1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
0-16715
----------------------
Commission File Number
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
March 15, 1996
----------------------
Date of Report
(Date of Earliest Event Reported)
PHONETEL TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1462198
------------------------ ---------------------------
(State of Incorporation) (I.R.S. Identification No.)
1127 Euclid Avenue
650 Statler Office Tower
Cleveland, Ohio 44115-1601
---------------------------------------------------
Address and zip code of principal executive offices
(216) 241-2555
-----------------------------
Registrant's telephone number
page 1 of 3 pages
2
PART I
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 15, 1996, PhoneTel Technologies, Inc., the Registrant (or "Company")
completed the following acquisitions:
On November 22, 1995, the Company entered into an agreement and Plan
of Merger to acquire the outstanding common stock of International Pay
Phones, Inc. of South Carolina and International Pay Phones, Inc. of
Tennessee (collectively "IPP"), companies affiliated through common
ownership and management. Under the terms of the Agreements, the
Company acquired 2,101 installed phones for a purchase price of
$3,367,212 in cash, and 555,589 restricted shares of the Company's
Common Stock, par value $0.01, ("Common Stock"), plus 5,453 shares of
the Company's 14% Convertible Cumulative Redeemable Preferred Stock,
(immediately convertible into 54,530 shares of Common Stock), plus
warrants to purchase 117,785 shares of the Company's Common Stock at a
nominal per share exercise price. Additionally, the Company assumed
approximately $1,754,000 in liabilities. The purchase price included
the purchase of two five year non-compete agreements, valued at
$40,000, for two of IPP's former officers.
On November 16, 1995, the Company entered into a Share Purchase
Agreement with Paramount Communications Systems, Inc. ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed
phones for a cash purchase price of $9,618,553, plus 8,333 shares of
14% Convertible Cumulative Redeemable Preferred Stock (immediately
convertible into 83,330 shares of Common Stock), plus warrants to
purchase 179,996 shares of the Company's Common Stock at a nominal per
share exercise price. Additionally the Company assumed approximately
$733,000 in liabilities. The purchase price included a five year
consulting and non-compete agreement, valued at $50,000 for one of
Paramount's former officers.
The assets of IPP and Paramount consisted of 4,626 pay telephones installed on
locations, together with enclosures, inventory of uninstalled pay telephones,
parts, vehicles, computers and contracts pursuant to which the acquired pay
telephones are installed on property owned by others. The acquisitions of IPP
and Paramount will be accounted for using the purchase method and, accordingly,
the purchase price will be allocated to the net assets, based on their
estimated fair values.
ITEM 5. OTHER EVENTS
CHANGES IN STOCKHOLDERS' EQUITY
Subsequent to December 31, 1995, the Company created three new classes of
preferred stock: (i) Series A Special Convertible Preferred Stock, $0.20 par
value, 250,000 authorized shares, immediately convertible into 20 shares of
Common Stock, and non-voting, ("Series A Preferred"); (ii) Series B Special
Convertible Preferred Stock, $0.20 par value, 250,000 authorized shares,
immediately convertible into 20 shares of Common Stock, and non-voting ("Series
B Preferred"); and (iii) 14% Convertible Cumulative Redeemable Preferred Stock,
without par value, $60 Stated Value, non-voting, June 30, 2000, mandatory
redemption date at a redemption price of $60 per share, 200,000 authorized
shares, and immediately convertible into 10 shares of Common Stock ("14%
Preferred").
CHANGES IN LONG-TERM DEBT
In a transaction consummated on March 15, 1996, the Company borrowed additional
funds of $30,530,954 (out of a total credit facility commitment of $37,250,000)
from Internationale Nederlanden (U.S.) Capital Corporation and one other lender
(collectively know as "ING"). The Company has available under the credit
facility $6.7 million to fund future acquisitions and for general working
capital purposes. The Company used the funds to complete the Paramount and IPP
acquisitions, repaid all outstanding long-term debt and capital lease
obligations which had a secured interest in the Company's installed phones,
redeemed certain series of Preferred Stock and paid related transaction fees.
The ING credit facility requires monthly interest payments at prime plus 5%.
Principal payments commence September 1997, with the amount of the principal
payment contingent upon numerous factors, including the borrowing base and cash
flow of the Company. All of the Company's installed phones are pledged as
collateral to the ING credit facility.
The majority of the ING credit facility (currently $29 million) can be converted
into Series B Preferred at the ratio of 833 shares for each $100,000 in
outstanding debt and interest. Additionally, ING received warrants to purchase
204,824 shares of Series A Preferred at an exercise price of $0.20 per share.
Each share of Series A Preferred and Series B Preferred is convertible into 20
shares of Common Stock. The difference between the exercise price of Series A
Preferred and the estimated fair value of the warrants on the date of grant will
be recorded as interest expense over the term of the ING credit facility. The
Company has estimated the annual non-cash interest expense to be $3,000,000.
Concurrent with the ING transaction, the Company redeemed the 10% Cumulative
Preferred, the 8% Preferred, and the 7% Preferred. The redemption price was
$1,117,371 and 34,434 shares of 14% Preferred. In the aggregate, $6,475,011 of
the Company's outstanding obligations, including portions of the purchase price
for the pending acquisitions, was liquidated by issuing 107,918 shares of 14%
Preferred.
Warrants to purchase 2,018,946 shares of Common Stock at a nominal exercise
price per share ("Nominal Value Warrants") were issued in conjunction with the
IPP and Paramount acquisitions, redemption of the 10% Cumulative Preferred, 8%
Preferred, and the 7% Preferred, and conversion of certain debt of the Company
to the 14% Preferred.
