AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PHONETEL TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
OHIO 4813 34-1462198
(State or Other (Primary Standard Industrial (I.R.S.Employer
Jurisdiction of Classification Code Number Identification No.)
Incorporation or
Organization)
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1127 Euclid Avenue, Suite 650
Cleveland, Ohio 44115-1601
(216) 241-2555
(Address and Telephone Number of
Principal Executive Offices and
Principal Place of Business)
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TAMMY L. MARTIN, ESQ.
EXECUTIVE VICE PRESIDENT,
CHIEF ADMINISTRATIVE OFFICER,
GENERAL COUNSEL AND SECRETARY
PHONETEL TECHNOLOGIES, INC.
1127 EUCLID AVENUE, SUITE 650
CLEVELAND, OHIO 44115-1601
(216) 241-2555
(Name, Address and Telephone
Number of Agent For Service)
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Copies to:
Norman R. Miller, Esq.
Stephen M. Banker, Esq. Wolin, Fuller, Ridley & Miller LLP
Skadden, Arps, Slate, Meagher & Flom 3100 Bank One Center
919 Third Avenue 1717 Main Street
New York, New York 10022 Dallas, Texas 75201
(212) 735-3000 (214) 939-4906
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement. If any
of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |_|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
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Common Stock, $.01 par value.... $27,000,000 $8,182
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes shares issuable by the Company which are subject to an over-
allotment option granted to the Underwriters.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH
DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 9, 1996
PROSPECTUS
___________ SHARES
PHONETEL TECHNOLOGIES, INC.
[PHONETEL TECHNOLOGIES, INC. LOGO]
COMMON STOCK
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Of the _________ shares of Common Stock offered hereby (the
"Offering"), ________ shares are being sold by PhoneTel Technologies, Inc.
(the "Company") and 500,000 shares are being sold by certain shareholders
of the Company (the "Selling Shareholders"). See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Shareholders.
The Common Stock is listed on The Nasdaq SmallCap Market
("Nasdaq") under the trading symbol "PNTL." On October 4, 1996, the last
reported sale price of the Common Stock on Nasdaq was $4 per share. See
"Price Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
PROCEEDS
PRICE TO UNDERWRITING PROCEEDS TO TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
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Per Share......... $ $ $
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Total(3).......... $ $ $
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(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
See "Underwriting."
(2) Before deducting certain expenses of the Offering payable by the Company
estimated at $ , including a non-accountable expense allowance
of $100,000 payable to the Representative for due diligence and other
out-of-pocket expenses. See "Underwriting."
(3) The Company has granted the Underwriters a 45-day option to purchase up
to additional shares of Common Stock, solely to cover over-
allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
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The shares of Common Stock are offered severally by the
Underwriters named herein subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates representing the shares will be ready for delivery at the
offices of Southcoast Capital Corporation, New York, New York, on or about ,
1996.
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SOUTHCOAST CAPITAL
CORPORATION
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The date of this Prospectus is , 1996.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT
OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN
ACCORDANCE WITH RULE 10B-6A OF THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and
other information filed by the Company with the Commission may be inspected
at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
should also be available for inspection and copying at the regional offices
of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048; and at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information
statements and other information regarding issuers, such as the Company,
that file electronically with the Commission and the address of such Web
site is http://www.sec.gov. Additionally, such reports and other
information concerning the Company are available for inspection at the
offices of the National Association of Securities Dealers, Inc. located at
1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on
Form SB-2 filed by the Company with the Commission under the Securities
Act. This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the Common Stock offered hereby. Any statements
contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to such copy
filed as an exhibit to the Registration Statement or otherwise filed with
the Commission. Each such statement is qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected without charge at the office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof
may be obtained from the Commission at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be
read in conjunction with the more detailed information and financial
statements and the notes thereto appearing elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the
"Company" include PhoneTel Technologies, Inc. and its subsidiaries, and the
information in this Prospectus (i) gives effect to a one-for-six reverse
share split of the Common Stock ("Stock Split") effected on December 26,
1995 and (ii) assumes no exercise of the Underwriters' over-allotment
option. Terms used in this Prospectus but not otherwise defined herein have
the meanings set forth in the Glossary, which begins on page A-1 of this
Prospectus.
THE COMPANY
PhoneTel Technologies, Inc. is currently the eleventh largest pay
telephone operator in the United States. As of September 30, 1996, the
Company owned and operated more than 25,000 public pay telephones, of which
approximately 96% are located in 17 states. Almost half of the Company's
pay telephones, are located in Florida, Texas and California, which are
three of the four most populous states. The Company's pay telephones are
located where significant demand exists for pay telephone services, such as
shopping malls, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals. The Company derives
substantially all of its revenues from calls placed from its pay telephones
through the deposit of coins ("coin calls") as well as from calling cards,
credit cards, collect calls, third party billed calls and dial-around calls
(collectively, "non-coin calls"). On September 30, 1995 and 1996, the
Company had approximately 8,275 and 25,468 installed pay telephones,
respectively, an increase of 17,193 pay telephones over such one-year
period. Such increase was primarily the result of a series of acquisitions
by the Company of 6 independent pay telephone companies. Such acquisitions,
together with an acquisition made in September 1995, had an aggregate cost
of approximately $64.6 million.
The Company acquired 7,335 pay telephones (located primarily in
California, Colorado and Washington) from Amtel Communications Services,
Inc. and certain of its affiliates (collectively, "Amtel") as of September
13, 1996. The Company acquired the pay telephones in the Amtel acquisition
for a purchase price of $13 million, in a combination of cash and Common
Stock. The Company acquired 3,303 pay telephones (located primarily in
Illinois, Florida, Missouri and Virginia) from Payphones of America, Inc.
("POA") as of August 1, 1996. The Company acquired the pay telephones in
the POA acquisition, which was consummated on September 16, 1996, for a
purchase price of approximately $13 million, in a combination of cash,
Common Stock and the assumption of certain liabilities.
After giving pro forma effect to the acquisitions of International
Pay Phones, Inc. of Tennessee and of International Pay Phones, Inc. of
South Carolina (herein collectively referred to as "IPP"), Paramount
Communications Systems, Inc. ("Paramount"), POA and Amtel (collectively,
the "1996 Acquisitions") and the acquisitions of World Communications, Inc.
("World") and Public Telephone Corporation ("Public Telephone") (the
acquisitions of World and Public Telephone and the 1996 Acquisitions
collectively referred to herein as the "Acquisitions"), the Company would
have achieved revenues of $59.6 million and $30.2 million for the year
ended December 31, 1995 and the six months ended June 30, 1996,
respectively, and EBITDA (as defined in footnote 5 on page 8) of $10.4
million and $6.5 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively. On a pro forma basis, the EBITDA
margin increased to 21.5% for the six months ended June 30, 1996 from 17.4%
for the year ended December 31, 1995, which increase is due to the
implementation of the Company's strategy of lowering costs by eliminating
duplicate administrative and operational expenses. See "Pro Forma Financial
Data."
Calls made from pay telephones are estimated to generate revenues
to the United States telecommunications industry of approximately $7
billion per year. Pay telephones are primarily owned or operated by Bell
Operating Companies ("BOCs"), other local exchange carriers ("LECs") and
independent pay telephone companies. Of the approximately 2.2 million pay
telephones operated in the United States in 1996, the American Public
Communications Counsel estimates that approximately 83% are operated by
BOCs, LECs and other long distance services providers and approximately 17%
(approximately 350,000 pay telephones) are operated by independent pay
telephone companies, of which approximately 25 companies each own or
operate more than 1,500 pay telephones. Management believes that the highly
fragmented nature of the independent pay telephone industry presents a
significant number of attractive acquisition opportunities for the Company.
In June 1995, Peter Graf was appointed Chairman of the Board of
Directors and in September 1995 was appointed Chief Executive Officer of
the Company. In September 1995, Stuart Hollander, Joseph Abrams, Aron
Katzman and Steven Richman were appointed to the board of directors of the
Company, and the majority of the existing board resigned at that time. The
new management team identified and implemented the business strategy set
forth under "--Business Strategy" below.
RECENT REGULATORY DEVELOPMENT
On September 20, 1996, the Federal Communications Commission
("FCC") adopted new rules which require providers of long distance services
to pay to the Company (and all other owners of pay telephones) a flat fee
of $45.85 per month per telephone as compensation for interstate
dial-around calls. This replaces the $6.00 flat fee per month per telephone
in place since May 1992. In October 1997, the flat fee will be replaced by
a per-call compensation mechanism, at a rate initially set at $0.35 per
call. Management believes that as a result of these changes the Company
will generate significant additional revenues, net of related expenses and
processing fees, commencing October 20, 1996. See "Business--Products and
Services--Operator Assisted Long Distance Services" and
"Business--Governmental Regulations--Federal."
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale and cost savings. The
Company has implemented the following strategy to meet its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the pay telephone industry. Accordingly, the Company maintains
an active acquisition program to acquire independent pay telephone
companies that are in or contiguous to its existing markets or that can
form the basis of a new cluster. The Company is actively seeking additional
financing to fund its acquisition strategy and the effective integration,
operation and expansion of the acquired businesses. See "Risk Factors -
Need for Additional Financing." On September 30, 1995 and 1996, the Compa-
ny had approximately 8,275 and 25,468 installed pay telephones,
respectively, representing an increase of 17,193 pay telephones. The
Company intends to acquire additional installed pay telephones by the end
of 1996. Management believes that the Company's experience in completing
acquisitions of companies in the pay telephone industry and its experience
in managing national and regional accounts will be instrumental in
identifying and negotiating acquisitions as well as integrating the
acquired businesses. In addition, as the Company grows to become the
dominant supplier of independent pay telephone services in an area,
"fill-in" and contiguous acquisitions become less attractive to other
potential acquirors as their ability to create significant clusters is
reduced. Moreover, the Company believes that such growth will enhance its
ability to negotiate more favorable rates with long distance and operator
services providers.
Facilitate internal growth. The Company intends to enhance its
sales and marketing efforts to achieve internal growth through increases in
the number of pay telephones owned. In evaluating locations for the
installation of public pay telephones, the Company generally conducts a
site survey to examine various factors, including population density,
traffic patterns, historical usage information and other geographic
factors.
Reduce operating costs. The Company believes that in addition to
facilitating additional acquisitions, the clustering of pay telephones
creates an opportunity to generate savings through reduced field service
and collection expenses, the closing of duplicate offices, reduction in
staff and general corporate overhead expenses and reduced expenses
associated with interLATA and intraLATA traffic. After giving pro forma
effect to the 1996 Acquisitions, the Company would have increased EBITDA
margins to 21.5% for the six months ended June 30, 1996 from 17.4% for the
year ended December 31, 1995 through economies achieved by both an increase
in scale and in geographic concentration.
Achieve brand recognition. The Company seeks to promote and
achieve recognition of its products and services by posting on all of its
pay telephones the "PhoneTel" label. In addition, all of the Company's
marketing materials display the "PhoneTel" name and logo. The Company
believes that achieving brand recognition will facilitate its expansion
strategy as well as enhance recognition and awareness of the Company's
products and services through advertisements in trade magazines.
Form strategic alliances. As part of its strategy to continue to
reduce operating costs, the Company outsources its long distance service
and operator service operations to a number of subcontractors that are
operator service providers ("OSPs"), principally Intellicall, Inc.
("Intellicall"). The Company intends to continue its strategic alliances
with Intellicall, together with other OSPs, and the suppliers of its pay
telephone equipment as its market presence becomes more dominant. By
achieving closer working relationships with its OSPs and suppliers, the
Company believes that it would be in a position to negotiate agreements
with such parties on pricing and other terms that are more favorable.
Use of state-of-the-art technology. The Company's pay telephones
are "smart" telephones and are operated by means of advanced microprocessor
technology that enables the telephones to perform substantially all of the
necessary coin-driven functions independent of the Company's central
office. Unlike "dumb" telephones used by most BOCs and other LECs, smart
telephones enable the Company to determine each telephone's operability and
need for service as well as its readiness for collection of coin revenues.
In addition, rate changes and other software-dependent functions can also
be performed internally from the central office without dispatching service
technicians to individual pay telephones. As a result, the Company can
increase the number of operating telephones it owns while significantly
reducing the costs of checking telephones, maintenance and coin collection.
Provide superior customer service. The Company strives to maximize
the number of its telephones that are operational at any one time and
thereby retain existing customers and attract new ones. Accordingly, the
Company offers both advanced telecommunications technology and trained
field technicians to ensure superior customer service. The Company aims to
repair malfunctions within 24 hours of their occurrence.
THE OFFERING
Common Stock Offered by the Company..... shares
Common Stock Offered by the Selling
Shareholders............................ 500,000 shares
Common Stock to be Outstanding
after the Offering (1).................. shares
Use of Proceeds to the Company.......... To pay a portion of the indebted-
ness under the Credit Agreement
(as defined herein) and for
working capital and other general
corporate purposes.
Nasdaq Symbol.......................... PNTL
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(1) Based on the shares outstanding at September 30, 1996. Does not
include an aggregate of 12,551,876 shares of Common Stock reserved
at September 30, 1996 for issuance under the following
circumstances: (i) the exercise of warrants to purchase shares of
Series A Preferred (as defined herein), which are immediately
convertible into Common Stock, (ii) the conversion of 14% Preferred
(as defined herein) into Common Stock, (iii) the exercise of the
Nominal Value Warrants (as defined herein) and certain other
warrants, (iv) the exercise of outstanding options and (v) the
conversion of certain outstanding indebtedness under the Credit
Agreement into shares of Series B Preferred (as defined herein),
which are immediately convertible into Common Stock. See
"Capitalization," "Management's Discussion and Analysis of Results
of Operations and Financial Conditions-Liquidity and Capital
Resources" and "Description of Capital Stock--Equity Securities
Reserved for Issuance."
RISK FACTORS
Prospective investors should consider carefully all of the
information set forth in this Prospectus, particularly the matters set
forth under the caption "Risk Factors."
SUMMARY FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
PRO FORMA FOR SIX MONTHS PRO FORMA FOR
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED JUNE 30, SIX MONTHS
------------------------------------ DECEMBER --------------------- ENDED JUNE
1993 1994 1995 31, 1995 (1) 1995 1996 30, 1996 (2)
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STATEMENT OF OPERATIONS DATA:
Total revenues......................... $11,070 $15,866 $18,718 $59,610 $7,878 $16,806 $30,240
Cost and expenses...................... 11,683 17,180 24,007 68,892 9,077 24,497 38,042
Loss from operations................... (613) (1,314) (5,289) (9,282) (1,199) (7,691) (7,802)
Interest expense, net.................. 166 381 821 10,394 214 2,089 2,988
Loss before extraordinary items........ (779) (1,695) (6,110) (19,876) (1,413) (9,780) (10,854)
Net loss .............................. (779) (1,695) (6,110) (1,413) (10,047)
Net loss applicable to common
shareholders ........................ (986) (1,987) (6,419) (1,568) (12,185)
Net loss per common share (3).......... (0.96) (1.35) (3.29) (3.83) (0.99) (3.41) (1.80)
Weighted average number of common
shares............................... 1,031,384 1,470,188 1,950,561 5,365,561 1,586,142 3,576,381 6,121,427
OPERATING DATA:
EBITDA (4)............................. $283 $922 $1,264 $10,381 $233 $2,956 $6,503,
EBITDA margin (5)...................... 2.56% 5.81% 6.75% 17.42% 2.96% 17.59% 21.51%
Number of pay telephones in service.... n/a 4,744 9,723 24,802 5,038 14,826 25,468
PRO FORMA,
ACTUAL PRO FORMA (6) AS ADJUSTED (7)
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BALANCE SHEET DATA:
Total assets............................................ $52,043 $75,494 $89,999
Long-term debt and obligations under capital leases
(including current installments) (8)................... 28,764 49,461 41,461
14% Redeemable Preferred Stock.......................... 6,404 6,404 6,404
Non-mandatorily redeemable preferred stock, common
stock and other shareholders' equity................... 10,117 15,066 37,571
Working capital (deficit) (9)........................... (8,984) (15,240) 7,265
(1) Gives effect to the Acquisitions, as if such transactions had occurred
on January 1, 1995. Such unaudited pro forma financial data is not
necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period.
(2) Gives effect to the 1996 Acquisitions, as if such transactions had
occurred on January 1, 1996. Such unaudited pro forma financial data is
not necessarily indicative of the results of operations that might have
occurred if the transactions had taken place on such date or which might
occur in any future period.
(3) Pro forma net loss applicable to common shareholders excludes the
extraordinary loss on debt restructuring and the loss on redemption of
10% Preferred (as defined herein), 8% Preferred (as defined herein) and
7% Preferred (as defined herein) realized in March 1996.
(4) EBITDA represents earnings before interest income, interest expense,
income taxes, depreciation, amortization and settlements of employment
contracts and other unusual charges. EBITDA is not intended to represent
an alternative to operating income (as determined in accordance with
generally accepted accounting principles) as an indicator of the
Company's operating performance, or as an alternative to cash flows from
operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity.
(5) EBITDA margin is calculated by dividing (a) EBITDA by (b) total
revenues. EBITDA margin is a measure commonly used in the Company's
industry as an indicator of the efficiency of the Company's operations.
(6) Gives effect to (i) the acquisition of POA and Amtel and (ii) funds
borrowed under the Credit Agreement to fund such acquisitions, as if
such transactions had occurred on June 30, 1996. Such unaudited pro
forma financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken place
on such date or which might occur in any future period.
(7) Gives effect to (i) the acquisition of POA and Amtel, (ii) funds
borrowed under the Credit Agreement to fund such acquisitions and (iii)
the sale of Common Stock by the Company pursuant to this Offering and
the application of the estimated net proceeds therefrom, as if such
transactions had occurred on June 30, 1996. Such unaudited pro forma
financial data is not necessarily indicative of the results of
operations that might have occurred if the transactions had taken place
on such date or which might occur in any future period.
(8) Excludes $5,850 constituting the unamortized portion of long-term debt
discount, which was originally assigned to warrants issued to the
Lenders in connection with the Credit Agreement.
(9) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets.
RISK FACTORS
Investment in the Common Stock offered hereby involves a high
degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should carefully consider the following
risk factors in evaluating the Company and its business before purchasing
any of the shares of Common Stock offered hereby.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged as a result of its outstanding
indebtedness and the debt incurred to finance the 1996 Acquisitions. As of
June 30, 1996 on a pro forma basis after giving effect to the 1996
Acquisitions, the Company's total indebtedness was $49.5 million, its total
assets were $75.5 million and its mandatorily redeemable preferred stock
and other equity was $21.5 million.
The Company's high degree of leverage could have important
consequences for the Company, including: (i) the ability of the Company to
obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such
financing may not be on terms favorable to the Company; (ii) a substantial
portion of the Company's cash flow will be used to pay the Company's
interest expense, which will reduce the funds that would otherwise be
available to the Company for its operations and future business
opportunities; (iii) a decrease in net operating cash flows or an increase
in expenses of the Company could make it difficult for the Company to meet
its debt service requirements and force it to modify its operations; (iv)
the Company may be more highly leveraged than its competitors which may
place it at a competitive disadvantage; and (v) the Company's high degree
of leverage may make it more vulnerable to a downturn in its business or
the economy generally. Any inability of the Company to service its
indebtedness or obtain additional financing, as needed, would have a
material adverse effect on the Company. See "--Need for Additional
Financing."
HISTORY OF LOSSES
The Company was incorporated in 1984 and began providing
commercial public pay telephone services in 1986. Although the Company has
experienced revenue growth since the beginning of its operation, the
Company has operated at a loss since its inception. For the year ended
December 31, 1995 and for the six months ended June 30, 1996, the Company
has incurred net losses of approximately $6,109,697 and $10,047,417,
respectively. There can be no assurance that revenue growth will continue
or that the Company will ever achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and
notes thereto contained elsewhere in this Prospectus.
GROWTH RISKS
The Company is subject to various risks associated with an
acquisition growth strategy, including the risk that the Company will be
unable to identify and acquire suitable companies in the future or to
integrate successfully and manage the acquired companies. There can be no
assurance that companies acquired in the future will be beneficial to the
successful implementation of the Company's overall strategy or will
ultimately produce returns that justify the Company's investment, or that
the Company will be successful in integrating and managing the acquired
companies or achieving meaningful economies of scale. The Company may also
be required to hire additional personnel and senior management in order to
continue its acquisition program. The dedication of management resources to
such efforts may detract attention from the day-to-day business of the
Company. There can be no assurance that there will not be substantial costs
associated with such activities or that there will not be other material
adverse effects of these integration efforts, which could have a material
adverse effect on the Company's operating results. Furthermore, there can
be no assurance that competition for acquisitions will not grow, thereby
increasing the costs of making acquisitions. While management believes that
pursuing its growth strategy will improve its overall market position and,
ultimately, its profitability, there can be no assurance that this will
occur. The Company's ability to install additional pay telephones depends
on numerous factors, including locating satisfactory sites for pay
telephones, hiring qualified employees to service the sites and raising
additional capital or otherwise financing such expansion. See
"Business--Business Strategy."
NEED FOR ADDITIONAL FINANCING
The Company's expansion strategy requires substantial capital
investment. Capital is needed not only for the acquisition of the assets of
companies, but also for the effective integration, operation and expansion
of such businesses. The Company may issue shares of Common Stock or other
equity-related securities to finance future acquisitions, which may result
in the dilution of the Company's shareholders. In addition, the Company may
incur additional debt to finance its expansion strategy which may cause an
increase in its interest expense and divert cash flow which would otherwise
be available to the Company for its operations and future business
opportunities. Such additional financing may also include sufficient funds
to pay all obligations under the Credit Agreement. In the event that the
Company chooses to issue Common Stock as acquisition consideration and the
Common Stock does not maintain a sufficient valuation, or potential
acquisition candidates are unwilling to accept Common Stock as part of the
consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to continue
its acquisition program. There can be no assurance that acceptable
financing for future acquisitions or for the integration and expansion of
existing businesses can be obtained when it is needed or that, if
available, it will be on terms the Company deems acceptable. As a result,
the Company might be unable to implement successfully its acquisition
strategy. Management believes, but cannot assure, that the net proceeds to
the Company from the Offering, cash flow from operations, the proceeds
of the Credit Agreement and other financing alternatives will be sufficient
to meet the Company's cash requirements for working capital and its
obligations over the next twelve months. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
GOVERNMENT REGULATION
The operations of the public pay telephone industry are regulated
by the public service or utility commissions of the various states and, to
a lesser extent, by the FCC. In particular, the Company must obtain
approvals to operate public pay telephones from the public utility
commissions of most states in which the Company operates. In addition, from
time to time legislation is enacted by Congress or the various state
legislatures that affects the telecommunications industry generally and
the pay telephone industry specifically. Court decisions may also have a
significant effect on the pay telephone industry. Changes in existing laws
and regulations as well as the creation of new ones, applicable to the
activities of the Company or other telecommunication businesses (including
the extent of competition, the charges of providers of interexchange and
operator services and the implementation of new technologies), may have a
material adverse effect on the Company's business, results of operations or
financial condition.
The recently enacted Section 276 ("Section 276") of the
Telecommunications Act of 1996 (the "Telecommunications Act") and the
implementing rules adopted by the FCC pursuant to Section 276 are expected
to have a significant effect on the pay telephone industry. For a
discussion of the potential effects of Section 276 on the pay telephone
industry and competition within this industry, including the FCC's rules to
implement Section 276, see "Business--Governmental Regulations" and
"--Competition." Since neither Section 276 nor the FCC rules have yet been
interpreted by the courts, there can be no assurance that the rules and
policies ultimately adopted thereunder will not adversely affect the
Company.
RELIANCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the
contributions of its executive officers and other key personnel. The loss
of services of one or more of its executive officers or key personnel could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's success also will depend
in part on its ability to attract and retain other qualified and skilled
employees. There can be no assurance that the Company will be able to
identify, hire or retain such employees. The Company's inability to
identify, hire or retain qualified personnel could have a material adverse
effect on the Company's business, results of operations or financial
condition. See "Management" and "Business--Employees."
SERVICE INTERRUPTIONS; EQUIPMENT FAILURE
The Company outsources its long distance service and operator
service operations to a number of subcontractors, including Intellicall,
the Company's primary provider of such services, American Telephone &
Telegraph Company ("AT&T"), Bell South Telecommunications, Inc. ("Bell
South"), Opticom, a division of One Call Communications, Inc. ("Opticom"),
and Conquest Telecommunications Service Company ("Conquest"). Such
operations require that the switching equipment and the equipment of its
long distance service and operator providers be operational 24 hours per
day, 365 days per year. The Company's long distance and operator service
providers ("OSPs") may experience temporary service interruptions or
equipment failure which may result from causes beyond the Company's
control. In addition, the Company's pay telephones may experience line
interruptions in their connections to the LECs due to weather conditions or
other natural occurrences such as earthquakes or floods which are beyond
the Company's control. Any such event could have a material adverse effect
on the Company.
DEPENDENCE UPON THIRD-PARTY PROVIDERS
The Company's ability to complete operator service and direct dial
long distance calls is dependent upon contractual arrangements with
carriers for the transmission of calls, with providers of live operator
support, validation of credit card and calling card billing information and
with billing and collection services. While the Company believes that it
has access to several providers of these services at competitive rates and
expects to continue to have such access in the foreseeable future, the
continuing availability of these resources cannot be assured.
COMPETITION
The public pay telephone industry is, and can be expected to
remain, highly competitive. While the Company's principal competition comes
from BOCs and other LECs, the Company also competes for locations with
other independent public pay telephone companies, some of which have
greater financial resources than the Company. Competition from these
sources could prevent the Company from obtaining or maintaining desirable
locations for its pay telephones, could cause the Company to pay higher
commissions on the revenues generated by its pay telephones or could affect
the Company's ability to complete future acquisitions thereby reducing the
Company's profits. The Company also competes with long distance companies
that provide operator services to owners of property on which LEC-owned pay
telephones are located and to hotels, motels and similar locations. In
addition, the Company competes with providers of cellular communications
services and personal communications services (wireless), which provide an
alternative to the use of pay telephones.
Furthermore, pursuant to the recently enacted Section 276 of the
Telecommunications Act and the FCC's implementing regulations, BOCs will in
1997 be permitted to negotiate with location providers and participate in
the selection of interLATA long distance service providers for their pay
telephones. This provision will enable BOCs to generate revenues from a new
service as well as to compete with independent pay telephone providers for
locations to install their pay telephones by offering location providers
higher commissions for long distance calls than those currently offered by
independent pay telephone providers. This competition for locations may
have a material adverse effect on the Company's business, results of
operations and financial condition.
TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving
industry standards. The Company believes that its future success will
depend on its ability to anticipate and respond to such changes on a timely
basis. There can be no assurance that the Company will have sufficient
resources to make the investments necessary to acquire new technology or to
introduce new services that would satisfy an expanded range of customer
needs.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation
could, together or separately, discourage potential acquisition proposals,
delay or prevent a change in control of the Company and limit the price
that certain investors might be willing to pay in the future for shares of
the Company's Common Stock. These provisions include the authority of the
Board of Directors to issue shares of preferred stock with rights and
privileges which could be senior to the Common Stock, without obtaining
shareholder approval. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
transactions, could have the effect of making it more difficult for a third
party to acquire, or discourage a third party from acquiring, a significant
percentage of the outstanding voting stock of the Company. Although the
Company has the ability to use such provisions as anti-takeover measures,
the Company currently has no intention to issue such preferred stock in the
future. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES
The Company can make no prediction as to the effect, if any, that
sales of additional shares of Common Stock or the availability of shares
for future sale will have on the market price of the Common Stock. Sales in
the public market of substantial amounts of the Common Stock (including
shares issued upon the exercise of outstanding options or warrants), or the
perception that such sales could occur, could depress prevailing market
prices for the Common Stock. Such sales also may make it more difficult for
the Company to sell equity securities or equity-related securities in the
future at a time and price that the Company deems appropriate. See "Shares
Eligible for Future Sale."
As of September 30, 1996, options and warrants to purchase
2,464,902 shares of Common Stock were issued and outstanding, all of which
were immediately exercisable. In addition, at September 30, 1996, an
aggregate of 10,092,974 shares of Common Stock have been reserved for
issuance pursuant to the conversion of shares of the Company's Series A
Preferred (as defined herein), Series B Preferred (as defined herein) and
14% Preferred (as defined herein). Holders of the Company's options,
warrants and convertible preferred stock and certain holders of the
Company's Common Stock have entered into registration rights agreements
with the Company and have demand and/or piggyback registration rights under
certain circumstances. The Company has obtained waivers of such
registration rights in connection with the Offering from the holders of
approximately 92% of the underlying shares of Common Stock having piggyback
registration rights as a result of the filing of the Registration Statement
of which this Prospectus forms a part. However, in order to satisfy its
obligations under such registration rights agreements, the Company intends
to file a shelf registration statement to register under the Securities Act
approximately 13,005,110 shares of Common Stock, including the shares
issuable upon the exercise or conversion of such options, warrants and
convertible preferred stock. Upon effectiveness of the shelf registration
statement, all of such shares of Common Stock, when issued, will be
eligible for sale without restriction under the Securities Act. However,
the Selling Shareholders, who hold approximately 69% of the underlying
shares of Common Stock having registration rights, have agreed not to
transfer, sell or otherwise dispose of shares of Common Stock (except in
the Offering) without the consent of Southcoast Capital Corporation for a
period of 6 months commencing on the date of the consummation of the
Offering, with sales permitted for the 12 months thereafter on a limited
basis as agreed upon with Southcoast Capital Corporation. In addition,
other holders of approximately 24% of the underlying shares of Common Stock
having registration rights have agreed not to transfer, sell or otherwise
dispose of such shares for a period of 180 days commencing on the date of
the consummation of this Offering without the consent of Southcoast Capital
Corporation.
The Company and its executive officers and directors have agreed
pursuant to lock-up agreements that they will not offer or sell any shares
of Common Stock of the Company beneficially owned by them during a period
of 180 days (the "Lock-up Period") following the date of this Prospectus
without the prior written consent of Southcoast Capital Corporation, except
that the Company may issue shares of Common Stock upon the exercise of
options or in connection with acquisitions. After the Lock-up Period, all
such shares may be sold in accordance with Rule 144 under the Securities
Act. See "Underwriting" and "Shares Eligible For Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE
There may be significant volatility in the market price for the
Company's Common Stock. Quarterly operating results of the Company, changes
in general conditions in the economy, the financial markets of the
telecommunications industry or other developments affecting the Company or
its competitors, could cause the market price of the Company's Common Stock
to fluctuate substantially. In addition, in recent years, the stock market
and, in particular, the telecommunications industry segment, has
experienced significant price and volume fluctuations. This volatility has
affected the market prices of securities issued by many companies for
reasons unrelated to their operating performance.
SEASONALITY
The Company's revenues may fluctuate seasonally. The Company's pay
telephones in the northern and western states, some of which are located
outdoors, typically experience reduced revenues in the winter months due to
weather conditions, which may have a material adverse effect on the
Company's operating performance.
DEPENDENCE ON SIGNIFICANT CUSTOMER
The Company's pay telephone operations are diversified on both a
geographical and customer account basis. Currently, it operates pay
telephones in 39 states (approximately 96% of which pay telephones are
located in 17 states) through agreements with both multi-station customers
such as shopping malls, convenience stores, service stations and grocery
stores as well as with high volume single station customers.
In 1992, the Company entered into a ten-year agreement with The
Edward J. DeBartolo Corporation and its affiliates (which merged with Simon
Property Group in 1996 and is now known as Simon DeBartolo Group ("Simon
DeBartolo")), pursuant to which the Company manages the pay telephone
equipment for certain properties owned and managed by Simon DeBartolo. The
Company derived approximately 15% and 8% of its total revenues for the year
ended December 31, 1995 and the six months ended June 30, 1996
respectively, from its management agreement with Simon DeBartolo. As the
Company expands its installed pay telephone base through additional
acquisitions and internal growth, it expects that the percentage of total
revenues derived from Simon DeBartolo will continue to decline. There can
be no assurance that the agreement will be renewed upon expiration. Other
than Simon Debartolo, no single customer generated more than 5% of the
Company's revenues for the year ended December 31, 1995 or the six months
ended June 30, 1996.
DIVIDEND POLICY
The Company has never declared or paid any dividend on its Common
Stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The Credit Agreement restricts the
Company's ability to pay dividends, and the Company cannot pay dividends on
the Common Stock unless dividends are also paid on the Series A Preferred
and the Series B Preferred. See "Dividend Policy."
POSSIBLE CHANGE IN CONTROL
In connection with the Company's Credit Agreement dated March 15,
1996, as amended (the "Credit Agreement"), with Internationale Nederlanden
(U.S.) Capital Corporation ("ING") and Cerberus Partners, L.P. ("Cerberus"
and, together with ING, the "Lenders"), ING and Cerberus received warrants
to purchase a total of 204,824 shares of Series A Special Convertible
Preferred Stock ("Series A Preferred") which, in turn, are convertible into
4,096,480 shares of Common Stock. In addition, $29,000,000 of the
outstanding debt under the Credit Agreement is convertible into 241,667
shares of Series B Special Convertible Preferred Stock ("Series B
Preferred") which, in turn, is convertible into a total of 4,833,333 shares
of Common Stock. Prior to the consummation of the Offering, ING and
Cerberus intend to exercise warrants in an amount sufficient to purchase
shares of Series A Preferred that are convertible into an aggregate of
500,000 shares of Common Stock, which shares will be sold in this Offering.
Upon consummation of the Offering, ING and Cerberus will still have the
right to acquire 3,596,480 shares of Common Stock upon exercise of the
remaining warrants and 4,833,333 shares of Common Stock assuming conversion
of the outstanding debt under the Credit Agreement, which would result in
ownership in the aggregate of ___% of the Company's Common Stock (based on
the amount outstanding as of September 30, 1996).
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Prospectus that reflect projections or
expectations of future financial or economic performance of the Company,
and statements of the Company's plans and objectives for future operations,
including those relating to the Company's services and ability to generate
additional revenues, are "forward looking" statements, within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Such statements include, but are not limited to, the anticipated effects of
Section 276 of the Telecommunications Act and the FCC's implementing
regulations, the achievement of cost savings from the acquisitions
described herein and the availability of capital resources.
No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated
in any such forward looking statements. Important factors that could result
in such differences, in addition to the risk factors identified above,
include: general economic conditions in the Company's markets, including
recession, interest rates and other economic factors; disruption of
operations; and other factors that generally affect businesses.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to
be approximately $___ million ($ million if the Underwriters' overallotment
option is exercised in full). Of this amount, the Company intends to use
approximately $8.0 million to repay a portion of the outstanding debt under
the Company's Credit Agreement (of which $41.0 million was outstanding at
September 30, 1996). The Company will use the balance of the net proceeds
for working capital and other general corporate purposes, including for
acquisitions (subject to obtaining the Lenders' approval pursuant to the
Credit Agreement.) A portion of the borrowings being repaid under the
Credit Agreement matures on December 31, 1997 while the other portion
matures on June 30, 1999, and all borrowings thereunder bear interest at
the prime rate plus 5%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a description of the Credit Agreement. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders. See "Pro Forma Financial Data."
