1
EXHIBIT (a) 3.
2
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
PAYPHONES OF AMERICA, INC.
AND SUBSIDIARY
December 31, 1995 and 1994
3
KERBER, ECK & BRAECKEL LLP
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditors' Report
----------------------------
Board of Directors
Payphones of America, Inc.
We have audited the accompanying consolidated balance sheets of
Payphones of America, Inc. (a Tennessee corporation) and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Payphones of America, Inc. and subsidiary as of December 31, 1995 and 1994, and
the consolidated results of their operations and their consolidated cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
4
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in
Note B, the Company has suffered recurring losses from operations and has
limited liquidity which raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note B. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Kerber, Eck & Braeckel LLP
------------------------------
Kerber, Eck & Braeckel LLP
St. Louis, Missouri
January 30, 1996 (except for Note L, as
to which the date is February 7, 1996)
5
Payphones of America, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1995 1994
----------- -----------
CURRENT ASSETS
Cash $ 3,852 $ 147,910
Accounts receivable 377,325 367,973
Prepaid expenses 25,754 14,315
----------- -----------
Total current assets 406,931 530,198
PROPERTY AND EQUIPMENT
Telephone equipment 3,891,230 3,831,941
Furniture and fixtures 59,497 47,396
Trucks and autos 201,555 154,956
----------- -----------
4,152,282 4,034,293
Less accumulated depreciation
and amortization 1,422,621 820,509
----------- -----------
2,729,661 3,213,784
Uninstalled pay telephone equipment 89,145 104,074
Building not used in operations, net of
accumulated depreciation of $5,375
for 1995 and $3,763 for 1994 59,125 60,738
----------- -----------
2,877,931 3,378,596
OTHER ASSETS
Site location contracts, less
accumulated amortization of $1,000,928
for 1995 and $406,776 for 1994 1,980,822 2,530,488
Excess of cost over net assets of
businesses acquired, less accumulated
amortization of $70,377 for 1995 and
$50,889 for 1994 709,125 728,613
Covenants not to compete, less accumulated
amortization of $545,417 for 1995 and
$380,417 for 1994 279,584 444,584
Other intangibles, less accumulated
amortization of $59,099 for 1995 and
$43,589 for 1994 102,558 117,767
Other 24,332 21,510
----------- -----------
3,096,421 3,842,962
----------- -----------
$ 6,381,283 $ 7,751,756
=========== ===========
LIABILITIES 1995 1994
----------- -----------
CURRENT LIABILITIES
Notes payable to bank $ 243,750 $ 262,750
Current maturities of long-term obligations 1,330,954 1,241,818
Accounts payable 882,723 699,385
Accrued expenses 146,063 18,656
----------- -----------
Total current liabilities 2,603,490 2,222,609
LONG-TERM OBLIGATIONS, less current
maturities 4,753,853 5,355,740
DEFERRED INCOME TAXES - 284,000
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible preferred stock - authorized but
unissued, 10,000,000 shares - -
Common stock - authorized, 10,000,000 shares
without par value; issued and outstanding,
2,567,324 shares in 1995 and 1,033,990
shares in 1994 348,756 339,423
Additional contributed capital - 132,230
Accumulated deficit (1,324,816) (582,246)
----------- -----------
(976,060) (110,593)
----------- -----------
$ 6,381,283 $ 7,751,756
=========== ===========
The accompanying notes are an integral part of these statements.
6
Payphones of America, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
1995 1994
------------- -------------
Net sales
Coin calls $ 3,747,247 $ 2,153,974
Non-coin calls 4,418,667 3,692,117
Other 49,221 22,053
------------- -------------
Total net sales 8,215,135 5,868,144
Cost of sales
Telephone charges 3,599,271 2,676,604
Commissions 1,178,156 722,746
Service, maintenance and network expense 289,036 214,636
Depreciation and amortization 1,218,095 723,516
------------- -------------
6,284,558 4,337,502
------------- -------------
Gross profit 1,930,577 1,530,642
Selling, general and administrative expenses
Salaries, wages and benefits 823,430 488,913
Depreciation and amortization 200,095 198,398
Dues and subscriptions 53,905 50,960
Outside services 40,521 63,736
Phone maintenance 118,824 -
Professional services 171,303 85,920
Taxes
Personal property 75,785 4,295
Sales 63,948 37,907
Telephone 69,137 24,696
Rent 71,511 31,389
Other 223,165 120,105
------------- -------------
1,911,624 1,106,319
------------- -------------
Earnings from operations 18,953 424,323
Other income (expense)
Interest income 415 14,741
Interest expense (971,141) (600,624)
Gain (loss) on sale of assets (80,652) 98,904
Other income 12,135 9,366
------------- -------------
(1,039,243) (477,613)
------------- -------------
Loss before income taxes (1,020,290) (53,290)
Income taxes
Current (6,280) (8,856)
Deferred 284,000 (128,000)
------------- -------------
277,720 (136,856)
------------- -------------
NET LOSS $ (742,570) $ (190,146)
============= =============
The accompanying notes are an integral part of these statements.
