
in revenues, gross profit and gross profit margins were largely attributable
to relocation of the Company's pay telephones to more profitable locations in
Arizona (primarily the metropolitan Phoenix and Tucson areas) in January-April
1995. The Company had miscellaneous income of $12,095 and $32,676 in the
fiscal years ended June 30, 1995 and 1994, respectively, which was generated
primarily from dial around revenues received from long distance carriers.
The Company's selling, general and administrative expenses increased by
3.0% to $1,384,225 in the fiscal year ended June 30, 1995 compared to
$1,343,367 in the comparable prior period. This increase was due to the
contingency accrual for additional sales tax of $79,748 in the fiscal year
ended June 30, 1995 and an increase in depreciation and amortization charges
to $438,331 in the fiscal year ended June 30, 1995 from $412,426 in the
comparable prior period. These increased costs were offset in part by a
decrease in salaries and other administrative costs as a result of the
Company's relocation of its operations from Las Vegas to Phoenix in
January-April 1995.
Liquidity and Capital Resources
The Company requires capital to support the purchase of new pay
telephones and related equipment, for repairs and upgrades to existing pay
telephones and related equipment, and for working capital and general
corporate purposes.
At June 30, 1996, the Company had cash and cash equivalents of $694,293,
compared to cash and cash equivalents of $184,999 at June 30, 1995. This
increase resulted primarily from the Company's receipt of gross proceeds of
$458,250 from the sale of Common Stock and Warrants in its SB-2 offering. The
SB-2 offering was terminated in September 1996. See "Item 1-Description of
Business-General." The Company also generated $221,725 in net cash flows
from operations in the fiscal year ended June 30, 1996. The foregoing
increases in cash and cash equivalents were offset by a net decrease in cash
of $140,710 for the purchase of property and equipment in such period and by a
decrease in cash of $24,089 used to pay accrued dividends on the Company's
Series A 6% Preferred Stock. See "Results of Operations for the Fiscal Years
Ended June 30, 1996 and 1995" above and the Financial Statements filed
herewith.
<PAGE> 16
The funding sources currently available to the Company include operating
cash flow and potential additional financings. As noted above, the Company
terminated its SB-2 stock offering in September 1996. The Company has no
current plans to sell additional shares of capital stock and has no third
party financing arrangements in place. Therefore, the Company's sole source
of additional cash for the foreseeable future is likely to be its net
operating cash flow, if any. Principal uses of working capital will include
payment of the Company's general and administrative expenses and the Company's
liabilities for accrued and unpaid dividends on its outstanding shares of
Series A 6% Preferred Stock.
The Company believes that its existing cash balances and net cash flows
from operations (if any) will be sufficient to meet the Company's cash
requirements for the next 12 months. However, the foregoing and the Company's
ability to operate profitably are subject to material uncertainties due to
federal and state regulations and regulatory proceedings which could have a
material adverse impact on the Company. The Company is unable to determine
whether pending federal or state regulatory measures will be adopted or the
exact nature of the regulatory measures, if any. However, the Company
believes that these matters could have a material adverse impact on the
Company and its operations and could prevent the Company from continuing its
payphone operations. See "Item 1-Description of Business-Regulation" and
"--Results of Operations for the Fiscal Years Ended June 30, 1996 and 1995."
The Company is exploring various business combinations which might result in
the Company's sale of all or a portion of its pay telephone assets and the
Company's use of proceeds received from that sale to enter a new line of
business. The Company has not entered into any agreement concerning the
foregoing, and there may be no assurance that such an agreement will be
entered into by the Company.
Item 7. Financial Statements.
The following financial statements are attached hereto and
incorporated herein:
Page
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-3
Balance Sheets for the years ended June 30, 1996 and 1995 . . . . F-4
Statements of Operations for the Years Ended June 30, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Stockholders' Equity for the years ended June 30,
1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Cash Flows for the years ended June 30, 1996,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-8
Item 8. Changes in and Disagreements With Accountants.
None.
<PAGE> 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
General
The following information is provided for the Company's executive officers
and directors at September 27, 1996:
David Westfere, 30, has been President, Chief Executive Officer, Chief
Executive Officer and a director of the Company since April 6, 1995. He was
the Company's General Manager of Operations from January 1991 until April 6,
1995. From 1988 until 1990, he was the route supervisor for the Company's pay
telephone operation in Bakersfield, California, and from 1990 until 1991 he
was the route supervisor of the Company's pay telephone operation in Phoenix,
Arizona.
Ramona Westfere, 44, has been a director and Secretary/Treasurer of the
Company since April 6, 1995. From 1989 to April 6, 1995, she was employed by
the Company as an administrative assistant to a former officer and director of
the Company during such period. Ms. Westfere is Mr. Westfere's wife.
Todd D. Chisholm, 34, has been a director of the Company since June 27, 1995.
From June 1990 until September 1992, he was employed as a staff accountant by
Orton & Company, Certified Public Accountants, in Salt Lake City, Utah, and
from September 1992 until June 1994, he was employed as audit manager by
Jones, Jensen, Orton & Company, Certified Public Accountants, in Salt Lake
City. From June 1994 to the present, Mr. Chisholm has been self-employed as
a certified public accountant in Salt Lake City. From April 1995 to the
present, he has also been Vice-President and Chief Financial Officer of The
Solarium, Inc., a privately held tanning salon.