The Company has reserved 13,966,026 shares of Common Stock for issuance under
the following scenarios: (1) conversion of $29,000,000 of ING outstanding debt
into 241,667 shares of Series B Preferred Stock which is then immediately
convertible into 4,833,333 shares of Common Stock; (2) exercising of warrants to
purchase 204,824 shares of Series A Preferred Stock at $0.20 per share,
immediately convertible into 4,096,480 shares of Common Stock; (3) conversion of
107,918 shares of 14% Preferred into 1,079,179 shares of Common Stock; (4)
conversion, upon Shareholder approval, of 530,534 shares of 10% Non-Voting
Preferred into 885,992 shares of Common Stock; (5) the exercising of 2,018,946
Nominal Value Warrants; (6) the exercising of 580,351 warrants at prices ranging
from $5.70 to $15.75 per share; and (7) the exercising of 471,745 stock options
at prices ranging from $3.00 to $19.50 per share.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
The Company herein states that it is impracticable to provide at the time of
this filing all of the requisite financial information to accompany this
Current Report in Form 8-K pursuant to the Rules and Regulations of The
Securities and Exchange Act of 1934. IPP's and Paramount's independent
auditors are in the process of completing and preparing the required financial
statements and footnotes for the year ended December 31, 1995. Upon receipt of
the audited financial statements of IPP and Paramount, the Company will
commence the preparation of the pro forma information and anticipates that this
Report will be supplemented by amendment to include said statements within the
time permitted by the aforementioned Rules and Regulations.
page 2 of 3 pages
3
EXHIBITS
(a) Financial Statements of Business Acquired:
1. International Pay Phones, Inc. of South Carolina Financial
Statements For the Year Ended December 31, 1994
2. International Payphones, Inc. of Tennessee Financial Statements
For the Year Ended December 31, 1994 and for the Nine Months
Ended September 30, 1995
3. Paramount Communications Systems, Inc. Financial Statements
For the Years Ended December 31, 1994, 1993, and 1992.
(b) Pro Forma Financial Information:
Pro forma financial information to be submitted by amendment to Form
8-K within the time permitted.
(c) Other Exhibits:
1. Agreement and Plan of Merger between PhoneTel Technologies,
Inc. and International Pay Phones, Inc. (a South Carolina
company) dated November 22, 1995, and all amendments thereto.
2. Agreement and Plan of Merger between PhoneTel Technologies,
Inc. and International Pay Phones, Inc. (a Tennessee company)
dated November 22, 1995, and all amendments thereto.
3. Share Purchase Agreement between PhoneTel Technologies, Inc.
and Paramount Communications Systems, Inc., dated November 16,
1995, and all amendments thereto.
4. Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation.
5. Security Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Public Telephone Corporation, World
Communications, Inc., Northern Florida Telephone Corporation
and Paramount Communications Systems, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation as Agent for itself and
certain other lenders.
6. Warrant Purchase Agreement dated as of March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P.
7. Registration Rights Agreement dated March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PhoneTel Technologies, Inc.
(Registrant)
Date: April 1, 1996 /s/ Peter G. Graf
---------------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
page 3 of 3 pages
4
EXHIBIT A-2
INTERNATIONAL PAYPHONES, INC.
Financial statements
September 30, 1995 amd December 31, 1994
5
International Payphones, Inc.
Table of Contents
Page
Auditors' opinion 1
Balance Sheets, September 30, 1995 and December 31, 1994 2
Statements of Earnings and Retained Earnings, For the nine month period and
year ended September 30, 1995 and December 31, 1994 3
Statements of cash flows, for the nine months and year ended September 30, 1995
and December 30, 1994. 4
Notes to financial statements, September 30, 1995 and December 31, 1994 5
6
SEWELLL/MCCANDLESS, CPA'S, PA
CERTIFIED PUBLIC ACCOUNTANTS
SUITE 100, SAPELO BUILDING
HILTON HEAD ISLAND, SOUTH CAROLINA 29928
Member of the Telephone (803) 785-2060
American Institute of CPAs Fax (803) 842-6501
South Carolina Association of CPAs
To The Stockholders
International Payphones, Inc.
Hilton Head Island, South Carolina
We have audited the accompanying Balance Sheets of International Payphones, Inc.
(a Tennessee corporation) as of September 30, 1995 and December 31, 1994, and
the related Statements of Earnings and Retained Earnings and Cash Flows for the
nine month period and year then ended. These financial statements are the
responsibility of the management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Payphones, Inc.
and the results of its operations and its cash flows for the nine month period
ended September 30, 1995 and the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
/s/____________Sewell, CPA
November 22, 1995
1
7
INTERNATIONAL PAYPHONES, INC.
BALANCE SHEETS
September 30, 1995 and December 31, 1994
1995 1994
---------- ----------
ASSETS
Current Assets
Cash $ 26,044.85 $ 25,530.67
Accounts receivable - trade 51,494.31 35,913.21
Other amounts receivable (Note D) 18,322.86 25,574.54
Parts and supplies inventory 11,625.00 11,625.00
---------- ----------
Total current assets 107,487.02 98,643.42
Property and Equipment
Property and equipment (Notes B and F) 744,819.89 720,142.61
Accumulated depreciation (511,944.71) (455,592.94)
---------- ----------
Net Property and Equipment 232,875.18 264,549.67
---------- ----------
TOTAL ASSETS $ 340,362.20 $ 363,193.09
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note F) $ 67,023.47 $ 48,761.05
Accounts payable - trade 1,914.15 7,822.66
Accrued payroll and payroll taxes 1,983.20 10,265.07
Other accrued liabilities (Note E) 34,211.91 24,220.91
Deferred income taxes (Note C) 6,000.00 5,100.00
---------- ----------
Total current liabilities 111,132.73 96,169.69
Long-term debt - net of current portion (Note F) 74,833.35 81,515.83
---------- ----------
TOTAL LIABILITIES 185,966.08 177,685.52
Shareholders' Equity
Common stock 3,321.00 3,321.00
Additional paid-in capital 106,000.00 106,000.00
Retained earnings 45,075.12 76,186.57
---------- ----------
Total shareholders' equity 154,396.12 185,507.57
---------- ----------
TOTAL LIABILITIES AND EQUITY $ $ 340,362.20 $ 363,193.09
========== ==========
The accompanying notes are an integral part of this statement.