CAPITALIZATION
The following table sets forth the capitalization of the Company
at June 30, 1996 (A) on an actual basis, (B) on a pro forma basis to give
effect to (i) the acquisitions of POA and Amtel and (ii) funds borrowed
under the Credit Agreement to fund such acquisitions as if such
transactions had occurred on June 30, 1996 and (C) on a pro forma basis as
set forth in the preceding clause (B) and as adjusted to reflect the sale
by the Company of __________ shares of Common Stock pursuant to this
Offering and the application of the estimated net proceeds therefrom as set
forth under "Use of Proceeds," as if such transactions had occurred on June
30, 1996. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Financial Data" and the consolidated financial
statements of the Company and notes thereto included elsewhere in this
Prospectus.
JUNE 30, 1996
-------------------------------------------------
PRO FORMA, AS
ACTUAL PRO FORMA ADJUSTED
----------- -------------- ---------------
Total long-term debt (including current installments):
Credit Agreement, Net (1).......................... $26,372,962 $35,149,508 $27,149,508
Notes payable (including obligations under
capital leases)..................... 2,391,276 14,311,544 14,311,544
---------- ---------- ----------
Total long-term debt (including current
installments)...................... 28,764,238 49,461,052 41,461,052
Redeemable preferred stock:
14% Cumulative Redeemable Convertible Preferred
Stock:
$60 stated value; 200,000 shares authorized;
107,918.19 shares issued and outstanding;
4,464.48 shares reserved for issuance upon
declaration of dividends (2)..................... 6,404,228 6,404,228 6,404,228
Non-mandatorily redeemable preferred stock, common
stock and other shareholders' equity:
Series A Special Convertible Preferred Stock:
$0.20 par value; 250,000 shares authorized;
no shares issued.......................... - - -
Series B Special Convertible Preferred Stock:
$0.20 par value; 250,000 shares authorized;
no shares issued.......................... - - -
Common stock: $.01 par value; 50,000,000 shares
authorized; 5,248,230 shares is actual;
7,577,059 shares issued and outstanding,
pro forma; 14,327,059 shares issued and
outstanding, pro forma, as adjusted (3)......... 52,482 75,770 143,270
Additional paid-in capital........................ 35,702,864 40,629,081 63,066,581
Accumulated deficit (4)........................... (25,638,420) (25,638,420) (25,638,420)
----------- ------------ ----------
Total non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity... 10,116,926 15,066,431 37,571,431
----------- ----------- ----------
Total capitalization................................. $45,285,392 $70,931,711 $85,436,711
=========== =========== ===========
- ------------
(1) Excludes $5,850,492 constituting the unamortized portion of the debt
discount, which was originally assigned to warrants issued to the
Lenders in connection with the Credit Agreement. The total face amount
of the Credit Agreement outstanding as of June 30, 1996 was $32,223,454.
(2) The redemption amount of $6,742,980 (plus accrued dividends) is due
on June 30, 2000.
(3) Does not reflect the issuance of any Common Stock pursuant to options
and warrants outstanding.
(4) Reflects a $2,002,386 reduction (of which $1,227,589 was a non-cash
item) resulting from the redemption of the Company's 10% Cumulative
Redeemable Preferred Stock (the "10% Preferred"), the 8% Cumulative
Redeemable Preferred Stock (the "8% Preferred") and 7% Cumulative
Convertible Redeemable Preferred Stock (the "7% Preferred") on March 15,
1996. See Note 15 to the audited consolidated financial statements of
the Company included elsewhere in this Prospectus.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on Nasdaq under the symbol "PNTL." The
following table sets forth on a per share basis, for the periods indicated,
the high and low sales prices of the Common Stock as reported by Nasdaq.
PRICE RANGE
------------------------------------------
HIGH LOW
------------------ ------------------
FISCAL 1996:
First Quarter................. $7 7/8 $5
Second Quarter................ 6 1/2 2 3/4
Third Quarter................. 5 2
Fourth Quarter (through
October 8, 1996)............. 4 3/8 3 5/8
FISCAL 1995:
First Quarter................. $7 1/8 $4 7/8
Second Quarter................ 8 1/4 4 7/8
Third Quarter................. 8 1/4 5 7/16
Fourth Quarter................ 8 5/8 5 1/4
FISCAL 1994:
First Quarter................. $20 1/4 $14 1/4
Second Quarter................ 15 3/4 8 5/8
Third Quarter................. 9 3/8 6
Fourth Quarter................ 11 1/4 6 3/4
On October 4, 1996, the last sale price as reported by Nasdaq
was $4 per share.
As of September 30, 1996, there were approximately 313 shareholders of
record of the Company's Common Stock. The number of record holders does not
take into account shares held in nominee or "street" names for the account
of beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The payment of dividends by the
Company is restricted by the Credit Agreement, and the Company cannot pay
any dividends on its Common Stock unless dividends are paid to the holders
of the Series A Preferred and Series B Preferred in an amount equal to that
which such holders would have been entitled to receive if such holders had
converted their shares of Series A Preferred or Series B Preferred, as
applicable, into Common Stock prior to the record date used by the Board of
Directors for determining the holders of Common Stock entitled to receive
such dividends. Any future declaration of dividends will be subject to the
discretion of the Board of Directors of the Company. The timing, amount and
form of dividends (other than with respect to the holders of 14% Preferred
which are only entitled to receive dividends payable in additional shares
of 14% Preferred), if any, will depend, among other things, on the
Company's financial condition, capital requirements, cash flow,
profitability, plans for expansion, business outlook and other factors
deemed relevant by the Board of Directors of the Company.
SELECTED FINANCIAL DATA
The historical financial data for the fiscal years ended December
31, 1993, 1994 and 1995 have been derived from, and should be read in
conjunction with, the audited consolidated financial statements of the
Company and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in
this Prospectus. The historical financial data for the six months ended
June 30, 1995 and 1996 have been derived from, and should be read in
conjunction with, the unaudited consolidated financial statements of the
Company included elsewhere in this Prospectus which, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the interim period
financial data. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------------------ ------------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues............................. $5,988 $7,067 $11,070 $15,866 $18,718 $7,878 $16,806
Cost and expenses.................... 6,515 7,647 11,683 17,180 24,007 9,077 24,497
Loss from operation.................. (527) (580) (613) (1,314) (5,289) (1,199) (7,691)
Interest expense, net................ 190 203 166 381 821 214 2,089
Loss before extraordinary items...... (717) (783) (779) (1,695) (6,110) (1,413) (9,780)
Net loss............................. (717) (783) (779) (1,695) (6,110) (1,413) (10,047)
Net loss applicable to common
shareholders....................... (717) (980) (986) (1,987) (6,419) (1,568) (12,185)
Net loss per common share
before extraordinary items......... (1.09) (1.41) (.96) (1.35) (3.29) (.99) (3.33)
Net loss per common share............ (1.09) (1.41) (.96) (1.35) (3.29) (.99) (3.41)
Weighted average number of shares.... 660,500 695,543 1,031,384 1,470,188 1,950,561 1,586,142 3,576,381
BALANCE SHEET DATA:
Total assets......................... $2,795 $3,664 $4,697 $10,158 $28,917 $9,707 $52,043
Long-term debt and obligations
under capital leases (including
current installments).............. 1,317 2,564 1,022 4,180 13,862 3,824 28,764(1)
Shareholders' equity................. (546) (519) 2,190 2,648 9,711 2,030 ---
14% Redeemable Preferred Stock....... --- --- --- --- --- --- 6,404
Non-mandatorily redeemable preferred
stock, common stock and other
shareholders' equity.............. (---) (---) --- --- --- --- 10,117
Working capital (deficit) (2)........ (1,040) (1,687) (1,239) (4,033) (4,844) (4,398) (8,984)
(1) Excludes $5,850 constituting the unamortized portion of long-term debt
discount, which was originally assigned to warrants issued to the
Lenders in connection with the Credit Agreement.
(2) Working capital (deficit) is calculated by subtracting the Company's
current liabilities from its current assets in accordance with generally
accepted accounting principles.
PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined, condensed financial statements
adjust the historical statements of operations data for the year ended
December 31, 1995 and the six months ended June 30, 1996 and adjusts the
historical balance sheet data as of June 30, 1996 to give effect to (i) the
acquisition of World on September 22, 1995, Public Telephone on October 15,
1995, IPP and Paramount on March 15, 1996, Amtel on September 13, 1996, and
POA on September 16, 1996; (ii) the funds borrowed under the Credit
Agreement; and (iii) the sale by the Company of $25,000,000 of Common Stock
pursuant to this Offering and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds." The pro forma adjustments
are included in the unaudited pro forma balance sheet as if the
transactions had occurred on June 30, 1996 and in the unaudited pro forma
statements of operations as if the transactions had occurred at the
beginning of each period presented. The unaudited pro forma combined
condensed financial data should be read in conjunction with the historical
financial statements and notes thereto included elsewhere in this
Prospectus, and are not necessarily indicative of the results of operations
that might have occurred if the transactions had taken place on the dates
indicated or which might occur in any future period.
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT JUNE 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
Pro Forma
Adjustments
PhoneTel for
Technologies Amtel POA Acquisitions
---------------- ---------------- -------------- ---------------
Assets
Current assets:
Cash $1,025,382 $422,566 ($650,188) (1)(2)(3)
Accounts receivable, net 1,570,576 527,883 $372,558 (900,441) (1)(2)
Other current assets 302,469 137,553 39,245 (145,084) (1)(2)
------------ ---------- ---------- ----------
Total current assets 2,898,427 1,088,002 411,803 (1,695,713)
Property and equipment, net 22,995,039 12,276,039 2,482,341 (5,674,740) (1)(2)
Intangible assets, net 24,286,302 1,885,584 14,199,511 (1)(2)(3)
Other assets 1,863,716 294,619 793,406 (2,610,831) (1)(2)
================ ================ ============== ===============
$52,043,484 $13,658,660 $5,573,134 $4,218,227
================ ================ ============== ===============
Liabilities and Equity
Current liabilities:
Current portion of long-term debt:
Payable to related parties $3,548,454 $7,276,546 (3)
Payable to others 1,502,653 $50,459 238,425 (2)
Current portion capital leases 73,510 690,200 (2)
Accounts payable 2,039,122 $1,930,980 84,690 (3,017,670) (1)(2)(3)
Accrued expenses 3,338,419 767,661 782,997 (2,744,956) (1)(2)(3)
Pre-petition liabilities 80,598,956 (80,598,956) (1)
Deferred revenues 900,000
Contractual settlements and
other unusual charges 480,551
---------------- ---------------- -------------- ---------------
Total current liabilities 11,882,709 83,297,597 918,146 (78,156,411)
Long-term debt:
Payable to related parties 23,149,508 1,500,000 (3)
Payable to others 287,556 644,190 3,203,940 (2)
Obligations under capital leases 202,557 5,380,965 1,712,089 (2)
14% preferred mandatorily
redeemable at $6,742,960 6,404,228
Other equity:
Common stock 52,482 50,000 348,756 (375,468) (1)(2)
Additional paid in capital 35,702,864 4,926,217 (1)(2)
Accumulated deficit (25,638,420) (69,688,937) (1,718,923) 71,407,860 (1)(2)
---------------- ---------------- -------------- ---------------
Total other equity 10,116,926 (69,638,937) (1,370,167) 75,958,609
================ ================ ============== ===============
$52,043,484 $13,658,660 $5,573,134 $4,218,227
================ ================ ============== ===============
The accompanying footnotes to the financial information are an integral part of these financial statements.
Pro Forma
Pro Forma Adjustments Pro Forma
Combined for this Offering As Adjusted
---------------- ------------------- ----------------
Assets
Current assets:
Cash $797,760 $14,505,000 (4) $15,302,760
Accounts receivable, net 1,570,576 1,570,576
Other current assets 334,183 334,183
---------------- ------------------- ----------------
Total current assets 2,702,519 14,505,000 17,207,519
Property and equipment, net 32,078,679 32,078,679
Intangible assets, net 40,371,397 40,371,397
Other assets 340,910 340,910
================ =================== ================
$75,493,505 $14,505,000 $89,998,505
================ =================== ================
Liabilities and Equity
Current liabilities:
Current portion of long-term debt:
Payable to related parties $10,825,000 ($8,000,000) (4) $2,825,000
Payable to others 1,791,537 1,791,537
Current portion capital leases 763,710 763,710
Accounts payable 1,037,122 1,037,122
Accrued expenses 2,144,121 2,144,121
Pre-petition liabilities
Deferred revenues 900,000 900,000
Contractual settlements and
other unusual charges 480,551 480,551
---------------- ------------------- ----------------
Total current liabilities 17,942,041 (8,000,000) 9,942,041
Long-term debt:
Payable to related parties 24,649,508 24,649,508
Payable to others 4,135,686 4,135,686
Obligations under capital leases 7,295,611 7,295,611
14% preferred mandatorily
redeemable at $6,742,960 6,404,228 6,404,228
Other equity:
Common stock 75,770 67,500 (4) 143,270
Additional paid in capital 40,629,081 22,437,500 (4) 63,066,581
Accumulated deficit (25,638,420) (25,638,420)
---------------- ------------------- ----------------
Total other equity 15,066,431 22,505,000 37,571,431
================ =================== ================
$75,493,505 $14,505,000 $89,998,505
================ =================== ================
The accompanying footnotes to the financial information are an integral part of these financial statements.
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
- -----------------------------------------------------------------------------------------------------------------------------
PhoneTel IPP and
Technologies Paramount (5) Amtel POA
--------------- ---------------- --------------- ---------------
Revenues $16,805,510 $2,488,680 $7,204,822 $3,768,225
Operating expenses:
Line and transmission charges 3,866,207 585,463 2,428,704 698,365
Location commissions 2,536,730 376,269 1,639,127 436,681
Other operating expenses 5,047,451 356,816 321,947 1,060,772
Depreciation and amortization 5,312,885 183,931 777,823 698,212
Selling, general and administrative 2,398,724 492,244 2,231,970 883,212
Contractual settlements and
other unusual charges 5,334,514
--------------- ---------------- --------------- ---------------
24,496,511 1,994,723 7,399,571 3,777,242
--------------- ---------------- --------------- ---------------
Loss from operations (7,691,001) 493,957 (194,749) (9,017)
Other income (expense):
Interest expense - related parties (1,816,890)
Interest expense - others (274,221) (30,881) (6,077) (333,230)
Interest income 1,976 1,606
Reorganization expenses (789,888)
Other (12,638) (959,011) (51,364)
--------------- ---------------- --------------- ---------------
Total other income (expense) (2,089,135) (43,519) (1,753,370) (384,594)
--------------- ---------------- --------------- ---------------
Loss before income taxes
and extraordinary item (9,780,136) 450,438 (1,948,119) (393,611)
Income taxes 4,000
--------------- ---------------- --------------- ---------------
Loss before extraordinary item ($9,780,136) $450,438 ($1,952,119) ($393,611)
=============== ================ =============== ===============
Earnings per share calculation:
Preferred dividend requirement (134,741)
---------------
Loss before extraordinary
item applicable to
common shareholders ($9,914,877) $450,438 ($1,952,119) ($393,611)
=============== ================ =============== ===============
Loss per common share before
extraordinary item (10) ($2.77)
===============
Weighted average number of shares 3,576,381 216,217 2,162,163 166,666
=============== ================ =============== ===============
The accompanying footnotes to the financial information are an integral part of these financial statements.
Pro Forma
Adjustments Pro Forma
for Pro Forma Adjustments Pro Forma
Acquisitions Combined for this Offering As Adjusted
---------------- ---------------- ------------------ ----------------
Revenues ($27,625) (7) $30,239,612 $30,239,612
Operating expenses:
Line and transmission charges 7,578,739 7,578,739
Location commissions 4,988,807 4,988,807
Other operating expenses (206,786) (6)(7) 6,580,200 6,580,200
Depreciation and amortization 2,062,209 (6)(7)(8) 9,035,060 9,035,060
Selling, general and administrative (1,481,569) (6)(7)(8) 4,524,581 4,524,581
Contractual settlements and
other unusual charges 5,334,514 5,334,514
------------
---------------- --------------
373,854 38,041,901 38,041,901
------------ ---------------- --------------
Loss from operations (401,479) (7,802,289) (7,802,289)
Other income (expense):
Interest expense - related parties (581,446) (9) (2,398,336) $530,000 7) (1,868,336)
Interest expense - others 51,414 (6)(7) (592,995) (592,995)
Interest income 3,582 3,582
Reorganization expenses 789,888 (6) -
Other 959,011 (6) (64,002) (64,002)
------------ ---------------- ------------------ --------------
Total other income (expense) 1,218,867 (3,051,751) 530,000 (2,521,751)
------------ ---------------- ------------------ --------------
Loss before income taxes
and extraordinary item 817,388 (10,854,040) 530,000 (10,324,040)
Income taxes 4,000 4,000
------------ ---------------- ------------------ --------------
Loss before extraordinary item $817,388 ($10,858,040) $530,000 ($10,328,040)
============ ================ ================== ==============
Earnings per share calculation:
Preferred dividend requirement (134,741) (134,741)
---------------- --------------
Loss before extraordinary
item applicable to
common shareholders $817,388 ($10,992,781) $530,000 ($10,462,781)
============ ================ ================== ==============
Loss per common share before
extraordinary item (10) ($1.80) (10) ($0.81)
================ ==============
Weighted average number of shares 6,121,427 6,750,000 (11) 12,871,427
================ ================== ==============
The accompanying footnotes to the financial information are an integral part of these financial statements.
PhoneTel Technologies, Inc. and Subsidiaries
Unaudited Pro Forma Combined Condensed Statement of Operations for the Year Ended December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
World, Public
PhoneTel Telephone, IPP
Technologies & Paramount (12) Amtel POA
---------------- -------------------- ---------------- --------------
Revenues $18,717,983 $18,488,923 $17,059,140 $8,215,135
Operating expenses:
Line and transmission charges 5,475,699 6,377,191 6,862,015 3,599,271
Location commissions 3,467,626 2,361,157 3,921,741 1,178,156
Other operating expenses 5,310,262 1,847,352 2,651,734 289,036
Depreciation and amortization 4,383,049 2,059,628 1,621,029 1,218,095
Selling, general and administrative 3,200,742 5,229,060 15,103,091 1,911,624
Other 67,356
Contractual settlements and
other unusual charges 2,169,503
---------------- -------------------- ---------------- --------------
24,006,881 17,874,388 30,226,966 8,196,182
---------------- -------------------- ---------------- --------------
Loss from operations (5,288,898) 614,535 (13,167,826) 18,953
Other income (expense):
Interest expense - related parties
Interest expense - others (836,911) (1,109,102) (7,429,502) (971,141)
Interest income 16,112 19,671 415
Reorganization expenses (539,942)
Other (405,505) (429,967) (68,517)
---------------- -------------------- ---------------- --------------
Total other income (expense) (820,799) (1,494,936) (8,399,411) (1,039,243)
---------------- -------------------- ---------------- --------------
---------------- -------------------- ---------------- --------------
Loss before income taxes
and extraordinary item (6,109,697) (880,401) (21,567,237) (1,020,290)
Income taxes 38,100 4,000 (277,720)
---------------- -------------------- ---------------- --------------
Loss before extraordinary item ($6,109,697) ($918,501) ($21,571,237) ($742,570)
================ ==================== ================ ==============
Earnings per share calculation:
Preferred dividend requirements (309,668) (343,567)
---------------- --------------------
Loss before extraordinary
item applicable to
common shareholders ($6,419,365) ($1,262,068) ($21,571,237) ($742,570)
================ ==================== ================ ==============
Loss per common share before
extraordinary item (10) ($3.29)
================
Weighted average number of shares 1,950,561 1,086,171 2,162,163 166,666
================ ==================== ================ ==============
The accompanying footnotes to the financial information are an integral part of these financial statements.
Pro Forma
Adjustments Pro Forma
for Pro Forma Adjustments Pro Forma
Acquisitions Combined for this Offering As Adjusted
--------------- ---------------- ------------------- --------------
Revenues ($2,871,447) (13)(14) $59,609,734 $59,609,734
Operating expenses:
Line and transmission charges (1,694,515) (13) 20,619,661 20,619,661
Location commissions (1,067,000) (13)(15) 9,861,680 9,861,680
Other operating expenses (3,027,295) (13)(14)(15) 7,071,089 7,071,089
Depreciation and amortization 8,686,142 (13)(14)(15) 17,967,943 17,967,943
Selling, general and administrative (14,309,744) (13)(14)(15) 11,134,773 11,134,773
Other 67,356 67,356
Contractual settlements and
other unusual charges 2,169,503 2,169,503
--------------- ---------------- ----------------
(11,412,412) 68,892,005 68,892,005
--------------- ---------------- ----------------
Loss from operations 8,540,965 (9,282,271) (9,282,271)
Other income (expense):
Interest expense - related parties (8,298,232) (16) (8,298,232) $1,060,000 (18) (7,238,232)
Interest expense - others 8,215,247 (13)(14) (2,131,409) (2,131,409)
Interest income 36,198 36,198
Reorganization expenses 539,942 (13)
Other 429,967 (13) (474,022) (474,022)
--------------- ---------------- --------------- ----------------
Total other income (expense) 886,924 (10,867,465) 1,060,000 (9,807,465)
--------------- ---------------- --------------- ----------------
--------------- ---------------- --------------- ----------------
Loss before income taxes
and extraordinary item 9,427,889 (20,149,736) 1,060,000 (19,089,736)
Income taxes (38,100) (15) (273,720) (273,720)
--------------- ---------------- --------------- ----------------
Loss before extraordinary item $9,465,989 ($19,876,016) $1,060,000 ($18,816,016)
=============== ================ =============== ================
Earnings per share calculation:
Preferred dividend requirements (653,235) (653,235)
---------------- ----------------
Loss before extraordinary
item applicable to
common shareholders $9,465,989 ($20,529,251) $1,060,000 ($19,469,251)
=============== ================ =============== ================
Loss per common share before
extraordinary item (10) ($3.83) (10) ($1.61)
================ ================
Weighted average number of shares 5,365,561 6,750,000 (11) 12,115,561
================ =============== ================
The accompanying footnotes to the financial information are an integral part of these financial statements.
FOOTNOTES TO PRO FORMA FINANCIAL INFORMATION
(1) ACCOUNTING ENTRY FOR ASSETS PURCHASED FROM AMTEL
Debit Credit
Cash $ 6,400,188
Accounts receivable, net 527,883
Other current assets 137,553
Other assets 1,517,425
Property and equipment, net 8,566,221
Intangible assets, net $ 8,525,949
Accounts payable 1,930,980
Pre-petition payables 80,598,956
Accrued expenses 370,161
Common stock 28,379
Additional paid in capital 4,616,218
Accumulated deficit 69,688,937
Represents the acquisition of selected assets of Amtel for a
purchase price consisting of: (i) $7,000,000 in cash ($1,300,000
paid in June 1996); (ii) 2,162,163 unregistered shares of the
Company's Common Stock, valued at the average of the BID and ASK
(as reported by NASDAQ on September 13, 1996, less an unregistered
and block discount of 20.19% as determined by an independent
valuation firm) $4,637,840, or $2.15 per share; and (iii)
acquisition expenses of approximately $675,122; and the elimination
of assets and liabilities not acquired.
(2) ACCOUNTING ENTRY FOR THE POA ACQUISITION
Debit Credit
Cash $ 200,000
Accounts receivable, net 372,558
Other current assets 7,531
Property and equipment, net $ 2,891,481
Intangible assets, net 5,613,562
Other assets 1,093,406
Current portion of long-term debt
- others 238,425
Current portion of long-term
leases 690,200
Accounts payable 84,690
Accrued expenses 610,249
Long-term debt - others 3,203,940
Obligations under capital leases 1,712,089
Common stock 347,089
Additional paid in capital 309,999
Accumulated deficit 1,718,923
(2) ACCOUNTING ENTRY FOR THE POA ACQUISITION
(continued)
Represents the acquisition of POA for a purchase price consisting
of: (i) $500,000 in cash ($300,000 paid in March 1996); (ii)
166,666 unregistered shares of Common Stock, valued at the average
of the BID and ASK (as reported by NASDAQ on September 16, 1996,
less an unregistered and block discount of 30.42% as determined by
an independent valuation firm) $311,665, or $1.87 per share; (iii)
assumption of capital lease obligations of $7,750,000; (iv) notes
payable to selling shareholders of POA, $3,634,114; (v) assumption
of other debt $234,890; (vi) two five year non-competition and
consulting agreements with two of the selling shareholders,
$307,264; and (vii) approximately $166,748 in related acquisition
expenses; and the elimination of assets and liabilities not
acquired.
(3) FINANCING TO COMPLETE THE ACQUISITION OF AMTEL AND POA AND TO
PROVIDE ADDITIONAL WORKING CAPITAL
Debit Credit
Cash $ 5,950,000
Intangibles, net 60,000
Accrued expenses 1,764,546
Accounts payable 1,002,000
Current long-term debt $ 7,276,546
Long-term debt 1,500,000
Represents the additional borrowings under the Credit Agreement, as
amended September 13, 1996, to complete the acquisitions of POA and
Amtel, pay related acquisition expenses and to pay other
obligations of the Company. The portion reflected as current
long-term debt is not contractually due within one year; it is
reflected as current solely to reflect the Company's intent to
repay a portion of the debt with proceeds of the Offering.
(4) ADJUSTMENTS FOR THE OFFERING
Debit Credit
Cash $ 14,505,000
Current long-term debt -
related parties 8,000,000
Special Series A Preferred 5,000 5,000
Common Stock 67,500
Additional paid in capital 22,437,500
Represents the proceeds from the sale of 6,250,000 shares of Common
Stock at an offering price of $4.00 per share, net of estimated
transaction fees of $2,500,000; the repayment of $8,000,000 in
related party debt; and, the exercise of warrants to purchase, in
the aggregate, 25,000 shares of Series A Preferred by the Selling
Shareholders and the immediate conversion by the Selling
Shareholders of the shares of Series A Preferred into 500,000
shares of Common Stock. The Company would receive proceeds of
$5,000 from the exercise of the Series A Preferred warrants by the
Selling Shareholders. The Company will receive no proceeds from the
sale of the 500,000 shares of Common Stock being sold by the
Selling Shareholders.
(5) PRO FORMA ADJUSTMENTS FOR THE ACQUISITIONS COMPLETED ON MARCH 15,
1996
The following adjustment combines the operations of IPP and
Paramount for the period from January 1, 1996 through March 14,
1996.
IPP Paramount Combined
Revenues $ 856,459 $ 1,632,221 $ 2,488,680
Operating expenses:
Line & transmission charges 309,582 275,881 585,463
Location commissions 144,412 231,857 376,269
Other operating expenses 90,474 266,342 356,816
Depreciation & amortization 102,013 81,918 183,931
Selling, general, & admin. 296,181 196,063 492,244
---------- ----------- -----------
942,662 1,052,061 1,994,723
---------- ----------- ----------
Loss from operations (86,203) 580,160 493,957
Other income (expense):
Interest expense (19,511) (11,370) (30,881)
Other - (12,638) (12,638)
------------ ----------- ----------
(19,511) (24,008) (43,519)
Loss before income taxes (105,714) 556,152 450,438
Income taxes - - -
------------ ----------- ----------
Net loss $ (105,714) $ 556,152 $ 450,438
============= ============ ============
(6) AMTEL'S COST SAVINGS FOR THE SIX MONTHS ENDED JUNE 30, 1996
Represents the estimated reduction in: (i) selling, general, and
administrative expenses of $823,408; (ii) other operating expenses
of $25,000; (iii) reorganization expenses of $789,888; (iv)
interest expense of $6,077; and (v) other expense of $959,011
resulting from the acquisition of certain assets of Amtel offset by
the incremental increase in depreciation and amortization of $555,275
associated with the acquired tangible and intangible assets. The
savings are primarily due to the elimination of costs associated
with Amtel's operations which were not acquired, the closing of
certain offices, the elimination of redundant executives and
administrative personnel in billing and other operating areas, and
the elimination of the costs associated with the bankruptcy of Amtel.
The increase in property and equipment is assumed to depreciate
over 60 months, other assets over 36 months, while the intangible
assets, consisting primarily of existing telephone location
contracts, is being amortized over 54 months, representing the
average remaining life of all acquired telephone location
contracts.
(7) POA'S PRO FORMA ADJUSTMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996
Represents the estimated reduction in revenues, from the
acquisition of POA, of $27,625; and the estimated cost savings
consisting of: (i) other operating expenses, $181,786; (ii)
selling, general, and administrative expenses, $419,400; (iii)
interest expense of $45,337; offset by the incremental depreciation and
amortization of $762,025 associated with the acquired tangible and
intangible assets. The savings are primarily the result of the
elimination of certain offices, executives and administrative
personnel in billing and other operating areas. The increase in
property and equipment is assumed to depreciate over 60 months while
the intangible assets, consisting primarily of POA's existing
telephone location contracts, is being amortized over 72 months,
representing the average remaining life of all acquired contracts.
(8) IPP'S AND PARAMOUNT'S PRO FORMA ADJUSTMENTS FOR THE PERIOD FROM
JANUARY 1 THROUGH MARCH 14, 1996
Represents the estimated reduction in selling, general, and
administrative expenses, $238,761; offset by the incremental
depreciation and amortization of $744,909 associated with the
acquired tangible and intangible assets. The savings are primarily
the result of backroom efficiencies, including the elimination of
certain offices and executives and economies of scale in billing
and other areas. The increase in property and equipment is assumed
to depreciate over 60 months while the intangible assets, consisting
primarily of POA's existing telephone location contracts, is being
amortized over 60 months, representing the average remaining life of
all acquired contracts.
(9) INTEREST ON THE ADDITIONAL DEBT FOR THE SIX MONTHS ENDED JUNE 30,
1996
Represents the estimated increase in interest expense of $581,446
resulting from the additional debt, under the Credit Agreement,
required to complete the Amtel and POA acquisitions, pay related
expenses and other obligations, at an assumed interest rate of
13.25%.
(10) CALCULATION OF EARNINGS PER SHARE
Loss per share excludes an increase of the loss to common
shareholders of $2,002,386 realized on redemption of the 10%
Preferred, 8% Preferred, and 7% Preferred and an extraordinary
loss of $267,281 realized on the restructuring of the Company's
debt on March 15, 1996.
(11) SHARES OF COMMON STOCK PROJECTED TO BE OUTSTANDING
Represents 6,250,000 shares of Common Stock (excluding the
Underwriters' Over Allotment) sold pursuant to this Offering, and,
the exercise of warrants to purchase, in the aggregate, 25,000
shares of Series A Preferred by the Selling Shareholders and the
immediate conversion by the Selling Shareholders of the shares of
Series A Preferred into 500,000 shares of Common Stock.
(12) PRO FORMA ADJUSTMENTS FOR THE ACQUISITIONS COMPLETED IN SEPTEMBER
AND OCTOBER 1995 AND MARCH 1996
Represents the operations of World, Public Telephone, IPP and
Paramount for the period from January 1, 1995 through December 31,
1995 or the date of acquisition, as appropriate.
Public IPP and
World Telephone Paramount
January 1, 1995 - January 1, 1995 - January 1, 1995
September 21, 1995 October 14, 1995 December 31, 1995 Combined
Revenues $ 6,317,048 $1,941,190 $10,230,685 $18,488,923
Operating expenses:
Line and transmission charges 2,706,199 535,771 3,135,221 6,377,191
Location commissions 852,944 196,243 1,311,970 2,361,157
Other operating expenses 1,026,000 112,071 709,281 1,847,352
Depreciation and amortization 855,059 268,262 936,307 2,059,628
Selling, general and
administrative 1,276,056 594,588 3,358,416 5,229,060
------------ ---------- ------------ -----------
6,716,258 1,706,935 9,451,195 17,874,388
------------- ---------- ----------- ----------
Income (loss) from
operations (399,210) 234,255 779,490 614,535
Other income (expense):
Interest expense (590,980) (304,664) (213,458) (1,109,102)
Interest income 834 3,371 15,466 19,671
Other - (321,923) (83,582) (405,505)
------------- ------------- ------------ ---------------
(590,146) (623,216) (281,574) (1,494,936)
--------------- ------------- ------------ ---------------
Income (loss) before taxes (989,356) (388,961) 497,916 (880,401)
Income taxes - - 38,100 38,100
------------- ------------ ------------ ---------------
Net income (loss) $ (989,356) $ (388,961) $ 459,816 $ (918,501)
============= ============= ============ ===============
(13) AMTEL'S PRO FORMA ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1995
Represents the estimated reduction in revenues (for assets not
acquired) resulting from the acquisition of Amtel, $2,859,394;
and the estimated reduction in of: (i) selling, general, and
administrative expenses of $11,360,614; (ii) other operating
expenses of $2,131,584; (iii) line and transmission charges of
$1,694,515; (iv) commissions expense of $800,000; (v) interest
expense, excluding the effects of debt borrowed to fund the
acquisitions, of $7,429,502; (vi) reorganization expense of
$539,942; (vii) other expenses of $429,967; offset by the
incremental increase in depreciation and amortization of
$1,045,167 associated with the acquired tangible and
intangibles assets. The savings are primarily due to the
elimination of employees and expenses resulting from the
restructuring plan implemented by the trustee on behalf of the
bankruptcy court in the later part of 1995, the elimination of
costs associated with Amtel's operations which were not acquired,
the closing of certain offices, the elimination of the redundant
executives and administrative personnel in billing and other
operating areas, and the elimination of costs associated with the
bankruptcy of Amtel. The increase in property and equipment is
assumed to depreciate over 60 months, other assets over 36 months,
while the intangible assets, consisting primarily of existing
telephone location contracts, is being amortized over 54 months,
representing the average remaining life of all acquired contracts.
(14) POA'S PRO FORMA ADJUSTMENTS FOR THE YEAR ENDED DECEMBER 31, 1995
Represents the estimated reduction in revenues (for assets not
acquired) resulting from the acquisition of POA, $12,053; and
the estimated reductions in: (i) other operating expenses, $95,711;
(ii) selling, general and administrative expenses, $945,079; (iii)
interest expense of $722,745; offset by the incremental depreciation
and amortization of $1,524,050 associated with the acquired tangible
and intangible assets. The savings are primarily the result of
the elimination of certain offices, executives and administrative
personnel in billing and other operating areas. The increase in
property and equipment is assumed to depreciate over 60 months while
the intangible assets, consisting primarily of POA's existing
telephone location contracts, is being amortized over 72 months,
representing the average remaining life of all acquired contracts.
(15) EXPENSE REDUCTIONS RELATING TO THE ACQUISITIONS COMPLETED
IN SEPTEMBER AND OCTOBER 1995 AND MARCH 1996
Represents the estimated expense reductions relating to the acqui-
sitions of World, Public Telephone, IPP and Paramount for 1995
through the date of acquisition, where appropriate, consisting of:
(i) location commissions, $267,000; (ii) other operating expenses,
$800,000; (iii) selling, general and administrative expenses,
$2,004,051; (iv) income taxes, $38,100; offset by the incremental
depreciation and amortization of $6,116,925 associated with the
acquired tangible and intangible assets. The savings are primarily
the result of the elimination of certain offices, executives and
administrative personnel in billing and other operating areas. The
increase in property and equipment is assumed to depreciate over 60
months while the intangible assets, consisting primarily of existing
telephone location contracts, is being amortized over the estimated
average remaining terms of the acquired contracts, ranging from 36
to 72 months.