Mr. and Mrs. Westfere were appointed as directors of the Company on April 6,
1995 by the Company's sole remaining director at the time. Mr. Chisholm was
appointed as a director on June 27, 1995 by Mr. and Mrs. Westfere, who were
the Company's sole remaining directors at the time of such appointment.
The term of office of each director is one year or until his successor is
elected at the annual meeting of shareholders of the Company. All officers of
the Company serve at the pleasure of the Company's Board of Directors. The
Board of Directors has no nominating, audit or compensation committee.
Compliance with Section 16(a) of the Exchange Act
For the fiscal year ended June 30, 1995, Teletek, Inc., a 10% owner of the
Company's Common Stock during such fiscal year, failed to file a Form 3 on a
timely basis. Said party failed to file a Form 3 upon the Company registering
its Common Stock pursuant to Section 12 of the Securities Exchange Act of
1934, as amended, on or about July 12, 1994. Teletek, Inc. has also failed
to file a Form 5 for such fiscal year and for the fiscal year ended June 30,
1996.
<PAGE> 18
Item 10. Executive Compensation.
The following table sets forth the aggregate executive compensation earned by
or paid to former management of the Company for the fiscal years ended June
30, 1995 and 1994:
<TABLE>
<CAPTION>
Annual Compensation
Other
Annual
Name and Principal Compen-
Positions Year Salary Bonus sation
<S> <C> <C>
Michael G. Swan 1995 $39,500(2)(3)
President(1)
1994
</TABLE>
(1) Mr. Swan was the Chief Executive Officer and a director of the
Company during the fiscal year ended June 30, 1994 and for that portion of the
fiscal year ended June 30, 1995 until his resignation as an officer and
director of the Company on April 6, 1995.
(2) Of this amount, $24,500 was paid to Higgins Family Limited Partnership,
and the balance was paid to Mr. Swan in connection with a consulting agreement
between the Company and Mr. Swan commencing April of 1995.
(3) The Company paid no long-term compensation to Mr. Swan for the periods
reported.
The following table sets forth the aggregate executive compensation
earned by or paid to current management of the Company for the fiscal years
ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Annual Compensation
<S> <C> <C> <C> <C>
Other
Annual
Name and Principal Compen-
Positions Year Salary Bonus sation
David Westfere,
President(1)(2) 1996 $ 32,440 0 $ 46,972(3)
1995 $ 32,400 $ 16,000 $ 35,031(4)
1994 $ 32,400 $ 11,000 $ 21,336(5)
</TABLE>
<PAGE> 19
(1) Mr. Westfere was appointed Chief Executive Officer and a director of the
Company on April 6, 1995. He was the Company's general manager of operations
during the fiscal year ended June 30, 1994 and during the portion of the
fiscal year ended June 30, 1995 prior to being appointed Chief Executive
Officer of the Company.
(2) The Company did not pay any long-term compensation to Mr. Westfere during
the above periods.
(3) The Company paid health insurance premiums of $5,972 for Mr. Westfere and
his family during this period. The Company also paid a total of $36,000 to
C&N, Inc., a company controlled by Mr. Westfere, for property management
services related to the Company's leased office and warehouse facilities
during such period. See "Item 12-Certain Relationships and Related
Transactions." This figure also includes a $5,000 bonus paid to Mr. Westfere
and each of the Company's other directors for services rendered as directors
during the fiscal year ended June 30, 1996.
(4) During such period, the Company paid (i) health insurance premiums
for Mr. Westfere and his family of $8,331; (ii) a car allowance of $8,700 to
Mr. Westfere; (iii) fees for property management services related to the
Company's leased office and warehouse facilities of $6,000 to Mr. Westfere and
$12,000 to C&N, Inc., a corporation controlled by Mr. Westfere.
(5) During such period, the Company paid (i) health insurance premiums
for Mr. Westfere and his family of $6,936; and (ii) a car allowance of $14,400
to Mr. Westfere.
No other executive officer of the Company received any compensation exceeding
$100,000 for the fiscal years ended June 30, 1996, 1995 or 1994.
<PAGE> 20
Compensation of Directors
Directors are permitted to receive fixed fees and other compensation for their
services as directors, as determined by the Board of Directors. In December
1995, the company paid a $5,000 bonus to each of the Company's directors for
their services as directors during the fiscal year ended June 30, 1996. No
other fees have been paid to the Company's directors.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information concerning the Common Stock
ownership as of September 27, 1996, of (i) each person who is known to the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock; (ii) all directors; (iii) each of the Company's executive
officers; and (iv) directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
<S> <C> <C>
Oak Holdings, Inc. 2,500,000(1) 47.4%
Apartado 63685
Panama, Republic of Panama
Grafton Holdings S.A. 2,500,000(2) 47.4%
Apartado 63685
Panama, Republic of Panama
Peter Robin Baily 2,500,000(3) 47.4%
Apartado 6-4569
Panama City, Republic of Panama
Pedro Coranado
Apartado 6-2495 2,500,000(4) 47.4%
Panama City, Republic of Panama
</TABLE>
(1) These shares are held directly and of record by Oak Holdings, Inc.
(2) These shares are held directly and of record by Oak Holdings, Inc.