2
8
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
For the nine month period ended September 30, 1995 and the year ended December
31, 1994
1995 1994
----------- ------------
Revenue $ 886,672.41 $ 1,135,734.73
Direct costs
Access fees 233,637.13 299,918.06
Commissions locations 147,179.21 174,710.50
Phone supplies, repairs 81,952.04 78,708.14
----------- ------------
462,768.38 553,336.70
----------- ------------
Gross Profit 423,904.03 582,398.03
General and Administrative expenses 313,680.91 428,756.04
Depreciation expense 63,780.59 96,689.77
----------- ------------
377,461.50 525,445.81
----------- ------------
Earnings from operations 46,442.53 56,952.22
Other income (expense):
Interest expense (8,816.26) (20,919.23)
Gain (loss) on sale of assets 916.16 (2,731.45)
----------- ------------
Earnings before taxes 38,542.43 33,301.54
Provision for State excise taxes (Note C) 2,300.00 2,535.00
----------- ------------
Net earnings 36,242.43 30,766.54
BEGINNING RETAINED EARNINGS 76,186.57 88,677.65
----------- ------------
112,429.00 119,444.19
Less dividend distributions (67,353.88) (43,257.62)
----------- ------------
ENDING RETAINED EARNINGS $ 45,075.12 $ 76,186.57
=========== ============
The accompanying notes are an integral part of this statement.
3
9
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1995 and year ended December 31, 1994
1995 1994
---------- ----------
Cash Flows From Operating Activities
Net income (loss) $ 36,242.43 $ 30,766.54
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities
Depreciation 63,780.59 96,689.77
(Gain) loss on disposal of property (916.16) 2,731.45
(Increase) decrease in accounts receivable (15,581.10) (4,610.68)
(Increase) decrease in inventories -- 32,152.00
Increase (decrease) in accounts payable (5,908.51) (16,981.09)
Increase (decrease) in deferred income taxes 900.00 (5,280.00)
Increase (decrease) in other accrued expenses 9,991.00 3,112.86
Increase (decrease) in payroll taxes (8,281.87) 9,691.53
---------- ----------
Total adjustments 43,983.95 117,505.84
---------- ----------
Net Cash Provided (Used) by Operating Activities 80,226.38 148,272.38
Cash Flows From Investing Activities
Proceeds from sale of assets 18,250.06 5,312.20
Purchases of fixed assets -- (18,225.16)
Leasehold improvements -- (10,274.42)
---------- ----------
Net Cash Provided (Used) by Investing Activities 18,250.06 (23,187.38)
Cash Flows From Financing Activities
Proceeds from long-term debt -- 30,893.30
Decrease in other amounts receivable 7,251.60 29,012.38
Repayment of long-term debt (16,833.29) (52,552.75)
Repayment of capital lease obligations (21,026.77) (59,859.12)
Repayment of stockholder loans -- (22,575.20)
Dividends paid (67,353.88) (43,257.62)
---------- ----------
Net Cash Provided (Used) by Financing Activities (97,962.34) (118,349.01)
---------- ----------
NET INCREASE (DECREASE) IN CASH 514.10 6,735.99
CASH AT BEGINNING OF YEAR 25,530.67 18,794.88
---------- ----------
CASH AT END OF YEAR $ 26,044.77 $ 25,530.67
========== ==========
Supplemental Disclosures
- ------------------------
Noncash Investing and Financing Activities
Assets acquired through capital lease $ (49,440.00) $ (66,598.00)
Capital lease used to acquire assets 49,440.00 66,598.00
Cash Paid During the Year for:
Interest $ 8,816.00 $ 20,919.00
Income taxes 1,400.00 2,535.00
The accompanying notes are an integral part of this statement.
4
10
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 1995 and December 31, 1994
Note A - General
International Payphones, Inc. is a Tennessee corporation formed in 1985 to
sale, install, lease and maintain pay telephone equipment. The majority of the
Company's operations are in the eastern region of the the state of Tennessee
where it owns approximately 500 telephones and receives pay telephone coin
income and long distance commissions. Under agreements with pay phone site
location owners, the Company collects the pay phone coin revenue and the long
distance commission income and pays a percentage of this revenue to the site
location owner each month. These agreements cover periods ranging from five to
twenty years. Approximately thirty to forty percent of the Company's revenue is
received under agreements with two long distance telecommunications companies.
These agreements are between an affiliate of the Company, Resort Hospitality
Services, and the two long distance carriers.
Note B - Property and equipment
Property and equipment is stated at cost and is depreciated using the
straight-line method over useful lives ranging from 5 to 7 years for equipment
and vehicles and 31.5 years for leasehold improvements. Repairs and maintenance
are charged to expense when incurred and improvements which substantially
prolong the useful lives of the assets involved are capitalized and depreciated.
The cost of assets classified by major categories is as follows:
1995 1994
---------- ----------
Furniture & fixtures $ 58,120.58 $ 58,120.58
Office equipment 35,998.97 35,998.97
Telephone equipment 515,563.78 466,123.78
Leasehold improvements 74,802.66 74,802.66
Vehicles 60,333.90 85,096.62
---------- ----------
Total cost 744,819.89 720,142.61
Note C - Income taxes
The Company is an S corporation for Federal income tax purposes. As a
result, no provision for Federal income taxes is made by the Company because the
individual stockholders' report and pay Federal income tax on their allocated
percentage of the Company's net earnings. The Company does pay Tennessee state
excise tax on its net earnings at a 6% tax rate.