(16) INTEREST ON THE ADDITIONAL DEBT FOR THE YEAR ENDED DECEMBER 31,
1995
Represents the incremental increase in interest expense of
$8,298,232 resulting from the additional debt required to complete
the World, Public Telephone, IPP, Paramount, POA and Amtel
acquisitions and pay related expenses and other obligations, at an
assumed interest rate of 13.25%.
(17) INTEREST SAVINGS ON THE DEBT REPAID FOR THE PERIOD ENDED JUNE 30,
1996
Represents the interest savings of $530,000 resulting from the
repayment of debt, under the Credit Agreement, with $8,000,000 of
the Offering proceeds.
(18) INTEREST SAVINGS ON THE DEBT REPAID FOR THE YEAR ENDED DECEMBER 31,
1995
Represents the interest savings of $1,060,000 resulting from the
repayment of debt, under the Credit Agreement, with $8,000,000 of
the Offering proceeds.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the consolidated financial statements of the Company and
the notes thereto which appear elsewhere in this Prospectus.
OVERVIEW
The Company derives substantially all of its revenues from coin
calls and non-coin calls placed from its pay telephones. Non-coin calls
include calling cards, credit cards, collect calls and third party billed
calls. Typically, each public pay telephone has a presubscribed (dedicated)
provider of long distance and OSPs. The Company receives revenues for
non-coin calls placed from its pay telephones in the form of commissions
from its presubscribed long distance and OSPs based on the volume of calls
made as well as the amount generated per call. Pursuant to recently
promulgated FCC regulations, the Company is able to derive additional
revenues from access it provides callers to any carrier other than the
presubscribed carrier. This practice is commonly referred to as
"dial-around" access. The Company believes that the rules and regulations
recently promulgated by the FCC under Section 276 of the Telecommunications
Act will result in additional revenues for the Company by (i) providing for
dial-around compensation of $45.85 per telephone per month from October 20,
1996 through October 1, 1997, and for per-call compensation thereafter, at
a rate initially set at $.0.35 per cell (as compared with the flat fee of
$6.00 per telephone per month in place prior to October 20, 1996) and (ii)
restricting certain subsidies and discriminatory practices by BOCs and
other LECs in favor of their own pay telephone services which, the Company
believes, may result in an increase in the local coin drop rate thereby
generating additional revenues. However, there can be no assurance as to
the ultimate effect that the rules and policies adopted by the FCC on its
own or after judicial review will have on the Company's business, results
of operations or financial condition. See "Business -- Governmental
Regulations."
The Company's principal operating expenses consist of (i)
telephone line charges, (ii) commissions paid to location providers which
are typically expressed as a percentage of revenues and are fixed for the
term of the agreements with the respective location providers, and (iii)
field service and collection costs which are principally comprised of
personnel costs of collecting coins from and maintaining the Company's pay
telephones. The Company pays monthly line charges to BOCs and other LECs
for interconnection to the local network for local calls, which are
computed on either a flat monthly charge plus a per message or per minute
usage rate based on the time and duration of the call. The Company also
pays fees to BOCs and other LECs and long distance carriers based on usage
for local or long distance coin calls. The Company believes that the rules
and regulations recently promulgated by the FCC under Section 276 of the
Telecommunications Act may result in cost reductions by restricting certain
subsidies and discriminatory practices by LECs in favor of their own pay
telephone services thereby reducing tariffed rates charged by BOCs and
other LECs for such services. However, there can be no assurance that the
rules and policies ultimately adopted by the FCC on its own or after
judicial review will not have a material adverse effect on the Company's
business, results of operations or financial condition.
Notwithstanding the aforementioned anticipated benefits of Section
276 and the implementing regulations, as a result of the provisions
permitting BOCs to negotiate with location owners and select interLATA long
distance carriers for their pay telephones, it is anticipated that Section
276 and the implementing regulations may also result in increased
competition for pay telephone locations and a concomitant increase in the
commissions payable to location owners. Moreover, revenues may be
diminished if the FCC prescribes lower benchmark rates for interstate
operator long distance calls. See "Business -- Governmental Regulations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations,
included elsewhere in this Prospectus, expressed as a percentage of total
revenues:
Six Months
Year Ended December 31, Ended June 30,
---------------------------------- --------------------
1993 1994 1995 1995 1996
------ ------ ------- ------ -----
Total revenues:
Coin calls............................ 38.3% 53.1% 64.8% 63.4% 62.0%
Non-coin.............................. 54.9 33.5 20.2 29.3 31.5
Other revenues........................ 6.8 13.4 15.0 7.3 6.5
Operating Expenses:
Line charges.......................... 25.1 28.1 29.3 26.7 23.0
Location commissions.................. 23.5 21.4 18.5 19.2 15.1
Depreciation and amortization......... 8.1 14.1 23.4 18.2 31.7
Selling, general and administrative
expenses............................ 21.7 17.9 17.1 17.1 14.3
Other operating expenses.............. 27.2 26.9 28.4 34.1 30.0
Contractual settlements and other
unusual charges..................... - - 11.6 - 31.8
----- ----- -------- ----- -----
Total operating expenses................. 105.6 108.4 128.3 115.2 145.8
EBITDA................................... 2.6 5.8 6.8 3.0 17.6
Interest expense, net.................... 1.6 2.4 4.5 2.7 12.4
Loss before extraordinary items.......... (7.0) (10.7) (32.6) (17.9) (58.2)
Extraordinary items...................... - - - - (1.6)
Net loss................................. (7.0) (10.7) (32.6) (17.9) (59.8)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Total Revenues. Total revenues from all product lines increased
$8,927,448, or 113.3%, from $7,878,062 for the six months ended June 30,
1995 to $16,805,510 for the six months ended June 30, 1996. This increase
is attributable primarily to an increase in the number of installed pay
telephones, which increased by 9,788, or 194.3%, from June 30, 1995 to June
30, 1996, with the majority of the increase occurring in the fourth quarter
of 1995 and the first quarter of 1996 due to the Company's recent
acquisitions.
Revenues from coin calls increased $5,416,015 or 108.4%, from
$4,995,329 for the six months ended June 30, 1995 to $10,411,344 for the
six months ended June 30, 1996. Non-coin revenues increased $2,987,035, or
129.6%, from $2,305,495 for the six months ended June 30, 1995 to
$5,292,530 for the six months ended June 30, 1996. The increases were
primarily due to the acquisition and installation of pay telephones
producing additional revenues. However, the increase in non-coin revenues
was offset in part by a reduction in operator assisted calls as a result of
aggressive dial-around advertising by long distance carriers such as AT&T
and MCI Communications Corporation ("MCI").
Other revenues increased $524,398, or 90.8%, from $577,238 for the
six months ended June 30, 1995 to $1,101,636 for the six months ended June
30, 1996. This increase was primarily the result of an increase in the
number of pay telephones and increased revenues from dial-around calls.
Operating Expenses. Total operating expenses increased
$15,419,091, or 169.9%, from $9,077,420 for the six months ended June 30,
1995 to $24,496,511 for the six months ended June 30, 1996. Operating
expenses represented 115.2% of total revenues for the six months ended June
30, 1995 and 145.8% of total revenues for the six months ended June 30,
1996.
Line and transmission charges increased $1,765,780, or 84.1%, from
$2,100,427 for the six months ended June 30, 1995 to $3,866,207 for the six
months ended June 30, 1996. Line charges represented 26.7% of total
revenues for the six months ended June 30, 1995 and 23.0% of total revenues
for the six months ended June 30, 1996, a decrease of 3.7%. The dollar
increase in line charges was, in part, due to additional telephones
acquired from IPP and Paramount, the increases in coin calls resulting from
the continuation of the 1994 program which offered customers a three minute
long-distance call anywhere in the continental United States for $0.75 (the
"$0.75 Long Distance Call Program" subsequently changed to $1.00 for the
first three minutes in some locations), as well as increases in certain
local telephone company line charges.
Location commissions increased $1,020,365, or 67.3%, from
$1,516,365 for the six months ended June 30, 1995 to $2,536,730 for the six
months ended June 30, 1996. Location commissions represented 19.2% of total
revenues for the six months ended June 30, 1995 and 15.1% of total revenues
for the six months ended June 30, 1996, a decrease of 4.1%. The dollar
increase is due to location agreements from pay telephones acquired in the
acquisitions of World and Public Telephone, while the percentage decrease
is due to such location agreements having lower commission rates than those
for the Company's existing pay telephones.
Other operating expenses (consisting of personnel costs, rent,
utilities, repair and maintenance of the phones, operator services
processing fees and property and sales taxes), increased $2,364,741, or
88.1%, from $2,682,710 for the six months ended June 30, 1995 to $5,047,451
for the six months ended June 30, 1996. Other operating expenses
represented 34.1% of total revenues for the six months ended June 30, 1995
and 30.0% of total revenues for the six months ended June 30, 1996, a
decrease of 4.1%. The dollar increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable
to the outsourcing of operator services and to the acquisitions of World
and Public Telephone completed in September and October 1995, respectively,
and to a lesser extent, the acquisitions of IPP and Paramount completed in
March 1996, the increase in the Company's pay telephone base, and the
additional field personnel to accommodate the increased business. The
percentage decrease reflects the economies of scale resulting from these
acquisitions that the Company has already realized. Additional economies of
scale are expected to be realized from acquisitions made in September 1996,
resulting in the further decrease of other operating expenses as a
percentage of total revenues for the full year 1996.
Depreciation and amortization increased $3,880,394, or 270.9%,
from $1,432,491 for the six months ended June 30, 1995 to $5,312,885 for
the six months ended June 30, 1996. Depreciation and amortization
represented 18.2% of total revenues for the six months ended June 30, 1995
and 31.6% of total revenues for the six months ended June 30, 1996, an
increase of 13.4%. The dollar and percentage increases were primarily due
to the Company's acquisitions and expansion of its pay telephone base,
purchases of additional computer equipment, service vehicles and software
to accommodate the Company's growth.
Selling, general and administrative ("SG&A") expenses increased
$1,053,297, or 78.3%, from $1,345,427 for the six months ended June 30,
1995 to $2,398,724 for the six months ended June 30, 1996. SG&A represented
17.1% of total revenues for the six months ended June 30, 1995 and 14.3% of
total revenues for the six months ended June 30, 1996, a decrease of 2.8%.
The dollar increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount, while the percentage decrease was due
primarily to the additional revenues from these acquisitions and the
resulting economies of scale provided by such acquisitions.
Contractual settlements and other unusual charges consist
primarily of: (i) the settlement of contractual obligations under certain
employment contracts, $325,000; (ii) the settlement of other contractual
obligations, $210,599; (iii) the write-off of selected assets in connection
with the continued evaluation of the Company's operations and certain
one-time charges for changes to the operations of the Company, $282,131;
(iv) losses recognized on the early pay-off of obligations under capital
leases and other debt concurrent with the debt restructuring completed on
March 15, 1996, $630,645; and (v) the estimated fair market value of the
Nominal Value Warrants charged to operations on March 15, 1996, $3,886,139.
In the aggregate, contractual settlements and other unusual charges were
$5,334,514, or 31.7% of total revenues, for the six months ended June 30,
1996 and $0 for the six months ended June 30, 1995.
EBITDA. EBITDA increased $2,723,265 or 1,168.1%, from $233,133 for
the six months ended June 30, 1995 to $2,956,398 for the six months ended
June 30, 1996. For the reasons discussed above, EBITDA represented 3.0% of
total revenues for the six months ended June 30, 1995 and 17.6% for the six
months ended June 30, 1996.
Other Expense and Income. Other expense and income is comprised of
interest expense incurred on debt with related parties and others and
interest income. Total other expense (net of interest income) increased
$1,875,493, or 877.9%, from $213,642 for the six months ended June 30, 1995
to $2,089,135 for the six months ended June 30, 1996. Other expenses
represented 2.7% of total revenues for the six months ended June 30, 1995
and 12.4% of total revenues for the six months ended June 30, 1996, an
increase of 9.7%. The dollar and percentage increases were due to the
financing obtained for the recent acquisitions. Related party interest
expense was $1,816,890 for the six months ended June 30, 1996, representing
10.8% of total revenues. Included in related party interest expense was
non-cash interest expense of $561,008, or 3.3% of revenues, for the six
months ended June 30, 1996, representing the accretion of the debt under
the Credit Agreement to its maturity amount.
Extraordinary Items. The Company recorded an extraordinary loss of
$267,281 representing 1.6% of total revenues for the six months ended June
30, 1996. The extraordinary loss related to one-time costs that were
incurred in connection with the restructuring of the Company's long-term
debt. Concurrent with the restructuring of the Company's debt and the
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, the Company
recorded the difference between the carrying value of the 10% Preferred, 8%
Preferred and 7% Preferred and the redemption price as reductions in
earnings available to the common stockholders of $2,002,386.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total Revenues. Total revenues from all product lines increased
$2,851,896, or 18.0%, from $15,866,087 for the year ended December 31, 1994
to $18,717,983 for the year ended December 31, 1995. This increase was
attributable primarily to an increase in the number of installed pay
telephones. The total installed pay telephones increased by 4,979 pay
telephones, or 105.0%, with the majority of the increase occurring late in
the third quarter and in the fourth quarter of fiscal 1995 and attributable
to the acquisition of World and Public Telephone. In addition, revenues
improved as a result of the continuation of the $0.75 Long Distance Call
Program.
Revenues from coin calls increased $3,708,952, or 44.0%, from
$8,421,237 for the year ended December 31, 1994 to $12,130,189 for the year
ended December 31, 1995. Non-coin revenues decreased $1,542,637, or 29.0%,
from $5,319,138 for the year ended December 31, 1994 to $3,776,501 for the
year ended December 31, 1995. The decrease was primarily the result of a
decrease in the number of pay telephones to which the Company provided
operator services through pre-subscription arrangements and aggressive
dial-around advertising by AT&T, MCI and Sprint Communications Company
("Sprint"). In December 1995, the Company decided to focus on the ownership
and maintenance of its pay telephone business and outsourced its operator
service center to Intellicall. A substantial portion of the transfer of
such service center was completed by March 31, 1996. The Company wrote off
the fixed assets of its operator service center in 1995 and recorded a
non-cash charge of $298,626.
Other revenues increased $685,581, or 32.3%, from $2,125,712 for
the year ended December 31, 1994 to $2,811,293 for the year ended December
31, 1995. This increase was primarily the result of the acquisitions of
World and Public Telephone in September and October of 1995, respectively.
Operating Expenses. Line charges increased $1,019,190, or 22.9%,
from $4,456,509 for the year ended December 31, 1994 to $5,475,699 for the
year ended December 31, 1995. Line charges represented 28.1% of total
revenues for the year ended December 31, 1994 and 29.3% of total revenues
for the year ended December 31, 1995. The increase resulted, in part, from
increased coin calls resulting from the $0.75 Long Distance Call Program as
well as increases in certain local telephone company line charges. However,
this program reduces billing, collection and operator service costs.
Location commissions increased $76,436, or 2.3%, from $3,391,190
for the year ended December 31, 1994 to $3,467,626 for the year ended
December 31, 1995. Location commissions represented 21.4% of total revenues
for the year ended December 31, 1994 and 18.5% of total revenues for the
year ended December 31, 1995. The decrease in location commissions as a
percentage of total revenues is due to lower location commissions for those
pay telephones acquired from World and Public Telephone.
Depreciation and amortization increased $2,146,780, or 96.0%, from
$2,236,269 for the year ended December 31, 1994 to $4,383,049 for the year
ended December 31, 1995. Depreciation and amortization represented 14.1% of
total revenues for the year ended December 31, 1994 and 23.4% of total
revenues for the year ended December 31, 1995. The increase was primarily
due to the acquisitions of World and Public Telephone and expansion of its
pay telephone base which included purchases of additional computer
equipment, service vehicles and software to accommodate the Company's
growth.
SG&A expenses increased $368,967, or 13.0%, from $2,831,775 for
the year ended December 31, 1994 to $3,200,742 for the year ended December
31, 1995. The increase was due to increases in advertising, travel and
entertainment, wages and payroll related expenses and general office
expenses as a result of hiring additional personnel to conduct the
Company's expanded selling and marketing program and customer services.
SG&A expenses represented 17.9% of total revenues for the year ended
December 31, 1994 and 17.1% of total revenues for the year ended December
31, 1995. The Company expects that SG&A expenses will increase only
marginally in the near term because the Company has an established
infrastructure in place, but will continue to decrease as a percentage of
total revenues as total revenues increases.
Other operating expenses increased $1,045,590, or 24.5%, from
$4,264,672 for the year ended December 31, 1994 to $5,310,262 for the year
ended December 31, 1995. Other operating expenses represented 26.9% of
total revenues for the year ended December 31, 1994 and 28.4% of total
revenues for the year ended December 31, 1995. The increase was the result
of higher personnel costs, rent, utilities and service related expenses
attributable to the acquisitions of World and Public Telephone, the
increase in the Company's pay telephone base, and the additional personnel
to accommodate the increased business.
Contractual settlements and other unusual charges consist
primarily of costs associated with the settlement of contractual
obligations to certain former officers of the Company and related legal
fees, the write-off of selected assets in connection with the outsourcing
of the operator service center and consulting and legal fees incurred for
changes to the operations of the Company. Settlements of employment
contracts and other unusual charges were $2,169,503, and represented 11.6%
of total revenues, for the year ended December 31, 1995. There were no
contractual settlements and other unusual charges for 1994.
EBITDA. EBITDA increased $341,713, or 37.1%, from $921,941 for the
year ended December 31, 1994 to $1,263,654 for the year ended December 31,
1995. For the reasons discussed above, EBITDA represented 5.8% of total
revenues for the year ended December 31, 1994 and 6.8% of total revenues
for the year ended December 31, 1995.
Interest Expense, Net. Interest expense, net of interest income,
increased $448,696, or 115.6%, from $388,215 for the year ended December
31, 1994 to $836,911 for the year ended December 31, 1995. Interest
expense, net of interest income, represented 2.4% of total revenues for the
year ended December 31, 1994 and 4.5% of total revenues for the year ended
December 31, 1995. The increase was due to financing obtained for
acquisitions, additional service vehicles and switch operating equipment.
In addition, the Company entered into financing agreements with certain
manufacturers throughout the year for the purchase of phone equipment to
accommodate the expansion of its pay telephone base.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Total Revenues. Total revenues from all product lines increased
$4,796,570, or 43.3%, from $11,069,517 for the year ended December 31, 1993
to $15,866,087 for the year ended December 31, 1994. This increase was
attributable primarily to an increase in the number of installed pay
telephones, which increased by 2,559 from 2,185 at December 31, 1993 to
4,744 at December 31, 1994, with the majority of the increase relating to
acquisitions.
Revenues from coin calls increased $4,183,389, or 98.7%, from
$4,237,848 for the year ended December 31, 1993 to $8,421,237 for the year
ended December 31, 1994. Non-coin revenue decreased $755,266, or 12.4%,
from $6,074,394 for the year ended December 31, 1993 to $5,319,128 for the
year ended December 31, 1994. The decrease was primarily the result of a
reduction in the number of telephones to which the Company provided
operator services through pre-subscription arrangements and aggressive
dial-around advertising by AT&T, Sprint and MCI.
Other revenues increased $1,368,437, or 180.7%, from $757,275 for
the year ended December 31, 1993 to $2,125,712 for the year ended December
31, 1994. This increase was primarily the result of an increase in the
number of installed telephones and dial-around compensation.
Operating Expenses. Line charges increased $1,680,061, or 60.5%,
from $2,776,448 for the year ended December 31, 1993 to $4,456,509 for the
year ended December 31, 1994. Line charges represented 25.1% of total
revenues for the year ended December 31, 1993 and 28.1% of total revenues
for the year ended December 31, 1994. The increase in line charges was, in
part, due to increased coin calls resulting from the implementation of the
$0.75 Long Distance Call Program, as well as increases in certain local
telephone company line charges.
Location commissions increased $791,860, or 30.5%, from $2,599,330
for the year ended December 31, 1993 to $3,391,190 for the year ended
December 31, 1994. Location commissions represented 23.5% of total revenues
for the year ended December 31, 1993 and 21.4% of total revenues for the
year ended December 31, 1994. The decrease as a percentage of total
revenues resulted from the renegotiation of location agreements acquired in
the acquisition of Alpha Pay Phones - IV L.P. ("Alpha").
Depreciation and amortization increased $1,340,228, or 149.6%,
from $896,041 for the year ended December 31, 1993 to $2,236,269 for the
year ended December 31, 1994. Depreciation and amortization represented
8.1% of total revenues for the year ended December 31, 1993 and 14.1% of
total revenues for the year ended December 31, 1994. This increase was
primarily due to the Company's acquisition of the Alpha assets at the end
of the first quarter of 1994 and expansion of the pay telephone base,
purchases of additional computer equipment, service vehicles and software
to accommodate the Company's growth.
SG&A expenses increased $429,192, or 17.9%, from $2,402,583 for
the year ended December 31, 1993 to $2,831,775 for the year ended December
31, 1994. The increase was primarily the result of the increases in
advertising, travel and entertainment, wages and payroll related expenses
and general office expenses as a result of hiring additional personnel to
conduct the Company's expanded selling and marketing program and customer
services. SG&A represented 21.7% of total revenues for the year ended
December 31, 1993 and 17.8% of total revenues for the year ended December
31, 1994.
Other operating expenses increased $1,256,539, or 41.8%, from
$3,008,133 for the year ended December 31, 1993 to $4,264,672 for the year
ended December 31, 1994. The increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable
to the addition of the Alpha assets, new operations in Texas, the
establishment of Florida and Nevada sales offices, the increase in the
Company's pay telephone base and the additional field personnel to
accommodate the increased business. Other operating expenses represented
27.2% of total revenues for the year ended December 31, 1993 and 26.9% of
total revenues for the year ended December 31, 1994.
EBITDA. EBITDA increased $638,918, or 225.7%, from $283,023 for
the year ended December 31, 1993 to $921,941 for the year ended December
31, 1994. For the reasons discussed above, EBITDA represented 2.6% of total
revenues for the year ended December 31, 1993 and 5.8% of total revenues
for the year ended December 31, 1994.
Interest Expense, Net. Interest expense, net of interest income,
increased $213,221, or 121.8%, from $174,994 for the year ended December
31, 1993 to $388,215 for the year ended December 31, 1994. Interest
expense, net of interest income, represented 1.6% of total revenues for the
year ended December 31, 1993 and 2.4% of total revenues for the year ended
December 31, 1994. The increase was due to the financing obtained for
acquisitions, additional service vehicles and switch operating equipment.
In addition, the Company entered into financing agreements with certain
manufacturers throughout the year for the purchase of telephone equipment
to accommodate the expansion of its pay telephone base.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. Net cash provided by (used in) operating activities
during the fiscal years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1996 were $11,208, $2,380,216, $(579,133) and
$(397,324), respectively. Net cash used in operating activities consisted
primarily of the funding of operating losses, increases in current assets
(other than cash) and repayment of significant current liabilities. Cash
flows used in operating activities in the six months ended June 30, 1996
decreased by $862,598 over cash provided by operations for the six months
ended June 30, 1995 of $465,274, mostly due to the larger loss in the first
and second quarter of 1996, and the repayment of contractual and other
obligations offset by non-cash charges related to Nominal Value Warrants,
depreciation and amortization, and accretion of debt.
Cash used in investing activities during the fiscal years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1996
were $1,196,761, $3,214,302, $2,354,011 and $16,542,990, respectively. Cash
used in investing activities consisted primarily of capital expenditures
and payments to acquire companies.
Cash provided by financing activities during the fiscal years
ended December 31, 1993, 1994 and 1995 and for the six months ended June
30, 1996 were $859,846, $1,229,282, $3,167,850 and $17,252,234,
respectively, which consisted primarily of proceeds from the issuance of
debt and equity offset by redemptions of preferred and common stock and
repayments of debt.
Credit Agreement. On March 15, 1996, the Company entered into the
Credit Agreement with the Lenders, pursuant to which the Lenders agreed to
lend the Company up to $37,250,000. On March 15, 1996, the Company borrowed
$30,530,954 (out of a total Credit Agreement commitment of $37,250,000 )
from the Lenders. During the second quarter of 1996, the Company borrowed
an additional $1,692,500 against the Credit Agreement. The initial
borrowings under the Credit Agreement were used to complete the Paramount
and IPP acquisitions, to repay $8,503,405 of outstanding debt and
$3,173,931 of outstanding obligations under capital leases, to redeem the
10% Preferred, 8% Preferred, and 7% Preferred, and to pay related
transaction fees. The additional borrowings of $1,692,500 were used for an
acquisition deposit ($1,300,000) classified as a non-current asset and
working capital.
On September 13, 1996, concurrent with the acquisition of Amtel,
the Lenders amended the Credit Agreement, increasing the maximum borrowings
available under the Credit Agreement to $41,000,000. The Company then
borrowed an additional $8,776,546 and used $5,950,000 of the proceeds to
complete the Amtel and POA acquisitions and the remainder of the proceeds,
$2,826,546, for working capital and payment of certain related acquisition
expenses. As of September 30, 1996, borrowings of $41,000,000 were
outstanding and there was no additional borrowing availability under the
Credit Agreement.
The Credit Agreement consists of (i) the Revolving A Loans (as
defined therein) in the aggregate principal amount of $7,250,000, (ii) the
Revolving B Loans (as defined therein) in the aggregate principal amount of
$4,750,000 and (iii) the Term Loans (as defined therein) in the aggregate
principal amount of $29,000,000. The obligations under the Credit Agreement
are secured by a first priority lien on all of the Company's installed
telephones and other assets (other than the telephones acquired in the POA
acquisition).
The Credit Agreement requires monthly interest payments at the
Alternate Base Rate (as defined therein) plus 5% (13.25% at September 30,
1996). The Credit Agreement contains certain representations and
warranties, certain negative and affirmative financial covenants and
certain conditions and events of default which are customarily required for
similar financings. Such covenants include, among other things,
restrictions on the Company's ability to pay dividends, incur or permit to
exist debt, liens or lease obligations, make investments and capital
expenditures, dispose of assets and also include restrictions on the
activities of subsidiaries. Such financial covenants also require the
Company to maintain certain financial ratios including, among other things,
minimum net worth, working capital and EBITDA (as defined therein). The
Credit Agreement also contains a subjective acceleration clause which
states that in the event of a material adverse change in the business, as
determined by the Lenders, the Lenders can require prepayment of the debt
at their discretion. The Lenders have agreed to waive their right to
exercise this subjective acceleration clause through December 31, 1997.
Principal payments under the Credit Agreement commence April 1997,
and continue monthly and/or quarterly through June 1999 at which time the
remaining principal balance is due. The amount of the principal payment is
contingent upon numerous factors, including the borrowing base and cash flow
of the Company. Based on amounts borrowed under the Credit Agreement as of
September 30, 1996, the estimated principal payments due April 30, 1997
would be $2,972,222, with monthly principal payments of $222,222 thereafter
through December 31, 1997, and quarterly principal payments of $634,375
commencing September 30, 1997, increasing to $1,087,500 quarterly for 1998
and $1,268,750 at March 31, 1999.
Of the Term Loans outstanding under the Credit Agreement,
$29,000,000 can be converted into Series B Preferred at the ratio of 833
shares for each $100,000 in outstanding debt and accrued interest.
Additionally, in connection with the execution of the original Credit
Agreement on March 15, 1996, ING and Cerberus each received 102,412
warrants (204,824 warrants in total and referred to herein as the
"Lenders' Warrants"), which would collectively allow them to purchase
up to 204,824 shares of Series A Preferred at an exercise price of $0.20
per share. Each share of Series A Preferred is convertible into 20 shares
of the Company's Common Stock. See "Description of Capital Stock." ING and
Cerberus may separately exercise their warrants without any action of the
other party. The Company intends to repay all of the Revolving B Loans and
a portion of the Revolving A Loans outstanding under the Credit Agreement
with the net proceeds of this Offering.
Other. The redemption price for the 10% Preferred, 8% Preferred
and 7% Preferred consisted of cash payments aggregating $1,117,371 and
34,436.33 shares of 14% Preferred. In the aggregate, $6,269,487 of the
Company's outstanding obligations, including portions of the purchase price
for the IPP and Paramount acquisitions, was liquidated by issuing
107,918.19 shares of 14% Preferred. The $2,002,386 excess of the
redemption price of the preferred issues redeemed over their aggregate
carrying value was recorded as a reduction of earnings available to common
shareholders on March 15, 1996.
At September 30, 1996, long-term debt and obligations under
capital leases, consisted of: (i) related party debt (payable to the
Lenders and an officer of the Company), including the current portion and
excluding the portion allocated to the Lenders Warrants, of $35,807,084
compared to $1,732,500 at December 31, 1995, an increase of $34,074,384;
and (ii) other long-term debt, including the current portion, of
$1,820,620 as compared to $8,596,413 at December 31, 1995, a decrease of
$6,775,793. After giving pro forma effect to the debt associated with the
1996 Acquisitions, total long-term debt and obligations under capital
leases, including the current portion and the amount allocated to the
Lenders warrants, was $55,077,888 at September 30, 1996. The overall
increase is primarily attributable to debt incurred in connection with the
acquisitions of IPP, Paramount, POA and Amtel. The Company is actively
seeking additional financing to fund its acquisition strategy and the
effective integration, operation and expansion of the acquired businesses.
See "Risk Factors -- Need for Additional Financing."
On March 15, 1996, warrants to purchase 2,018,942 shares of Common
Stock ("Nominal Value Warrants") were issued in conjunction with the
acquisitions of IPP and Paramount, redemption of the 10% Preferred, 8%
Preferred and 7% Preferred, and conversion of certain debt of the Company
to the 14% Preferred. The warrants expire on March 13, 2001. An independent
appraiser has estimated the fair value market value of the Nominal Value
Warrants to be $4,974,673, using the Black-Scholes valuation model, of
which $3,886,139 (the amount attributable to the warrants provided to
related parties in connection with the redemption of the preferred shares
and the conversion of certain debt) was recorded in the caption,
contractual settlements and other unusual charges in the Company's
statement of operations for the six months ended June 30, 1996.
In 1995, the Company sold 602,003 shares of its Common Stock to
officers, directors, creditors and affiliates of the Company and to others,
including a predecessor of Southcoast Capital Corporation, the
Representative of the Underwriters, at prices ranging from $4.20 to $6.01
per share. See "Underwriting." Additionally, certain warrants and options
to purchase 660,506 shares of the Company's Common Stock at prices ranging
from $5.70 to $6.00 were granted in 1995.
On September 12, 1995, the Company borrowed $1,200,000 (which was
recorded net of the value of warrants issued of $349,000) from third party
investors pursuant to a 19 month credit agreement and made interest
payments at 12-1/2%. The proceeds were used for operating expenses and to
make certain employee severance payments. This debt was repaid on March 15,
1996 with borrowings under the Credit Agreement.
Management believes, but cannot assure, that the net proceeds to
the Company from the Offering, cash flow from operations, the proceeds of
the Credit Agreement and other financing alternatives will be sufficient
to meet the Company's cash requirements for working capital and its
obligations over the next twelve months.
BUSINESS
GENERAL
The Company is currently the eleventh largest independent pay
telephone operator in the United States. As of September 30, 1996, the
Company owned and operated more than 25,000 public pay telephones, of which
approximately 96% are located in 17 states. Almost half of the Company's
pay telephones are located in Florida, Texas and California, which are
three of the four most populous states. The Company's pay telephones are
located where significant demand exists for pay telephone services, such as
shopping malls, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals. The Company derives
substantially all of its revenues from calls placed from its pay telephones
through the deposit of coins ("coin calls") in its telephones as well as
from calling cards, credit cards, collect calls, third party billed calls
and dial-around calls (collectively, "non-coin calls"). On September 30,
1995 and 1996, the Company had approximately 8,275 and 25,468 installed pay
telephones, respectively, an increase of 17,193 pay telephones over such
one-year period. Such increase was primarily the result of a series of
acquisitions by the Company of 6 independent pay telephone companies. Such
acquisitions, together with the acquisition of World made in September
1995, had an aggregate cost of approximately $64.6 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company acquired 7,335 pay telephones (located primarily in
California, Colorado and Washington) from Amtel as of September 13, 1996.
The Company acquired the pay telephones in the Amtel acquisition for a
purchase price of $13 million, in a combination of cash and Common Stock.
The Company acquired 3,303 pay telephones (located primarily in Illinois,
Florida, Missouri and Virginia) from POA as of August 1, 1996. The Company
acquired the pay telephones in the POA acquisition, which was consummated
on September 16, 1996, for a purchase price of approximately $13 million,
in a combination of cash, Common Stock and the assumption of certain
liabilities.
After giving pro forma effect to the Acquisitions, the Company
would have achieved revenues of $59.6 million and $30.2 million for the
year ended December 31, 1995 and the six months ended June 30, 1996,
respectively, and EBITDA of $10.4 million and $6.5 million for the year
ended December 31, 1995 and the six months ended June 30, 1996,
respectively. On a pro forma basis, the EBITDA margin increased to 21.5%
for the six months ended June 30, 1996 from 17.4% for the year ended
December 31, 1995, which increase is due to the implementation of the
Company's strategy of lowering costs in acquired companies by eliminating
duplicate administrative and operational expenses of the acquired
companies. See "Pro Forma Financial Data."
In June 1995, Peter Graf was appointed Chairman of the Board of
Directors and in September 1995 was appointed Chief Executive Officer of
the Company. In September 1995, Stuart Hollander, Joseph Abrams, Aron
Katzman and Steven Richman were appointed to the board of directors of the
Company, and the majority of the existing board resigned at that time. The
new management team identified and implemented the business strategy set
forth under "--Business Strategy" below.
The Company was incorporated under the laws of the State of Ohio
on December 24, 1984. The Company's executive offices are located at 1127
Euclid Avenue, Suite 650, Cleveland, Ohio 44115-1601 and its telephone
number is (216) 241-2555.
BUSINESS STRATEGY
The Company's objective is to grow through additional acquisitions
and internally, thereby achieving economies of scale and cost savings. The
Company has implemented the following strategy to meet its objective:
Grow through acquisitions. The Company believes that there is a
significant opportunity to consolidate the highly fragmented independent
segment of the pay telephone industry. Accordingly, the Company maintains
an active acquisition program to acquire independent pay telephone
companies that are in or contiguous to its existing markets or that can
form the basis of a new cluster. The Company is actively seeking additional
financing to fund its acquisition strategy and the effective integration,
operation and expansion of the acquired businesses. See "Risk Factors--Need
for Additional Financing." On September 30, 1995 and 1996 , the Company
had approximately 8,275 and 25,468 installed pay telephones, respectively,
representing an increase of 17,193 pay telephones. The Company intends to
acquire additional installed pay telephones by the end of 1996. Management
believes that the Company's experience in completing acquisitions of
companies in the pay telephone industry and its experience in managing
national and regional accounts will be instrumental in identifying and
negotiating acquisitions as well as integrating the acquired businesses. In
addition, as the Company grows to become the dominant supplier of
independent pay telephone services in an area, "fill-in" and contiguous
acquisitions become less attractive to other potential acquirors as their
ability to create significant clusters is reduced. Moreover, the Company
believes that such growth will enhance its ability to negotiate more
favorable rates with long distance and operator services providers.