Grafton Holdings S.A. ("Grafton") has indicated that it has direct beneficial
ownership of such shares. However, the Company believes that Grafton has
indirect ownership of such shares as the sole corporate director of Oak
Holdings, Inc. As the sole corporate director of Oak Holdings, Inc., Grafton
has represented to the Company that it is responsible for the management of
Oak Holdings, Inc.
(3) These shares are held directly and of record by Oak Holdings, Inc.
Mr. Baily has indicated to the Company that he has indirect beneficial
ownership of such shares by virtue of being a controlling shareholder of Oak
Holdings, Inc. with Pedro Coronado.
<PAGE> 21
(4) These shares are held directly and of record by Oak Holdings,
Inc. Mr. Coranado has indicated to the Company that he has indirect
beneficial ownership of such shares by virtue of being a controlling
shareholder of Oak Holdings, Inc.
<TABLE>
<S> <C> <C>
Teletek, Inc. 6,138,257(5) 58.9%
3340 Topaz Street
Suite 2 1 0
Las Vegas, NV 89121
Higgins Family Limited
Partnership 235,230(6) 4.5%
2654 East Topaz Square
Las Vegas, NV 89121
Michael G. Swan 487,198(7) 9.2%
2654 East Topaz Square
Las Vegas, Nevada 89121
Todd D. Chisholm 0 N/A
50 West Broadway
Suite 1130
Salt Lake City, Utah 84101
</TABLE>
(5) Of these shares, a total of 992,065 shares are held of record by
Teletek, Inc. ("Teletek"). Based solely upon the foregoing shares, Teletek,
Inc. currently owns approximately 18.8% of the total issued and outstanding
shares of Common Stock of the Company (5,277,099 shares). In addition,
Teletek owns 727 shares of the Company's Series A 6% Preferred Stock. These
shares of Series A 6% Preferred Stock are convertible at 75% of the average
bid prices of the Common Stock for the ten trading days immediately prior to
conversion based upon the cash amount attributable to such shares and any
unpaid interest. The cash amount of such preferred shares, plus unpaid
interest, as of September 27, 1996, was approximately $1,929,822. The average
bid price of the Company's Common Stock on the 10 trading days immediately
prior to September 27, 1996 was $.50 per share. Therefore, based upon the
conversion price of $.375 per share, the shares of Series A 6% Preferred Stock
owned by Teletek would be convertible into a total of 5,146,192 shares of the
Company's Common Stock. In that event, Teletek would own a total of 6,138,257
shares of Common Stock, or 59.8% of the total issued and outstanding shares of
Common Stock of the Company.
(6) These shares are held of record by this entity. Michael Swan, a former
Chief Executive Officer and director of the Company, is the general partner of
the Partnership and controls the disposition of the shares owned by the
Partnership. Mr. Swan may therefore be deemed to be a beneficial owner of
such shares.
(7) Represents (i) 237,198 shares owned by the Higgins Family Limited
Partnership, of which Mr. Swan is the General Partner; and (ii) 250,000 shares
which may be purchased by Mr. Swan upon the exercise of stock options which
are currently exercisable.
<PAGE> 22
<TABLE>
<S> <C> <C>
David Westfere 10,000(8) (9)
1725 West Third Street
Tempe, AZ 85281
Ramona Westfere 10,000(8) (9)
1725 West Third Street
Tempe, AZ 85281
Directors and Executive 10,000 (9)
Officers as a Group
(3 Persons)
(8) These shares are owned jointly by Mr. and Mrs. Westfere, husband and
wife.
(9) Less than 1%.
As of September 27, 1996, the Company had outstanding 727 shares of
Series A 6% Preferred Stock, all of which shares were owned of record by
Teletek, Inc.
There are no arrangements known to the Company, the operation of
which may at a subsequent date result in a change of control of the Company.
However, if at any time Teletek should elect to convert its shares of Series A
6% Preferred Stock into shares of Common Stock, control of the Company would
change to that entity upon such conversion. See Footnote 5 to the Table
immediately above.
Item 12. Certain Relationships and Related Transactions.
The Company pays $3,000 per month to C&N, Inc. ("C&N"), an Arizona
corporation, for property management services at the Company's two
office/warehouse facilities. The Company paid C&N a total of $36,000 under
this agreement during the fiscal year ended June 30, 1996. Mr. Westfere, an
officer and director of the Company, is the president of C&N, and Mr. and Mrs.
Westfere and their minor children are C&N's sole shareholders. The agreement
between the Company and C&N commenced on January 1, 1995, and is renewable
from year to year. The agreement was negotiated between Mr. Westfere and
former management of the Company as part of the total compensation package for
Mr. and Mrs. Westfere. It is believed that the terms of the agreement are
more favorable to Mr. and Mrs. Westfere than the Company could obtain with a
non-affiliated party.
Mr. Chisholm, a director of the Company, performs accounting services for the
Company. He is paid a flat fee of $920 per month for compilation and payroll
services and is paid an hourly fee for any additional work. It is believed
that the terms of the arrangement are at least as favorable as terms that
could be obtained with a non-affiliated party.