There are timing differences in how items of income and expense reported on
the tax return and in the financial statements. These differences involve trade
receivables for long distance commission income which is reported as income when
earned in the financial statements but is reported as received for tax purposes.
In addition, depreciation expense is claimed under IRS Code Section 179 and
using accelerated writeoff methods for tax purposes, while the straight-line
writeoff method is used for financial reporting. State excise tax is provided
for in the financial statements as the items of income and deduction are
recognized therein regardless of when they are reported on the income tax
return. As a result of the timing differences, deferred tax liabilities of
$6,000 and $5,100, respectively, have been accrued at September 30, 1995 and
December 31, 1994. In addition, income tax expense at September 30, 1995
includes $900 in deferred state excise taxes.
5
11
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATENENTS - Continued
September 30, 1995 and December 31, 1994
Note D - Other amounts receivable:
The Company is affiliated through common stock ownership and control with
other companies involved in the telecommunications industry. Loans to these
affiliates on open account totaled $ 4,786 at September 30, 1995 and $ 19,886 at
December 31, 1994. Loans to employees at September 30, 1995 and December 31,
1994 totaled $ 7,937 and $ 3,450, repectively. Finally, estimated tax deposits
of $ 5,600 at September 30, 1995 and equipment lease deposits of $ 2,239 at
December 31, 1994 are included in other amounts receivable.
Note E - Other accrued liabilities:
Other accrued liabilities include the Company's estimate of unpaid site
commissions. Under agreements with its sits owners, commissions are payable
after the end of the month in which the net coin and long distance revenue is
received. As of September 30, 1995 and December 31, 1994, the Company has
accrued three and two months, respectively, of unpaid site commissions.
Note F - Long-term debt:
Long-term debt at September 30, 1995 and December 31, 1994 includes the
following:
1995 1994
Note payable to First National Bank of Gatlinburg
dated November 2, 1994 in the face amount of $ 17,000
payable in 18 monthly installments of $ 1,000 including
interest at prime plus 1.5% $ 7,216.17 $ 15,269.36
Note payable to Conquest Communications dated in
December, 1993 in the face amount of $ 25,000 payable
in monthly installments with interest. - 5,117.01
Note payable to First Union Bank of Georgia
dated October 11, 1993 in the face amount of $ 24,763
payable in 60 monthly installments of $ 487 including
interest at 6.75%. This note is collateralized by a
1994 Ford Explorer. - 19,773.54
Notes payable (two) to First Union Bank of South
Carolina dated September 17, 1993 in the face amounts
of $ 15,022 each, both payable in 60 monthly install-
ments of $ 292 including interest at 6.25%. These notes
are collateralized by two 1993 Ford cargo vans. 19,172.04 23,457.12
Note payable to First Tennessee Bank
dated January 31, 1994 in the face amount of $ 13,893
payable in 60 monthly installments of $ 289 including
interest at 9.00%. This note is collateralized by a
1994 Toyota Corolla. 10,038.85 11,681.97
Note payable to Nationsbank of South Carolina
dated December 14, 1993 in the face amount of $ 15,596
payable in 60 monthly installments of $ 309 including
interest at 7.00%. This note is collateralized by a
1994 Ford Econoline. 10,674.63 12,867.48
6
12
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATENENTS - Continued
September 30, 1995 and December 31, 1994
Note F - Long-term debt (continued):
Note payable to First National Bank of Gatlinburg
dated August 28, 1995 in the face amount of $ 25,000
payable in 23 monthly installments of $ 1,000 including
interest at prime plus 2.362%. This note is collateralized
by pay phones and royalty contracts. 24,231.50 -
Capitalized lease purchase agreement dated January 26,
1994 in the original sum of $ 66,370, due in 36 monthly
installments of $ 2,139 through December, 1996,
decreasing to $ 1,123 through March, 1997, including sales
tax and finance charges at 14%. This agreement is
collateralized by pay telephone equipment and calls for
a $ 1 purchase option by the lessee at the end
of the lease period. 28,049.30 42,110.40
Capitalized lease purchase agreement dated May 5,
1995 in the original sum of $ 49,440, due in 36 monthly
installments of $ 1,842 through March, 1998, including
sales tax and finance charges at 19%. This agreement is
collateralized by pay telephone equipment and allows
for a purchase option by the lessee at the end of the
lease period. 42,474.33 -
------------ -------------
141,856.82 130,276.88
Less current portion (67,023.47) (48,761.05)
------------ -------------
$ 74,833.35 $ 81,515.83
============ =============
Note C - Operating leases
The Company leases its office space from one of the stockholders under an
oral agreement at a monthly rate of $ 1,000 plus utilities, taxes, repairs,
maintenance and leasehold improvements.
The Company also leases three vehicles under separate non-cancellable
operating lease agreements dated March 25, 1993, January 22, 1994 and April 21,
1995. These agreements call for monthly lease payments of $ 509, $ 1,006, and
$444, respectively, including sales tax. Each agreement allows for additional
charges for excess milage upon expiration of the lease. All maintenance, taxes,
insurance and operating expenses are the responsibility of the lessee. Future
minimum annual lease payments under the vehicle leases are as follows:
Year ended December 31, 1995 $ 22,183.00
Year ended December 31, 1996 18,936.00
Year ended December 31, 1997 11,371.00
Year ended December 31, 1998 1,333.00
-------------
Totals $ 53,823.00
7
13
EXHIBIT A-1
FINANCIAL STATEMENTS
INTERNATIONAL PAY PHONES, INC.
FOR THE YEAR ENDED DECEMBER 31, 1994
MILLER SHERRILL BLAKE CPA PA
14
INTERNATIONAL PAY PHONES, INC.