Facilitate internal growth. The Company intends to enhance its
sales and marketing efforts to achieve internal growth through increases in
the number of pay telephones owned. In evaluating locations for the
installation of public pay telephones, the Company generally conducts a
site survey to examine various factors, including population density,
traffic patterns, historical usage information and other geographic
factors.
Reduce operating costs. The Company believes that in addition to
facilitating additional acquisitions, the clustering of pay telephones
creates an opportunity to generate savings through reduced field service
and collection expenses, the closing of duplicate offices, reduction in
staff and general corporate overhead expenses and reduced expenses
associated with interLATA and intraLATA traffic. After giving pro forma
effect to the 1996 Acquisitions, the Company would have increased EBITDA
margins to 21.5% for the six months ended June 30, 1996 from 17.4% for the
year ended December 31, 1995 through economies achieved by both an increase
in scale and in geographical concentration.
Achieve brand recognition. The Company seeks to promote and
achieve recognition of its products and services by posting on all of its
pay telephones the "PhoneTel" label. In addition, all of the Company's
marketing materials display the "PhoneTel" name and logo. The Company
believes that achieving brand recognition will facilitate its expansion
strategy as well as enhance recognition and awareness of the Company's
products and services through advertisements in trade magazines.
Form strategic alliances. As part of its strategy to continue to
reduce operating costs, the Company outsources its long distance service
and operator service operations to a number of subcontractors that are
OSPs, principally Intellicall. The Company intends to continue its
strategic alliances with Intellicall, together with other OSPs, and the
suppliers of its pay telephone equipment as its market presence becomes
more dominant. By achieving close working relationships with its OSPs and
suppliers, the Company believes that it would be in a position to negotiate
agreements with such parties on pricing and other items that are more
favorable.
Use of state-of-the-art technology. The Company's pay telephones
are "smart" telephones and are operated by means of advanced microprocessor
technology that enables the telephones to perform substantially all of the
necessary coin-driven functions independent of the Company's central
office. Unlike "dumb" telephones used by most BOCs and other LECs, smart
telephones enable the Company to determine each telephone's operability and
need for service as well as its readiness for collection of coin revenues.
In addition, rate changes and other software-dependent functions can also
be performed internally from the central office without dispatching service
technicians to individual pay telephones. As a result, the Company can
increase the number of operating telephones it owns while significantly
reducing the costs of checking telephones, maintenance and coin collection.
Provide superior customer service. The Company strives to maximize
the number of its telephones that are operational at any one time and thereby
retain existing customers and attract new ones. Accordingly, the Company
offers both advanced telecommunications technology and trained field
technicians to ensure superior customer service. The Company aims to repair
malfunctions within 24 hours of their occurrence.
INDUSTRY OVERVIEW
Today's telecommunications marketplace was principally shaped by
the 1984 court-directed divestiture of the BOCs by AT&T. The AT&T
divestiture and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T divestiture, including the
authorization of the connection of competitive or independently-owned
public pay telephones to the public switched network, have resulted in the
creation of new business segments in the telecommunications industry. Prior
to these developments, only BOCs or other LECs owned and operated pay
telephones. Of the approximately 2.2 million pay telephones operated in the
United States in 1996, the American Public Communications Counsel estimates
that approximately 83% are operated by BOCs, LECs and other long distance
service providers and approximately 17% are operated by independent pay
telephone companies. Within the United States, there are currently
approximately 350,000 pay telephones owned or operated by independent pay
telephone companies, of which approximately 25 companies each own or
operate more than 1,500 pay telephones. Management believes that the highly
fragmented nature of the independent pay telephone industry, which is
characterized by a large number of small providers typically lacking the
financial resources and economies of scale of the major independent public
pay telephone companies, provides a significant number of attractive
acquisition opportunities for the Company.
As part of the AT&T divestiture, the United States was divided
into geographic areas known as Local Access Transport Areas or "LATAs."
BOCs and the GTE Operating Companies ("GTE") provide telephone service that
both originates and terminates within the same LATA ("intraLATA") pursuant
to tariffs filed with and approved by state regulatory authorities. Until
recently, BOCs and GTE were prohibited from offering or deriving revenues
or income from services between LATAs ("interLATA"). However, as a result
of the February 8, 1996 enactment of the Telecommunications Act, the BOCs
and GTE may now provide interLATA telecommunications services and, may
compete for the provision of interLATA toll calls, upon receipt of all
necessary regulatory approvals and the satisfaction of applicable
conditions. The Telecommunications Act permits the BOCs to provide
virtually all "out of region" long distance telecommunications services
immediately upon the receipt of any state and/or federal regulatory
approvals otherwise applicable to long distance service. For the BOCs and
GTE to provide interLATA toll service within the same states in which they
also provide local exchange service ("in-region service"), prior FCC
approval must be obtained. This FCC approval to provide "in-region" service
is conditioned upon, among other things, a showing by a BOC that, with
certain limited exceptions, facilities-based local telephone competition is
present in its market, that it has entered into at least one
interconnection agreement, and that it has satisfied the 14-point
"competitive checklist" established by the Telecommunications Act. In
addition, the Telecommunications Act is designed to facilitate the entry of
any entity (including cable television companies and utilities) into both
the competitive local exchange and long distance telecommunications
markets. As a result of the Telecommunications Act, long distance
companies (such as AT&T and MCI), cable television companies, utilities and
other new competitors should be able to provide local exchange service in
competition with the incumbent LEC. This should ultimately increase the
number and variety of carriers that provide local access line service to
independent public pay telephone providers such as the Company.
Long distance companies, such as AT&T, MCI and Sprint, provide
interLATA services and, in some circumstances, may also provide long
distance service within LATAs. An interLATA long distance telephone call
generally begins with an originating LEC transmitting the call from the
originating telephone to a point of connection with a long distance
carrier. The long distance carrier, through its owned or leased switching
and transmission facilities, transmits the call across its long distance
network to the LEC servicing the local area in which the recipient of the
call is located. This terminating LEC then delivers the call to the
recipient.
Prior to 1987, coin calls were the sole source of revenues for
independent public pay telephone operators. Long distance calling card and
collect calls from these public pay telephones were handled exclusively by
AT&T. Beginning in 1987, a competitive operator service system developed
which allowed OSPs, including long distance companies such as MCI and
Sprint, to handle non-coin calls and to offer independent public pay
telephone companies commissions for directing operator assisted or calling
card calls to them.
Generally, pay telephone revenues may be generated through: (i)
coin calls; (ii) operator service calls ("0+" i.e., credit card, collect
and third number billing calls, and "0-", i.e. calls transferred by the
LECs to the OSPs requested by the caller); and (iii) access code calls
using carrier access numbers (e.g., "10XXX" codes, "1-800" or "950"). Each
of these categories can be applied among local, intraLATA toll, intrastate
interLATA, interstate interLATA and international levels. Section 276 of
the Telecommunication Act and the FCC implementing rules (both of which
were recently enacted) will permit independent pay telephone providers to
generate revenues from all intrastate, interstate and international calls,
including subscriber 800 calls or equivalent (e.g., 888 calls), access card
calls made to access a preferred Inter-Exchange Carrier and debit card calls.
ACQUISITION STRATEGY
The Company believes that the existence of many small independent
public pay telephone providers presents acquisition opportunities for the
Company. The Company believes that acquisitions of other independent pay
telephone companies and management's experience in identifying and
negotiating potential acquisitions and integrating acquired companies into
the Company's ongoing operations may substantially accelerate its rate of
growth and profitability. The Company intends to continue this acquisition
program upon consummation of this Offering.
In reviewing potential acquisition candidates, the Company
considers various factors, including:
Historical and Pro Forma Financial Performance. The Company
reviews the historical revenues and cash flows of the pay telephone
providers to be acquired and analyzes their prospective profitability based
on pro forma considerations, such as lower service and collection expenses,
lower general and administrative expenses, and the more favorable terms and
conditions which the Company may be able to obtain from OSPs and long
distance carriers.
Location and Economies of Scale. The Company considers the
geographic proximity of the pay telephones to be acquired to the Company's
existing markets and the extent to which the acquisition would provide the
Company with economies of scale through more efficient operation and
maintenance of a larger number of pay telephones within a geographic
region. In addition, the Company seeks to acquire independent pay telephone
companies in new markets where the Company believes it can create a new
cluster and achieve internal growth through increases in the number of pay
telephones as well as through additional acquisitions. The Company also
assesses the resources that would be necessary to integrate effectively and
efficiently the target company into the Company's existing operations,
including the staff required to service the new pay telephones. To date,
the Company has targeted companies that operate primarily in the
southeastern, midwestern and western areas of the United States.
Property Agreements and Condition of Equipment. The Company
reviews the revenue sharing terms and commissions, expiration date and
transferability of related site location agreements with location
providers, the line charges required to be paid for the pay telephones and
the type and condition of the proposed equipment to be acquired. The
Company also conducts a physical survey of the proposed pay telephones to
be acquired.
Regulatory Matters. The Company reviews the applicable regulatory
framework in each state where the Company is considering the acquisition of
public pay telephones as well as any potential changes in regulatory
matters that may affect the profitability of operating public pay
telephones in such states.
The Company believes that it has a competitive advantage over
other potential acquirors because of management's experience in identifying
and negotiating potential acquisitions and in integrating acquired
companies into the Company's ongoing operations.
The following table summarizes the recent acquisitions completed
by the Company as of September 16, 1996:
Number of
Installed
Date of Pay Telephones Primary
Acquired Company Acquisition Acquired Areas Served
---------------- ----------- -------------- ------------
S>
Amtel Communications Services (1) September 13, 1996 7,335 California; Washington;
Oregon; Colorado
Payphones of America, Inc. (2) August 1, 1996 3,303 Missouri; Illinois;
Virginia; Florida
IPP (3) March 15, 1996 2,101 North Carolina;
South Carolina; Tennessee
Paramount Communications Systems,
Inc. (4) March 15, 1996 2,528 Florida
Public Telephone Corporation (5) October 16, 1995 1,200 Illinois; Michigan
World Communications, Inc. (6) September 22, 1995 3,237 Missouri; Illinois;
Florida
Alpha Pay Phones - IV L.P. (7) March 25, 1994 2,155 Texas
------
Total Pay Telephones: 21,959
======
- ----------------
(1) The purchase price paid by the Company for Amtel consisted of $7.0
million in cash and $6.0 million in Common Stock. Such purchase price
also included 1,100 pay telephones in inventory.
(2) The purchase price paid by the Company for POA consisted of $500,000
in cash, 166,666 shares of Common Stock, assumption of $7.75 million
of capital lease obligations, $3.6 million in notes payable to the
sellers, the assumption of $.2 million in liabilities, two five-year
non-competition and consulting agreements with two of the sellers for
an aggregate of $307,264.
(3) The purchase price paid by the Company for IPP consisted of $3.5
million in cash, 555,589 shares of Common Stock, 5,453 shares of 14%
Preferred, 117,785 Nominal Value Warrants and the assumption of $1.8
million in liabilities, of which $1.6 million was repaid by the Company
on March 15, 1996.
(4) The purchase price paid by the Company for Paramount consisted of $9.6
million in cash, 8,333 shares of 14% Preferred, 179,996 Nominal Value
Warrants and the assumption of $0.7 million in liabilities which were
repaid by the Company on March 15, 1996.
(5) The purchase price paid by the Company for Public Telephone consisted
of 224,879 shares of Common Stock and the assumption of $2.8 million
in liabilities.
(6) The purchase price paid by the Company for World consisted of 402,500
shares of Common Stock, 530,534 shares of 10% Non-Voting Preferred and
the assumption of $6.9 million in liabilities. All shares of the 10%
Non-Voting Preferred were converted into 884,214 shares of the
Company's Common Stock on June 28, 1996.
(7) The purchase price paid by the Company for Alpha consisted of $2.3
million in cash, a $1.1 million note payable to the sellers
and the assumption of $2.2 million in liabilities.
In addition, the Company is in preliminary discussions to acquire
three other independent pay telephone companies for the purchase of
approximately 16,400 pay telephones by the end of 1996. There can be no
assurances, however, as to the availability of financing to complete such
acquisitions or that any of such acquisitions will be completed. In
addition, the Company may not complete any such acquisition without
obtaining the approval of the Lenders pursuant to the Credit Agreement.
PRODUCTS AND SERVICES
Installation of Pay Telephones
The Company's primary business is the installation of public pay
telephones on a revenue sharing basis. The Company installs public pay
telephones in properties owned or controlled by others where significant
demand exists for pay telephone services, such as shopping malls,
convenience stores, service stations, grocery stores, restaurants and truck
stops, at no cost to the property owner. The Company then services and
collects money from these telephones and pays the location owner a share of
the pay telephone's revenues. Typically, the Company enters into contracts
for this service with the property owner or occupant for a period of up to
10 years. However, the duration of the contract and the commission
arrangement depends on the location, number of telephones and revenue
potential of the account. As of September 30, 1996, the Company had more
than 25,000 installed pay telephones in service.
Substantially all of the Company's public pay telephones accept
coins as well as other forms of payment for local or long-distance calls.
The Company's public pay telephones generate coin revenues primarily from
local calls. State regulatory authorities typically set the maximum rate
that may be charged by BOCs and other LECs and independent pay telephone
companies although this will change over the next year as states follow the
FCC's mandate and deregulate the price of a local coin call. See
"--Governmental Regulations." The Company charges the same rate as the BOCs
and other LECs for local calls in substantially all of the territories in
which the Company's pay telephones are located. In most territories that
charge is $0.25, although in some jurisdictions the charge is less than
$0.25 per local call and in a limited number of other jurisdictions, which
have already deregulated local calls, the charge is $0.35. Whereas local
coin calls have traditionally been provided for an unlimited call duration,
some jurisdictions in which the Company's pay telephones are located have
begun to allow call timing, which requires the deposit of an additional
amount after a specified period. The Company pays local line and usage
charges to LECs for all of its installed public pay telephones. These line
charges cover basic service to the telephone as well as the transport of
local coin calls. These charges will change over the next year as the FCC
and the states implement Section 276 of the Telecommunications Act. See
"--Governmental Regulations." The Company believes these changes will have
an overall favorable impact on its business.
Operator-Assisted Long Distance Services
The Company subcontracts its long distance and operator service
operations to a number of subcontractors, including Intellicall, which is
the primary provider of such services, AT&T, BellSouth, Opticom and
Conquest. The Company receives commissions from these services based on the
volume of calls made as well as on the amount of revenues generated per
call. The Company also receives additional revenues from long distance
carriers for dial-around access from non-coin calls made from its public
pay telephones to gain access to a long distance company other than one
designated by the Company. In May 1992, the FCC ruled that independent pay
telephone providers are entitled to dial-around compensation on an interim
basis at a fixed rate of $6.00 per telephone per month for interstate
dial-around calls. Similarly state regulatory authorities, including
Illinois, Florida, Georgia and South Carolina, have implemented intrastate
dial-around compensation programs for independent public pay telephones.
Other states are currently considering intrastate dial-around compensation
programs for independent public pay telephones. Recently, AT&T and Sprint
proposed to provide their respective share of dial-around compensation by
paying $0.25 per call in lieu of their respective portion of the flat
monthly rate payment amounts. The two proposals were approved by the FCC.
In 1995, the FCC proposed rules to require other long distance callers to
pay compensation on a per-call basis. The recently enacted Section 276 of
the Telecommunications Act requires the FCC to establish a per-call
compensation plan to ensure that pay telephone service providers are fairly
compensated for all calls made from their telephones. In an order released
on September 20, 1995, the FCC implemented new rules that replace the
current $6.00 flat fee per telephone per month with an interim $45.85 flat
fee per telephone per month. In October 1997, the flat fee will be replaced
by a per-call compensation mechanism. See "--Governmental Regulations."
Management believes that both the interim plan and the per-call
compensation plan will generate significant additional revenues for the
Company.
MANAGEMENT INFORMATION SYSTEMS
The Company is committed to utilizing information technology to
support the management of its pay telephone business. The Company's
management information systems have enabled the Company to enhance customer
service and to achieve strong operational and financial controls by
enabling management to react quickly and efficiently to critical
information collected from the Company's pay telephones.
The custom operational software used to manage the Company's pay
telephone business is an internally developed application named Prophecy.
Prophecy is a complete and comprehensive system of data collection and
analysis that supports daily operations in the field and provides the
Company with management data. The Prophecy software allows the Company's
management information systems to accept direct output from the polling
operations of the individual pay telephones, analyze the data and produce
daily operational reports for the Company's field offices. In addition,
Prophecy develops summaries of management information.
The Prophecy software is scalable and is able to support the
varying proprietary protocols of the individual manufacturers of its pay
telephones. The Company currently purchases its pay telephones from Protel,
Inc., Intellicall and Elcotel, Inc. at comparable prices. The Company's
polling operations are supported by the software provided by the
manufacturers of the pay telephones owned by the Company. The Company
believes that its sophisticated, technologically advanced and scalable
management information systems support its expansion strategy by enabling
the Company to integrate efficiently and effectively newly acquired
companies.
The Company's pay telephones are "smart" telephones and are
operated by means of advanced microprocessor technology that enables the
telephones to perform substantially all the necessary coin-driven functions
independent of the Company's central office. Unlike the "dumb" telephones
used by most BOCs and other LECs, the Company's pay telephones are equipped
with an audit feature which is linked by modem to the Company's central
computer. Each pay telephone is called daily by the Company's central
office to determine its operability or need for service as well as its
readiness for collection of coin revenues. Rate changes and other
software-dependent functions can also be performed internally from the
central office without dispatching service technicians to individual pay
telephones. These polling processes are accomplished on a series of high
performance personal computers that are dedicated to the nightly processing
of pay telephone information.
SALES AND MARKETING
The Company relies on independent sales representatives as well as
its internal sales force to market its products and services. The Company
believes that developing its own sales force results in lower attrition
while increasing and improving the skill level of the representatives. The
Company also believes that the development of its own sales force has
allowed the Company to interact with and sell to key executives and
decision makers, resulting in increased revenues for the Company. The
Company also markets its products and services through advertising in trade
publications, booths at trade shows, and referrals from existing accounts.
The Company directs a major portion of its marketing efforts for
public pay telephones to multi-station accounts, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck
stops and bus terminals (stations). These multi-station accounts have the
advantages of greater efficiency in collection and maintenance. The Company
also solicits high volume, single station accounts, where there is a
demonstrated high demand for pay telephone service. The Company generally
will not install a pay telephone unless the site will generate a minimum
level of revenues, based on the Company's site evaluations.
In evaluating locations for the installation of public pay
telephones, the Company generally conducts a site survey to examine various
factors, including population density, traffic patterns, historical usage
information and other geographical factors.
The Company installs its public pay telephones pursuant to
agreements with property owners and occupants, which provide for a revenue
sharing arrangements based on revenues generated from the pay telephone.
The percentage of revenues paid by the Company to the location provider is
generally fixed for the term of the agreement and typically ranges from 15%
to 25% of gross revenues or approximately 20% of net revenues per pay
telephone. The term of a revenue sharing agreement generally ranges from
five to ten years and provides the Company with an option to renew for an
additional period ranging from five to ten years. The Company can generally
terminate an agreement on 30-days' prior notice to the location provider if
the public pay telephone does not generate sufficient total revenues for
two consecutive months. Furthermore, the failure of the Company to remedy a
default under certain of its property agreements within 30 days after
notice may give the location provider the right to terminate such
agreement.
CUSTOMERS
The Company's pay telephone operations are diversified on both a
geographical and customer account basis. Currently, it operates pay
telephones in 39 states through agreements with both multi-station
customers such as shopping malls, convenience stores, service stations and
grocery stores as well as with high volume single station customers.
In 1992, the Company entered into a ten-year agreement with Simon
DeBartolo, pursuant to which the Company manages the pay telephone
equipment for properties owned and managed by Simon DeBartolo. The Company
derived approximately 15% and 8% of its total revenues from its agreement
with Simon DeBartolo for the year ended December 31, 1995 and for the six
months ended June 30, 1996, respectively. As the Company expands its
installed pay telephone base through additional acquisitions, it expects
that the percentage of total revenues derived from Simon DeBartolo will
continue to decline. Other than Simon Debartolo, no single customer
generated more than 5% of the Company's revenues for the year ended
December 31, 1995 and the six months ended June 30, 1996. See "Risk
Factors--Dependence on Significant Customer."
GOVERNMENTAL REGULATIONS
The operations of the public pay telephone industry are regulated
primarily by the public service or utility commission of the various states
and by the FCC. In particular, the Company must obtain approvals to operate
public pay telephones from the public utility commissions of most states in
which the Company operates. In addition, from time to time, legislation is
enacted by Congress or the various state legislatures that affects the
telecommunications industry generally and the pay telephone industry
specifically. Court decisions may also have a significant effect on the pay
telephone industry. Changes in existing laws and regulations as well as the
creation of new ones, applicable to the activities of the Company or other
telecommunications businesses (including the extent of competition, the
charges of providers of interexchange and operator services and the
implementation of new technologies), may have a material adverse effect on
the Company's business, results of operations or financial condition.
State. Since the AT&T break-up, state regulatory authorities have
primarily been responsible for regulating intrastate pay telephone
services. Public utility commissions in most states have established rules
and regulations that govern the provision of public pay telephone services,
including certification or registration, notice to end users of the
identity of the service provider in the form of postings or verbal
announcements, requirements for rate quotes upon request, call routing
restrictions, and maximum price limitations. While not necessarily uniform,
these rules and regulations generally establish minimum technical and
operational characteristics to assure that public interest considerations
are met. To date, each state has had the right to regulate pricing and
other aspects of the operations of customer-owned pay telephones and all
intrastate telephone service. In some jurisdictions, in order for the
Company to operate its own pay telephones, it may be necessary to become
certificated and have tariffs filed. The procedure and length of time for
the process varies from state to state. Until recently, in many states only
local telephone companies were permitted to process local and/or intraLATA
operator assisted calls. The Company has obtained the requisite regulatory
approvals to provide public pay telephone service in all states in which it
provides such services and complies with applicable state regulations
governing such services.
The recently enacted Section 276 of the Telecommunications Act
gives the FCC authority to adopt rules affecting intrastate telephone
services and to preempt state rules and regulations inconsistent with those
adopted by the FCC. As discussed in more detail under the caption "--
Federal," the FCC adopted rules on September 20, 1996 that will preempt
certain existing state regulations and will limit the scope of future state
regulation of pricing and other aspects of pay telephone operation. In
particular, states are required to:
(a) deregulate the price of a local phone call;
(b) eliminate all intrastate subsidies for BOC and LEC pay
phone services;
(c) enact rules governing the provision of "public interest pay
phones;" and
(d) conduct a thorough review of all existing state
pay phone rules to ensure that those rules do
not conflict with the intent of Section 276 and
the FCC implementing rules.
Federal. Until recently, the FCC has not actively regulated the
provision of intrastate pay telephone services by independent pay telephone
companies. However, the Company believes that the recent enactment of
Section 276 of the Telecommunications Act will have a significant impact on
the FCC's role in governing and regulating the provision of intrastate pay
telephone services. In addition, the FCC actively regulates the interstate
and foreign telecommunications market, which affects the Company's
operations in numerous ways.
Until the enactment of Section 276, the FCC had regulated pay
telephones primarily in the context of its regulation of OSPs, and in
particular, through its implementation of the Telephone Operator Consumer
Services Improvement Act (the "Operator Services Act"). The Operator
Services Act was enacted in October 1990 and established various
requirements for companies that provide operator services and call
aggregators (which send calls to these OSPs). The requirements of the
Operators Services Act include call branding, information posting, rate
quoting and the filing of informational tariffs. The Company must comply or
ensure compliance with certain billing and consumer information
requirements. For example, the Company is not permitted to or to allow its
OSP to bill consumers for unanswered calls, bill for calls that do not
reflect the location or the origination of the call, or bill the call from
any location other than from where the call is made, unless the consumer's
consent is explicitly obtained. Furthermore, the Company and its OSP must
identify the OSP presubscribed to the pay telephone to end users in the
form of postings at or near the telephone or verbal announcements in
accordance with the FCC's requirements. The Company also must allow
consumers to access the interexchange carrier of their choice by entering a
specific code number, i.e., a "10XXX," "800" or a "950" number. The Company
believes that it complies with the provisions of the Operator Services Act
as a call aggregator (i.e. one who makes telephones available to the public
for long distance calls using an OSP). The Operator Services Act also
requires the FCC to take action to limit the exposure of pay telephone
companies to undue risk of fraud.
The Operator Services Act also directed the FCC to consider the
need to prescribe compensation to owners of independent pay telephones for
dial-around access to a long distance company other than the one selected
by the independent pay telephone company. In May 1992, the FCC ruled that
independent pay telephone companies are entitled to compensation for these
calls. Due to the complexity of establishing an accounting system for
determining compensation for these calls, the FCC has temporarily set
compensation at $6.00 per pay telephone per month, to be allocated among
long distance companies earning annual toll revenues for interstate calls
in excess of $100 million per year in accordance with their market share.
Similarly, state regulatory authorities, including, for example, Illinois,
Florida, Georgia and South Carolina, have implemented intrastate
dial-around compensation programs for independent pay telephone providers
and other states are considering such programs. In 1995, Section 276 of the
Telecommunications Act was enacted, which requires the FCC to establish a
per-call compensation plan to ensure that all pay telephone service
providers are fairly compensated for all calls, both intrastate and
interstate. See "--Compensation."
In 1992, the FCC initiated a rulemaking in which it proposed to
implement the "billed party preference" system ("BPP") for 0+ interLATA
traffic from pay telephones and other aggregator locations such as hotels
and motels. Under BPP, operator-assisted long distance traffic would be
carried automatically by the OSP preselected by the party being billed for
the call. Under the current presubscription system, unless an access code
is dialed, 0 + calls from pay telephones are routed to the OSP
presubscribed to the pay telephones. Under BPP as proposed, 0 + calls would
be completed by an OSP with no relationship to the pay telephone provider,
and thus would eliminate commissions paid by the presubscribed OSP to the
pay telephone provider on 0 + calls.
In June 1996, the FCC issued a Second Further Notice of Proposed
Rulemaking in CC Docket No. 92-77 in which it tentatively concluded that
the costs of BPP outweigh the benefits, and proposed to not implement BPP.
Instead, the FCC proposed to (i) establish benchmarks for OSP rates based
upon a composite of the rates charged by the three largest interexchange
carriers (AT&T, MCI, and Sprint), which composite is intended to reflect
rates in line with what consumers expect to pay, and (ii) require OSP's
that charge rates and/or fees imposed by location owners whose total is
greater than a given percentage above the benchmarks, to disclose the
applicable charges for the call to consumers orally before connecting a
call. Alternatively, the FCC proposed to require all OSP's to disclose
their rates on all 0+ calls.
In September 1996, the FCC adopted rules which implement the pay
telephone provisions of Section 276 of the Telecommunications Act. Key
elements of the rulemaking include:
(a) Compensation. Currently independent pay telephone providers are not
compensated on a per-call basis for toll-free calls, such as "800"
calls and debit card calls, both domestic and international. The new
FCC rules establish a three-phase compensation plan to ensure that pay
telephone providers are fairly compensated for all calls originating
from pay telephones, with the exception of emergency calls and
telecommunications relay service calls for hearing-disabled
individuals. For one year, the current $6.00 flat fee per telephone
per month will be replaced by an interim $45.85 flat fee per telephone
per month. After one year, the flat fee will be replaced by a per-call
compensation mechanism. For the first year thereafter, the per-call
payment shall be $.35; thereafter, the per-call rate shall be equal to
the local coin call rate for each location. Obtaining fair
compensation for these dial-around calls is particularly important
since the use of access codes to reach a preferred long distance
carrier has recently gained significant exposure and customer
acceptance, as evidenced by marketing campaigns of the larger
interexchange carriers, such as AT&T's "1-800-CALLATT" and MCI's
"1-800-COLLECT." BOCs are not permitted to receive compensation for
dial-around calls until they have complied with the Computer III
non-structural safeguards and have ceased subsidizing their pay
telephone operations (see below).
The Section 276 requirement that pay telephone operators receive fair
compensation for all pay telephone calls also applies to local coin
drop calls. To implement the requirement, the new FCC rules mandate a
two phase transition to market-based rates for local coin drop calls.
During the first year-long phase, states may continue to set the local
coin rate in the same manner as they currently do, but they are also
free to adopt market-based rates at any time during this one-year
period. In addition, states are required during this period to review
and remove, if necessary, those state regulations, such as entry and
exit restrictions, that affect pay telephone competition and are
inconsistent with the Telecommunications Act and the new FCC rules.
In the second phase, which will begin in October 1997, the market will
be allowed to set the rate for local coin calls in each state, unless
the state can demonstrate to the satisfaction of the FCC that there
are market failures within the state that would not allow market-based
rates.
(b) BOC Subsidization. BOCs and other LECs have traditionally included a
pay telephone cost element in determining the access charges imposed
upon carriers to terminate long distance calls. Section 276 and the
new FCC rules require LECs to eliminate these and other subsidies, to
reduce their interstate access charges, to operate their pay
telephones as detariffed customer premises equipment and to provide
independent pay telephone providers all functionalities used by the
LEC in its own delivery of pay telephone service. In contrast to the
past, when the LEC imposed a subscriber line charge on pay telephone
providers but not on their own pay telephones, the FCC now requires
that any subscriber line charge and tariffed network services charges
apply equally to both LEC and independent pay telephones.
(c) Non-Structural Safeguards. The FCC adopted certain non-structural
safeguards in its Computer III inquiry which were designed to prevent
BOCs from using their incumbent market power in an anti-competitive
manner. These safeguards generally allow the BOCs to provide certain
services on an integrated basis (i.e. directly rather than through a
separate subsidiary) provided that BOCs (1) allow nondiscriminatory
access to their network features and functionalities; (2) restrict use
of customer proprietary network information; (3) subscribe to certain
network information disclosure rules; (4) do not discriminate in the
provision, installation, and maintenance of services and reporting and
(5) adopt certain cost accounting safeguards. In its rulemaking, the
FCC applied these safeguards to the provision of pay telephone
services by the BOCs, and found that further non-structural safeguards
were unnecessary. The FCC also decided to reclassify BOC pay telephone
service as a "nonregulated activity" so that costs from pay telephone
activities would be separated from regulated non-pay telephone
accounts. Consistent with this approach, in a rulemaking initiated in
July 1996 to implement certain accounting safeguards under the
Telecommunications Act, the FCC proposed to apply accounting
safeguards identical to those adopted in Computer III to prevent the
subsidization of BOC pay telephone services by non-pay telephone
revenues.
(d) InterLATA Presubscription. In the past BOCs were not permitted to
compete in the interLATA marketplace. Section 276 permits BOCs to
negotiate with location providers and select interLATA long distance
service providers for their pay telephones, unless the FCC determines
that it is not in the public's interest. In its rulemaking, the FCC
concluded that a BOC should be permitted to negotiate for the right to
select the interLATA carrier serving its pay telephones, but not until
its plan to comply with the Computer III non-structural safeguards has
been approved by the FCC.
(e) IntraLATA Presubscription. Until recently, in almost every state only
the LEC has been able to be "presubscribed" to a telephone for local
and intraLATA toll calls, including at a pay telephone.
"Presubscription" refers to an arrangement whereby a call is
automatically connected to a pre-selected carrier, unless another
carrier's access code is dialed. According to the FCC, intraLATA
presubscription (the ability to presubscribe a carrier other than the
BOC or LEC) has been ordered to become available in eighteen states.
Section 276 provides that all pay telephone service providers have the
right to "negotiate with the location provider on the location
provider's selecting and contracting with, and subject to the terms of
any agreement with the location provider, to select and contract with,
the carriers that carry intraLATA calls from their payphones." The
FCC's new rules give all pay telephone service providers (including
BOCs and independent providers such as the Company) the right to
negotiate with location providers concerning the intraLATA carrier.
(f) Public Interest Pay Telephones. Section 276 requires the FCC to ensure
that pay telephones provided in the interest of public health, safety,
and welfare are maintained and supported equitably. The new FCC rules
adopt a narrow definition of "public interest payphone," and leave to
the discretion of the states how to fund their respective public
interest pay telephone programs, so long as the funding mechanism (1)
"fairly and equitably" distributes the costs of such program, and (2)
does not involve the use of subsidies prohibited by Section
276(b)(1)(B) of the Telecommunications Act. Each state's funding
review must be completed by October 1998.
The Company believes that Section 276 and the implementing
regulations adopted by the FCC will likely have an overall positive effect
on the pay telephone industry in general and the Company in particular.
However, the final rules adopted by the FCC and Section 276 have not yet
been interpreted by the courts, and there can be no assurance regarding the
effect that the rules and policies ultimately adopted thereunder will have
on the Company.
SERVICEMARK
The Company uses the Servicemark "PhoneTel" on its telephones,
letterhead and in various other manners. On November 22, 1988, the United
States Patent and Trademark Office granted the Company a Certificate of
Registration for the Servicemark "PhoneTel" for providing
telecommunications services for a period of twenty years.
COMPETITION
The public pay telephone industry is, and can be expected to
remain, highly competitive. While the Company's principal competition comes
from BOCs and other LECs, the Company also competes with other independent
providers of public pay telephone services, major OSPs and interexchange
carriers. In addition, the Company competes with providers of cellular
communications services and personal communications services (wireless),
which provide an alternative to the use of public pay telephones.
Furthermore, pursuant to the recently enacted Section 276 of the
Telecommunications Act and the FCC's implementing regulations, BOCs and GTE
are permitted to negotiate with location providers and select interLATA
long distance service providers for their pay telephones See
"--Governmental Regulations." This will enable BOCs and GTE to generate
revenues from a new service, as well as to compete with independent pay
telephone providers for locations to install their pay telephones by
offering location providers higher commissions for long distance calls than
those currently offered by independent pay telephone providers. This
competition for locations may have a material adverse effect on the
Company's business, results of operations and financial condition.
Some of the other public pay telephone companies have pursued an
acquisition strategy similar to the Company's and frequently compete with
the Company for the most favorable pay telephone contracts and sites.
Although the Company is one of the largest independent public pay telephone
service providers, most LECs and interexchange carriers and some
independent public pay telephone companies with which the Company competes
have substantially greater financial, marketing and other resources than
the Company. In addition, in response to competition from public pay
telephone companies, many LECs have increased their compensation
arrangement with location providers by offering higher commissions.
However, due to the long-term nature of the Company's contracts with
property owners and occupants, the Company believes such competition will
have minimal impact on existing pay telephone services.
The Company believes the principal competitive factors in the
public pay telephone industry are (i) commission payments to location
providers, (ii) the ability to serve accounts with locations in several
LATAs or states and (iii) the quality of service provided to location
owners and pay telephone users. The Company believes that it is
well-positioned to compete effectively in the pay telephone industry.