<PAGE> 23
On April 6, 1995, the Company entered into a Consulting Agreement with
Mr. Swan, who was a director of the Company and the Company's Chief Executive
Officer until his resignation on that same date. Pursuant to the Consulting
Agreement, Mr. Swan served as a financial consultant and advisor to the
Company in return for the Company's payment of a monthly consulting fee of
$5,000 and the Company's reimbursement of Mr. Swan's reasonable business
expenses on behalf of the Company. Mr. Swan also received options to purchase
250,000 shares of the Company's Common Stock at the then-current market price
for the Company's Common Stock. The Consulting Agreement had a term of three
years commencing in April 1995. The Company paid Mr. Swan $60,000 in
consulting fees and reimbursed Mr. Swan (through an entity controlled by Mr.
Swan, High Desert Holdings, Inc.) for $8,092 in business expenses incurred
during the fiscal year ended June 30, 1996. On October 3, 1996, the Company
and Mr. Swan entered into a Severance Agreement, pursuant to which: (a) the
Consulting Agreement was terminated; (b) Mr. Swan is expressly prohibited from
performing any services for the Company, or from representing himself to be an
agent or representative of the Company, without the prior written consent of
Mr. Westfere, the Company's Chief Executive Officer; and (c) the Company
agreed to pay Mr. Swan $5,000 per month through the original term of the
Consulting Agreement (April 1998). The Company may terminate the Severance
Agreement in the event Swan (i) breaches the Severance Agreement, (ii) is
convicted of a felony involving or related to Swan's previous employment with
the Company or services provided by Swan for the benefit of or related to the
Company; or (iii) dies. See also "Item 3-Legal Proceedings" for additional
information concerning legal proceedings involving the Company and Mr. Swan.
The Severance Agreement is filed as Exhibit 10.5 hereto.
Item 13. Exhibits List and Reports on Form 8-K.
(a) The following exhibits are furnished with this Report pursuant to Item
601 of Regulation
S-B:
Exhibit No. Description of Exhibit Page
3(i) Articles of Incorporation, as amended *
3(ii) By-Laws of the Company, as currently in effect *
3(iii) Certificate regarding Series A 6% Preferred Stock ***
4(a) Form of certificate evidencing shares of Common Stock *
4(b) Form of certificate evidencing shares of Series A 6% ***
Preferred Stock
10.1 Assignment and Assumption of Liabilities Agreement **
10.2 Stock Purchase Agreement dated April 3, 1995 between Oak ****
Holdings and Teletek, Inc.
<PAGE> 24
10.3 Consulting Agreement dated April 6, 1995, between the ****
Company and Michael Swan
10.4 Consulting Agreement dated January 1, 1995, between the ***
Company and C&N, Inc.
10.5 Severance Agreement dated October 3, 1996 between the Page __
Company and Michael Swan
10.6 Form 12b-25 dated September 26, 1996 *****
* Incorporated by reference to the exhibits filed with the Company's
registration statement on Form 10-SB (Commission File No. 0-24138) filed with
the Securities and Exchange Commission on May 13, 1994.
** Incorporated by reference to the exhibits filed with the Company's 1994
annual report on Form 10-KSB (Commission File No. 0-24138) filed with the
Securities and Exchange Commission on October 13, 1994.
*** Incorporate by reference to the exhibits filed with the Company's
registration statement on Form SB-2 (Commission File Number 33-85884).
**** Incorporated by reference to the exhibits filed with the Company's
Current Report on Form 8-K (Commission File No. 0-24138) filed with the
Securities and Exchange Commission on April 12, 1995.
***** Incorporated by reference to the Company's Form 12b-25 dated September
26, 1996.
(b) No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
<PAGE> 25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
UNITED PAYPHONE SERVICES, INC.
By /s/ David D. Westfere
David D. Westfere
Its President and Chief Executive Officer
Date: October 11, 1996.
By: /s/ Ramona Westfere
Ramona Westfere
Its Principal Accounting and Financial Officer
Date: October 11, 1996
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.
By: /s/ David D. Westfere October 11, 1996
David D. Westfere, Director
By: /s/ Ramona Westfere October 11, 1996
Ramona Westfere, Director
By: /s/ Todd D. Chisholm October 11, 1996
Todd D. Chisholm, Director
<PAGE> F1
UNITED PAYPHONE SERVICES, INC.
FINANCIAL STATEMENTS
June 30, 1996 and 1995
<PAGE> F2
C O N T E N T S
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 3
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENTS OF STOCKHOLDERS' EQUITY 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
</TABLE>
<PAGE> F3
INDEPENDENT AUDITORS' REPORT
Officers and Directors
United Payphone Services, Inc.
Tempe, Arizona
We have audited the balance sheet of United Payphone Services, Inc. as of June
30, 1996, and the related statements of operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United Payphone Services,
Inc. as of June 30, 1996, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles. The financial statements of United Payphone Services, Inc. as of
June 30, 1995, were audited by other auditors whose report dated August 28,
1995, expressed an unqualified opinion on those statements.
Salt Lake City, Utah
July 26, 1996
<PAGE> F4
UNITED PAYPHONE SERVICES, INC.