TABLE OF CONNENTS
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENT
Balance Sheet 2
Statement of Income and Retained Earnings 3
Statement of Cash Flows 4
Notes to Financial Statement 5-8
SUPPLEMENTARY INFORMATION REPORT 9
Schedule of Cost of Goods Sold 10
Schedule of General and Admministrative Expenses 11
MILLER SHERRILL BLAKE CPA PA
15
- -------------------------------------------------------------------------------------------------------------
MILLER SHERRILL BLAKE CPA PA Charlotte Office Lincolnton Office Shelby Office
Certified Public Accountants 2415 Tuckaseegee Road 232 East Main Street 825 S. Washington Street
P.O. Box 668307 P.O. Box 782 P.O. Box 3026
Charlotte, NC 28266 Lincolnton, NC 28093 Shelby, NC 28150
(704) 732-2234
(704) 394-3156 (704) 332-4217 - Clt. Line (704) 482-4358
(704) 392-9741 - FAX (704) 732-6041 - FAX (704) 481-0455 - FAX
January 17, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones, Inc.
(a South Carolina corporation) as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Pay Phones, Inc.
as of December 31, 1994, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
_____________________________
For the Firm
16
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
December 31, 1994
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 13,939
Accounts Receivable 80,984
-----------
TOTAL CURRENT ASSETS 94,923
-----------
PROPERTY AND EQUIPMENT
Leasehold Improvements 16,000
Office Furniture and Equipment 27,441
Vehicles 146,295
Telephone Equipment 2,134,307
Accumulated Depreciation (1,155,533)
-----------
TOTAL PROPERTY AND EQUIPMENT 1,168,510
-----------
OTHER ASSETS
Covenants Not to Compete - Net of Amortization 143,695
Goodwill - Net of Amortization 21,900
Deferred Tax Asset 35,800
-----------
TOTAL OTHER ASSETS 201,395
-----------
TOTAL ASSETS $ 1,464,828
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 93,151
Bank Overdraft 17,982
Notes Payable 166,645
Notes Payable - Related Party 61,903
Current Portion of Long-Term Debt 264,089
-----------
TOTAL CURRENT LIABILITIES 603,770
-----------
LONG-TERM LIABILITIES
Notes Payable - Less Current Portion 724,379
Obligations under Capital Leases - Less Current Portion 137,819
-----------
TOTAL LONG-TERM LIABILITIES 862,198
-----------
TOTAL LIABILITIES 1,465,968
-----------
STOCKHOLDERS' EQUITY
Common Stock 10,000
Additional Paid - In - Capital 57,224
Retained Earnings (68,364)
-----------
TOTAL STOCKHOLDERS' EQUITY (1,140)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,464,828
===========
See Independent Auditors' Report and Notes to Financial Statement
Page Two
MILLER SHERRILL BLAKE CPA PA
17
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1994
Sales $ 2,631,627
Cost of Goods Sold 1,950,062
---------
GROSS PROFIT 681,565
Operating Expenses
- ------------------
General And Administrative Expenses 435,365
Depreciation Expense 389,201
Interest Expense 103,697
-----------
TOTAL OPERATING EXPENSES 928,263
-----------
INCOME FROM OPERATIONS (246,698)
Other (Income) Expense
- ----------------------
Miscellaneous Income (2,076)
(Gain) Loss on Sale of Assets 28,571
-----------
Total Other (Income) Expense 26,495
Income Before Corporate Taxes (273,193)
Deferred Tax Benefit Provision (35,800)
-----------
NET INCOME (237,393)
BEGINNING RETAINED EARNINGS 169,029
-----------
ENDING RETAINED EARNINGS $ (68,364)
===========
See Independent Auditors' Report and Notes to Financial Statement
Page Three
MILLER SHERRILL BLAKE CPA PA
18
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
Net Cash Flow From Operating Activities:
Net Income (237,393)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 389,201
Net (increase) decrease in receivables (24,429)
Net increase (decrease) in accounts payable and accrued expenses 50,764
Net increase (decrease) in accrued taxes (3,791)
Net change in deferred tax asset/liability 35,800
Gain on sale of property and equipment 28,571
-------
Net Cash Provided (Used) by Operating Activities 238,723
-------
Cash Flow From Investing Activities:
Purchase of equipment (186,716)
-------
Net Cash Provided (Used) by Investing Activities (186,716)
Cash Flow From Financing Activities:
Payments to settle short-term debt (133,405)
Payments to settle long-term debt (352,114)
Proceeds from short-term debt 206,903
Proceeds from long-term debt 260,736
Payments under capital lease obligations (43,290)
-------
Net Cash Provided (Used) by Financing Activities (61,170)
-------
Net Increase (Decrease) In Cash and Cash Equivalents (9,163)
Cash and Cash Equivalents at beginning of year 23,102
-------
Cash and Cash Equivalents at end of year 13,939
=======
Supplemental Disclosures
Interest Paid 103,697
=======
Income Taxes Paid 3,587
=======
See Independent Auditors' Report and Notes to Financial Statement
Page Four
MILLER SHERRILL BLAKE CPA PA
19
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Business Activity
- -----------------
International Pay Phones, Inc. was incorporated under the laws of the State of
South Carolina on May 29, 1990. The Company purchases or leases pay phones from
suppliers and installs them in various locations throughout the southeastern
United States. Revenue is generated through contracts established with the
property owners regarding the use of the phones.
Cash
- ----
Cash includes cash in bank and instruments with maturities of 30 days or less.
Depreciation
- ------------
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B - RELATED PARTY TRANSACTIONS
- -----------------------------------
The Company has the following notes payable due to related parties as of
December 31, 1994:
Amounts payable to officers due on demand $ 5,000
Amounts payable to shareholders due on demand 50,000
Amounts payable to corporations related through common
ownership due on demand 6,903
------
$ 61,903
======
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $14,934 for the year ended December
31, 1994.