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Payphones of America, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Period indicated below
Additional Retained
Common contributed earnings
stock capital (deficit) Total
------------ ----------- --------------- -------------
Balance at January 1, 1994
As originally reported $ 339,423 $ 210,219 $ (153,727) $ 395,915
Prior period adjustment - 55,192 (238,373) (183,181)
------------ ---------- -------------- ------------
As restated 339,423 265,411 (392,100) 212,734
Net loss for the year ended
December 31, 1994 - - (190,146) (190,146)
Cash dividends - (133,181) - (133,181)
------------ ---------- -------------- ------------
Balance at December 31, 1994 339,423 132,230 (582,246) (110,593)
Net loss for the year ended
December 31, 1995 - - (742,570) (742,570)
Stock warrants exercised 9,333 - - 9,333
Cash dividends - (132,230) - (132,230)
------------ ---------- -------------- ------------
Balance at December 31, 1995 $ 348,756 $ - $ (1,324,816) $ (976,060)
============ ========== ============== ============
The accompanying notes are an integral part of this statement.
8
Payphones of America, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1995 1994
------------ -----------
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (742,570) $ (190,146)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 1,418,191 921,914
(Gain) loss on sale of assets 80,652 (98,904)
Changes in assets and liabilities
(Increase) decrease in accounts receivable (9,352) 9,040
(Increase) decrease in prepaid expenses (11,439) 72
Increase in other asset (2,822) -
Increase in accounts payable 183,338 244,517
Increase in accrued expenses 127,407 18,554
Increase (decrease) in deferred income taxes (284,000) 128,000
----------- -----------
Total adjustments 1,501,975 1,223,193
----------- -----------
Net cash provided by operating activities 759,405 1,033,047
Cash flows from investing activities
Capital expenditures (203,112) (229,613)
Proceeds from sale of assets 54,297 195,714
------------ -----------
Net cash used in investing activities (148,815) (33,899)
Cash flows from financing activities
Proceeds from long-term obligations 507,239 123,355
Payments on notes payable to bank (19,000) (11,900)
Payments on long-term obligations (1,119,990) (696,191)
Stock warrants exercised 9,333 -
Dividends paid (132,230) (133,181)
----------- ----------
Net cash used in financing activities (754,648) (717,917)
----------- ----------
Net increase (decrease) in cash (144,058) 281,231
Cash (overdraft) at beginning of period 147,910 (133,321)
------------ -----------
Cash at end of period $ 3,852 $ 147,910
============ ===========
The accompanying notes are an integral part of these statements.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. The Company
-----------
Payphones of America, Inc. operates, services and maintains a system of
approximately 2,800 pay telephones in the Southeastern and Midwestern United
States.
2. Principles of Consolidation
---------------------------
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances
have been eliminated in consolidation.
3. Accounts Receivable
-------------------
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
4. Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives. Leased property
under capital leases is amortized over the service lives of the assets for
those leases which substantially transfer ownership. The straight-line
method of depreciation is followed for substantially all assets for
financial reporting purposes, but accelerated methods are used for tax
purposes. Future income taxes resulting from depreciation temporary
differences have been provided for.
5. Intangible Assets
-----------------
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at
cost. Amortization of site contract costs is recorded using the
straight-line method over five years, the expected average lives of the
contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to
compete are being amortized over their contractual lives of five years.
Other intangible assets, including license agreements and deferred financing
costs, are amortized over the life of the agreements.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Recognition of Revenue
----------------------
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also
recorded for fees associated with the call.