BALANCE SHEETS
June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 694,293 $ 184,999
Trade accounts receivable 29,524 53,310
Prepaid expenses 5,000 8,216
TOTAL CURRENT ASSETS 728,817 246,525
PROPERTY AND EQUIPMENT 707,204 876,977
OTHER ASSETS
Deposits 2,106 3,216
TOTAL ASSETS $ 1,438,127 $ 1,126,718
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> F5
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 106,997 $ 151,982
Accrued expenses 32,212 16,978
Accrued preferred dividends 84,967 -
Current portion of long-term liabilities 770 -
TOTAL CURRENT LIABILITIES 224,946 168,960
LONG-TERM LIABILITIES 173,201 169,443
COMMITMENTS AND CONTINGENCIES 132,442 132,442
TOTAL LIABILITIES 530,589 470,845
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001, 6%
cumulative convertible, non-voting
Authorized 100,000 shares, issued
727 shares at stated value 1,817,591 1,817,591
Common stock, par value $.001
Authorized 50,000,000 shares,
issued 5,277,099 and 4,666,099
shares, respectively 5,277 4,666
Capital in excess of par value 3,039,921 2,587,282
Retained earnings (deficit) (3,955,251) (3,753,666)
TOTAL STOCKHOLDERS' EQUITY 907,538 655,873
TOTAL LIABILITIES
AND EQUITY $ 1,438,127 $ 1,126,718
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> F6
UNITED PAYPHONE SERVICES, INC.
STATEMENTS OF OPERATIONS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INCOME
Coin collection $ 1,455,517 $ 1,372,382 $ 1,223,473
Operator services 635,212 701,862 562,744
Service fees 36,845 - -
2,127,574 2,074,244 1,786,217
Cost of sales 988,876 954,385 965,798
GROSS PROFIT 1,138,698 1,119,859 820,419
EXPENSES
General and
administrative expenses 966,778 945,894 930,941
Depreciation and
amortization 319,518 438,331 412,426
1,286,296 1,384,225 1,343,367
OPERATING LOSS (147,598) (264,366) (522,948)
OTHER INCOME (EXPENSE)
Miscellaneous income 48,499 12,095 32,676
Interest income 2,995 4,041 3,743
Gain on sale of equipment 3,625 58,117 -
Loss from litigation - - (258,429)
55,119 74,253 (222,010)
Net loss before income taxes(92,479) (190,113) (744,958)
Income tax expense 50 50 880
NET LOSS (92,529) (190,163) (745,838)
Preferred dividends 109,056 109,278 4,481
NET LOSS ATTRIBUTABLE
TO COMMON STOCK $ (201,585) $ (299,441) $ (750,319)
NET LOSS PER SHARE $ (.04) $ (.06) $ (.16)
WEIGHTED AVERAGE
SHARES OUTSTANDING 4,734,544 4,666,099 4,666,099
</TABLE>
Certain 1995 and 1994 items have been reclassified to conform to the 1996
presentation
The accompanying notes are an integral part of the financial statements
<PAGE> F7
UNITED PAYPHONE SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Capital in
Common Stock Excess of
Shares Amount Par Value
<S> <C> <C> <C>
Balance at 6/30/93 4,716,099 $ 4,716 $ 2,658,032
Issuance of preferred
stock to related party
for relief of debt - - -
Capital contribution
by stockholder - - 52,000
Cancellation of common
shares in lieu of payment
of note receivable (50,000) (50) (32,750)
Preferred dividends - - -
Net loss for year ended
6/30/94 - - -
Balance at 6/30/94 4,699,099 4,666 2,587,282
Preferred dividends - - -
Net loss for year ended
6/30/95 - - -
Balance at 6/30/95 4,666,099 4,666 2,587,282
Issuance of common
stock with warrants
attached for $.75
per unit 611,000 611 457,639
Cost of stock offering - - (5,000)
Preferred dividends - - -
Net loss for year ended
6/30/96 - - -
Balance at 6/30/96 5,277,099 5,277 3,039,921
</TABLE>
Certain 1995 and 1994 items have been reclassified to conform to the
1996 presentation
The accompanying notes are an integral part of the financial statements
<PAGE> F8
UNITED PAYPHONE SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained Total
Preferred Earnings Stockholders'
Stock (Deficit) (Equity)
<S> <C> <C> <C>
Balance at 6/30/93 $ - $ (2,703,906) $ (131,158)
Issuance of preferred
stock to related party
for relief of debt 1,817,591 - 1,817,591
Capital contribution
by stockholder - - 52,000
Cancellation of common
shares in lieu of payment
of note receivable - - (32,800)
Preferred dividends - (4,481) (4,481)
Net loss for year ended
6/30/94 - (745,838) (745,838)
Balance at 6/30/94 1,817,591 (3,454,225) 955,314
Preferred dividends - (109,278) (109,278)
Net loss for year ended
6/30/95 - (190,163) (190,163)
Balance at 6/30/95 1,817,591 (3,753,666) 655,873
Issuance of common
stock with warrants
attached for $.75
per unit - - 458,250
Cost of stock offering - - (5,000)
Preferred dividends - (109,056) (109,056)
Net loss for year ended
6/30/96 - (92,529) (92,529)
Balance at 6/30/96 1,817,591 (3,955,251) 907,538
</TABLE>
Certain 1995 and 1994 items have been reclassified to conform to the 1996
presentation
The accompanying notes are an integral part of the financial statements
<PAGE> F9
UNITED PAYPHONE SERVICES, INC.