NOTE C - RETIREMENT PLAN
- ------------------------
The Company sponsors a 401(k) plan covering all of the eligible employees who
elect to participate. The Company matches 50% of each employees deferred salary
up to a maximum of 2% of compensation. The contribution was $5,847 for 1994.
See Independent Auditors' Report
Page Five
MILLER SHERRILL CPA PA
20
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE D - LONG-TERM DEBT
- -----------------------
Long-term debt consists of the following notes:
Note Payable - NationsBank $ 13,293
Due in monthly installments of $327.26 which includes interest calculated at 7.5%.
Matures in November of 1998. Secured by vehicle.
Note Payable - NationsBank 13,295
Due in monthly installments of $327.26 which includes interest calculated at 7.5%.
Matures in November of 1998. Secured by vehicle.
Note Payable - First Union National Bank 11,677
Due in monthly installments of $292.10 which includes interest calculated at 6.25%.
Matures in September of 1998. Secured by vehicle.
Note Payable-First Union National Bank 11,677
Due in monthly installments of $292.10 which includes interest calculated at 6.25%.
Matures in September of 1998. Secured by vehicle.
Note Payable - First Union National Bank 12,702
Due in monthly installments of $327.49 which includes interest calculated at 7.5%.
Matures in October of 1998. Secured by vehicle.
Note Payable - Ford Motor Credit 16,539
Due in monthly installments of $395.81 which includes interest calculated at 11.75%.
Matures in June of 1999. Secured by vehicle.
Note Payable - First Union National Bank 15,486
Due in monthly installments of $357.26 which includes interest calculated at 7.75%.
Matures in March of 1999. Secured by vehicle.
Note Payable - Ford Motor Credit 16,802
Due in monthly installments of $401.09 which includes interest calculated at 7.75%.
Matures in January of 1999. Secured by vehicle.
Note Payable - First National Bank 528,493
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance.
See Independent Auditors' Report
Page Six
MILLER SHERRILL BLAKE CPA PA
21
MILLER SHERRILL BLAKE CPA PA
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE D - LONG-TERM DEBT - (Continued)
- -------------------------------------
Note Payable- Karl Baker $ 231,643
Due in monthly installments of $5,219.19 which includes interest calculated at 8.0%.
Matures in April of 1999. Secured by phone equipment.
Note Payable - First Union National Bank 9,998
Due in monthly installments of $666.67 principle plus interest calculated at 10.0%.
Matures in April of 1996. Secured by assets of the company.
Note Payable - Elcotel 24,411
Due in monthly installments of $1,341 which includes interest calculated at 16.049%.
Matures in September of 1996. Secured by phone equipment and guaranteed by
officers.
-------
906,016
Less: Current Maturities (181,637)
-------
Total Long-Term Debt $ 724,379
=======
Maturities of long-term debt in each of the next five years are as follows:
1995 $ 181,637
1996 193,141
1997 194,620
1998 209,562
1999 127,056
-------
$ 906,016
=======
NOTE E - INCOME TAXES
- ---------------------
Under Financial Accounting Standards Board Statement No. 109, deferred
tax assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the following
components:
Deferred tax asset arising from:
Net operating loss carryforward $ 34,300
Temporary differences - Principally depreciation methods 1,500
-------
Total deferred tax asset $ 35,800
The Company has unused net operating losses available for carryforward to offset
future taxable income. The net operating loss carryforward was $228,776 at
December 31, 1994 and will expire in the year 2009.
See Independent Auditors' Report
Page Seven
MILLER SHERRILL BLAKE CPA PA
22
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
NOTE F - LEASES
- ---------------
The Company is the lessee of telephone equipment under capital leases expiring
in various years through 1997. The assets and liabilities under capital leases
are recorded at the lower of the present value of the minimum lease payments or
the fair value of the asset. The assets are depreciated over the lower of their
related lease terms or their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense for the year ended
December 31, 1994. The following is a summary of property held under capital
leases:
Telephone Equipment $ 292,845
Accumulated Depreciation (35,686)
-------
$ 257,159
=======
Minimum future lease payments under capital leases as of December 31, 1994 for
each of the next five years are as follows:
1995 $ 82,452
1996 94,760
1997 43,059
1998 0
1999 0
-------
$ 220,271
=======
NOTE G - CONTINGENCIES
- ----------------------
The Company is party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE H - SUBSEQUENT EVENTS
- --------------------------
The shareholders of International Pay Phones, Inc. are negotiating to sell all
outstanding shares of stock to PhoneTel Technologies, Inc. The transaction has
not been finalized as of the date this statement was issued.
NOTE I - LINE OF CREDIT
- -----------------------
The Company has a line of credit for $150,000 that expires in March of 1995. At
December 31, 1994 the Company has outstanding $100,000 on the line of credit.
Interest is calculated at 10.50%. Loan is guaranteed by officers and their
spouses.
NOTE J - STOCKHOLDERS' EQUITY
- -----------------------------
The Company has 100,000 shares of $1 par common stock authorized and 10,000
shares outstanding at December 31, 1994.
See Independent Auditors' Report
Page Eight
MILLER SHERRILL BLAKE CPA PA
23
- -------------------------------------------------------------------------------------------------------------
MILLER SHERRILL BLAKE CPA PA Charlotte Office Lincolnton Office Shelby Office
Certified Public Accountants 2415 Tuckaseegee Road 232 East Main Street 825 S. Washington Street
P.O. Box 668307 P.O. Box 782 P.O. Box 3026
Charlotte, NC 28266 Lincolnton, NC 28093 Shelby, NC 28150
(704) 732-2234
(704) 394-3156 (704) 332-4217 - Clt. Line (704) 482-4358
(704) 392-9741 - FAX (704) 732-6041 - FAX (704) 481-0455 - FAX
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL INFORMATION
To the Board of Directors and Stockholders
International Pay Phones, Inc.