7. Concentrations of Credit Risk
-----------------------------
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of 1995
revenues were generated by the Company's pay telephones located in the
states of Missouri (36%) and Virginia (33%). No other area has a
disproportionate credit risk.
8. Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B - GOING CONCERN
The Company has experienced recurring losses and has accumulated losses
since inception of $1,324,816. As of December 31, 1995, the Company's
current liabilities exceed its current assets by $2,196,559. These factors
raise doubt about the Company's ability to continue as a going concern. The
Company's continued existence as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its debt and lease obligations and to
obtain additional financing or refinancing as may be required.
Historically, the Company has generated sufficient cash flow to meet its
obligations and to pay its debt and lease obligations, and, although it
cannot be assured that the Company will be able to continue as a going
concern in view of its present financial condition, management believes that
continued strategic business acquisitions and improvements in planning and
budgeting should enable the Company to meet its obligations and sustain its
operations.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE C - NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over
the bank's corporate base rate (8.50% at December 31, 1995). The line of
credit is secured by certain equipment of the Company and other accounts
receivable and matures on February 10, 1996.
NOTE D - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31,:
1995
---------------------------------------------
Current Long-term 1994
portion portion Total Total
-------------- ------------- ------------- --------------
Notes payable to stockholders $ 248,333 $ 184,276 $ 432,609 $ 149,000
Note payable to Mark Twain Bank 1,594 26,988 28,582 29,683
Notes payable to Ford Motor
Credit Company 36,098 36,389 72,487 63,582
Notes payable to Ronald L. Coleman 14,069 299,868 313,937 426,517
Note payable to Pay-Tele
Communications, Inc. d/b/a
Midwest Telecom 105,454 185,273 290,727 397,818
Note payable to Communications
Finance Corporation 87,466 320,034 407,500 482,853
Note payable to R. Greg Kintz and
Paul Wm. Schindler 103,350 45,750 149,100 236,550
Capital lease obligations
Berthel, Fisher & Company
Leasing, Inc. 717,554 3,655,275 4,372,829 4,749,921
Intellicall, Inc. 17,036 - 17,036 59,466
Copying Concepts Office Systems - - - 2,168
-------------- ------------- ------------- --------------
$ 1,330,954 $ 4,753,853 $ 6,084,807 $ 6,597,558
============== ============= ============= ==============
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE D - LONG-TERM OBLIGATIONS - Continued
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of
10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire
unpaid balance of principal and interest will be due October 15, 1998. This
note is secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999.
The notes require monthly payments of $4,329 including interest at rates
from 8.12% to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments
of $4,271 including interest at rates from 8% to 15%.
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note
requires annual principal payments of $100,000 with interest at the rate of
10% through maturity on June 1, 1998. The note is personally guaranteed by
the stockholders of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity
on September 15, 1999. The note is personally guaranteed by the
stockholders of the Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally
pledged some of their common stock to the lenders as security.
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting
purposes, the present values of minimum lease payments have been
capitalized. Implicit interest rates for these leases range from 14% to
18%.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE D - LONG-TERM OBLIGATIONS - Continued
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under
capital leases included on the accompanying balance sheets:
Telephone equipment $ 3,871,519
Site location contracts 2,980,749
-------------
6,852,268
Less accumulated depreciation
and amortization (2,256,701)
-------------
$ 4,595,567
=============
Annual maturities of all long-term obligations are as follows for years
following December 31, 1995:
1996 $ 1,330,954
1997 1,087,032
1998 1,024,518
1999 998,138
2000 771,115
2001 and thereafter 873,050
--------------
$ 6,084,807
==============
NOTE E - INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 "Accounting For Income Taxes" (SFAS).