STATEMENTS OF CASH FLOWS
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Cash received from coin
collections and services $2,151,361 $2,096,318 $1,787,490
Cash received from interest
and other income 51,493 16,136 36,419
2,202,854 2,112,454 1,823,909
Less cash paid for:
Cost of sales 1,033,861 915,079 981,837
General and administrative
expenses 947,162 807,699 676,483
Interest costs 56 1,148 499
Income taxes paid
to governments 50 50 880
1,981,129 1,723,976 1,659,699
Net cash flows from operating
activities 221,725 388,478 164,210
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (148,210) (480,913) (306,668)
Sale of property and equipment 7,500 74,500 -
Cash paid for deposits - (979) -
Net cash used by
investing activities (140,710) (407,392) (306,668)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans - 125,294 296,020
Cash used to reduce
short-term borrowing - (13,496) -
Cash used to reduce
long-term liabilities (882) - (59,669)
Cash used to pay dividends (24,089) (113,759) -
Capital contributed by shareholder - - 52,000
Cash received from issuance of stock 453,250 - -
Net cash flows from (used by)
financing activities 428,279 (1,961) 288,351
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 509,294 (20,875) 145,893
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 184,999 205,874 59,981
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 694,293 $ 184,999 $ 205,874
</TABLE>
NON-CASH FINANCING ACTIVITIES
During the year ended June 30, 1996 the Company acquired office equipment with
a cost of $5,410 through a capital lease.
During the year ended June 30,1994 the Company paid for expenses totaling
$449,318 by issuing common stock and retired debt totaling $1,817,591 by
issuing preferred stock. During the same year a note receivable was settled
by cancelling common stock.
Certain 1995 and 1994 items have been reclassified to conform to the 1996
presentation
The accompanying notes are an integral part of the financial statements
<PAGE> F10
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The Company's accounting policies conform to generally accepted accounting
principles. The following policies are considered to be significant:
Nature of Operations
United Payphone Services, Inc. operates private pay telephones in the Phoenix
and Tucson, Arizona areas. The Company was incorporated on July 24, 1987 as a
Nevada corporation under the name KTA Corporation. In February, 1989 the
Company began operating pay telephones in the Reno, Nevada area. On September
25, 1989 the Company changed its name to United Payphone Services, Inc. Since
that time operations have been moved to Arizona. Prior to May, 1996 the
controlling shareholder was Oak Holdings, Inc. Because of the May, 1996 stock
offering, Oak Holdings' interest fell below 50%.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. In these financial
statements, assets, liabilities, and earnings involve extensive reliance on
management's estimates. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with original maturities of less than three months.
Accounts Receivable
Accounts receivable balances considered uncollectible are written off and bad
debt expense is recognized using the direct write-off method. No allowance
for uncollectible accounts is recognized. The difference between the direct
write-off method and the allowance method is not considered material.
Revenue Recognition
Revenue is recognized upon receipt of coin and rendering of telephone service.
Depreciation
Depreciation expense is computed using the straight-line method in amounts
sufficient to write off the cost of depreciable assets over their estimated
useful lives.
<PAGE> F11
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation (continued)
Normal maintenance and repair items are charged to costs and expenses as
incurred. The cost and accumulated depreciation of property and equipment
sold or otherwise retired are removed from the accounts and gain or loss on
disposition is reflected in net income in the period of disposition.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of income taxes currently due plus deferred
income tax charges and credits. Deferred tax assets are evaluated for their
potential future benefit to the Company and valuation allowances are
established based on such analysis.
Net Loss Per Common Share
Net loss per common share is calculated by dividing net loss attributable to
common stock (net loss adjusted by preferred dividends) by the weighted
average number of common shares outstanding. The calculation of fully diluted
net loss per share was antidilutive in each period presented, and therefore,
the same as primary loss per share.
NOTE 2 - CASH AND CASH EQUIVALENTS
The Company maintains cash balances at banks in Arizona and Utah. Accounts
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
June 30, 1996, the Company's uninsured bank balances total $358,550 ($0 for
1995).
<PAGE> F12
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 1996 and 1995 are detailed in the
following summary:
<TABLE>
<CAPTION>
Accumulated Net Book
1996 Cost Depreciation Value
<S> <C> <C> <C>
Furniture and fixtures $ 22,544 $ 11,569 $ 10,975
Office equipment 92,536 59,578 32,958
Automobiles 64,804 37,785 27,019
Payphones 1,650,865 1,559,959 90,906
Payphone accessories 379,002 179,842 199,160
Payphone installations 475,554 161,004 314,550
Property improvements 32,121 5,084 27,037
Equipment under capital
leases 5,410 811 4,599
$ 2,722,836 $ 2,015,632 $ 707,204
</TABLE>
<TABLE>
<CAPTION>
Accumulated Net Book
1995 Cost Depreciation Value
<S> <C> <C> <C>
Furniture and fixtures $ 21,337 $ 8,497 $ 12,840
Office equipment 87,728 51,349 36,379
Automobiles 56,101 31,279 24,822
Payphones 1,633,846 1,429,808 204,038
Payphone accessories 337,201 118,885 218,316
Payphone installations 407,506 56,295 351,211
Property improvements 31,743 2,372 29,371
$ 2,575,462 $ 1,698,485 $ 876,977
</TABLE>
NOTE 4 - LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to related party, principal and
interest due September, 1997, bearing
interest at 8%, unsecured $ 55,683 $ 55,683
Note payable to related party, principal and
interest due September, 1997, bearing
interest at 8%, unsecured 113,760 113,760
</TABLE>
<PAGE> F13
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 4 - LONG-TERM LIABILITIES (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Capital lease payable to vendor in monthly
installments of $106, due December, 2001,
bearing interest at 12%, secured by
equipment 4,528 -
173,971 169,443
Less current portion (770) -
Long-term portion $ 173,201 $ 169,443
</TABLE>
Maturities of long-term liabilities over the next five years are as
follows:
<TABLE>
<C> <C>
1997 $ 770
1998 170,311
1999 978
2000 1,102
2001 810
Thereafter -
Total long-term liabilities $ 173,971
</TABLE>
Future minimum lease payments under capital leases together with the present
value of the net minimum payments as of June 30, 1996 are as follows:
<TABLE>
<C> <C>
1997 $ 1,272
1998 1,272
1999 1,272
2000 1,272
2001 848
Total minimum lease paymets 5,936
Less amount representing interest (1,408)
Present value of net minimum lease
payments (current portion of $770) $ 4,528
</TABLE>
<PAGE> F14
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Contingent liability
In March, 1993, the Arizona Department of Revenue assessed a sales tax
deficiency of $73,680 against the Company for the period from January 1, 1990
through January 31, 1993 with respect to coin revenues from privately operated
payphones. A timely protest was filed with the Department of Revenue seeking
abatement of the entire assessment.