Our report on our audit of the basic financial statements of International Pay
Phones, Inc. for December 31, 1994 appears on page one. This audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The additional information contained in Schedules I - II is presented
for the purposes of additional analysis and is not a required part of the basic
financial statements. Such information has not been subjected to the auditing
procedures applied in the audit of the basic financial statements, and,
accordingly, we express no opinion on it.
MILLER SHERRILL BLAKE CPA PA
____________________________
For the Firm
24
INTERNATIONAL PAY PHONES, INC.
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31,1994
SCHEDULE I
Cost of Goods Sold
- ------------------
Line Charges $ 839,834
Telephone Commissions 475,349
Salaries 327,212
Telephone Supplies 154,885
Auto Expenses 46,808
Other Labor 44,644
Commissions - Sales 34,870
Armored Car Service 17,449
Auto Insurance 5,637
Equipment Rental 1,149
Freight 2,225
---------
Total Cost Of Goods Sold $1,950,062
=========
See Independent Auditors' Report on Supplementary Information
Page Ten
MILLER SHERRILL BLAKE CPA PA
25
INTERNATIONAL PAY PHONES, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31,1994
SCHEDULE II
General and Administrative Expenses
- -----------------------------------
Salary - Officers $ 83,651
Payroll Taxes 33,125
Advertising 3,135
Amortization 25,451
Answering Service 1,278
Bank Service Charges 7,826
Contributions 800
Dues and Subscriptions 8,177
Entertainment 10,230
Group Insurance 11,969
General Insurance 14,201
Officer Life Insurance 1,221
Lease Expense 9,392
Taxes and Licenses 14,992
Moving Expense 600
Office Expense 23,162
Pager Expense 8,380
Retirement Contribution 5,847
Postage 9,723
Professional Fees 15,535
Rent 21,274
Repairs and Maintenance 2,910
Convention Expense 5,143
Storage 6,411
Telephone 62,274
Travel 38,447
Uniforms 2,772
Utilities 7,439
-------
Total General and Administrative Expenses $435,365
=======
See Independent Auditors' Report on Supplementary Information
Page Eleven
MILLER SHERRILL BLAKE CPA PA
26
Exhibit A-3
[KPMG LOGO]
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Financial Statements
December 31, 1994, 1993 and 1992
(With Independent Auditors' Report Thereon)
27
KPMG Peat Marwick LLP
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheets of Paramount Communications
Systems, Inc. as of December 31, 1994, 1993 and 1992, and the related statements
of income, shareholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paramount Communications
Systems, Inc. as of December 31, 1994, 1993 and 1992, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
March 10, 1995
28
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEETS
December 31, 1994 ,1993 and 1992
Assets 1994 1993 1992
------ ---- ---- ----
Current assets:
Cash and cash equivalents $ 198,549 159,990 89,253
Accounts receivable 258,931 265,745 331,825
Other current assets 30,274 82,383 71,708
---------- --------- ---------
Total current assets 487,754 508,118 492,786
Property and equipment, net (note 2) 714,693 1,256,379 1,509,774
Intangible assets, less accumulated amortization of
$471,044 in 1994, $341,318 in 1993 and $210,843
in 1992 256,331 386,057 366,532
Other assets 15,188 3,203 60,063
---------- --------- ---------
$1,473,966 2,153,757 2,429,155
========== ========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses 177,908 175,383 652,232
Location commissions payable 55,043 57,283 44,205
Accrued interest payable -- 1,668 12,668
Sales tax payable 16,252 20,000 22,175
Shareholder distributions payable 384,620 376,989 163,163
Current maturities of notes payable - related parties
(note 3) 436,619 448,353 329,261
---------- --------- ---------
Total current liabilities 1,070,442 1,079,676 1,223,704
Long-term portion of notes payable - related parties
(note 3) 276,555 656,187 686,560
---------- --------- ---------
Total liabilities 1,346,997 1,735,863 1,910,264
---------- --------- ---------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized,
issued and outstanding 100 100 100
Additional paid-in capital 19,900 19,900 19,900
Retained earnings 106,969 397,894 498,891
---------- --------- ---------
Total shareholders' equity 126,969 417,894 518,891
Commitments and contingencies (note 4)
---------- --------- ---------
$1,473,966 2,153,757 2,429,155
========== ========= =========
See accompanying notes to financial statements.
29
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF INCOME
Years ended December 31, 1994, 1993 and 1992
1994 1993 1992
---- ---- ----
Revenues:
Coin calls $ 3,685,295 3,454,573 2,462,105
Non-coin calls 2,030,194 2,090,038 1,975,358
----------- --------- ---------
Total revenues 5,715,489 5,544,611 4,437,463
----------- --------- ---------
Operating costs and expenses:
Telephone charges 1,748,270 1,735,964 1,496,395
Commissions 676,304 598,368 458,339
Selling, general and administrative 2,099,203 2,139,160 1,594,112
Depreciation and amortization 770,429 741,380 615,111
----------- --------- ---------
Total operating costs and expenses 5,294,206 5,214,872 4,163,957
----------- --------- ---------
Operating income 421,283 329,739 273,506
----------- --------- ---------
Other income (expense):
Interest and other income (expense) (4,686) 2,966 64,706
Interest expense (72,902) (90,768) (66,833)
----------- --------- ---------
Total other expenses (77,588) (87,802) (2,127)
----------- --------- ---------
Net income $ 343,695 241,937 271,379
=========== ========= =========
See accompanying notes to financial statements.