Under the liability method specified by SFAS 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted
tax rates which will be in effect when these differences reverse. Deferred
tax income and expense is the result of changes in deferred tax assets and
liabilities. The principal types of differences between assets and
liabilities for financial statement and tax return purposes are accumulated
depreciation and accumulated amortization.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE E - INCOME TAXES - Continued
The provision for income taxes consists of the following for the year ended
December 31,:
1995 1994
----------- -------------
Current $ (6,280) $ (8,856)
Deferred 284,000 (128,000)
----------- ------------
$ 277,720 $ (136,856)
=========== ============
Deferred tax assets and liabilities are attributable to the following at
December 31,:
1995 1994
------------- -------------
Deferred tax assets (liabilities)
Noncurrent
Accumulated depreciation $ (472,000) $ (365,000)
Accumulated amortization 262,000 81,000
Tax benefit of net operating loss
carryforward 460,000 -
------------- -------------
250,000 (284,000)
Less valuation allowance (250,000) -
------------- -------------
Net deferred tax asset (liability) $ - $ (284,000)
============= =============
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from
future profitability which can be predicted with reasonable certainty.
The Company has net operating loss carryforwards for Federal income tax
purposes which are available to offset future Federal taxable income. These
carryforwards expire as follows:
2008 $ 9,194
2009 332,849
2010 836,510
-------------
$ 1,178,553
=============
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE F - COMMITMENTS
The Company conducts a substantial portion of its operations utilizing
leased facilities and equipment. The minimum rental commitments under
operating leases are as follows for the year ended December 31,:
1996 $ 95,091
1997 93,246
1998 60,550
1999 59,000
2000 64,400
2001 and thereafter 310,500
-----------
Total minimum lease payments $ 682,787
===========
Rent expense for all operating leases for the years ended December 31, 1995
and 1994,was $71,512 and $31,389, respectively.
NOTE G - STOCK WARRANTS
The Company has issued various warrants which are exercisable for common
stock as follows:
Warrant Number Exercise Expiration
number of shares price date
----------------------- --------------- --------------------------
6 319,114 $ 1.00 October 24, 2004
9 250,000 $ 2.00 July 28, 2000
Warrant six has been issued to the Company's vice president and warrant nine
has been issued to a lender.
NOTE H - STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the year ended
December 31,:
1995 1994
----------- ------------
Interest $ 852,612 $ 597,956
Income taxes 6,280 16,388
During 1995 and 1994, the Company entered into capital lease obligations
totalling $100,000 and $4,000,000, respectively, which represent noncash
financing activities.
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Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE I - PRIOR PERIOD ADJUSTMENT
Retained earnings at December 31, 1994, were restated following completion of
the Company's first audit to reflect the correction of the following account
balances:
Accounts receivable $ (14,061)
Property and equipment 15,307
Other assets 20,521
Accumulated depreciation and
amortization 21,219
Accounts payable (94,965)
Income taxes payable (20,639)
Notes payable 49,112
Deferred income taxes (156,000)
Additional contributed capital (55,192)
Other (3,675)
-----------
$ 238,373
===========
NOTE J - ACQUISITION
On September 23, 1994, the Company purchased certain assets of Eastern
Telecom Corporation, operators of pay telephones in the Southeastern region
of the United States. The acquisition was accounted for using the purchase
method. The purchase price of $4,000,000 was allocated as follows:
Fair market value of assets acquired
Inventories $ 2,000
Equipment 1,721,839
Site contracts 2,276,161
--------------
Purchase price $ 4,000,000
==============
In connection with the asset purchase, the Company entered into a purchase
commitment with the seller for services of $500,000. In 1995, the commitment
decreased to approximately $192,000 based on actual revenues generated by the
assets acquired. The Company's annual obligation under this agreement is
$32,000 through 2001.
NOTE K- RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements to
conform to the 1995 presentation.
17
Payphones of America, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1995 and 1994
NOTE L - SUBSEQUENT EVENT
On February 7, 1996, the Telecommunications Act of 1996 was signed into law.
The Act recognizes that independent public payphone providers are entitled to
fair rules to compete with the Regional Bell Operating Companies and other
local exchange companies. For instance, the Act prohibits Bell operating
companies from subsidizing payphone service directly or indirectly with
revenues generated from their exchange or access services. Bell companies
are also prohibited from discriminating in favor of their payphone services.
The legislation directs the Federal Communications Commission to develop fair
rules in implementing the payphone provision within nine months. The
potential impact of this Act on the financial position of the Company is
unknown at this time.
NOTE M - FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash
and trade payables are representative of their fair values due to the
short-term maturity of these instruments. The book value of the Company's
debt instruments is considered to approximate their fair value at December
31, 1995, based on market rates and conditions.