At issue is the taxability of the coin revenue under the classification of
telecommunications. Under Arizona law, telecommunications is defined as the
transmitting of a signal. Since the Company's pay telephones use the signal
of the local exchange carrier, legal counsel believes that the Company's
operations do not constitute intrastate telecommunication services and
therefore are not subject to sales tax as such.
The Company's protest has been consolidated with those of seven other private
pay telephone operators. At the first administrative hearing the hearing
officer ruled in favor of the taxpayers. Upon review the Director of the
Department of Revenue reversed the decision of the hearing officer. An appeal
was made before the Arizona State Board of Tax Appeals in October, 1995. The
Board of Appeals has not yet issued a decision.
The Department of Revenue has abated the penalties assessed in connection with
the original deficiency assessment. Management believes that a compromise
will ultimately be reached and that the accrued contingent liability of
$132,442 will be sufficient to settle the matter.
Operating lease
The Company has entered into a long-term operating lease for its corporate
headquarters and operations facility in Tempe, Arizona. The lease calls for
monthly lease payments of $3,030. The minimum lease obligation over the next
five years is summarized below:
<TABLE>
<C> <C>
1997 $ 36,365
1998 36,365
1999 30,304
2000 -
2001 -
</TABLE>
Consulting Agreement
A long-term consulting agreement has been entered into with an individual.
The agreement calls for the payment of a monthly consulting fee of $5,000.
The agreement runs through April, 1998.
<PAGE> F15
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 6 - CAPITAL STOCK
Preferred Stock
The Company has outstanding 727 shares of cumulative, convertible,
preferred stock at June 30, 1996 and 1995. Cumulative dividends at 6% are
payable annually. Dividends are in arrears to the amount of $84,967. Each
share of preferred stock is convertible at the option of the holder at a rate
equal to 75% of the average bid price of the common shares for the ten days
prior to the conversion date. The preferred stock is redeemable by the
Company at the cash price paid for the shares plus the amount of any dividends
accumulated and unpaid as of the date of redemption.
Warrants
Stock purchase warrants were issued in connection with the May, 1996 issuance
of common stock. The offering was made in units consisting of two shares of
common stock, on class A warrant and one class B warrant. Each class A
warrant entitles the holder to purchase one share of common stock at $1.25 per
share and expires in January, 1998. Each class B warrant entitles the holder
to purchase one share of common stock at $1.31 per share and expires in
January, 1999.
NOTE 7 - INCOME TAXES
The Company used an asset and liability approach to financial accounting and
reporting for income taxes. The difference between the financial statement
and income tax bases for assets and liabilities is determined annually.
Deferred income tax assets and liabilities are computed for those differences
that have future income tax consequences using the currently enacted tax laws
and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred income tax asset to the amount that will more likely than not be
realized. Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and
liabilities.
<PAGE> F16
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 7 - INCOME TAXES (CONTINUED)
Income taxes payable as of June 30, 1996 and 1995 are detailed in the
following summary:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Currently payable $ 50 $ 50
Deferred income tax liability $ - $ -
Deferred income tax asset 1,257,000 -
Valuation allowance (1,257,000) -
Net deferred income tax asset - -
Net deferred income tax liability $ - $ -
</TABLE>
The deferred tax assets result from net operating loss carryforwards
available.
At June 30, 1996, the Company had net operating loss carryforwards available
to offset future income taxes totaling $2,805,251 expiring from 2003 and 2011.
The Company's income tax expense differed from the statutory federal rate of
34% due to state income taxes, and carryfowards of prior year net operating
losses.