EMPLOYEES
The Company had 168 employees at September 16, 1996, of whom 124
were employed to support field operations. The Company considers its
relations with its employees to be satisfactory. None of the employees of
the Company or the acquired companies are a party to agreements with any
unions.
PROPERTIES
The Company's principal office is located at 1127 Euclid Avenue,
Suite 650, Cleveland, Ohio, where the Company leases approximately 15,200
square feet of space at a monthly rental of $12,728. The lease is scheduled
to terminate in December 1997. The monthly rent will increase to $15,200 in
1997. The lease also contains five, one year renewal options. As of
September 30, 1996, the Company also maintains service and sales offices in
leased premises in Fort Lauderdale, Orlando, Ocala, and Tampa, Florida; Las
Vegas, Nevada; Farmers Branch, Texas; Springfield, St. Louis, and Kansas
City, Missouri; Chicago, Illinois; Livonia, Michigan; Hilton Head, South
Carolina; Knoxville, Tennessee; San Diego, Hayward and Santa Fe Springs,
California; Kent, Washington; Denver, Colorado; Cicero, Indiana;
Lincolnton, North Carolina; Portland, Oregon; and Newport News, Virginia,
at an aggregate monthly rental of $39,958.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings as to
which the outcome would have a material adverse effect on the Company's
business, results of operations or financial condition.
MANAGEMENT
The following table sets forth the names and ages (as of September
30, 1996) of the members of the Company's Board of Directors and its
executive officers, and the positions with the Company held by each.
Name Age Position
- ---- --- --------
Peter G. Graf 59 Chairman,
Chief Executive Officer
and Director
Tammy L. Martin 32 Executive Vice President,
Chief Administrative
Officer, General Counsel
and Secretary
Nickey B. Maxey 40 Chief Operating Officer and
Director
Gary Pace 45 Senior Vice President,
Acquisitions and
Regulatory Matters
Richard Kebert 50 Chief Financial Officer
Stuart Hollander 66 Director
Joseph Abrams 60 Director
George H. Henry 43 Director
Aron Katzman 58 Director
Steven Richman 53 Director
PETER G. GRAF has been Chairman and a Director of the Company
since July 1, 1995 and was elected Chief Executive Officer of the Company
in September 1995 and spends a substantial portion of his time fulfilling
such duties. Mr. Graf is licensed as an attorney and as a certified public
accountant and serves as an officer and/or director of various
privately-held companies and the managing partner of an accounting firm.
From 1991 to September 1995, Mr. Graf served as Vice Chairman of USA Mobile
Communications Holdings, Inc.
TAMMY L. MARTIN was elected Executive Vice President and Chief
Administrative Officer of the Company in April 1996. Prior to that, Ms.
Martin has been General Counsel and Secretary of the Company since
September 1995 and served as associate legal counsel for the Company during
1993 and 1994. Prior to joining the Company, Ms. Martin was in private
legal practice from 1992 to 1993 and was self-employed as an accountant
from 1990 to 1992.
NICKEY B. MAXEY has served as Chief Operating Officer and a
Director of the Company since April 1996. Mr. Maxey was founder and
President of International Pay Phones, Inc., a Tennessee company and
International Pay Phones, Inc., a South Carolina company, both of which
were merged into the Company in March 1996. Mr. Maxey has also owned and
operated Resort Hospitality Services, Inc., a telecommunications company
since 1990.
GARY PACE has been Senior Vice President of the Company since its
merger with World in September 1995. Prior to such merger, Mr. Pace was
President of World since 1989.
RICHARD KEBERT has served as Chief Financial Officer of the
Company since September 1996. Prior to joining the Company in 1996, Mr.
Kebert was an independent consultant. From 1994 to 1996, he was Vice
President - Finance and Administration of Accordia of Cleveland, Inc. For
12 years prior thereto, Mr. Kebert held several senior management positions
with Mr. Coffee, inc., including Vice President - Administration and
Secretary. Mr. Kebert is licensed as a certified public accountant.
STUART HOLLANDER has been a Director since September 1995. Mr.
Hollander was founder, principal owner and Chairman of the Board of World
from 1986 until it was merged into the Company in 1995. Prior to that he
was Executive Vice President of Hollander & Company, Inc., one of the
largest distributors of consumer electronics in the U.S., representing
Zenith Radio Corporation; the founder and an officer of Lesley Acceptance
Corporation; Chairman and a Member of the Board of Jaeger of Canada, Inc.;
and a member of the Board of Pioneer Bank and Trust Company.
JOSEPH ABRAMS has been a Director since September 1995. Mr. Abrams
is also a director of Merisel, Inc. a public company that distributes micro
computer hardware and software, and Spectrum Signal Processing, Inc., a
public company that specializes in digital signal solutions. Mr. Abrams was
a co-founder of and served as the President of AGS Computers from 1967 to
1991 . From 1991 to 1996, Mr. Abrams has been a private Investor.
GEORGE H. HENRY has been a Director since April 1993. Mr. Henry
has been the managing director of G. Howard Associates, Inc., a private
investment firm, since 1986. Mr. Henry is also on the Board of Directors of
Biovail International Corporation and a trustee of Mitchell College.
ARON KATZMAN has been a Director since September 1995. Mr. Katzman
is President of New Legends, Inc., a country club/residential community in
the St. Louis, Missouri area, and Chairman and Chief Executive Officer of
Decorating Den of Missouri, a company engaged in the selling of decorating
franchises in Missouri. Previously, Mr. Katzman was founder and a former
Director of Medicine Shoppe, Inc., a franchisor of pharmacies, and Chairman
and Chief Executive Officer of Roman Company, a manufacturer and
distributor of fashion costume jewelry, from 1984 until it was sold in
1994. Mr. Katzman was formerly a director and officer of World, which was
merged into the Company in September 1995.
STEVEN RICHMAN has been a Director since September 1995. Mr.
Richman is the principal owner of, and has served as the Chairman and
President of, Fabric Resources International for more than the past five
years. Mr. Richman was the co-founder and an officer of Cable Systems USA;
and an officer at Cellular Systems USA and a director of USA Mobile
Communications Holdings, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has a Compensation Committee
and an Audit Committee. Although neither committee had held any meetings in
1995, both committees are scheduled to meet in the fourth quarter of 1996.
The Audit Committee is expected to meet on a quarterly basis in 1997.
The Compensation Committee has the authority to make decisions
with respect to executive compensation matters. Joseph Abrams (Chairman of
the Compensation Committee), George Henry and Steven Richman are the
members of the Compensation Committee.
The Audit Committee has the authority to recommend to the Board of
Directors the independent accountants to audit the Company's financial
statements, to meet with the independent accountants and to review the
Company's financial statements, results of audits and fees charged. Aron
Katzman (Chairman of the Audit Committee) and Peter Graf are the members of
the Audit Committee.
COMPENSATION OF DIRECTORS
The Company compensates directors for serving on the Board and
reimburses them for any expenses incurred as a result of Board of Directors
meetings. The Board of Directors had approved an annual fee of $5,000 for
non-employee directors. During 1995, Mr. Henry received a fee $5,000 which
was paid in Common Stock of the Company valued at the market price at the
close of date of issuance.
EXECUTIVE COMPENSATION
On September 22, 1995, the Company entered into a consulting
agreement with Stuart Hollander, World's former Chairman, pursuant to the
terms of the acquisition of World. The agreement with Mr. Hollander
entitles him to annual salaries of $125,000 and $135,000 during the two
year term of the agreement.
On September 22, 1995 the Company also entered into an employment
agreement with the Company's Senior Vice President, Gary Pace, pursuant to
the terms of the acquisition of World. The agreement with Mr. Pace entitles
him to annual salaries of $110,000 and $120,000, as well as certain
bonuses, during the two year term of the agreement.
On September 1, 1996, the Company also entered into an employment
agreement with the Company's Chief Financial Officer, Richard Kebert. The
agreement with Mr. Kebert entitles him to an annual salary of $120,000, as
well as a guaranteed minimum bonus of $15,000 during the eighteen-month
term of the agreement.
The following table sets forth a summary of all compensation of
the Company's Chief Executive Officer and all other executive officers
whose total compensation exceeded $100,000 per year for any year in the
three year period ended December 31, 1995 (the "named executive officers").
SUMMARY COMPENSATION TABLE
Name and
Principal
Position Year Annual Compensation Long-Term Compensation
- ------------------ ------ --------------------------------- --------------------------------------------------
Awards Payouts
--------------------- --------------------------
Other Long-
Annual Restricted Term All Other
Compen- Stock Options/ Incentive Compensa-
Salary Bonus sation Award(s) SARs Payouts tion
($) ($) ($) ($) (#) ($) ($)
----- ----- ----- ----- --- ----- ----
Peter G. Graf 1995 -- -- -- -- 47,583 -- --
Chief Executive
Officer, Chairman
and Director 1994 -- -- -- -- 24,705 -- --
Jerry H. Burger 1995 $ 74,293 $13,600 $13,600(1) -- 62,500 -- $212,000(2)
Former Chief 1994 $ 40,000 -- -- -- -- -- --
Executive Officer 1993 $ 42,000 $75,000 $ 5,917(3) 43,333(4)
Bernard Mandel 1995 $147,544 $ 9,760 $ 9,760(5) -- 41,666 -- $146,500(6)
Former President, 1994 $ 88,894 -- $ 4,154(3) -- __ -- --
Chief Operating 1993 $ 83,269 $25,000 $ 3,698(3) -- 10,000(7) -- --
Officer and
Secretary
Daniel J. Moos 1995 $ 95,000 $ 1,442 $12,800(8) -- 54,999(9) -- --(10)
Former Executive
Vice President,
Chief Financial
Officer, and
Treasurer
- --------------------
1 Represents the value of 2,833 shares paid to Mr. Burger for services
provided.
2 On September 15, 1995, the Company and Mr. Burger entered into a
separation agreement which provided for the termination of the
employment agreement and the resignation of Mr. Burger as a director,
officer and employee of the Company. Pursuant to the separation
agreement, the Company agreed to pay Mr. Burger $650,000 in
installments, with the final amount paid March 15, 1996. All other
compensation represents payment under the separation agreement with Mr.
Burger and related expenses excluding payment of $445,000, plus accrued
interest of $4,291, paid on March 15, 1996.
3 Value of non-business use of Company automobile.
4 26,000 options expired in 1995.
5 Represents the value of 2,033 shares paid to Mr. Mandel for services
provided.
6 On September 15, 1995, the Company and Mr. Mandel entered into a
separation agreement which provided for the termination of the
employment agreement and the resignation of Mr. Mandel as a director,
officer and employee of the Company. Pursuant to the separation
agreement, the Company agreed to pay Mr. Mandel the amount of $450,000
in installments, with the final amount paid March 15, 1996. All other
compensation represents payment under the separation agreement with Mr.
Mandel, excluding payment of $308,500, plus accrued interest of $2,976,
paid on March 15, 1996.
7 Expired in 1995.
8 Represents the value of 2,666 shares paid to Mr. Moos for services
provided.
9 33,000 options not vested at December 31, 1995.
10 On July 29, 1996, the Company and Mr. Moos entered into a separation
agreement which provided for the termination of his employment agreement
and the resignation of Mr. Moos as an executive vice president, chief
financial officer and treasurer of the Company, effective August 2,
1996. Pursuant to the separation agreement, the Company agreed to pay
Mr. Moos the amount of $325,000 in installments, of which $25,000 has
been paid, with the final amount to be paid on the earlier to occur of
(i) December 31, 1996 and (ii) the consummation of a debt or equity
offering by the Company in an amount equal to or greater than $10
million.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
Percent of Total
Number of Options/
Securities Warrants/SARs Exercise
Underlying Granted to or Base
Name and Options/SARs Employees in Price
Principal Position Granted (#) Fiscal Year ($/SH) Expiration Date
- -------------------------------- ------------------ ------------------- --------------- -------------------
Peter G. Graf 41,833 6.3% $5.70 December 31, 1997
Chief Executive Offi-
cer, Chairman and Director 5,750 0.9% $6.00 August 15, 2000
Jerry H. Burger 62,500(1) 9.5% $6.00(2) August 31, 1997
Former Chief
Executive Officer
Bernard Mandel 41,666(3) 6.3% $6.00(2) August 31, 1997
Former President,
Chief Operating Officer
and Secretary
Daniel J. Moos 54,999(4) 8.3% $6.00(2) August 2, 1998
Former Executive
Vice President, Chief
Financial Officer
and Treasurer
- ------------------------------------------
(1) Excludes 38,306 additional options issued pursuant to anti-dilution
provisions.
(2) Does not reflect anti-dilutive repricing of options on June 4, 1996,
which lowered the exercise price to $3.72 per share.
(3) Excludes 25,537 additional options issued pursuant to anti-dilution
provisions.
(4) Excludes 33,709 additional options issued pursuant to anti-dilution
provisions.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
SHARES (#) ($)
NAME AND ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
PRINCIPAL POSITION ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------- ------------- ------------- ------------- -------------
Peter G. Graf -0- -0- 75,064 $31,316
Chief Executive Offi-
cer, Chairman and
Director
Jerry H. Burger -0- -0- 127,361 $31,840
Former Chief Execu-
tive Officer
Bernard Mandel -0- -0- 66,666 $91,667
Former President,
Chief Operating Offi-
cer and Secretary
Daniel J. Moos -0- -0- 54,999 $13,750
Former Executive
Vice President,
Chief Financial
Officer and Treasurer
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock owned by each Director of the
Company, each person known by the Company to own, beneficially more than 5%
of the outstanding Common Stock, the named executive officers, all
directors and officers as a group and the Selling Shareholders as of
September 30, 1996 and as adjusted to reflect the sale of the shares in the
Offering. Unless otherwise indicated, the number of shares of Common Stock
owned by the named shareholders assumes the exercise of the warrants or
options that are exercisable within 60 days, the number of which is
separately referred to in a footnote, and the percentage shown assumes the
exercise of such warrants or options and assumes that no warrants or
options held by others are exercised. This information is based upon
information furnished by such persons and statements filed with the
Securities and Exchange Commission and other information known by the
Company.
BENEFICIAL BENEFICIAL
OWNERSHIP OWNERSHIP
NAME AND ADDRESS PRIOR TO THE AFTER THE
OF BENEFICIAL OWNER OFFERING OFFERING
- ------------------------------- ------------------------------ --------------------------
Shares
Share to Share
Directors Number Percentage be Sold Number Percentage
- --------- ------ ---------- ------- ------ ----------
Peter G. Graf(1)(16)............ 1,029,376 12.89% -- 1,029,376 %
Director, Chairman &
Chief Executive Officer
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Nickey B. Maxey(2)(16).......... 406,184 5.30% -- 406,184 %
Chief Operating Officer and
Director
1127 Euclid Avenue, Suite 650
Cleveland, OH 44115-1601
Steven Richman(3)(16)........... 258,535 3.31% -- 258,535 %
Director
9 Beech Lane
Kings Point, NY 11024
Joseph Abrams(4)(16)............ 195,536 2.50% -- 195,536 %
Director
85 Old Farm Road
Bedminister, NJ 07921
Aron Katzman(5)(16)............. 244,664 3.14% -- 244,664 %
Director
10 Layton Terrace
St. Louis, MO 63124
Stuart Hollander(6)............. 323,559 4.24% -- 323,559 %
Director
32 Lake Forest
St. Louis, MO 63117
George H. Henry(7)............. 360,376 4.70% -- 360,376 %
Director
6860 Sunrise Court
Coral Gables, FL 33133
Named Executive Officers
Jerry Burger(8)................ 239,930 3.06% -- 239,930 %
Former Chief Executive Officer
27040 Cedar Road
Beachwood, OH 44122
Bernard Mandel(9)............... 100,824 1.31% -- 100,824 %
Former President, Chief
Operating
Officer & Secretary
8233 Whispering Pines Drive
Russell, OH 44072
Daniel J. Moos(10).............. 100,707 1.30% -- 100,707 %
Former Executive Vice
President, Chief Financial
Officer & Treasurer
7399 Stow Road
Hudson, OH 44236
Executive Officers and
Directors.................. 2,961,473 34.62% -- 2,961,473 %
as a group (10 persons)(11)(17)
Selling Shareholders
Internationale Nederlanden
(U.S.) Capital
Corporation (12)(18)............ 4,464,907 36.89% 250,000 4,214,907 %
Capital Corporation
135 East 57th Street
New York, NY 10022
Cerberus Partners, L.P.(13)(18). 4,464,907 36.89% 250,000 4,214,907 %
950 Third Avenue, 20th floor
New York, NY 10022
Other 5% Beneficial Owners
ACI-HDT Supply Company, et al.,
as Debtors-In-Possession (14)..... 2,162,163 28.3% -- 2,162,163 %
5452 Oberlin Drive, Suite B
San Diego, CA 92121
Southcoast Capital Corp-
oration(15)(17)............... 475,108 5.90% -- 475,108 %
277 Park Avenuek, NY 10172
J&C Resources(16)(17)............ 486,860 6.25% -- 486,860 %
216 Daniel Webster Highway
S. Nashua, NH 03060
- -------------------------
(1) Includes warrants to purchase 75,064 shares of Common Stock through
March 13, 2001, and 14% Preferred which is convertible
through June 30, 2000 into 269,454 shares of Common Stock.
(2) Includes 14% Preferred which is convertible through June 30, 2000 into
31,262 shares of Common Stock.
(3) Includes warrants to purchase 126,830 shares of Common Stock through March
13, 2001, 4,444 shares of Common Stock held by his spouse, and 14%
Preferred which is convertible through June 30, 2000 into 44,909 shares
of Common Stock.
(4) Includes warrants to purchase 125,997 shares of Common Stock through
March 13, 2001, and 14% Preferred which is convertible through June 30,
2000 into 62,873 shares of Common Stock.
(5) Includes warrants to purchase 95,128 shares of Common Stock through March
13, 2001, and 14% Preferred which is convertible
through June 30, 2000 into 47,469 shares of Common Stock.
(6) Includes 148,864 shares of Common Stock held by his spouse and 6,266
shares of Common Stock held by other family members.
(7) Includes options to purchase 35,000 shares of Common Stock through
October 9, 1998.
(8) Includes options to purchase 210,430 shares of Common Stock through
August 31, 1997. Beneficial owner has anti-dilution rights pursuant
to stock option agreements or other rights which will require adjust-
ments to the number of shares beneficially owned as a result of
certain transactions which occurred during the period from July 1,
1996 to September 30, 1996.
(9) Includes options to purchase 97,541 shares of Common Stock through
August 31, 1997 and 1,250 shares of Common Stock held by his
spouse. Beneficial owner has anti-dilution rights pursuant to stock
option agreements or other rights which will require adjustments to
the number of shares beneficially owned as a result of certain
transactions which occurred during the period from July 1, 1996 to
September 30, 1996.
(10) Includes options to purchase 88,708 shares of Common Stock which
expire August 2, 2000. Beneficial owner has anti-dilution rights
pursuant to stock option agreements or other rights which will
require adjustments to the number of shares beneficially owned as a
result of certain transactions which occurred during the period
from July 1, 1996 to September 30, 1996.
(11) Includes beneficial ownership of Common Stock described above with
respect to Messrs. Graf, Maxey, Richman, Abrams, Katzman, Hollander,
Henry, and beneficial ownership of Common Stock of Mr. Pace and Ms.
Martin.
(12) Includes Lenders' Warrants to purchase the Series A Preferred,
which is immediately convertible into 2,048,240 shares of Common
Stock and certain debt under the Credit Agreement which is
convertible into Series B Preferred, which is immediately
convertible into 2,416,667 shares of Common Stock. ING may exercise
a portion of its Lender Warrants in order to sell Shares of Common
Stock in the Offering.
(13) Includes Lenders' Warrants to purchase the Series A Preferred,
which is immediately convertible into 2,048,240 shares of Common
Stock and certain debt under the Credit Agreement which is
convertible into Series B Preferred, which is immediately
convertible into 2,416,667 shares of Common Stock. Cerberus may
exercise a portion of its Lender Warrants in order to sell Shares
of Common Stock in the Offering.
(14) Represents the shares of Common Stock given by the Company to ACI-HDT
Supply Company and its affiliates (collectively referred to herein as
Amtel) as consideration in the Amtel acquisition. Each of the
Amtel entities is a Debtor-In-Possession in separate Chapter 11
reorganization proceedings pending before the Untied States Bankruptcy
Court for the Southern District of California (the "Bankruptcy Court")
identified as Case Nos. 95-08253-All. Pursuant to the Asset Purchase
Agreement dated as of June 26, 1996, as amended, between the Company
and Amtel, Amtel has agreed to distribute the shares of Common Stock to
its creditors after a final plan of reorganization is confirmed by order
of the Bankruptcy Court.
(15) Includes warrants to purchase 310,660 shares of Common Stock through
March 13, 2001, and 14% Preferred which is convertible through June 30,
2000 into 107,782 shares of Common Stock.
(16) Represents 14% Preferred which is convertible through June 30, 2000
into 148,200 shares of Common Stock.
(17) See "Certain Transactions" for information with respect to the 14%
Preferred and the Nominal Value Warrants.
(18) Cerberus may sell fewer shares of Common Stock. In such event, ING
will sell additional shares of Common Stock such that the aggregate
number of shares of Common Stock sold by the Selling Shareholders
equals 500,000.
CERTAIN TRANSACTIONS
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942
shares of Common Stock expiring March 13, 2001 were issued in conjunction
with the acquisitions of IPP and Paramount, redemption of the 10%
Preferred, 8% Preferred, and 7% Preferred, and conversion of certain debt
of the Company into the 14% Preferred. See "Description of Capital
Stock--Preferred Stock--14% Preferred" for a description of the terms of
the 14% Preferred. Concurrently with their exchange of debt and preferred
stock for the 14% Preferred, the following directors, executive officers
and security holders of 5% or more of the Common Stock received the amount
of 14% Preferred and Nominal Value Warrants shown below.
VALUE OF
DEBT/PREFERRED
SURRENDERED AND
STATED VALUE OF 14% NUMBER OF WARRANTS
PREFERRED ISSUED ISSUED
------------------- ------------------
Peter G. Graf................................... $1,500,000 539,989
Chief Executive Officer
Chairman and Director
Southcoast Capital Corporation.................. 600,000 143,994
Joseph Abrams................................... 350,000 125,997
Director
Aron Katzman.................................... 264,250 95,128
Director
Steven Richman.................................. 250,000 89,998
Director
Nickey Maxey.................................... 174,032 62,650
Chief Operating Officer and Director
J&C Resources................................... 825,000 296,994
5% Owner
A predecessor of Southcoast Capital Corporation, the
Representative of the Underwriters, was paid fees consisting of (i)
$600,000 in cash, (ii) $600,000 of 14% Preferred and (iii) Nominal Value
Warrants to purchase 143,944 shares of Common Stock of the Company for the
provision of financial services in connection with the Credit Agreement. In
addition, a predecessor of Southcoast Capital Corporation received 56,666
shares of Common Stock and warrants to purchase 166,666 shares of the
Company's Common Stock at an exercise price of $6.00 per share for services
rendered in connection with the acquisition of World and certain bridge
financing.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000
shares of Common Stock, $.01 par value per share, and 10,000,000 shares of
Preferred Stock, without par value, except as further designated by the
Board of Directors (the "Preferred Stock"). Upon completion of the Offering
there will be outstanding (i) _________ shares of Common Stock, (ii)
116,316.05 shares of 14% Cumulative Redeemable Convertible Preferred Stock,
$60 stated value per share (the "14% Preferred"), (iii) Lenders' Warrants
to purchase 204,824 shares of Series A Preferred, which are then
immediately convertible into 4,096,480 shares of Common Stock, (iv) 983,805
Nominal Value Warrants, which are exercisable into the same number of
shares of Common Stock, (v) 830,351 additional warrants which are
exercisable into the same number of shares of Common Stock and, (vi)
650,746 stock options for Common Stock, all of which are immediately
exercisable. In addition, approximately $29,000,000 of indebtedness
outstanding under the Credit Agreement may be converted at Lenders' option
into approximately 241,667 shares of Series B Preferred, which are then
immediately convertible into 4,833,333 shares of Common Stock.
The following summary is qualified in its entirety by the
provisions of the Company's Articles of Incorporation, as amended (the
"Articles of Incorporation"), a copy of which has been incorporated by
reference as an exhibit to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of shareholders and they do not
have any cumulative voting rights except as permitted by Ohio law.
Accordingly, holders of a majority of the outstanding shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefore, subject to preferential
dividend rights of any outstanding series of Preferred Stock. Upon the
liquidation, dissolution or winding-up of the Company, holders of Common
Stock are entitled to receive ratably the net assets of the Company
available for distribution after the payment of all debts and liabilities
of the Company and the liquidation preferences which may be granted to
holders of the Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of
Common Stock are, and the shares offered hereby will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of the 14% Preferred, the
Series A Preferred, the Series B Preferred and any other series of
Preferred Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to issue from time to time up
to an aggregate of 10,000,000 shares of Preferred Stock, in one or more
series, without any further shareholder approval. Each such series of
Preferred Stock shall have such number of shares, designations,
preferences, voting powers, qualifications and special or relative rights
or privileges as shall be determined by the Board of Directors, which may
include, among others, dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights.
The authority of the Board to create and issue at its discretion
any series of Preferred Stock without shareholder approval, could adversely
affect the voting power and other rights of the holders of Common Stock.
The ability of the Board to issue Preferred Stock, while providing
flexibility in connection with financings, acquisitions and other corporate
purposes, could have the effect of discouraging an attempt by another
person or entity to acquire control of the Company through a merger, sale
of the Company's assets or similar transaction, since the issuance of
Preferred Stock could be used to dilute the share ownership of a person or
entity seeking to obtain control of the Company. Additionally, future
issuances of any series of Preferred Stock could result in additional
classes of shares with conversion features and preferences over the Common
Stock with respect to dividends and distributions in liquidation and could
also result in the dilution of net income and book value per share of the
Company.
The Board of Directors has designated the following outstanding
series of Preferred Stock pursuant to its authority under the Articles of
Incorporation:
Series A Preferred
The Company has 250,000 shares of Series A Preferred authorized,
none of which have been issued. Lenders' Warrants for the purchase of
204,824 shares of Series A Preferred at an exercise price of $0.20 per
share were issued by the Company in connection with the Credit Agreement.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The Series A Preferred shares are pari passu with the Common Stock
with respect to the payment of dividends. If a dividend or other
distribution is declared by the Board of Directors to be paid to holders of
the Common Stock, then simultaneously with the payment of such dividend or
making of such distribution, and as a condition precedent to its right to
do so, the Board of Directors will pay or distribute to the holders of the
Series A Preferred the same dividends or distributions as such holders
would have been entitled to receive if such holders had converted their
shares of Series A Preferred into Common Stock prior to the record date
used by the Board of Directors for determining the holders of Common Stock
entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series A Preferred is
pari passu with the Series B Preferred and senior to the Common Stock and
any other series of Preferred Stock. Accordingly, upon the liquidation,
dissolution or winding up of the Company, holders of the Series A Preferred
will be entitled to receive, on a ratable and pari passu basis with the
holders of the Series B Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any payment to
holders of Common Stock or any other series of Preferred Stock, a
liquidation preference of $0.20 per share plus accrued and unpaid dividends
to the date of payment.
Holders of the Series A Preferred have the right, at any time, to
convert each share of Series A Preferred into 20 shares of fully paid and
nonassessable Common Stock, subject to certain antidilution adjustments and
regulatory restrictions applicable to bank holding companies.
Except as provided by law, the holders of Series A Preferred have
no voting rights.
Series B Preferred
The Company has 250,000 shares of Series B Preferred authorized,
none of which have been issued. Term Loans of $29,000,000 outstanding under
the Credit Agreement may be converted into Series B Preferred at the ratio
of 833 shares of Series B Preferred for each $100,000 of outstanding debt
and accrued interest. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Series B Preferred shares are pari passu with the Common Stock
with respect to the payment of dividends. If a dividend or other
distribution is declared by the Board of Directors to be paid to holders of
the Common Stock, then simultaneously with the payment of such dividend or
making of such distribution, and as a condition precedent to its right to
do so, the Board of Directors will pay or distribute to the holders of the
Series B Preferred the same dividends or distributions as such holders
would have been entitled to receive if such holders had converted their
shares of Series B Preferred into Common Stock prior to the record date
used by the Board of Directors for determining the holders of Common Stock
entitled to receive such dividend or distribution.
With respect to liquidation preferences, the Series B Preferred is
pari passu with the Series A Preferred and senior to the Common Stock and
any other series of Preferred Stock. Accordingly, upon the liquidation,
dissolution or winding up of the Company, holders of the Series B Preferred
will be entitled to receive, on a ratable and pari passu basis with the
holders of the Series A Preferred, out of the assets of the Company legally
available for distribution to its stockholders before making any payment to
holders of Common Stock or any other series of Preferred Stock, a
liquidation preference of $120 per share plus accrued and unpaid dividends
to the date of payment.
Holders of the Series B Preferred have the right, at any time, to
convert each share of Series B Preferred into 20 shares of fully paid and
nonassessable Common Stock, subject to certain antidilution adjustments and
regulatory restrictions applicable to bank holding companies.
Except as provided by law, the holders of Series B Preferred have
no voting rights.
14% Preferred
The Company has 200,000 shares of 14% Preferred authorized of
which 116,316.05 shares were issued at September 30, 1996. Holders of the
14% Preferred are entitled to receive dividends payable in additional
shares of 14% Preferred at a quarterly rate of 0.035 shares per share of
14% Preferred outstanding, on the first business day of each April, July,
October and January, commencing April 1, 1996. Dividends on the outstanding
shares of 14% Preferred accrue, whether or not declared. Unless full
cumulative dividends on all shares of 14% Preferred outstanding have been
paid, no redemption or fund for such redemption may be authorized, no
dividend (other than a dividend payable in Common Stock or any other class
of stock ranking junior to the 14% Preferred as to dividends and upon
liquidation) or other distribution may be declared or paid on any class of
the Company's stock ranking junior to the 14% Preferred as to dividends or
as to liquidation preferences. However, the holders of at least 50% of the
outstanding shares of 14% Preferred may vote to approve a redemption.
With respect to liquidation preferences, the 14% Preferred is
junior to the Series A Preferred and the Series B Preferred and is senior
to the Common Stock and any other series of Preferred Stock. Accordingly,
upon the liquidation, dissolution or winding up of the Company, holders of
the 14% Preferred will be entitled to receive out of the assets of the
Company legally available for distribution to its stockholders after making
payment to the holders of the Series A Preferred and the Series B Preferred
and before making any payment to holders of Common Stock or any other
series of Preferred Stock, a liquidation preference of $60.00 per share.
Holders of the 14% Preferred have the right, at any time, to
convert each share of 14% Preferred, including any accrued and unpaid
dividend shares, into 10 shares of fully paid and nonassessable Common
Stock, subject to certain antidilution adjustments.
The 14% Preferred is mandatorily redeemable by the Company on June
30, 2000, and is redeemable at any time prior thereto at the Company's
option, in each case, at a redemption price of $60 per share. Holders of
the 14% Preferred have 20 days from receipt of notice of a redemption by
the Company to convert their 14% Preferred shares into Common Stock.
Except as provided by law, the holders of the 14% Preferred have
no voting rights.
From time to time, the Board of Directors has designated other
series of Preferred Stock, none of which are currently outstanding.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of September 30, 1996, the Company has reserved 12,551,876
shares of Common Stock for issuance under the following circumstances: (i)
exercise of warrants to purchase 204,824 shares of Series A Preferred at
$0.20 per share, immediately convertible into 4,096,480 shares of Common
Stock; (ii) conversion of 116,316.05 shares of 14% Preferred into 1,163,161
shares of Common Stock; (iii) exercise of 983,805 Nominal Value Warrants;
(iv) exercise of 830,351 warrants at prices ranging from $5.70 to $15.75
per share; (v) exercise of 650,746 stock options at prices ranging from
$2.63 to $19.50 per share; and (vi) conversion of $29,000,000 of
outstanding debt under the Credit Agreement and accrued interest into
241,667 shares of Series B Preferred that are immediately convertible into
4,833,333 shares of Common Stock.
REGISTRATION RIGHTS
Holders of the 14% Preferred, the Lenders' Warrants, the Nominal
Value Warrants and other warrants and options exercisable for shares of
Common Stock and certain existing holders of Common Stock who in the
aggregate own or have the right to acquire an aggregate of approximately
13,005,110 shares of Common Stock (the "Registrable Securities"), have
entered into registration rights agreements with the Company. These
registration rights agreements provide that when the Company proposes to
register the sale of shares of Common Stock under the Securities Act for
its own account or otherwise, holders of Registrable Securities are
entitled to include their shares in such registration, subject to the right
of any managing underwriter of any such offering to exclude some or all of
the Registrable Securities from such registration and to certain other
conditions. In addition to such incidental registration rights, certain
holders of Registrable Securities have the right to demand registration
under the Securities Act of their Registrable Securities. The Company has
agreed that in the event of any registration of Registrable Securities that
it will bear all registration expenses, other than those which certain
registration rights agreements had assigned to the shareholders, and will
indemnify the holder thereof against certain liabilities incurred in
connection with such registration, including liabilities arising under the
Securities Act.
The Company has obtained waivers of the foregoing registration
rights in connection with the Offering from the holders of approximately
92% of the Registrable Securities having such piggyback registration rights
as a result of the filing of the Registration Statement of which this
Prospectus forms a part (including the Selling Shareholders). However, in
order to satisfy its obligations under the registration rights agreements,
the Company intends to file a shelf registration statement to register
under the Securities Act the sale of all of the Registrable Securities.
Notwithstanding the filing of such shelf registration statement, the
Selling Shareholders and certain other holders of Registrable Securities
have agreed not to transfer, sell or otherwise dispose of such shares,
without the consent of Southcoast Capital Corporation, for the periods
described under the caption "Shares Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is
Huntington Trust.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have
outstanding ________ shares of Common Stock, of which the ________ shares
sold in this Offering and _____ shares which were "restricted securities"
(as discussed below) and sold pursuant to the exemption from registration
provided by Rule 144 under the Securities Act, will be freely tradeable
without restrictions or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which will be
subject to the resale limitations of Rule 144 under the Securities Act. As
defined in Rule 144, an affiliate of an issuer is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by
or is under common control with, such issuer, and generally includes
members of the Board of Directors and senior management.
As of September 26, 1996, 6,417,483 shares (the "Restricted
Shares") were deemed "restricted securities" under Rule 144 in that they
were originally issued and sold by the Company in private transactions in
reliance upon exemptions under the Securities Act. The Restricted Shares
may not be sold except in compliance with the registration requirements of
the Securities Act or pursuant to an exemption from registration, such as
the exemption provided by Rule 144 under the Securities Act.
In general, Rule 144 as currently in effect allows a shareholder
who has beneficially owned Restricted Shares for at least two years
(including persons who may be deemed "affiliates" of the Company under Rule
144) to sell a number of shares within any three-month period that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately ______ shares after giving effect to this Offering) or (ii)
the average weekly trading volume in the Common Stock during the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner and notice of sale
and the availability of public information about the Company. A shareholder
(or shareholder whose shares are aggregated) who is not an "affiliate" of
the Company at any time during the 90 days immediately preceding a sale,
and who has beneficially owned his shares for at least three years (as
computed under Rule 144), is entitled to sell such shares under Rule 144
without regard to the volume and manner of sale limitations described
above.