30
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1994 ,1993 and 1992
Common Stock Additional
---------------- paid-in Retained
Shares Amount capital earnings Total
------ ------ ------- -------- -----
Balances at January 1, 1992 100 $ 100 19,900 372,529 392,529
Net income -- -- -- 271,379 271,379
Distributions -- -- -- (145,017) (145,017)
--- -------- ------ ------- -------
Balances at December 31, 1992 100 100 19,900 498,891 518,891
Net income -- -- -- 241,937 241,937
Distributions -- -- -- (342,934) (342,934)
--- -------- ------ ------- -------
Balances at December 31, 1993 100 100 19,900 397,894 417,894
Net income -- -- -- 343,695 343,695
Distributions -- -- -- (634,620) (634,620)
--- -------- ------ ------- -------
Balances at December 31, 1994 100 $ 100 19,900 106,969 126,969
=== ======== ====== ======= =======
See accompanying notes to financial statements.
31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 ,1993 and 1992
1994 1993 1992
---- ---- ----
Cash flows from operating activities:
Net income $ 343,695 241,937 271,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of plant and
equipment 582,753 552,954 461,730
Amortization of intangible assets 129,726 130,475 95,430
Amortization of deferred asset 57,950 57,951 57,951
Loss on write-off of property and equipment 14,980 -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 6,814 66,080 (283,542)
Increase in other current assets (5,841) (10,675) (62,481)
Increase in other assets (270) (1,091) (108,207)
Increase (decrease) in other current liabilities (5,131) (476,946) 471,074
----------- ------- -------
Net cash provided by operating activities 1,124,676 560,685 903,334
----------- ------- -------
Cash flows from investing activities:
Purchases of equipment (59,625) (299,559) (745,347)
Proceeds from sale of equipment 3,578 -- 44,220
Purchase of investments (11,715) -- --
Purchase of intangible assets -- (150,000) (219,875)
----------- ------- -------
Net cash used in investing activities (67,762) (449,559) (921,002)
----------- ------- -------
Cash flows from financing activities:
Increase in notes payable - related party 200,000 795,906 722,998
Distributions to shareholders (626,989) (129,108) (48,177)
Repayments of notes payable - related parties (591,366) (707,187) (662,085)
----------- ------- -------
Net cash provided by (used in) financing
activities (1,018,355) (40,389) 12,736
----------- ------- -------
Net (decrease) increase in cash and cash
equivalents 38,559 70,737 (4,932)
Cash and cash equivalents at beginning of year 159,990 89,253 94,185
----------- ------- -------
Cash and cash equivalents at end of year $ 198,549 159,990 89,253
=========== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 74,570 101,768 63,345
=========== ======= =======
See accompanying notes to financial statements.
32
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March, 1987 as a result of the deregulation
of the telephone industry. The Company is a Subchapter S corporation in
the business of installing, maintaining and operating pay telephones
throughout South Florida.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization on property and equipment are calculated on a
straight-line basis over five years, the estimated useful lives of the
assets.
(d) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location
contracts. The non-compete agreements are being amortized on a
straight-line basis over their duration (five years) and expire through
July, 1998. The location contracts are amortized over two and one-half
years and expire through June, 1995.
(e) RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also
recorded for fees associated with the call. Revenue from the telephone
service agreement is recognized in the month of service.
(f) INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is
made for income taxes as income or loss is included in the tax returns
of the shareholders.
(g) CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by
the Company's pay telephones located in the state of Florida. No single
customer accounted for more than 5% of the Company's sales.
(Continued)
33
-2-
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(h) DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to
its shareholders annually.
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
1994 1993 1992
---- ---- ----
Installed pay telephones and related equipment $2,845,325 2,846,898 2,553,413
Furniture, fixtures and office equipment 35,525 35,525 29,450
Automobiles 26,328 26,328 26,328
Leasehold improvements 4,025 4,025 4,025
Warehouse equipment 1,772 1,772 1,772
---------- --------- ---------
2,912,975 2,914,548 2,614,988
Less accumulated depreciation and amortization 2,198,282 1,658,169 1,105,214
---------- --------- ---------
$ 714,693 1,256,379 1,509,774
========== ========= =========
Depreciation and amortization of property and equipment was $582,753,
$552,954 and $461,730 in 1994, 1993 and 1992, respectively.
(3) RELATED PARTY TRANSACTIONS
(a) NOTES PAYABLE - RELATED PARTIES
1994 1993 1992
---- ---- ----
Notes payable to various related parties,
principal and interest payable monthly at
rates ranging from 8% to 10%, due from
March, 1993 to April, 1997, collateralized
by installed pay telephones and related
equipment 713,174 1,104,540 1,015,821
Less current maturities of notes payable -
related parties 436,619 448,353 329,261
-------- ------- -------
Long-term portion of notes
payable - related parties $276,555 656,187 686,560
======== ======= =======
Interest expense paid to related parties relating to the above amounted
to $72,902, $90,768 and $66,833 in 1994, 1993 and 1992, respectively.
(Continued)
34
-3-
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Aggregate maturities of notes payable - related parties subsequent to
December 31, 1994 are as follows:
1995 $ 436,619
1996 276,555
---------
$ 713,174
=========
(b) PAYROLL ALLOCATION - RELATED PARTY
Included in selling, general and administrative expenses is an
allocation of payroll for certain service personnel working for various
related party companies under common ownership. The allocation is based
on management's estimate of the amount of time each employee provides
each related company.
(c) COMMISSION REVENUE - RELATED PARTY
Operator assisted service commissions received from a company under
common ownership which are included in non-coin call revenue amounted
to $-0- in 1994, $241,438 in 1993 and $186,231 in 1992.
(4) OPERATING LEASE - RELATED PARTY
The Company occupies a facility under a lease with a related party which expired
on May 31, 1993. Under the terms of the lease, the Company has the right to
renew the lease for a five-year period which began immediately after the end of
the initial term. The Company has not renewed the lease and currently leases the
facility on a month-to-month basis. The lease provides that the Company pay its
proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the years ended December 31, 1994, 1993 and 1992 was $23,373,
$22,135 and $22,141, respectively.