<PAGE> F17
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 8 - CASH FLOWS FROM OPERATING ACTIVITIES
The following schedule reconciles net loss as reported in the
accompanying statements of operations with net cash flows from operating
activities in the statements of cash flows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net loss $ (92,529) $ (190,163) $ (745,838)
Adjustments to reconcile
net loss to net cash
flows from operating
activities:
Depreciation and amortization
expense 319,518 438,331 412,426
Bad debt - - 5,052
Issuance of stock for expense - - 449,318
Gain on sale of equipment (3,625) (58,117) (11,661)
(Increase) decrease in assets:
Accounts receivable 23,787 22,074 14,873
Prepaid expenses and deposits 4,326 54,570 6,254
Increase (decrease) in liabilities:
Accounts payable (44,985) 39,306 (16,039)
Accrued expenses 15,233 82,477 49,825
Net cash flows from
operating activities $ 221,725 $ 388,478 $ 164,210
</TABLE>
<PAGE> F18
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosure about
Fair Value of Financial Instruments". The carrying amounts and fair value of
the Company's financial instruments at June 30, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amounts Values
<S> <C> <C>
Cash and cash equivalents $ 694,293 $ 694,293
Long-term debt including
current maturities 173,971 179,971
Preferred stock 1,817,591 2,536,744
Warrants, Class A - 3,055
Warrants, Class B - 3,055
</TABLE>
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amounts reported on the balance sheet for cash and
cash equivalents approximate their fair value.
Long-term Debt
The fair values of the long-term debt are estimated using discounted
cash flow analyses based on the Company's incremental borrowing rate
as the discount rate.
Preferred Stock
The Company's preferred stock is not publicly traded and therefore a
fair value is not readily available. Based on the conversion ratio
of the preferred stock and the current market value of the common
stock, a fair value estimate was determined.
Warrants
The fair value of the stock purchase warrants was estimated based on the
redemption value of the warrants. During the first 30 days after the issuance
of the warrants the Company had the right to redeem the warrants at $.01 per
warrant. This is the basis of the fair value estimate.
<PAGE> F19
UNITED PAYPHONE SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE 10- RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with C & N, Inc., to provide
management services for $3,000 per month. C & N, Inc., is a related party by
virtue of the ownership of C & N, Inc. being Officers and Directors of the
Company.
As described in Note 4, the Company has notes payable to a related party. The
related party is Teletek, Inc., who is a significant shareholder in the
Company.
As described in Note 5, the Company has entered into a consulting agreement
with an individual. The individual is a related party by virtue of stock
ownership in the Company.
During July, 1995 the Company loaned $20,000 to the Company's president. The
amount was subsequently repaid with interest in December, 1995.
<PAGE> 26
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (the "Agreement") is entered into on October __,
1996, by and between UNITED PAYPHONE SERVICES, INC., a Nevada corporation (the
"Company"), and MICHAEL G. SWAN ("Swan").
RECITALS
A. The Company and Swan are parties to a Consulting Agreement dated
April 7, 1995 (the "Consulting Agreement"), pursuant to which Swan has
provided financial consulting and advisory services to the Company.
B. The Company and Swan believe that it is in their mutual best
interests to terminate Swan's services under the Consulting Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENTS
1. Termination of Consulting Agreement. The Consulting Agreement is
hereby terminated, effective immediately. Additionally, Swan agrees
that,without the prior written consent of David Westfere, the
President of the Company ("Westfere"), Swan shall not (a) perform
any services whatsoever for, or for the benefit of, the Company, or
(b) represent or hold himself out to bean agent or representative of
the Company in any capacity whatsoever. Any breach by Swan of this
Paragraph 1 shall entitle the Company to terminate this Agreement
and terminate any further payments to Swan which would otherwise be
required by Paragraph 2 hereof.
2. Severance Payments. The Company hereby agrees to pay Swan the sum of
$5,000 per month, payable on the 15th day of each month, commencing in
September 1996 and continuing through April 1998. Swan shall not be
entitled to reimbursement of any business or other expenses incurred
on or after September 15, 1996, or to any other payments or
reimbursements of any nature whatsoever by the Company.
3. Confidential Information. All confidential information which Swan
may now possess or acquire in the future concerning the Company shall
not be disclosed by Swan to any third person without the prior
written consent of Westfere.
4. Termination. The Company may terminate this Agreement immediately
upon written notice to Swan upon the occurrence of any one or more
of the following: (a) Swan's breach of this Agreement, including
without limitation Swan's breach of Paragraph 1 hereof; (b) Swan's
conviction of any felony involving or related to (i) Swan's previous
employment with the Company, or (ii) services provided by Swan for the
benefit of or related to the Company; or (c) Swan's death.
5. Entire Agreement. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter hereof, supersedes
all existing agreements between them concerning such subject matter,
and may be modified only by a written instrument duly executed by
Westfere on behalf of the Company and Swan.
6. Notices. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or hand delivered (by
messenger or overnight delivery service) to the Company or Swan at
the following address:
<PAGE> 27
If to the Company:
United Payphones Services, Inc.
1725 West Third Street
Tempe, Arizona 85281
Attention: David Westfere
If to Swan:
Michael G. Swan
c/o High Desert Holdings, Inc.
3340 Topaz Street
Suite 210
Las Vegas, Nevada 89121
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8. Attorney's Fees. In the event of any dispute or litigation arising
hereunder, the successful party in such dispute or litigation shall
be entitled to recover its costs and reasonable attorneys' fees from
the other party to such dispute or litigation.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Arizona.
DATED on October __, 1996.
UNITED PAYPHONES SERVICES, INC.
By /s/ David Westfere
David Westfere
Its President
COMPANY
Michael Swan
Michael Swan
<PAGE> 28
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
<PERIOD-TYPE> 12 MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 694,293
<SECURITIES> 0
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0
1,817,591
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