The Company and its directors and executive officers have agreed
not to offer, sell, contract to sell, grant any option or other right for
the sale of, or otherwise dispose of any shares of Common Stock in any
manner prior to the expiration of 180 days after the date of this Prospectus
without the prior written consent of Southcoast Capital Corporation.
As of September 30, 1996, options and warrants to purchase
2,464,902 shares of Common Stock were issued and outstanding, all of which
were immediately exercisable on such date. In addition, at September 30,
1996, an aggregate of 10,092,974 shares of Common Stock have been reserved
for issuance pursuant to the conversion of shares of the Company's Series A
Preferred, Series B Preferred and 14% Preferred. Holders of the Company's
options, warrants and convertible preferred stock and certain holders of
the Company's Common Stock have entered into registration rights agreements
with the Company and have demand and piggyback registration rights
necessary under certain circumstances. The Company has obtained waivers of
such registration rights in connection with the Offering from the holders
of approximately 92% of the Registrable Securities that had piggyback
registration rights as a result of the filing of the Registration Statement
of which this Prospectus forms a part. However, in order to satisfy its
obligations under such registration rights agreements, the Company intends
to file a shelf registration statement to register under the Securities Act
approximately 13,005,110 shares of Common Stock including the shares
issuable upon the exercise or conversion of such options, warrants and
convertible preferred stock. Upon effectiveness of the shelf registration
statement, all of such shares of Common Stock, when issued, will be
eligible for sale without restriction under the Securities Act. However,
the Selling Shareholders (who hold approximately 69% of the Registrable
Securities) have agreed not to transfer, sell or otherwise dispose of
shares of Common Stock (except in the Offering) without the consent of
Southcoast Capital Corporation for a period of 6 months commencing on the
date of the consummation of the Offering, with sales permitted for the 12
months thereafter on a limited basis as agreed upon by with Southcoast
Capital Corporation. In addition, holders of approximately 24% of the
Registrable Securities have agreed not to transfer, sell or otherwise
dispose of such shares for a period of 180 days commencing on the date of
the consummation of this Offering without the consent of Southcoast Capital
Corporation.
No prediction can be made of the effect, if any, that sales of
shares under Rule 144 or the availability of shares for sale will have on
the market price of the Common Stock prevailing from time to time after the
Offering. The Company is unable to estimate the number of shares that may
be sold in the public market under Rule 144, because such amount will
depend on the trading volume in, and market price for, the Common Stock and
other factors. Nevertheless, sales of substantial amounts of shares in the
public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. See "Underwrit-
ing."
UNDERWRITING
The Underwriters named below, for whom Southcoast Capital
Corporation is acting as the representative (the "Representative"), have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement (the "Underwriting Agreement"), to purchase ____ shares of Common
Stock from the Company and 500,000 shares of Common Stock from the Selling
Shareholders. The number of shares of Common Stock that each Underwriter
has agreed to purchase is set forth opposite their names below. The nature
of the obligations of the Underwriters is such that, if any of such shares
are purchased, all must be purchased.
NUMBER OF
UNDERWRITERS SHARES
Southcoast Capital Corporation............................ ------------
------------
Total......................................... ============
The Underwriters propose initially to offer the shares of Common
Stock offered hereby to the public at the price to public set forth on the
cover page of this Prospectus. The Underwriters may allow a concession to
selected dealers who are members of the National Association of Securities
Dealers, Inc. ("NASD") not in excess of $___ per share, and the
Underwriters may allow, and such dealers may reallow, to members of the
NASD a concession not in excess of $___ per share. After this Offering, the
price to public, the concession and the reallowance may be changed by the
Underwriters.
The Company has granted an option to the Underwriters, exercisable
within 45 days after the date of this Prospectus, to purchase up to an
aggregate of _______ additional shares of Common Stock at the price to
public, less underwriting discount, set forth on the cover page of this
Prospectus. The Underwriters may exercise such option only for the purpose
of covering any over-allotments. To the extent that the Underwriters
exercise such option, each Underwriter will be committed, subject to
certain conditions, to purchase that number of additional shares of Common
Stock which is proportionate to such Underwriter's initial commitment.
The Company and the Selling Shareholders have agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities
under the Securities Act.
The Underwriting Agreement provides for payment by the Company to
the Representative of a non-accountable expense allowance of $100,000 for
due diligence and other out-of pocket expenses.
The Company and its executive officers and directors have agreed
that for a period of 180 days after the date of this Prospectus, they will
not offer, sell or otherwise dispose any Shares of Common Stock beneficially
owned or controlled by them (including subsequently acquired shares) without
the prior written consent of Southcoast Capital Corporation, except that the
Company may issue shares of Common Stock upon the exercise of options or in
connection with acquisitions.
The Underwriters and certain selling group members that currently
act as market makers for the Common Stock may engage in "passive market
making" activities in the Common Stock in accordance with Rule 10b-6A under
the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the
period when Rule 10b-6 under the Exchange Act would otherwise prohibit such
activity. In general, under Rule 10b-6A, any Underwriter or selling group
member engaged in passive market making in the Common Stock (i) may not
affect transactions in, or display bids for, the Common Stock at a price
that exceeds the highest bid for the Common Stock displayed on Nasdaq by a
market maker that is not participating in the distribution of the Common
Stock, (ii) may not have net daily purchases of the Common Stock that
exceed 30% of its average daily trading volume in such stock for the two
full consecutive calendar months immediately preceding the filing date of
the Registration Statement of which this Prospectus is a part, and (iii)
must identify its bids as bids made by a passive market maker.
Southcoast Capital Corporation from time to time performs
investment banking and other financial services for the Company and owns
56,666 shares of Common Stock, representing 1.08% of the Common Stock
outstanding prior to the Offering. In addition, a predecessor of Southcoast
Capital Corporation received (i) $600,000 in cash, (ii) 10,000 shares of
14% Preferred and (iii) certain Nominal Value Warrants to purchase 143,944
shares of Common Stock of the Company for the provision of financial
services in connection with the Credit Agreement. A predecessor of
Southcoast Capital Corporation also received warrants to purchase 166,666
shares of the Company's Common Stock at an exercise price of $6.00 per
share in connection with the acquisition of World and certain bridge
financing. See "Certain Transactions." Certain of the other Underwriters,
from time to time, perform investment banking and other financial services
for the Company.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be
passed upon for the Company by Tammy L. Martin, Esq., General Counsel of
the Company, and certain other legal matters relating to the Offering will
be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New
York, New York. Certain legal matters will be passed upon for the
Underwriters by Wolin, Fuller, Ridley & Miller LLP, Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of
December 31, 1994 and 1995 and for the three years ended December 31, 1995
included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Paramount Communications Systems, Inc.
as of December 31, 1995 and for the year then ended included in this
Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of Paramount Communications Systems, Inc.
as of December 31, 1994 and for the year then ended included in this
Prospectus have been so included in reliance on the report of KPMG Peat
Marwick LLP, independent accountants given on the authority of said firm as
experts in auditing and accounting.
The financial statements of International Pay Phones, Inc. (South
Carolina) as of December 31, 1994 and 1995 and for each of the two years
ended December 31, 1994 and 1995 included in this Prospectus have been so
included in reliance on the report of Miller Sherrill Blake, CPA, PA,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of International Pay Phones, Inc.
(Tennessee) as of December 31, 1994 and 1995 and for each of the two years
ended December 31, 1994 and 1995 included in this Prospectus have been so
included in reliance on the report of Ernest M. Sewell, CPA, independent
accountant, given on the authority of said person as an expert in auditing
and accounting.
The financial statements of Payphones of America, Inc. as of
December 31, 1994 and 1995 and for each of the two years ended December 31,
1994 and 1995 included in this Prospectus have been so included in reliance
on the report of Kerber, Eck & Braeckel LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Amtel Communications,
Inc. and combined companies as of December 31, 1995 and for the six months
ended June 30, 1996 and the combined statement of revenue and direct
operating expenses for three months ended December 31, 1994 included in
this Prospectus have been so included in reliance on the report of Harlan &
Boettger, CPAs, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
GLOSSARY
The following is a description of certain terms used in this Prospectus.
ACCESS CHARGES -- The fees paid by long distance companies to LECs for
originating and terminating long distance calls on LECs' networks.
BPP (Billed-Party Preference) -- Billing system whereby the party being billed
preselects the service provider of his or her choice to carry long distance
traffic (as opposed to the provider presubscribed by the pay telephone
provider).
BOCS (Bell Operating Companies) -- The seven regional holding companies and
their respective local telephone operating companies established by the MFJ.
Under the MFJ, the BOCs were prohibited from providing interLATA
telecommunications services and from manufacturing telecommunications
equipment.
CALL AGGREGATOR -- Person that, in the ordinary course of its operations,
makes telephones available to the public or to transient users for interstate
telephone calls using an OSP.
COMPUTER III -- FCC rulemaking proceeding that established certain
non-structural safeguards designed to prevent BOCs from using their incumbent
market power in an anti-competitive manner.
CUSTOMER PROPRIETARY NETWORK INFORMATION -- Information that relates to the
quantity, technical configuration, type, destination, and amount of use of a
telecommunications service subscribed to by any customer of a
telecommunications carrier, and that is made available to the carrier by the
customer solely by virtue of the carrier-customer relationship.
DIAL-AROUND CALLS -- Telephone calls placed from pay telephones using a long
distance service provider other than the one selected by the independent pay
telephone company.
FCC -- Federal Communications Commission
IN-REGION SERVICE -- InterLATA toll service provided by the BOCs within the
same states in which they also provide local exchange service.
INTEREXCHANGE CARRIER -- See Long Distance Company.
INTERLATA PRESUBSCRIPTION -- Ability of a customer to presubscribe to a
carrier of its choice for interLATA calls.
INTRALATA PRESUBSCRIPTION -- Ability of a customer to presubscribe to a
carrier of its choice for local and intraLATA calls.
LOCATION PROVIDER -- The property owner or occupant that supplies the site on
which pay telephones are placed in operation by the telephone provider.
LATA (Local Access and Transport Area) -- The geographically defined areas in
which BOCs were authorized by the MFJ to provide local exchange service.
LONG DISTANCE COMPANY OR INTEREXCHANGE CARRIER -- Company providing services
between local exchanges on either an intrastate or interstate basis. A long
distance company may offer services by using its own or by reselling another
carrier's facilities.
LECS (Local Exchange Carrier) -- Companies providing local exchange telephone
service (including, but not limited to, BOCs).
MFJ (Modification of Final Judgment) -- Court order that divested the seven
BOCs from AT&T and imposed various line of business restrictions on the BOCs
and AT&T.
OPERATOR SERVICES ACT -- The Telephone Operator Consumer Services Improvement
Act of 1990, which imposed various requirements for OSPs and call aggregators.
OSP (Operator Services Provider) -- Provider of operator assistance in the
billing or completion (or both) of an interstate telephone call.
TELECOMMUNICATIONS ACT -- The Telecommunications Act of 1996, which amended
the Communications Act of 1934.
1
PHONETEL TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
PHONETEL TECHNOLOGIES, INC.
Audited Financial Statements:
Report of Independent Accountants.................................................... F-3
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995............ F-4
Consolidated Statements of Operations for the years ended December 31, 1993, 1994
and 1995........................................................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1993, 1994 and 1995................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995........................................................................... F-8
Notes to Consolidated Financial Statements........................................... F-10
Unaudited Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996................ F-26
Consolidated Statements of Operations for the six and three months ended June 30,
1995 and 1996...................................................................... F-27
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and
1996............................................................................... F-28
Consolidated Statements of Changes in Mandatorily Redeemable Preferred Stock and
Non-Mandatorily Redeemable Preferred Stock, Common Stock and Other Shareholders'
Equity............................................................................. F-29
Notes to Consolidated Financial Statements........................................... F-31
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
Audited Financial Statements -- 1995
Report of Independent Accountants.................................................... F-37
Balance Sheet as of December 31, 1995................................................ F-38
Statement of Income for the year ended December 31, 1995............................. F-39
Statement of Cash Flows for the year ended December 31, 1995......................... F-40
Statement of Changes in Shareholders' Equity for the year ended December 31, 1995.... F-41
Notes to Financial Statements........................................................ F-42
Audited Financial Statements -- 1994
Report of Independent Certified Public Accountants................................... F-45
Balance Sheet as of December 31, 1994................................................ F-46
Statement of Income for the year ended December 31, 1994............................. F-47
Statement of Shareholders' Equity for the year ended December 31, 1994............... F-48
Statement of Cash Flows for the year ended December 31, 1994......................... F-49
Notes to Financial Statements........................................................ F-50
INTERNATIONAL PAY PHONES, INC. (SOUTH CAROLINA)
Audited Financial Statements -- 1995
Independent Auditors' Report......................................................... F-53
Balance Sheet as of December 31, 1995................................................ F-54
Statement of Income and Retained Earnings for the year ended December 31, 1995....... F-55
Statement of Cash Flows for the year ended December 31, 1995......................... F-56
Notes to Financial Statements........................................................ F-57
Independent Auditors' Report on Supplemental Information............................. F-62
Schedule of Cost of Goods Sold for the year ended December 31, 1995.................. F-63
Schedule of General and Administrative Expenses for the year ended December 31,
1995............................................................................... F-64
Audited Financial Statements -- 1994
Independent Auditors' Report......................................................... F-65
Balance Sheet as of December 31, 1994................................................ F-66
F-1
2
PAGE
----
Statement of Income and Retained Earnings for the year ended December 31, 1994....... F-67
Statement of Cash Flows for the year ended December 31, 1994......................... F-68
Notes to Financial Statements........................................................ F-69
INTERNATIONAL PAY PHONES, INC. (TENNESSEE)
Audited Financial Statements
Independent Auditors' Report......................................................... F-73
Balance Sheets as of December 31, 1995 and 1994...................................... F-74
Statements of Earnings and Retained Earnings for the years ended December 31, 1995
and 1994........................................................................... F-75
Statements of Cash Flows for the years ended December 31, 1995 and 1994.............. F-76
Notes to Financial Statements........................................................ F-77
PAYPHONES OF AMERICA, INC.
Audited Financial Statements
Independent Auditors' Report......................................................... F-80
Consolidated Balance Sheets as of December 31, 1995 and 1994......................... F-81
Consolidated Statements of Operations for the years ended December 31, 1995 and
1994............................................................................... F-82
Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
December 31, 1995 and 1994......................................................... F-83
Consolidated Statements of Cash Flows for the years ended December 31, 1995 and
1994............................................................................... F-84
Notes to Financial Statements........................................................ F-85
Unaudited Financial Statements
Consolidated Balance Sheets as of June 30, 1995 and 1996............................. F-92
Consolidated Statements of Operations for the six months ended June 30, 1995 and
1996............................................................................... F-93
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and
1995............................................................................... F-94
AMTEL COMMUNICATIONS INC. AND COMBINED COMPANIES (DEBTOR-IN POSSESSION)
Audited Financial Statements
Independent Auditors' Report......................................................... F-95
Combined Balance Sheets as of June 30, 1996 and December 31, 1995.................... F-96
Combined Statements of Operations for the six months ended June 30, 1996 and the
year ended December 31, 1995....................................................... F-97
Combined Statements of Changes in Stockholder's Deficit for the six months ended
June 30, 1996 and the year ended December 31, 1995................................. F-98
Combined Statements of Cash Flows for the six months ended June 30, 1996 and the
year ended December 31, 1995....................................................... F-99
Notes to Financial Statements........................................................ F-100
Audited Statement of Revenues and Direct Operating Expenses
Independent Auditors' Report......................................................... F-104
Combined Statement of Revenues and Direct Operating Expenses for the three months
ended December 31, 1994............................................................ F-105
Notes to Combined Statement of Revenues and Direct Operating Expenses................ F-106
F-2
3
REPORT OF INDEPENDENT ACCOUNTANTS
March 29, 1996
To the Board of Directors
and Shareholders of
PhoneTel Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations and shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of PhoneTel
Technologies, Inc. and its subsidiaries at December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-3
4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1994 1995
----------- -----------
ASSETS
Current assets:
Cash............................................................. $ 478,756 $ 713,462
Accounts receivable, net of allowance for doubtful
accounts of $44,000 and $40,000, respectively................. 562,147 901,508
Other current assets............................................. 164,331 185,634
----------- -----------
Total current assets.......................................... 1,205,234 1,800,604
Property and equipment, net........................................ 5,294,839 14,099,111
Intangible assets, net............................................. 3,429,121 11,592,157
Other assets....................................................... 228,707 1,425,384
----------- -----------
$10,157,901 $28,917,256
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 1,814,760 $ 1,010,412
Current portion of obligation under capital leases............... 94,343 288,972
Accounts payable................................................. 2,514,110 2,772,306
Accrued expenses................................................. 814,656 1,610,100
Obligations relating to contractual settlements and restructuring
charges....................................................... -- 962,338
----------- -----------
Total current liabilities..................................... 5,237,869 6,644,128
Long-term debt..................................................... 2,063,896 9,318,501
Obligations under capital leases................................... 208,269 3,243,965
Commitments and contingencies...................................... -- --
Total shareholders' equity......................................... 2,647,867 9,710,662
----------- -----------
$10,157,901 $28,917,256
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
REVENUES:
Coin calls......................................... $ 4,237,848 $ 8,421,237 $12,130,189
Operator services.................................. 6,074,394 5,319,138 3,776,501
Commissions........................................ 667,976 1,856,482 2,681,172
Other.............................................. 89,299 269,230 130,121
----------- ----------- -----------
11,069,517 15,866,087 18,717,983
----------- ----------- -----------
COSTS AND EXPENSES:
Line and transmission charges...................... 2,776,448 4,456,509 5,475,699
Location commissions............................... 2,599,330 3,391,190 3,467,626
Other operating expenses........................... 1,891,984 3,238,252 4,452,032
Depreciation and amortization...................... 896,041 2,236,269 4,383,049
Selling, general and administrative................ 2,402,583 2,831,775 3,200,742
Billing and collection............................. 1,116,149 1,026,420 858,230
Contractual settlements and restructuring
charges......................................... -- -- 2,169,503
----------- ----------- -----------
11,682,535 17,180,415 24,006,881
----------- ----------- -----------
Loss from operations............................ (613,018) (1,314,328) (5,288,898)
Interest expense..................................... (174,994) (388,215) (836,911)
Interest income...................................... 9,137 7,421 16,112
----------- ----------- -----------
NET LOSS............................................. $ (778,875) $(1,695,122) $(6,109,697)
=========== =========== ===========
Less: Preferred stock dividend requirement........... (207,623) (291,980) (309,668)
----------- ----------- -----------
Net loss applicable to common shareholders........... $ (986,498) $(1,987,102) $(6,419,365)
=========== =========== ===========
Net loss per common share............................ $ (0.96) $ (1.35) $ (3.29)
=========== =========== ===========
Weighted average number of shares.................... 1,031,384 1,470,188 1,950,561
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ------------ --------- ------------
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- 2,500 $ 200,000 2,500 $ 200,000
Issuance of 7% preferred... 2,500 $ 200,000 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 2,500 $ 200,000 2,500 $ 200,000 2,500 $ 200,000
========= ----------- ========= ------------ ========= ------------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... -- -- 12,200 $ 981,084 12,200 $ 981,084
Issuance of 8% preferred... 12,200 $ 981,084 -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 12,200 $ 981,084 12,200 $ 981,084 12,200 $ 981,084
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of
year..................... 1,496 $ 1 1,496 $ 1 1,496 $ 1
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,496 $ 1 1,496 $ 1 1,496 $ 1
========= ----------- ========= ------------ ========= ------------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of
year..................... -- -- -- -- -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 530,534 $ 5,305,340
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- 530,534 $ 5,305,340
========= ----------- ========= ------------ ========= ------------
12% CONVERTIBLE PREFERRED
STOCK
Balance at beginning of
year..................... 6,500 $ 650,000 -- -- -- --
Conversion to Common
Stock.................... (6,500) (650,000) -- -- -- --
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... -- -- -- -- -- --
========= ----------- ========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of
year..................... 724,092 $ 7,241 1,284,449 $ 12,845 1,522,158 $ 15,222
Employee stock grants...... 1,533 15 -- -- -- --
Issuance of stock.......... 25,270 253 8,389 84 91,383 914
Private sales of stock..... -- -- 136,111 1,361 472,056 4,720
Exercise of warrants and
options.................. 331,796 3,318 87,931 879 8,333 83
Zandec interest and
commitment fee
conversion............... 76,164 762 -- -- -- --
Conversion of 12% Preferred
to Common Stock.......... 123,764 1,238 -- -- -- --
Financing costs............ 1,830 18 5,278 53 -- --
Acquisition of World
Communications, Inc...... -- -- -- -- 402,500 4,025
Conversion of debt to
equity................... -- -- -- -- 30,231 303
Acquisition of Public
Telephone Corporation.... -- -- -- -- 304,879 3,049
Acquisition escrow
deposits................. -- -- -- -- 23,810 238
--------- ----------- --------- ------------ --------- ------------
Balance at end of year..... 1,284,449 $ 12,845 1,522,158 $ 15,222 2,855,350 $ 28,554
========= ----------- ========= ------------ ========= ------------
F-6
7
PHONTEL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- CONTINUED
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995
------------------------ ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- --------- ------- --------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of
year..................... $ 3,482,110 $ 6,552,473 $ 8,755,364
Employee stock grants...... 10,335 -- --
Issuance of stock.......... 222,917 276,414 528,532
Private sales of stock..... -- 1,473,638 2,010,067
Exercise of warrants and
options.................. 1,335,876 552,581 34,917
JTMFC settlement........... 537,500 -- --
Zandec interest and
commitment fee
conversion............... 220,195 -- --
Options issued below fair
value.................... 24,785 -- --
Conversion of 12% Preferred
to Common Stock.......... 741,346 -- --
Financing costs............ (22,591) (99,742) (83,212)
Acquisition of World
Communications, Inc...... -- -- 2,712,852
Conversion of debt to
equity................... -- -- 137,375
Acquisition of Public
Telephone Corporation.... -- -- 2,054,902
Acquisition escrow
deposits................. -- -- 149,762
Warrants issued with
debt..................... -- -- 349,000
----------- ------------ ------------
Balance at end of year..... $ 6,552,473 $ 8,755,364 $ 16,649,559
----------- ------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of
year..................... $(4,658,009) $ (5,556,807) $ (7,303,804)
Net loss for the year...... (778,875) (1,695,122) (6,109,697)
Conversion of 12% Preferred
to Common Stock.......... (92,584) -- --
Dividends paid on 12% and
8% Preferred Stock....... (27,339) -- --
Dividends paid on 7% and 8%
Preferred Stock.......... -- (51,875) (40,375)
----------- ------------ ------------
Balance at end of year..... $(5,556,807) $ (7,303,804) $(13,453,876)
----------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY... $ 2,189,596 $ 2,647,867 $ 9,710,662
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Net loss........................................... $ (778,875) $(1,695,122) $(6,109,697)
Adjustments to reconcile net loss to net cash flow
from operating activities:
Depreciation and amortization................... 896,041 2,236,269 4,383,049
Stock and stock awards issued................... 10,350 76,498 529,449
Accretion of debt............................... -- -- 55,103
Loss on disposal of assets...................... -- -- 298,626
Changes in assets and liabilities:
Accounts receivable........................... (132,885) 32,355 (64,873)
Other current assets.......................... (71,841) (116,591) (47,121)
Accounts payable.............................. (174,731) 1,975,628 (151,008)
Accrued expenses.............................. 263,149 (128,821) (434,999)
Obligations relating to contractual
settlements and restructuring.............. -- -- 962,338
----------- ----------- -----------
11,208 2,380,216 (579,133)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of Alpha Pay Phones-IV................. -- (2,334,215) --
Acquisition of World Communications................ -- -- (696,006)
Acquisition of Public Telephone.................... -- -- 24,191
Cash acquisition deposits.......................... -- -- (950,000)
Purchases of intangible assets..................... -- (363,853) (427,409)
Purchases of other assets.......................... (288,924) (215,382) (67,559)
Purchases of property and equipment................ (907,837) (300,852) (237,228)
----------- ----------- -----------
(1,196,761) (3,214,302) (2,354,011)
----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances....................... -- 1,400,000 3,132,500
Principal payments on borrowings................... (1,637,957) (2,202,608) (1,890,850)
Proceeds from issuance of preferred and common
stock and other................................. 1,245,000 1,674,999 2,014,787
Dividends paid..................................... (27,339) (21,875) (40,375)
Debt financing costs............................... -- (75,000) --
Equity financing costs............................. (26,552) (99,689) (83,212)
Proceeds from warrant/option exercises............. 1,339,194 553,460 35,000
Proceeds from JTMFC settlement..................... 87,500 -- --
Repayment of advance from shareholder.............. (120,000) -- --
----------- ----------- -----------
859,846 1,229,287 3,167,850
----------- ----------- -----------
(Decrease) increase in cash.......................... (325,707) 395,201 234,706
Cash at beginning of period.......................... 409,262 83,555 478,756
----------- --------- -----------
Cash at end of period................................ $ 83,555 $ 478,756 $ 713,462
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year...................... $ 174,995 $ 385,311 $ 673,906
=========== =========== ===========
F-8
9
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ----------- ----------
NON-CASH TRANSACTIONS:
Common stock (402,500 shares) and preferred stock
(530,534 shares) issued for acquisition of World
Communications, Inc............................. -- -- $ 8,022,217
=========== =========== ===========
Common stock (304,879 shares) issued for
acquisition of Public Telephone Corporation..... -- -- $ 2,057,951
=========== =========== ===========
Common stock issued for services (1,830 shares in
1993, 8,389 shares in 1994, and 91,383 shares in
1995)........................................... $ 22,573 $ 76,498 $ 529,446
=========== =========== ===========
Common stock issued in payment of debt and interest
(30,231 shares in 1995)......................... -- -- $ 137,678
----------- ----------- -----------
Common stock issued for acquisition deposit (23,809
shares in 1995)................................. -- -- $ 150,000
=========== =========== ===========
Common stock (5,278 shares) issued for financing
costs in 1994................................... -- $ 99,689 --
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-9
10
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhoneTel Technologies, Inc. and subsidiaries (the "Company") operates in
the telecommunications industry specializing in the business segment that
encompasses the installation of private pay telephones on a revenue sharing
basis, offering operator assisted long distance services, and national and
regional account management. The Company was incorporated on December 24, 1984,
and began its private pay telephone operations in August 1985. In April 1988,
the Company commenced reselling operator assisted long distance services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The Company capitalizes all
labor and overhead costs related to installing telephones and depreciates those
costs over the life of the telephone or the length of the location contract,
whichever is shorter. Depreciation for financial reporting and tax purposes is
computed using the straight-line method and accelerated methods, respectively,
over the estimated useful lives of the assets commencing when the equipment is
installed or placed in service.
INTANGIBLE ASSETS
Intangible assets include location contracts, non-compete agreements, costs
associated with obtaining operating certification in various states and
capitalized sales commissions. Intangible assets are amortized over the life of
the respective location contract, non-compete and sales commission agreements,
and five years for state operating certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets. A loss relating to an impairment of assets occurs when the aggregate of
the estimated undiscounted future cash inflows, (including any salvage values,
less estimated cash outflows) to be generated by an asset is less than the
asset's carrying value. Impairment is measured based on the difference between
the present value of the discounted expected future cash flows and the asset's
carrying value. No impairment was recorded in 1995 or 1994.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, " Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which establishes criterion for when impairment should be evaluated, how an
asset is determined to be impaired and the method of calculating the impairment
loss. The methods required by SFAS No. 121 are consistent with the methods
currently being used by the Company to review
F-10
11
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets for impairment. Accordingly, the adoption of the Statement, which is
required for the Company in 1996, is not expected to have a significant impact
on the Company.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted long distance
services, and national and regional account management are recognized in the
period in which the customer places the related call.
EARNINGS PER SHARE
Earnings per share amounts are computed based on the weighted average
number of shares actually outstanding plus shares that would be outstanding
assuming exercise of dilutive stock options and warrants. The number of shares
that would be issued from the exercise of stock options and warrants would be
reduced by the number of shares that could have been purchased from the proceeds
at the average market price of the Company's stock.
Fully diluted earnings per share amounts would be determined in the same
manner as primary earnings per share except that the period-end stock price was
used and the number of shares was increased assuming conversion of the 7%
Cumulative Convertible Redeemable Preferred. (The 7% Cumulative Convertible
Redeemable Preferred was redeemed on March 15, 1996.) Due to the Company's net
loss, the impact of the assumed exercise of the stock options and warrants and
the assumed conversion of the 7% Cumulative Convertible Redeemable Preferred was
anti-dilutive and therefore were not included in the determination of the
weighted average shares outstanding.
The weighted average number of common shares outstanding has been adjusted
to reflect the one for six (1:6) reverse stock split which was effective
December 26, 1995.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of the
statement of cash flows.
INCOME TAXES
The Company utilizes the asset and liability method to account for income
taxes whereby deferred tax assets and liabilities are recognized to reflect the
future tax consequences attributable to temporary differences between the
financial reporting basis of the existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be recovered and settled. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in the period
in which the change is enacted.
CONTRACTUAL SETTLEMENTS AND RESTRUCTURING CHARGES
Contractual settlements and restructuring charges consist primarily of
costs associated with the settlement of contractual obligations to certain
former officers of the Company and related legal fees, and the write-off of
selected assets in connection with the outsourcing of the operator service
center, and consulting and legal fees incurred for changes to the operations of
the Company.
F-11
12
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts relating to 1993 and 1994 have been reclassified to conform
to the current year presentation. The reclassifications have had no impact on
total assets, shareholders' equity or net loss as previously reported.
2. FINANCIAL CONDITION
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility commitment of $37,250,000) from
Internationale Nederlanden (U.S.) Capital Corporation and one other lender
(collectively know as "ING") to meet its anticipated working capital
obligations, consolidate debt, redeem preferred stock, and complete the
acquisitions of two pay phone companies, IPP and Paramount. The Company has
available under the credit facility $6,700,000 to fund future acquisitions and
for general working capital purposes. (See Note 3 and Note 15.)
Management believes, but cannot assure, that cash flow from operations, the
proceeds from the financing discussed above and other financial alternatives
will be sufficient to allow the Company to sustain its operations, meet its
current obligations and maintain some modest sales growth.
3. ACQUISITIONS AND MERGERS
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public") in a transaction accounted for as a purchase. The
Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public and issued 224,879 unregistered shares of the Company's Common Stock
to the shareholders of Public. In connection with the acquisition, the Company
entered into five year non-compete agreements with two of Public's former owners
which require both cash payments and the issuance, in the aggregate, of 80,000
shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock. In connection with the acquisition, the Company
entered into two year non-compete and employment agreements with three of
World's former officers. These non-compete and employment agreements require, in
the aggregate, payment of $625,000 over a two year period.
On March 25, 1994, the Company acquired substantially all of the assets of
Alpha Pay Phones-IV L.P. ("Alpha"). The acquired assets included 2,155 installed
telephones for a cash purchase price of $2,334,215, a note payable to sellers of
$1,100,620 and assumption by the Company of outstanding Alpha liabilities of
$2,164,038.
F-12
13
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the Public and World acquisitions had occurred at the
beginning of 1994 and 1995 and as though the Alpha acquisition had occurred at
the beginning of 1994.
1994 1995
----------- ------------
Total revenues.............................................. $27,138,550 $ 26,976,221
Net loss.................................................... (4,771,759) (10,516,464)
Net loss applicable to common shareholders.................. (5,594,273) (11,356,666)
Net loss per common share................................... $ (2.57) $ (5.82)
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1994 or 1995, or of future results.
The pro forma statement of operations data includes adjustments related to
amortization of intangible assets, interest expense on borrowings used to
finance the acquisition and the weighted average number of common shares
outstanding after giving effect to the acquisitions.
ACQUISITIONS PENDING AT DECEMBER 31, 1995 AND COMPLETED ON MARCH 15, 1996
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. The Company
acquired 2,101 installed phones for a purchase price of $3,496,487 in cash,
555,589 unregistered shares of the Company's Common Stock, 5,453 shares of 14%
Preferred Stock (immediately convertible into 54,530 shares of Common Stock),
and warrants to purchase 117,785 shares of the Company's Common Stock at a
nominal exercise price per share. Additionally, the Company assumed
approximately $1,757,000 in liabilities, of which $1,551,796 was repaid by the
Company on March 15, 1996. The cash purchase price included three five year
non-compete agreements, with an aggregate value of $60,000, with three of IPP's
former officers. The acquisition will be recorded as a purchase and the
difference between the fair value of the tangible assets acquired and the total
purchase price will be recorded as an increase to intangibles and amortized over
the life of the acquired location contracts which is estimated to be 36 to 60
months.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed phones
for a cash purchase price of $9,618,553, 8,333 shares of 14% Preferred Stock
(immediately convertible into 83,330 shares of Common Stock), warrants to
purchase 179,996 shares of the Company's Common Stock at a nominal exercise
price per share, and the Company assumed outstanding liabilities of
approximately $733,000, of which $693,446 was repaid on March 15, 1996. The
purchase price included a five year consulting and non-compete agreement, valued
at $50,000, with one of Paramount's former officers. The acquisition will be
recorded as a purchase and the difference between the fair value of the tangible
assets acquired and the total purchase price will be recorded as an increase to
intangibles and amortized over the life of the acquired location contracts which
is estimated to be 36 to 60 months.
4. ACCOUNTS RECEIVABLE
The Company has billing, collection and advance payment agreements with
Zero Plus Dialing, Inc. ("ZPDI") which provide for, among other things, the sale
of certain eligible accounts to ZPDI. These receivables result from the Company
reselling operator assisted long distance services. Included in accounts
receivable at December 31, 1994 and 1995 is approximately $160,496 and $78,007,
respectively, due from ZPDI. Approximately $5,300,000 and $3,800,000 of
receivables were sold pursuant to these agreements
F-13
14
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. ACCOUNTS RECEIVABLE (CONTINUED)
during 1994 and 1995, respectively, of which approximately $676,755 and $594,076
have not been collected by ZPDI at December 31, 1994 and 1995, respectively.
5. PROPERTY AND EQUIPMENT
As of December 31, property and equipment consisted of the following:
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------------
(IN YEARS) 1994 1995
------------ ----------- -----------
Telephone boards, enclosures and cases....... 3-7 $ 6,155,690 $16,386,987
Operator service equipment................... 5 1,065,389 --
Furniture, fixtures and other equipment...... 3-5 1,329,155 989,300
Leasehold improvements....................... 2-5 413,177 231,466
----------- -----------
8,963,411 17,607,753
Less -- accumulated depreciation........... (3,668,572) (3,508,642)
----------- -----------
$ 5,294,839 $14,099,111
=========== ===========
Depreciation expense, including amortization of assets under capital
leases, was $668,415, $1,179,137 and $1,846,453 for the years ended December 31,
1993, 1994 and 1995, respectively.
6. INTANGIBLE ASSETS
As of December 31, intangible assets consisted of the following:
AMORTIZATION
PERIOD 1994 1995
------------- ----------- -----------
Costs incurred in the acquisition of
installed phones (See Note 3)............ 36-60 months $ 3,026,387 $12,362,884
Non-compete agreements..................... 24-60 months 400,000 1,513,765
State operating certifications............. 60 months 260,113 466,796
Capitalized sales commissions.............. 96-120 months 997,574 1,040,242
----------- -----------
4,684,074 15,383,687
Less: accumulated amortization............. (1,254,953) (3,791,530)
----------- -----------
$ 3,429,121 $11,592,157
=========== ===========
Amortization of intangible assets amounted to $227,629, $1,057,132 and
$2,536,596 for the years ended December 31, 1993, 1994 and 1995, respectively.
7. LONG-TERM DEBT
As of December 31, long-term debt consisted of the following:
1994 1995
----------- -----------
Note payable to two third party investors repaid on March
15, 1996. The principal due at the contractual maturity
of April 1997 was $1,200,000............................. -- $ 906,105
Notes payable to bank repaid on March 15, 1996............. -- 2,340,000
F-14
15
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1994 1995
----------- -----------
7. LONG-TERM DEBT (CONTINUED)
Notes payable due on demand to five former World
stockholders repaid on March 15, 1996.................... -- 625,000
Notes payable to former stockholders of Public due on April
16, 1996 with interest at 9%. On March 15, 1996 $211,285
was repaid............................................... -- 293,226
Non-compete notes payable to two former officers of Public
repaid on March 15, 1996................................. -- 203,480
Two notes payable to a service provider repaid on March 15,
1996..................................................... $ 1,852,628 1,401,872
Term notes payable to a vendor in monthly installments
ranging from $31,107 to $47,330 including interest at
rates varying from 10% to 13.75%. The vendor has a
security interest in the underlying phones. On March 15,
1996, the Company repaid $225,000, refinanced the
remaining balance owed at 15% interest and the vendor
released its security interest in the goods sold......... 694,611 1,066,428
Promissory notes payable to Alpha repaid on March 15,
1996..................................................... 751,848 500,756
Promissory notes payable to a group of five investors
repaid in 1995........................................... 300,000 --
Promissory note payable to a vendor in monthly installments
of $318 through $535 at an interest rate of 8.75%........ -- 120,617
Promissory note payable in monthly installments of $12,500
through January 1996 at an interest rate of 8%........... 147,721 124,614
Notes payable to directors and shareholders at an imputed
interest rate of prime plus 5%, repaid on March 15,
1996..................................................... -- 1,732,500
Notes payable to two investors repaid on March 15, 1996.... -- 200,000
Note payable to a vendor repaid on March 15, 1996.......... -- 201,101
Note payable to a consultant. On March 15, 1996, the
consultant accepted 12,500 shares of the Company's Common
Stock and $50,000 in full settlement of the debt......... -- 125,000
Non-compete obligation to a former owner of World payable
in bi-weekly installments of $6,000 at an imputed
interest at 9%........................................... -- 288,844
Various notes payable to vendors in monthly installments
ranging from $283 to $3,538 with interest rates ranging
from 6.9% to 10.4%....................................... 131,848 199,370
----------- -----------
3,878,656 10,328,913
Less current maturities.................................... (1,814,760) (1,010,412)
----------- -----------
$ 2,063,896 $ 9,318,501
=========== ===========
F-15
16
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
7. LONG-TERM DEBT (CONTINUED)
Following are maturities of long-term debt for each of the next five years
based on the terms of the ING credit facility (See Note 15):
AMOUNT
-----------
1996.................................................... $ 1,010,412
1997.................................................... 640,913
1998.................................................... 1,001,576
1999.................................................... 7,674,596
2000.................................................... 1,416
-----------
$10,328,913
===========
On March 15, 1996, $9,214,468 of outstanding debt was repaid.
8. LEASES
OPERATING LEASES
The Company leases its corporate offices and other locations, office
equipment and vehicles under noncancellable operating leases expiring at various
times through 1999.
Future minimum noncancellable payments under operating leases are as
follows:
1996...................................................... $329,352
1997...................................................... 303,658
1998...................................................... 96,721
1999...................................................... 54,473
2000...................................................... --
Rent expense under all operating leases was $264,369, $334,984 and $363,929
for the years ended December 31, 1993, 1994 and 1995, respectively.
CAPITAL LEASES
During 1995, as part of the acquisition of World and Public, the Company
assumed capital leases between various lessors and World and Public. World and
Public leased their installed phones. The allocation of the purchase price
increased the historical book value of the phones to their current fair value.
On March 15, 1996, the Company paid off these leases with the proceeds received
in the refinancing of its debt.
During 1994, the Company entered into lease financing agreements for the
acquisition of computer equipment. Each agreement has a term of 36 months with
interest ranging from 8.6% to 9.7% per year.
Assets recorded under capital leases at December 31 were as follows:
1994 1995
---------- ----------
Telephone boards, enclosures and cases...................... $ 111,349 $9,429,049
Operator service equipment.................................. 405,570 --
Office equipment............................................ 110,442 170,058
---------- ----------
627,361 9,599,107
Less accumulated amortization............................... (246,198) (616,778)
---------- ----------
$ 381,163) $8,982,329
========== ==========
F-16
17
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. LEASES (CONTINUED)
On March 15, 1996, the Company repaid $3,243,965 of the outstanding
obligations under capital leases. The following are maturities of long-term debt
(which replaced obligations under capital leases) based on the terms of the ING
credit facility (See Note 15):
1996................................................ $ 288,972
1997................................................ 112,545
1998................................................ 357,371
1999................................................ 2,774,049
2000................................................ --
----------
$3,532,937
==========
9. INCOME TAXES
No provisions for income tax were required and no income taxes were paid for the
years ended December 31, 1993, 1994 or 1995 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) at December 31
were as follows:
1994 1995
----------- -----------
Federal net operating loss carryforward................... $ 1,863,867 $ 5,342,374
Depreciation and amortization............................. 273,287 1,017,406
Bad debts................................................. 17,160 13,600
Other..................................................... 5,538 --
----------- -----------
Gross deferred tax assets................................. 2,159,852 6,373,380
Accruals.................................................. (117,000) --
Deferred sales commissions................................ (130,217) (125,066)
Valuation allowance on deferred tax assets................ (1,912,635) (6,248,314)
----------- -----------
Net deferred tax assets................................... $ -- $ --
=========== ===========
A valuation allowance has been provided against the net deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets will be ultimately realized. The net
operating loss carryforwards, if not utilized, will expire between the years
2002-2010. Internal Revenue Code Section 382 provides for the limitation on the
use of net operating loss carryforwards in years subsequent to significant
changes in ownership. As a result of the Company's Initial Public Offering in
1988 and certain other transactions, including acquisitions, changes in
ownership have occurred resulting in significant limitations on the use of net
operating loss carryforwards. The extent of limitations as a result of
significant changes in ownership has not been determined by the Company.
10. SHAREHOLDERS' EQUITY
As of December 31, shareholders' equity consisted of the following:
1994 1995
------------ ------------
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized;
530,534 shares issued and outstanding at December 31,
1995)................................................. -- $ 5,305,340
F-17
18
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1994 1995
------------ ------------
10. SHAREHOLDERS' EQUITY (CONTINUED)
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... $ 1 1
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares
issued and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 981,084 981,084
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1994 and 1995,
redeemed on March 15, 1996)........................... 200,000 200,000
Common Stock ($0.01 par value -- 22,500,000 shares
authorized; 1,522,158 and 2,855,350 shares issued and
outstanding at December 31, 1994 and 1995)............ 15,222 28,554
Additional paid-in capital.............................. 8,755,364 16,649,559
Accumulated deficit..................................... (7,303,804) (13,453,876)
------------ ------------
$ 2,647,867 $ 9,710,662
============ ============
PREFERRED STOCK
The Company's 10% Cumulative Non-Voting Redeemable Preferred Stock ("10%
Non-Voting Preferred") has a liquidation preference of $10 per share. Under the
terms of the 10% Non-Voting Preferred, which was issued in connection with the
acquisition of World Communications, Inc. by the Company, from December 1996
through November 1997 the Company can be required by each holder of the 10% Non-
Voting Preferred to repurchase their shares for $30 per share. At the time of
the World acquisition, the Company entered into a Voting and Proxy Agreement
("the Agreement") with certain common stockholders of the Company ("Holders")
representing, in the aggregate, over 50% of the then outstanding Common Stock of
the Company. The Agreement has also been signed by the holders of the Nominal
Value Warrants and Series A Preferred such that common shareholders representing
over 50% of the Common Stock have signed the Agreement. Under the terms of the
Agreement, the Holders agreed to call a special meeting of the shareholders by
June 1996 at which time the Holders will propose that each share of the 10%
Non-Voting Preferred be made convertible into 1.67 shares of the Company's
Common Stock (a total of 885,992 shares). Such number of shares had a fair value
at the date of acquisition approximately equal to the stated value of the 10%
Non-Voting Preferred. Under the terms of the Agreement, the Holders have agreed
to vote in favor of the proposal. Once the 10% Non-Voting Preferred is
convertible, the Company cannot be required to redeem the 10% Non-Voting
Preferred. No dividends were paid on the 10% Non-Voting Preferred in 1995 and no
dividends are payable or accrue for nine months from date of issuance or if the
stock is converted to Common Stock. In addition, certain holders of the 10%
Non-Voting Preferred and the Company entered into a separate Voting and Proxy
Agreement which provides that such holders shall vote the shares of 10%
Non-Voting Preferred held by them to approve the foregoing grant of conversion
rights.
The Company's 10% Cumulative Redeemable Preferred Stock ("10% Cumulative
Preferred") was issued to a significant customer in 1992 (see Note 12). No
dividends were paid on the 10% Cumulative Preferred in 1993, 1994 or 1995 and
all outstanding shares of the 10% Cumulative Preferred were redeemed on March
15, 1996.
F-18
19
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
All outstanding shares of the Company's 8% Cumulative Redeemable Preferred
Stock ("8% Preferred") were redeemed on March 15, 1996. Dividends paid on the 8%
Preferred were $24,400, $30,000 and $36,000 in 1993, 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
All outstanding shares of the Company's 7% Cumulative Convertible
Redeemable Preferred Stock ("7% Preferred") were redeemed on March 15, 1996.
Dividends paid on the 7% Preferred were $21,875 and $4,375 in 1994 and 1995,
respectively, and are reflected in the accumulated deficit.
PREFERRED DIVIDENDS
On December 31, 1993, 1994 and 1995, the Company had dividends in arrears
payable to preferred shareholders in the aggregate amount of $305,950, $546,055
and $826,548, respectively. On March 15, 1996, the 10% Cumulative Preferred, 8%
Preferred and the 7% Preferred Stock and dividends in arrears were either paid
or converted to a new class of preferred stock (See Note 15).
SALES AND ISSUANCE OF UNREGISTERED COMMON STOCK
Sales and issuances of the Company's unregistered Common Stock during 1995
were as follows:
NUMBER OF AVERAGE PRICE
SHARES ISSUED PER SHARE
------------- -------------
Private sales to officers and directors.................... 286,643 $4.77
Private sales to creditors of the Company.................. 133,332 4.50
Private sales to affiliates of the Company................. 38,888 4.63
Issued in connection with acquisitions..................... 731,189 6.74
Issued to third parties for services....................... 69,895 6.01
Issued to directors for services........................... 21,488 5.09
Issued to directors upon conversion of debt and accrued
interest................................................. 26,065 4.51
Issued to third party creditors upon conversion of debt and
accrued interest......................................... 4,166 4.80
Issued for exercising stock options........................ 8,333 4.20
Other issuances............................................ 13,193 5.20
---------
1,333,192
=========
Sales to directors, creditors and affiliates of the Company were made at
prices per share below the quoted market values (based on prices calculated by
the Company's investment advisor) of the Company's Common Stock on the dates of
the transactions. No expense was recognized by the Company as the Company
believes that the discount associated with these sales reflects the impact on
quoted market value of issuing unregistered shares.
F-19
20
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK WARRANT ACTIVITY
Stock warrant activity during 1993, 1994 and 1995 was as follows:
NUMBER EXERCISE
OF SHARES PRICE
--------- -------------
Balance, December 31, 1992................................. 350,887 $3.00- $ 6.00
Granted.................................................... 28,519 6.00- 8.70
Exercised.................................................. (310,962) 3.00- 6.00
Cancelled.................................................. (9,411) 4.50- 9.90
---------
Balance, December 31, 1993................................. 59,033 6.00- 9.90
Granted.................................................... 88,236 7.50- 15.75
Exercised.................................................. (35,000) 6.00- 8.70
Cancelled.................................................. --
---------
Balance, December 31, 1994................................. 112,269 7.50- 15.75
Granted:
To the Company's investment advisor...................... 166,666 6.00
To officers of the Company............................... 47,583 5.70- 6.00
To lenders............................................... 277,884 5.70- 6.00
---------
Total Granted.............................................. 492,133 5.70- 6.00
Exercised.................................................. --
Cancelled.................................................. (24,051) 9.90
---------
Balance, December 31, 1995................................. 580,351 $5.70- $15.75
=========
The estimated fair value of the warrants on the date of the grant for the
warrants issued to the investment advisor has been included in the determination
of World's purchase price. The fair value of warrants issued to lenders has been
recorded as an adjustment to interest expense. The difference between the
intrinsic value and the exercise price of the warrants issued to officers of the
Company was not material. All warrants outstanding at each period end are
exercisable.
STOCK OPTION ACTIVITY
Options are granted by the Company at the discretion of the Board of
Directors to key employees, officers and directors, and generally are
exercisable immediately upon issuance, have terms of three to five years and are
issued with exercise prices at or sightly below quoted market value of the
Company's Common Stock on the date of grant. The amount of compensation expense
recorded by the Company during 1994 and 1995 relating to stock option activity
was not material.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." The Statement, which is effective for the Company beginning in
1996, encourages companies to record stock options issued to both employees and
nonemployees at the fair value on the date of grant. As an alternative to fair
value recording, the Statement permits companies to continue to use the methods
outlined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" but requires that options issued to non-employees be
recorded at the fair value on the date of grant and requires pro forma
disclosure of the impact on the company as if the suggested method had been
used. The Company has not yet determined how it will adopt the Statement.
F-20
21
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. SHAREHOLDERS' EQUITY (CONTINUED)
Information relating to stock option activity during 1993, 1994 and 1995
was as follows:
NUMBER
OF SHARES OPTION PRICE
--------- -------------
Balance, December 31, 1992................................. 249,637 $3.00- $12.60
Granted.................................................... 187,500 3.00- 15.78
Exercised.................................................. (20,833) 3.18- 3.18
Cancelled.................................................. --
---------
Balance, December 31, 1993................................. 416,304 3.00- 15.78
Granted.................................................... 97,758 4.50- 19.50
Exercised.................................................. (52,930) 4.50- 6.00
Cancelled.................................................. (25,000) 5.22- 9.00
---------
Balance, December 31, 1994................................. 436,132 3.00- 19.50
Granted.................................................... 168,373 6.00- 6.00
Exercised.................................................. (8,333) 3.00- 6.00
Cancelled.................................................. (124,427) 6.00- 18.78
---------
Balance, December 31, 1995................................. 471,745 $3.00- $19.50
=========
Exercisable, December 31, 1995............................. 435,243 $3.00- $19.50
=========
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND SEVERANCE AGREEMENTS
On March 15, 1996, the Company settled the amounts owed under the September
15, 1995 Separation Agreements with two of its former officers. Under the terms
of the Separation Agreements, the Company was obligated to pay the former
officers the remainder of their employment agreements and the Company agreed to
accelerate the vesting of options for 194,027 shares of the Company's Common
Stock at $6.00 per share.
As part of the merger with World, the Company executed employment
agreements with three former employees of World. The former Chairman of World
will remain as an advisor to the Company for 24 months and receive $125,000 in
year one and $135,000 in year two plus certain benefits. The former President of
World has become an officer of the Company and will receive $110,000 for the
first year of his contract and $120,000 in the second year, plus other customary
benefits. The former Vice President and Secretary of World has become an officer
of the Company and will receive a base salary of $65,000 for the first year of
her contract and $70,000 for the second year, plus other customary benefits.
On May 1, 1995, the Company entered into a three year employment agreement
with two one year renewal options, with an officer of the Company, whereby he
will receive compensation of $95,000, $105,000 and $120,000 during the terms of
the agreement and $130,000 and $140,000 during the option periods of employment,
plus other customary benefits. This agreement provides for early contract
termination and a "change in control" provision which requires severance pay
equal to 150% of the normal salary which would have been payable over the next
three years.
CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion, any
such outstanding matters, of which the Company has knowledge,
F-21
22
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
have been reflected in the financial statements and are covered by insurance or
would have no material adverse effect on the Company's financial position,
results of operations or cash flows.
12. MAJOR CUSTOMER
The Edward J. DeBartolo Corporation and its affiliates (collectively
"DeBartolo"), accounted for 25%, 18% and 15% of the Company's total revenues for
the years ended December 31, 1993, 1994 and 1995, respectively. The 10%
Cumulative Preferred, which was issued in connection with the DeBartolo
management agreements, was recorded at $1 based on the Company's determination
that the benefits associated with the agreements should be recorded in the
statement of operations as earned. On March 15, 1996, all of the outstanding
shares of the 10% Cumulative Preferred were redeemed by the Company.
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and effective
January 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (collectively "the Statements"). The Statements
establish accounting standards for employers who offer postretirement or
postemployment benefits and require that the estimated cost of these benefits be
accrued over the service lives of the covered employers. The Company does not
offer postretirement or postemployment benefits to its employees and, therefore,
the adoption of the Statements did not have a material impact on the Company's
financial statements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents. The carrying amount reported in the balance
sheet approximates fair value.
Long-term debt. The estimated fair value of long-term debt is determined
using interest rates that could be available to the Company for similar
instruments with similar terms.
Estimated fair values of the Company's financial instruments at December
31, 1995 are as follows:
CARRYING
AMOUNT FAIR VALUE
----------- -----------
Cash and cash equivalents................. $ 713,462 $ 713,462
Long-term debt............................ 10,328,913 10,803,472
Obligations under capital leases.......... 3,532,937 3,741,869
15. SUBSEQUENT EVENTS
CHANGES IN STOCKHOLDER'S EQUITY, DEBT REFINANCING AND COMPLETION OF
ACQUISITIONS
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Special Convertible Preferred Stock, $0.20 par value, $0.20
Stated Value, 250,000 authorized shares, with each share immediately convertible
into 20 shares of Common Stock, and non-voting, ("Series A Preferred"); (ii)
Series B Special Convertible Preferred Stock, $0.20 par value, $120 Stated
Value, 250,000 authorized shares, with each share immediately convertible into
20 shares of Common Stock, and non-voting ("Series B Preferred"); and (iii) 14%
Convertible Cumulative Redeemable Preferred Stock, without par value, $60 Stated
Value, non-voting, 200,000 authorized shares, and with each share immediately
convertible into
F-22
23
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
10 shares of Common Stock ("14% Preferred"). Each share of the 14% Preferred is
entitled to receive a quarterly dividend of 0.035 shares of 14% Preferred.
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as the "Lenders"). The Company has available
under the Credit Facility $6,700,000 to fund future acquisitions and for general
working capital purposes. The Company used the funds to complete the Paramount
and IPP acquisitions, to repay all outstanding long-term debt and capital lease
obligations which had a secured interest in the Company's installed phones, to
redeem the 10% Cumulative Preferred, 7% Preferred and 8% Preferred and to pay
related transaction fees. The Credit Facility requires monthly interest payments
at prime plus 5% and contains various covenants restricting the Company's
ability to pay dividends or incur additional debt, among other conditions, and
also contains financial covenants requiring minimum net worth, working capital
and earnings before interest, depreciation and amortization among other
covenants. The Credit Facility also contains a subjective acceleration clause
which states that in the event of a material adverse change in the business, as
determined by the Lenders, the Lenders can call the debt at its discretion. The
Lenders have waived their right to exercise this subjective acceleration clause
through April 1, 1997, (subsequently amended -- see note 16).
Principal payments related to the original facility were to commence
September 1997 and continue quarterly through June 1999 at which time the
remaining principal balance is due. The amount of principal payments is
contingent upon numerous factors, including the borrowing base and cash flow of
the Company. Based on amounts borrowed at March 15, 1996, the estimated
principal payment in September 1997 would be $534,000, increasing to $884,000
quarterly for 1998. All of the Company's installed phones are pledged as
collateral to the Credit Facility.
The majority of the Credit Facility (currently $29,000,000) can be
converted into Series B Preferred at the ratio of 833 shares for each $100,000
in outstanding debt and interest. Additionally, the Lenders received warrants to
purchase 204,824 shares of Series A Preferred at an exercise price of $0.20 per
share. Each share of Series A Preferred and Series B Preferred is convertible
into 20 shares of Common Stock. The estimated fair value of the warrants on the
date of grant will be recorded as interest expense over the term of the Credit
Facility. The Company has estimated the annual non-cash interest expense to be
in excess of $1,900,000.
On March 15, 1996, concurrent with the consummation of the Credit Facility,
the Company redeemed the 10% Cumulative Preferred, the 8% Preferred, and the 7%
Preferred. The redemption price was $1,117,371 and 34,434 shares of 14%
Preferred. In the aggregate, $6,475,011 of the Company's outstanding
obligations, including portions of the purchase price for the pending
acquisitions, was liquidated by issuing 107,918 shares of 14% Preferred. The
approximately $2,000,000 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value will be recorded as a reduction of
earnings available to common shareholders during the first quarter of 1996.
On March 15, 1996, warrants to purchase 2,018,946 shares of Common Stock at
a nominal exercise price per share ("Nominal Value Warrants") were issued in
conjunction with the IPP and Paramount acquisitions, redemption of the 10%
Cumulative Preferred, 8% Preferred, and the 7% Preferred, and conversion of
certain debt of the Company to the 14% Preferred. The warrants expire on March
13, 2001. The Company has utilized an independent appraiser who has estimated
the fair value of the Nominal Value Warrants to be $4,974,673, using the
Black-Scholes valuation method, of which $3,886,139 (the amount attributable to
the warrants provided to related parties in connection with the redemption of
the 10% Cumulative Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
F-23
24
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. SUBSEQUENT EVENTS (CONTINUED)
As of March 15, 1996, the Company has reserved 14,366,022 shares of Common
Stock for issuance under the following scenarios: (1) conversion of $29,000,000
of the debt under the Credit Facility into 241,667 shares of Series B Preferred
Stock which is then immediately convertible into 4,833,333 shares of Common
Stock; (2) exercise of warrants to purchase 204,824 shares of Series A Preferred
Stock at $0.20 per share, immediately convertible into 4,096,480 shares of
Common Stock; (3) conversion of 107,918 shares of 14% Preferred into 1,079,179
shares of Common Stock; (4) conversion, upon Shareholder approval, of 530,534
shares of 10% Non-Voting Preferred into 885,992 shares of Common Stock; (5)
exercise of 2,018,942 Nominal Value Warrants; (6) exercise of 980,351 warrants
at prices ranging from $5.70 to $15.75 per share; and (7) exercise of 471,745
stock options at prices ranging from $3.00 to $19.50 per share.
16. SUBSEQUENT EVENTS -- UNAUDITED
PENDING ACQUISITIONS AND CHANGES TO SHAREHOLDERS' EQUITY
During the April and May 1996, warrants representing 972,487 shares of
Common Stock were exercised, and total proceeds to the Company were $9,725. Of
the total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are considered revenue producing telephones, for a
purchase price consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of
the Company's Common Stock, valued at the average of the BID and ASK (as
reported by The NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an
unregistered and block discount of 20.19% as determined by Key Trust Company of
Ohio, N.A. ("Key Trust")) $4,637,840, or $2.15 per share; and (iii)
approximately $675,122 in related acquisition expenses. The Amtel acquisition
closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquire approximately
3,115 installed pay telephones for a purchase price, consisting of: (i) $500,000
in cash; (ii) 166,666 unregistered shares of the Company's Common Stock, valued
at the average of the BID and ASK (as reported by NASDAQ on September 16, 1996,
less an unregistered and block discount of 30.42% as determined by Key Trust)
$311,665, or $1.87 per share; (iii) assumption of capital lease obligations of
$7,750,000; (iv) notes payable to the selling shareholders of POA, $3,634,114;
(v) assumption of other debt, $234,890; (vi) two five year non-competition and
consulting agreements with two of the selling shareholders, $307,264; and (vii)
approximately $166,748 in related acquisition expenses.
F-24
25
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
16. SUBSEQUENT EVENTS -- UNAUDITED (CONTINUED)
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA contracts).
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds, $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
Based on amounts borrowings under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter till December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, and September 30, 1996 the Company did not
meet certain financial loan covenants. The Lenders have amended the credit
agreement to enable compliance with these loan covenants.
F-25
26
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER (UNAUDITED)
31, JUNE 30,
1995 1996
----------- -----------
ASSETS
Current assets:
Cash............................................................. $ 713,462 $ 1,025,382
Accounts receivable, net of allowance for doubtful
of $40,000 and $100,961, respectively......................... 901,508 1,570,576
Other current assets............................................. 185,634 302,469
----------- -----------
Total current assets.......................................... 1,800,604 2,898,427
Property and equipment, net........................................ 14,099,111 22,995,039
Intangible assets, net............................................. 11,592,157 24,286,302
Other assets....................................................... 1,425,384 1,863,716
----------- -----------
$28,917,256 $52,043,484
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt -- related parties............. -- $ 3,548,454
Current portion of long-term debt -- others...................... $ 1,010,412 1,502,653
Current portion of obligation under capital leases............... 288,972 73,510
Accounts payable................................................. 2,772,306 2,039,122
Accrued expenses................................................. 1,610,100 3,338,419
Deferred revenues................................................ -- 900,000
Obligations relating to contractual settlements
and other unusual charges..................................... 962,338 480,551
----------- -----------
Total current liabilities..................................... 6,644,128 11,882,709
Long-term debt -- related parties (amounts due at
maturity $1,732,500 and $29,000,000, respectively)............... 1,732,500 23,149,508
Long-term debt -- others........................................... 7,586,001 287,556
Obligations under capital leases................................... 3,243,965 202,557
14% cumulative preferred stock mandatorily redeemable
(redemption amount $6,742,960, due June 30, 2000)................ -- 6,404,228
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity...................... 9,710,662 10,116,926
----------- -----------
$28,917,256 $52,043,484
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-26
27
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(UNAUDITED) THREE MONTHS ENDED JUNE
SIX MONTHS ENDED JUNE 30, 30,
-------------------------- ------------------------
1995 1996 1995 1996
----------- ------------ ---------- -----------
REVENUES:
Coin calls.............................. $ 4,995,329 $ 10,411,344 $2,664,224 $ 5,959,549
Non-coin................................ 2,305,495 5,292,530 1,004,207 3,383,648
Other................................... 577,238 1,101,636 436,316 855,709
----------- ------------ --------- -----------
7,878,062 16,805,510 4,104,747 10,198,906
----------- ------------ --------- -----------
OPERATING EXPENSES:
Line and transmission charges........... 2,100,427 3,866,207 1,287,084 2,260,838
Location commissions.................... 1,516,365 2,536,730 886,665 1,377,263
Other operating expenses................ 2,682,710 5,047,451 1,132,493 2,906,855
Depreciation and amortization........... 1,432,491 5,312,885 731,591 3,227,617
Selling, general & administrative....... 1,345,427 2,398,724 767,934 1,295,041
Other unusual charges and contractual
settlements.......................... -- 5,334,514 -- 531,149
----------- ------------ --------- -----------
9,077,420 24,496,511 4,805,767 11,598,763
----------- ------------ --------- -----------
Loss from operations...................... (1,199,358) (7,691,001) (701,020) (1,399,857)
OTHER INCOME (EXPENSE):
Interest expense -- related parties..... -- (1,816,890) -- (1,537,174)
Interest expense -- others.............. (220,230) (274,221) (116,939) (50,266)
Interest income......................... 6,588 1,976 6,038 2,142
----------- ------------ --------- -----------
(213,642) (2,089,135) (110,901) (1,585,298)
----------- ------------ --------- -----------
Loss before extraordinary item............ (1,413,000) (9,780,136) (811,921) (2,985,155)
Extraordinary item:
Loss on debt restructuring.............. -- (267,281) -- (90,571)
----------- ------------ --------- -----------
NET LOSS.................................. $(1,413,000) $(10,047,417) $ (811,921) $(3,075,726)
=========== ============ ========= ===========
Earnings per share calculation:
Preferred dividend payable in cash...... (154,834) -- (77,417) --
Preferred dividend payable in kind...... -- (110,622) -- (83,372)
Accretion of 14% Preferred to its
redemption value..................... -- (24,119) -- (24,119)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred......................... -- (2,002,386) -- --
----------- ------------ --------- -----------
Net loss applicable to
common shareholders..................... $(1,567,834) $(12,184,544) $ (889,338) $(3,183,217)
=========== ============ ========= ===========
Net loss per common share before
extraordinary item...................... $ (0.99) $ (3.33) $ (0.54) $ (0.74)
=========== ============ ========= ===========
Net loss per common share................. $ (0.99) $ (3.41) $ (0.54) $ (0.76)
=========== ============ ========= ===========
Weighted average number of shares......... 1,586,142 3,576,381 1,648,058 4,196,868
=========== ============ ========= ===========
The accompanying notes are an integral part of these financial statements.
F-27
28
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
1995 1996
----------- ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $(1,413,000) $(10,047,417)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Depreciation and amortization............................... 1,432,491 5,312,885
Issuance of Nominal Value Warrants.......................... -- 3,886,140
Stock issued in lieu of cash payments....................... 61,160 20,620
Accretion of related parties debt........................... -- 561,008
Accretion of other debt..................................... 45,921
Loss on debt restructuring.................................. -- 338,546
Increase in allowance for doubtful accounts................. -- 60,961
Amortization of deferred revenues........................... -- (300,000)
Changes in assets and liabilities:
Accounts receivable....................................... (233,352) (584,429)
Other current assets...................................... 94,429 (116,835)
Accounts payable.......................................... 575,257 (703,756)
Accrued expenses.......................................... (51,711) 1,610,819
Obligations relating to contractual settlements and other
unusual charges........................................ -- (481,787)
----------- ------------
465,274 (397,324)
----------- ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc................... -- (4,826,335)
Acquisition of Paramount Communications Systems................ -- (9,780,644)
Deferred charges on pending acquisitions....................... -- (44,747)
Deferred revenues.............................................. -- 1,200,000
Purchases of intangible assets................................. (185,087) (662,436)
Change in other assets......................................... (79,209) 236,668
Acquisition deposits........................................... -- (1,600,000)
Purchases of property and equipment............................ (220,626) (1,065,496)
----------- ------------
(484,922) (16,542,990)
----------- ------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances................................... 200,000 --
Proceeds from related party debt............................... -- 32,223,454
Proceeds from shareholder debt................................. -- 575,000
Principal payments on borrowings............................... (918,141) (10,272,477)
Proceeds from issuance of preferred and common stock and
other....................................................... 690,000 --
Dividends paid................................................. (40,375) --
Debt financing costs........................................... -- (4,166,097)
Redemption of 10% Preferred and 8% Preferred................... -- (1,117,371)
Equity financing costs......................................... (52,935) --
Proceeds from warrant and option exercises..................... 20,000 9,725
----------- ------------
(101,451) 17,252,234
----------- ------------
(Decrease) increase in cash...................................... (121,099) 311,920
Cash at beginning of period...................................... 478,756 713,462
----------- ------------
Cash at end of period............................................ $ 357,657 $ 1,025,382
=========== ============
The accompanying notes are an integral part of these financial statements.
F-28
29
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
-------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ---------- -----------
MANDATORILY REDEEMABLE PREFERRED STOCK
14% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
Redemption of 7% Preferred................... -- -- 3,625.00 $ 217,500
Redemption of 8% Preferred................... -- -- 14,143.33 848,600
Redemption of 10% Preferred.................. -- -- 16,668.00 1,000,000
Conversion of debt........................... -- -- 59,695.39 3,581,723
Acquisition of Paramount Communications...... -- -- 8,333.33 375,768
Acquisition of International Payphones....... -- -- 5,453.14 245,896
Dividends payable-in-kind.................... -- -- 4,464.48 110,622
Accretion of carrying value to amount
payable at redemption [June 30, 2000]..... -- -- -- 24,119
------- ---------- ---------- -----------
TOTAL MANDATORILY REDEEMABLE
PREFERRED STOCK.............................. -- -- 112,382.67 $ 6,404,228
======= ========== ========== ===========
NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
7% CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. 2,500 $ 200,000 2,500 $ 200,000
Redemption of 7% Preferred................... -- -- (2,500) (200,000)
------- ---------- ---------- -----------
Balance at end of period..................... 2,500 $ 200,000 --
======= ---------- ========== -----------
8% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 12,200 $ 981,084 12,200 $ 981,084
Redemption of 8% Preferred................... -- -- (12,200) (981,084)
------- ---------- ---------- -----------
Balance at end of period..................... 12,200 $ 981,084 -- --
======= ---------- ========== -----------
10% CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year................. 1,496 $ 1 1,496 $ 1
Redemption of 10% Preferred.................. -- -- (1,496) (1)
------- ---------- ---------- -----------
Balance at end of period..................... 1,496 $ 1 -- --
======= ---------- ========== -----------
10% CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of year................. -- -- 530,534 $ 5,305,340
Acquisition of World Communications, Inc..... 530,534 $5,305,340 -- --
Redemption of 10% Preferred.................. -- -- (530,534) (5,305,340)
------- ---------- ---------- -----------
Balance at end of period..................... 530,534 $5,305,340 -- --
======= ========== ========== ===========
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year................. -- -- -- --
------- ---------- ---------- -----------
Balance at end of period..................... -- -- -- --
======= ---------- ========== -----------
The accompanying notes are an integral part of these financial statements.
F-29
30
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY -- CONTINUED
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, 1995 1996
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
SERIES B SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year.............. -- -- -- --
--------- ------------ --------- ------------
Balance at end of period.................. -- -- -- --
========= ------------ ========= ------------
COMMON STOCK
Balance at beginning of year.............. 1,522,158 $ 15,222 2,855,350 $ 28,554
Issuance of stock for services............ 91,383 914 4,400 44
Private sales of stock.................... 472,056 4,720 -- --
Exercise of warrants and options.......... 8,333 83 972,487 9,725
Acquisition of World Communications,
Inc.................................... 402,500 4,025 -- --
Conversion of debt to equity.............. 30,231 303 -- --
Acquisition of Public Telephone
Corporation............................ 304,879 3,049 -- --
Acquisition escrow deposits............... 23,810 238 (23,810) (238)
Acquisition of International Payphones.... -- -- 555,589 5,555
Redemption of 10% Non-Voting Preferred.... -- -- 884,214 8,842
--------- ------------ --------- ------------
Balance at end of period.................. 2,855,350 $ 28,554 5,248,230 $ 52,482
========= ------------ ========= ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.............. $ 8,755,364 $ 16,649,559
Issuance of stock for services............ 528,532 20,576
Private sales of stock.................... 2,010,067 --
Exercise of warrants and options.......... 34,917 --
Acquisition of World Communications,
Inc.................................... 2,712,852 --
Conversion of debt to equity.............. 137,375 --
Acquisition of Public Telephone
Corporation............................ 2,054,902 --
Acquisition escrow deposits............... 149,762 (149,762)
Financing costs........................... (83,212) --
Acquisition of International Payphones.... -- 2,790,042
Acquisition of Paramount Communications... -- 443,510
Warrants issued with debt................. 349,000 6,411,500
Issuance of Nominal Value Warrants........ -- 4,240,941
Redemption of 10% Non-voting Preferred.... -- 5,296,498
------------ ------------
Balance at end of period.................. $ 16,649,559 $ 35,702,864
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year.............. $ (7,303,804) $(13,453,876)
Net loss for the period................... (6,109,697) (10,047,417)
Dividends paid on 7% and 8% Preferred..... (40,375) --
14% Preferred dividend payable-in-kind.... -- (110,622)
Accretion of 14% Preferred carrying
value.................................. -- (24,119)
Redemption of 7% Preferred................ -- (17,500)
Redemption of 8% Preferred................ -- (293,516)
Redemption of 10% Preferred............... -- (1,691,370)
------------ ------------
Balance at end of period.................. $(13,453,876) $(25,638,420)
------------ ------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY................ $ 9,710,662 $ 10,116,926
============ ============
The accompanying notes are an integral part of these financial statements.
F-30
31
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB and subsequently amended on Form 10-KSB(A)-1 for the year
ended December 31, 1995.
Certain amounts relating to the three and six months ended June 30, 1995
have been reclassified to conform to the current quarter presentation. The
reclassifications have no impact on total assets, shareholders' equity or net
loss as previously reported.
2. ACQUISITIONS AND MERGERS
On March 15, 1996, the Company completed the acquisition of the outstanding
common stock of International Pay Phones, Inc. (a South Carolina company) and
International Pay Phones, Inc. (a Tennessee company) (collectively "IPP"),
companies affiliated through common ownership and management. In connection with
the acquisition of IPP, the Company acquired 2,101 installed telephones for a
purchase price consisting of: (i) $3,496,487 in cash; (ii) 555,589 unregistered
shares of the Company's Common Stock, par value $.01, ("Common Stock"); (iii)
5,453.14 unregistered shares of 14% Convertible Cumulative Redeemable Preferred
Stock ("14% Preferred"); and (iv) warrants to purchase 117,785 shares of the
Company's Common Stock at a nominal exercise price per share ("Nominal Value
Warrants"). Additionally, the Company assumed approximately $1,757,000 in
liabilities, of which $1,551,796 was repaid by the Company on March 15, 1996.
The cash purchase price included three five year non-compete agreements, with an
aggregate value of $60,000, with three of IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation) ("Paramount").
Under the terms of the Agreement, the Company acquired 2,528 installed
telephones for a purchase price consisting of: (i) $9,618,553 in cash; (ii)
8,333.33 shares of 14% Preferred; and (iii) Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock.
In addition, the Company assumed outstanding liabilities of approximately
$733,000, of which $697,947 was repaid on March 15, 1996. The purchase price
included a five year consulting and non-compete agreement, valued at $50,000,
with one of Paramount's former officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,531,404, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 60 months.
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public Telephone") in a transaction accounted for as a purchase.
The Company acquired current assets of $54,742, approximately 1,200 installed
telephones, assumed approximately $2,800,000 in debt and outstanding liabilities
of Public Telephone and issued 224,879 unregistered shares of the Company's
Common Stock to the shareholders of Public Telephone. In connection with the
acquisition, the Company entered into five year non-compete agreements with two
of Public
F-31
32
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
Telephone's former owners which require both cash payments and the issuance, in
the aggregate, of 80,000 unregistered shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of $256,571,
and 3,237 installed telephones, assumed approximately $6,900,000 in debt and
outstanding liabilities of World and issued 402,500 unregistered shares of the
Company's Common Stock and 530,534 shares of the Company's 10% Non-Voting
Redeemable Preferred Stock, which was subsequently converted to 884,214
unregistered shares of Common Stock on June 28, 1996.
The Public Telephone and World acquisitions were recorded as purchases and
the differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,305,168, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 36 months.
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public, IPP and Paramount acquisitions had
occurred at the beginning of 1995 and as though the IPP and Paramount
acquisitions had occurred at the beginning of 1996.
PRO FORMA SELECTED RESULTS OF OPERATIONS DATA
------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
Total revenues....................... $ 18,386,972 $ 19,294,190 $ 9,602,762 $ 10,198,906
Net loss before extraordinary item... (7,072,374) (9,835,846) (3,468,918) (2,985,155)
Net loss applicable to common
shareholders....................... (7,492,475) (10,210,618) (3,678,969) (3,183,217)
Net loss per common share............ $(2.63) $(2.69) $(1.26) $(0.76)
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995 or 1996, or of future results.
The pro forma statement of operations data includes adjustments related to the
amortization of intangible assets, reductions in certain selling, general, and
administrative expenses, interest expense on borrowings used to finance the
acquisitions and the weighted average number of common shares outstanding after
giving effect to the acquisitions.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are installed telephones, for a purchase price
consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of the Company's
Common Stock, valued at the average of the BID and ASK (as reported by The
NASDAQ Stock Market ("NASDAQ") on September 13, 1996, less an unregistered and
block discount of 20.19% as determined by Key Trust Company of Ohio, N.A. ("Key
Trust")) $4,637,840, or $2.15 per share; and (iii) approximately $675,122 in
related acquisition expenses. The Amtel acquisition closed on September 13,
1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired approximately
3,115 installed pay telephones for a
F-32
33
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
2. ACQUISITIONS AND MERGERS (CONTINUED)
purchase price, consisting of: (i) $500,000 in cash; (ii) 166,666 unregistered
shares of the Company's Common Stock, valued at the average of the BID and ASK
(as reported by NASDAQ on September 16, 1996, less an unregistered and block
discount of 30.42% as determined by Key Trust) $311,665, or $1.87 per share;
(iii) assumption of capital lease obligations of $7,750,000; (iv) notes payable
to the selling shareholders of POA, $3,634,114; (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, $307,264; and (vii) approximately $166,748 in
related acquisition expenses.
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as intangibles and will be
amortized over the life of the acquired location contracts (54 months for
Amtel's contracts and 72 months for POA's contracts).
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and June 30, 1996, property and equipment consisted
of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31, JUNE 30,
(IN YEARS) 1995 1996
------------- ------------ -----------
Telephones, boards, enclosures and cases...... 3-7 $ 16,386,987 $27,228,267
Furniture, fixtures and other equipment....... 3-5 989,300 1,312,548
Leasehold improvements........................ 2-5 231,466 235,422
------------ -----------
17,607,753 28,776,237
Less -- accumulated depreciation............ (3,508,642) (5,781,198)
------------ -----------
$ 14,099,111 $22,995,039
============ ===========
4. INTANGIBLE ASSETS
As of December 31, 1995 and June 30, 1996, intangible assets consisted of the
following:
AMORTIZATION
PERIOD DECEMBER 31, JUNE 30,
(IN MONTHS) 1995 1996
------------ ------------ -----------
Costs incurred in the acquisition and
installation
of telephones................................ 36-120 $ 13,403,126 $23,459,098
Debt restructuring costs....................... 40 -- 5,495,898
Non-compete agreements......................... 24-60 1,513,765 1,623,765
State operating certifications................. 60 466,796 466,796
------------ -----------
15,383,687 31,045,557
Less: Accumulated amortization................. (3,791,530) (6,759,255)
------------ -----------
$ 11,592,157 $24,286,302
============ ===========
5. LONG-TERM DEBT -- RELATED PARTIES
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility") commitment of
$37,250,000) from Internationale Nederlanden (U.S.) Capital Corporation and one
other lender (collectively known as "Lenders"). Subsequent to March 15, 1996,
F-33
34
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
5. LONG-TERM DEBT -- RELATED PARTIES (CONTINUED)
the Company borrowed an additional $1,692,500 against the Credit Facility. As of
June 30, 1996, $5,026,546 was available to the Company under the Credit Facility
to fund acquisitions and for general working capital purposes, subject to
certain conditions (including availability of additional collateral). However,
at June 30, 1996, due to the unavailability of additional collateral, no
additional funds could be borrowed by the Company. The initial borrowings under
the Credit Facility were used to complete the Paramount and IPP acquisitions, to
repay $8,503,405 of outstanding debt and $3,173,931 of outstanding obligations
under capital leases, to redeem the 10% Cumulative Redeemable Preferred Stock
("10% Preferred"), 8% Cumulative Redeemable Preferred Stock ("8% Preferred"),
and 7% Cumulative Convertible Redeemable Preferred Stock ("7% Preferred"), and
to pay related transactions fees. The additional borrowings of $1,692,500 were
used for an acquisition deposit ($1,300,000) classified as a non-current asset
and working capital.
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,776,546 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions and the remaining portion of the proceeds, $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
There were no available amounts under the credit facility at September 13, 1996.
The Credit Facility requires monthly interest payments at the Alternate
Base Rate (as defined therein) plus 5% and contains various covenants
restricting the Company's ability to pay dividends or incur additional debt,
among other conditions, and also contains financial covenants requiring minimum
net worth, working capital and earnings before interest, depreciation and
amortization among other covenants. The Credit Facility also contains a
subjective acceleration clause which states that in the event of a material
adverse change in the business, as determined by the Lenders, the Lenders can
call the debt at their discretion. The Lenders have waived their right to
exercise this subjective acceleration clause through December 15, 1997. Pursuant
to the Credit Facility amendments dated September 13, 1996, principal payments
commence in April 1997, and continue monthly and/or quarterly through June 1999
at which time the remaining principal balance is due. The amount of the
principal payment is contingent upon numerous factors, including the borrowing
base and cash flow of the Company.
Based on amounts borrowings under the Credit Facility as of September 13,
1996, the estimated principal payment due April 30, 1997 would be $2,972,222,
with monthly principal payments of $222,222 thereafter till December 31, 1997,
and quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $1,087,500 quarterly for 1998 and $1,268,750 at March 31, 1999.
All of the Company's installed telephones are pledged as collateral to the
Credit Facility. On June 30, 1996, and September 30, 1996 the Company did not
meet certain financial loan covenants. The Lenders have amended the credit
agreement to enable compliance with these loan covenants.
The majority of the Credit Facility (currently $29,000,000) can be
converted into Series B Special Convertible Preferred Stock ("Series B
Preferred"), at the ratio of 833 shares for each $100,000 in outstanding debt
and accrued interest. Additionally, the Lenders received warrants to purchase
204,824 shares of Series A Special Convertible Preferred Stock ("Series A
Preferred"), at an exercise price of $0.20 per share for the initial borrowings
under the Credit Facility. Pursuant to the loan agreement, the Lenders will
receive additional warrants to purchase Series A Preferred for providing the
$1,300,000 acquisition deposit. Each share of Series A Preferred and Series B
Preferred is convertible into 20 shares of Common Stock. The debt under the
Credit Facility was initially recorded net of an allocation of the fair value of
the warrants, such fair value was determined using the Black-Scholes valuation
model. The Company recorded non-cash interest expense (accretion of debt) of
$480,864 for the three months ended June 30, 1996 and $561,008 for the six
months ended June 30, 1996.
F-34
35
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and June 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
14% Cumulative Redeemable Convertible Preferred Stock
($60 stated value -- 200,000 shares authorized;
107,918.19 shares issued and outstanding at June 30,
1996; cumulative dividends issuable of 4,464.48 shares,
valued at $110,622; mandatory redemption amount of
$6,742,960 due June 30, 2000)............................ -- $6,404,228
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the six and three months ended June 30, 1996, the
carrying value of the 14% Preferred was increased by $24,119 through accretions.
Each share of 14% Preferred is entitled to receive a quarterly dividend of 0.035
shares of 14% Preferred. Each share of 14% Preferred is convertible into 10
shares of Common Stock.
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
As of December 31, 1995 and June 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted of the
following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
10% Cumulative Nonvoting Redeemable Preferred Stock
($10 stated value -- 550,000 shares authorized; 530,534
shares issued and outstanding at December 31, 1995,
converted to Common Stock pursuant to its terms on June
28, 1996).............................................. $ 5,305,340 --
Series A Special Convertible Preferred Stock ($0.20 par
value, $0.20 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
Series B Special Convertible Preferred Stock ($0.20 par
value, $120 stated value -- 250,000 shares authorized;
no shares issued)...................................... -- --
10% Cumulative Redeemable Preferred Stock ($1,000 stated
value -- 3,880 shares authorized; 1,496 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 1 --
8% Cumulative Redeemable Preferred Stock ($100 stated
value -- 16,000 shares authorized; 12,200 shares issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 981,084 --
7% Cumulative Convertible Redeemable Preferred Stock
($100 stated value -- 2,500 shares authorized, issued
and outstanding at December 31, 1995, redeemed on March
15, 1996).............................................. 200,000 --
F-35
36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Common Stock
($0.01 par value -- 50,000,000 shares authorized;
2,855,350 and 5,248,230 shares issued and outstanding
at December 31, 1995 and June 30, 1996)................ 28,554 52,482
Additional paid-in capital............................... 16,649,559 35,702,864
Accumulated deficit...................................... (13,453,876) (25,638,420)
------------ ------------
$ 9,710,662 $ 10,116,926
============ ============
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14% Preferred.
On March 15, 1996, concurrent with the Lenders Credit Facility, the Company
redeemed the 10% Preferred, 8% Preferred, and 7% Preferred. The redemption price
was cash payments aggregating $1,117,371 and 34,436.33 shares of 14% Preferred.
In the aggregate, $6,269,487 of the Company's outstanding obligations, including
portions of the purchase price for the IPP and Paramount acquisitions, was
liquidated by issuing 107,918.19 shares of 14% Preferred.
The $2,002,386 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value was recorded as a reduction of
earnings available to common shareholders as of March 31, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of
Common Stock were issued in conjunction with the IPP and Paramount acquisitions,
redemption of the 10% Preferred, 8% Preferred and 7% Preferred, and conversion
of certain related party debt of the Company to the 14% Preferred. Certain
holders of the 14% Preferred are deemed related parties pursuant to the rules
and regulations of the Securities and Exchange Commission. The warrants expire
on March 13, 2001. The Company has utilized an independent appraiser who has
estimated the fair market value of the Nominal Value Warrants to be $4,974,673,
using the Black-Scholes valuation method, of which $3,886,139 (the amount
attributable to the warrants provided to related parties in connection with the
redemption of the 10% Preferred, 8% Preferred, and 7% Preferred shares and
conversion of certain debt) was recorded as an unusual charge in the Company's
statement of operations for the three months ended March 31, 1996.
During April and May 1996, warrants representing 972,487 shares of Common
Stock were exercised, and total proceeds to the Company were $9,725. Of the
total warrants exercised, 539,989 shares of Common Stock were issued to an
officer of the Company. On July 22, 1996, Nominal Value Warrants representing
62,650 shares of Common Stock were exercised by an officer of the Company, and
total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment to
the Articles of Incorporation which authorizes the Company to have outstanding
60,000,000 shares; of which 50,000,000 shares are to be classified as Common
Stock and 10,000,000 shares as Preferred Stock. The shareholders also approved
conversion rights to the 10% Preferred. Each share of 10% Preferred is
convertible into 1.6667 shares of Common Stock at any time by the shareholder or
the Company. On June 28, 1996, the Company converted the outstanding 10%
Preferred into 884,214 shares of Common Stock.
F-36
37
REPORT OF INDEPENDENT ACCOUNTANTS
May 17, 1996
The Board of Directors of
Paramount Communications Systems, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, of changes in shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1995 and the results of its operations, its
changes in shareholders' equity and its cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 6, on March 15, 1996, the Company's net assets were sold to
an unrelated party.
/s/ Price Waterhouse LLP
Cleveland, Ohio
F-37
38
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 479,984
Receivables:
Trade....................................................................... 237,455
Shareholder................................................................. 38,168
----------
Total current assets................................................... 755,607
Property and equipment, net...................................................... 788,582
Intangible assets, net........................................................... 146,029
Other assets..................................................................... 15,098
----------
$1,705,316
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 373,866
Location commissions payable................................................... 65,958
Shareholder distributions payable.............................................. 155,532
Notes payable to affiliates.................................................... 483,246
----------
Total current liabilities.............................................. 1,078,602
----------
Commitments and contingencies.................................................... --
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 606,714
----------
Total shareholders' equity.................................................. 626,714
----------
$1,705,316
==========
The accompanying notes are an integral part of these financial statements.
F-38
39
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
Revenues:
Coin calls..................................................................... $3,751,744
Non-coin calls................................................................. 1,923,724
----------
Total revenues.............................................................. 5,675,468
----------
Operating costs and expenses:
Telephone charges.............................................................. 1,543,956
Commissions.................................................................... 696,443
Selling, general and administrative............................................ 2,407,479
Depreciation and amortization.................................................. 393,204
----------
Total operating costs and expenses.......................................... 5,041,082
----------
Operating income............................................................ 634,386
----------
Other income (expenses):
Interest and other income...................................................... 14,800
Interest expense............................................................... (64,210)
Other.......................................................................... (85,231)
----------
Total other expenses........................................................ (134,641)
----------
Net income.................................................................. $ 499,745
==========
The accompanying notes are an integral part of these financial statements.
F-39
40
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
Cash flows from operating activities:
Net income..................................................................... $ 499,745
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 393,204
Changes in assets and liabilities:
Decrease in receivables................................................... 2,392
Decrease in other current assets.......................................... 11,190
Decrease in other assets.................................................. 9,632
Increase in other accounts payable and accrued expenses................... 179,706
Increase in location commissions payable.................................. 10,915
----------
Net cash provided by operating activities.............................. 1,106,784
----------
Cash flows from investing activities:
Purchases of equipment......................................................... (356,791)
----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related party....................... 200,000
Distributions to shareholders.................................................. (229,088)
Repayments of notes payable to related parties................................. (439,470)
----------
Net cash used in financing activities.................................. (468,558)
----------
Net increase in cash and cash equivalents.............................. 281,435
Cash and cash equivalents, beginning of year..................................... 198,549
----------
Cash and cash equivalents, end of year........................................... $ 479,984
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........................................... $ 64,210
==========
The accompanying notes are an integral part of these financial statements.
F-40
41
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
Balance
December 31, 1994............................... 100 $100 $ 19,900 $106,969 $126,969
Net income........................................ -- -- -- 499,745 499,745
Distributions..................................... -- -- -- -- --
---- ---- ------- -------- --------
Balance
December 31, 1995............................... 100 $100 $ 19,900 $606,714 $626,714
==== ==== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-41
42
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March 1987 as a result of the deregulation of the
telephone industry. The Company is in the business of installing, maintaining
and operating pay telephones throughout South Florida.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated on a straight-line
basis over five years, the estimated useful lives of the respective assets.
Maintenance, repairs and minor replacements of these items are charged to
expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July 1998. Also, in connection
with certain equipment acquisitions, the Company entered into location contracts
for two and one-half years terms. These contracts expired in June 1995.
REVENUE RECOGNITION
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida.
SHAREHOLDERS DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
FAIR VALUE OF FINANCIAL INSTRUMENTS
During 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments", which requires the disclosure of fair value of financial
instruments. The Company's financial instruments consist of cash and cash
equivalents, trade receivables and notes payable to affiliates. The carrying
amount of these instruments at December 31, 1995 approximates their fair value.
F-42
43
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Installed pay telephones and related equipment.............. $ 3,259,133
Furniture, fixtures and office equipment.................... 40,125
Automobiles................................................. 31,943
Leasehold improvements...................................... 4,025
Warehouse equipment......................................... 1,772
-----------
3,336,998
Accumulated depreciation.................................... (2,548,416)
-----------
Property and equipment, net................................. $ 788,582
===========
Depreciation expense amounted to $282,902 for the year ended December 31,
1995.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
Non-compete agreements...................................... $ 533,135
Location contracts.......................................... 194,240
-----------
727,375
Accumulated amortization.................................... (581,346)
-----------
Intangible assets, net...................................... $ 146,029
===========
Amortization expense related to intangible assets amounted to $110,302 for
the year ended December 31, 1995.
4. RELATED PARTY TRANSACTIONS
NOTES PAYABLE
The Company has notes payable to related parties, with principal and
interest payable monthly at an annual rate of 10% and due in 1996. These notes
are collateralized by installed pay telephones and related equipment. The notes
were assumed and subsequently paid-off by the acquiring company (Note 6).
Interest expense paid to related parties relating on these notes amounted
to $64,210 in 1995.
F-43
44
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. RELATED PARTY TRANSACTIONS (CONTINUED)
PAYROLL ALLOCATION
Included in selling, general and administrative expenses is an allocation
of payroll for certain service personnel working for various related party
companies under common ownership. The allocation is based on management's
estimate of the amount of time each employee provides each related company.
OPERATING LEASE
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the facility on a month-to-month basis. The lease provides that the Company pay
its proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1995 amounted to $22,812.
VEHICLE LEASES
The Company leases various vehicles from a related party. Total lease
payments made in connection with these leases amounted to $46,866 during 1995.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation from time to time in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material effect on the Company's financial
position or results of operations.
6. SUBSEQUENT EVENTS
ACQUISITION
On March 15, 1996, the Company completed an Asset Purchase Agreement with
an unrelated party. Under the terms of the Agreement, the Company sold its
assets, including 2,528 installed telephones and related equipment, for a cash
price of approximately $9.6 million, warrants to purchase shares of stock of the
acquiring company, and the assumption, by the acquiring company, of
approximately $733,000 of outstanding Company liabilities. The purchase price
also included a five year consulting agreement with one of the Company's former
officers valued at $50,000.
TELECOMMUNICATIONS REFORM
On February 8, 1996, the President of the United States signed into law the
Telecommunications Act of 1996 (the "Act"). The Act changes many provisions of
the Communications Act of 1934 and requires the Federal Communications
Commission (the "FCC") to change its existing rules and adopt new rules in
several areas affecting broadcasting. This Act is one of the most significant
changes to the Communications Act since its adoption in 1934. Since the Act
recently was passed and became law, the FCC has only begun the proceedings that
the Act requires and it remains to be seen how the FCC will interpret certain of
its provisions. Congress and the FCC currently have under consideration and may
in the future adopt new laws and regulations and policies regarding a wide
variety of matters which could, directly or indirectly, adversely affect the
operation of the Company as well as its business strategies.
F-44
45
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Paramount Communications Systems, Inc.:
We have audited the accompanying balance sheet of Paramount Communications
Systems, Inc. as of December 31, 1994, and the related statement of income,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paramount Communications
Systems, Inc. at December 31, 1994 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Fort Lauderdale, Florida
March 10, 1995
F-45
46
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1994
1994
----------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 198,549
Accounts receivable............................................................ 258,931
Other current assets........................................................... 30,274
----------
Total current assets................................................... 487,754
Property and equipment, net (note 2)............................................. 714,693
Intangible assets, less accumulated amortization of $471,044..................... 256,331
Other assets..................................................................... 15,188
----------
$1,473,966
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................................... 177,908
Location commissions payable................................................... 55,043
Accrued interest payable....................................................... --
Sales tax payable.............................................................. 16,252
Shareholder distributions payable.............................................. 384,620
Current maturities of notes payable -- related parties (note 3)................ 436,619
----------
Total current liabilities.............................................. 1,070,442
Long-term portion of notes payable -- related parties (note 3)................... 276,555
----------
Total liabilities...................................................... 1,346,997
----------
Shareholders' equity:
Common stock, $1 par value; 100 shares authorized, issued and outstanding...... 100
Additional paid-in capital..................................................... 19,900
Retained earnings.............................................................. 106,969
----------
Total shareholders' equity............................................. 126,969
Commitments and contingencies (note 4)...........................................
----------
$1,473,966
==========
See accompanying notes to financial statements.
F-46
47
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
1994
----------
Revenues:
Coin calls.................................................................... $3,685,295
Non-coin calls................................................................ 2,030,194
----------
Total revenues........................................................ 5,715,489
----------
Operating costs and expenses:
Telephone charges............................................................. 1,748,270
Commissions................................................................... 676,304
Selling, general and administrative........................................... 2,099,203
Depreciation and amortization................................................. 770,429
----------
Total operating costs and expenses.................................... 5,294,206
----------
Operating income...................................................... 421,283
----------
Other expense:
Interest and other expense.................................................... (4,686)
Interest expense.............................................................. (72,902)
----------
Total other expenses.................................................. (77,588)
----------
Net income............................................................ $ 343,695
==========
See accompanying notes to financial statements.
F-47
48
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- --------- ---------
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.
F-48
49
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
1994
-----------
Cash flows from operating activities:
Net income.................................................................... $ 343,695
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of plant and equipment....................... 582,753
Amortization of intangible assets.......................................... 129,726
Amortization of deferred asset............................................. 57,950
Loss on write-off of property and equipment................................ 14,980
Changes in assets and liabilities:
Decrease in accounts receivable.......................................... 6,814
Increase in other current assets......................................... (5,841)
Increase in other assets................................................. (270)
Decrease in other current liabilities.................................... (5,131)
-----------
Net cash provided by operating activities............................. 1,124,676
-----------
Cash flows from investing activities:
Purchases of equipment........................................................ (59,625)
Proceeds from sale of equipment............................................... 3,578
Purchase of investments....................................................... (11,715)
Purchase of intangible assets................................................. --
-----------
Net cash used in investing activities................................. (67,762)
-----------
Cash flows from financing activities:
Increase in notes payable -- related party.................................... 200,000
Distributions to shareholders................................................. (626,989)
Repayments of notes payable -- related parties................................ (591,366)
-----------
Net cash used in financing activities................................. (1,018,355)
-----------
Net increase in cash and cash equivalents............................. 38,559
Cash and cash equivalents at beginning of year.................................. 159,990
-----------
Cash and cash equivalents at end of year........................................ $ 198,549
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........................................ $ 74,570
===========
See accompanying notes to financial statements.
F-49
50
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) THE COMPANY
Paramount Communications Systems, Inc. (the "Company"), a Florida
corporation, was formed in March, 1987 as a result of the deregulation of the
telephone industry. The Company is a Subchapter S corporation in the business of
installing, maintaining and operating pay telephones throughout South Florida.
(b) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization on
property and equipment are calculated on a straight-line basis over five years,
the estimated useful lives of the assets.
(d) INTANGIBLE ASSETS
Intangible assets consist of non-compete agreements and location contracts.
The non-compete agreements are being amortized on a straight-line basis over
their duration (five years) and expire through July, 1998. The location
contracts are amortized over two and one-half years and expire through June,
1995.
(e) RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call. Revenue from the telephone service agreement
is recognized in the month of service.
(f) INCOME TAXES
The Company is a Subchapter S corporation. As such, no provision is made
for income taxes as income or loss is included in the tax returns of the
shareholders.
(g) CONCENTRATIONS OF CREDIT AND BUSINESS RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, receivables are generated by the
Company's pay telephones located in the state of Florida. No single customer
accounted for more than 5% of the Company's sales.
(h) DISTRIBUTIONS
The Company generally distributes 100 percent of tax-basis profits to its
shareholders annually.
F-50
51
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(2) PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
1994
----------
Installed pay telephones and related equipment............... $2,845,325
Furniture, fixtures and office equipment..................... 35,525
Automobiles.................................................. 26,328
Leasehold improvements....................................... 4,025
Warehouse equipment.......................................... 1,772
----------
2,912,975
Less accumulated depreciation and amortization............... 2,198,282
----------
$ 714,693
==========
Depreciation and amortization of property and equipment was $582,753.
(3) RELATED PARTY TRANSACTIONS
(a) NOTES PAYABLE -- RELATED PARTIES
1994
----------
Notes payable to various related parties, principal and
interest payable monthly at rates ranging from 8% to 10%,
due from March, 1993 to April, 1997, collateralized by
installed pay telephones and related equipment............. $ 713,174
Less current maturities of notes payable -- related
parties.................................................... 436,619
----------
Long-term portion of notes payable -- related
parties.......................................... $ 276,555
==========
Interest expense paid to related parties relating to the above amounted to
$72,902.
Aggregate maturities of notes payable -- related parties subsequent to
December 31, 1994 are as follows:
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.
(4) OPERATING LEASE -- RELATED PARTY
The Company occupies a facility under a lease with a related party which
expired on May 31, 1993. Under the terms of the lease, the Company has the right
to renew the lease for a five-year period which began immediately after the end
of the initial term. The Company has not renewed the lease and currently leases
the
F-51
52
PARAMOUNT COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(4) OPERATING LEASE -- RELATED PARTY (CONTINUED)
facility on a month-to-month basis. The lease provides that the Company pay its
proportional share of the building's taxes, maintenance, insurance and other
related occupancy expenses.
Rent expense for the year ended December 31, 1994 was $23,373.
F-52
53
May 21, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones, Inc.
(a South Carolina corporation) as of December 31, 1995, and the related
statement of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Pay Phones, Inc.
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ Miller Sherrill Blake CPA
Lincolnton, North Carolina
F-53
54
INTERNATIONAL PAY PHONES, INC.
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Current Assets
Cash and Cash Equivalents..................................................... $ 11,336
Accounts Receivable........................................................... 142,801
-----------
Total Current Assets....................................................... 154,137
-----------
Property and Equipment
Leasehold Improvements........................................................ 16,000
Office Furniture and Equipment................................................ 28,441
Vehicles...................................................................... 236,393
Telephone Equipment........................................................... 2,304,632
Accumulated Depreciation...................................................... (1,563,039)
-----------
Total Property and Equipment............................................... 1,022,427
-----------
Other Assets
Covenants Not to Compete -- Net of Amortization............................... 105,528
Goodwill -- Net of Amortization............................................... 21,282
-----------
Total Other Assets......................................................... 126,810
-----------
Total Assets.................................................................... $ 1,303,374
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses......................................... $ 151,539
Notes Payable................................................................. 107,125
Notes Payable -- Related Party................................................ 25,000
Current Portion of Long-Term Debt............................................. 343,763
-----------
Total Current Liabilities.................................................. 627,427
-----------
Long-Term Liabilities
Notes Payable -- Less Current Portion......................................... 643,935
Obligations under Capital Leases -- Less Current Portion...................... 95,895
-----------
Total Long-Term Liabilities................................................ 739,830
-----------
Total Liabilities..................................................... 1,367,257
-----------
Stockholders' Equity
Common Stock.................................................................. 10,000
Additional Paid-In-Capital.................................................... 57,224
Retained Earnings............................................................. (131,107)
-----------
Total Stockholders' Equity................................................. (63,883)
-----------
Total Liabilities And Stockholders' Equity...................................... $ 1,303,374
===========
See Independent Auditors' Report and Notes to Financial Statement.
F-54
55
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
Sales............................................................................ $3,360,596
Cost of Goods Sold............................................................... 2,308,012
----------
Gross Profit........................................................... 1,052,584
OPERATING EXPENSES
General And Administrative Expenses............................................ 517,868
Depreciation Expense........................................................... 413,144
Interest Expense............................................................... 149,248
----------
Total Operating Expenses............................................... 1,080,260
----------
Income From Operations........................................................... (27,676)
OTHER (INCOME) EXPENSE
(Gain) Loss on Sale of Assets.................................................. (733)
----------
Total Other (Income) Expense........................................... (733)
Income Before Corporate Taxes.......................................... (26,943)
Deferred Tax Expense............................................................. 35,800
----------
Net Income............................................................. (62,743)
Beginning Retained Earnings...................................................... (68,364)
----------
Ending Retained Earnings......................................................... $ (131,107)
==========
See Independent Auditors' Report and Notes to Financial Statement.
F-55
56
INTERNATIONAL PAY PHONES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
NET CASH FLOW FROM OPERATING ACTIVITIES:
Net Income..................................................................... $ (62,743)
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and Amortization............................................... 451,929
Net (increase) decrease in receivables...................................... (61,817)
Net increase (decrease) in accounts payable and accrued expenses............ 40,406
Net change in deferred tax asset/liability.................................. 35,800
Gain on sale of property and equipment...................................... (733)
---------
Net Cash Provided (Used) by Operating Activities................................. 402,842
---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment.......................................................... (66,943)
---------
Net Cash Provided (Used) by Investing Activities................................. (66,943)
---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments to settle short-term debt............................................. (148,738)
Payments to settle long-term debt.............................................. (187,055)
Proceeds from short-term debt.................................................. 52,315
Proceeds from long-term debt................................................... 50,000
Payments under capital lease obligations....................................... (105,024)
---------
Net Cash Provided (Used) by Financing Activities................................. (338,502)
---------
Net Increase (Decrease) In Cash and Cash Equivalents............................. (2,603)
Cash and Cash Equivalents at beginning of year................................. 13,939
---------
Cash and Cash Equivalents at end of year......................................... $ 11,336
=========
SUPPLEMENTAL DISCLOSURES
Interest Paid.................................................................. $ 149,248
=========
Income Taxes Paid.............................................................. $ 0
=========
See Independent Auditors' Report and Notes to Financial Statement.
F-56
57
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
International Pay Phones, Inc. was incorporated under the laws of the State
of South Carolina on May 29, 1990. The Company purchases or leases pay phones
from suppliers and installs them in various locations throughout the
southeastern United States. Revenue is generated through contracts established
with the property owners regarding the use of the phones.
CASH
Cash includes cash in bank and instruments with maturities of 30 days or
less.
DEPRECIATION
Depreciation is computed using the straight-line and the accelerated cost
recovery methods.
NOTE B -- RELATED PARTY TRANSACTIONS
The Company has the following notes payable due to related parties as of
December 31, 1995:
Amounts payable to shareholders due on demand............................. $25,000
Amounts payable to corporations related through common ownership due on
demand.................................................................. 14,800
-------
$39,800
=======
The Company rents its operating facility from a partnership related through
common ownership. The rent expense totaled $19,508 for the year ended December
31, 1995.
NOTE C -- RETIREMENT PLAN
The Company sponsors a 401(k) plan covering all of the eligible employees
who elect to participate. The Company matches 50% of each employees deferred
salary up to a maximum to 2% of compensation. The contribution was $3,115 for
the year ended December 31, 1995.
NOTE D -- NOTES PAYABLE
Short-term notes payable consist of the following at December 31, 1995:
Lincoln Bank....... $ 50,000 10.25% Personal Guarantees
Olen Beal.......... 50,000 12.00% Personal Guarantees
Conquest........... 7,125 10.00% Personal Guarantees
--------
$107,125
========
See Independent Auditor's Report.
F-57
58
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E -- LONG-TERM DEBT
Long-term debt consists of the following notes:
1995
---------
Note Payable -- NationsBank...................................................... $ 10,261
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- NationsBank...................................................... 10,264
Due in monthly installments of $327.26 which includes interest calculated at
7.5%. Matures in November of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 8,827
Due in monthly installments of $292.10 which includes interest calculated at
6.25%. Matures in September of 1998. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 9,616
Due in monthly installments of $327.49 which includes interest calculated at
7.5%. Matures in October of 1998. Secured by vehicle.
Note Payable -- Ford Motor Credit................................................ 13,576
Due in monthly installments of $395.81 which includes interest calculated at
11.75%. Matures in June of 1999. Secured by vehicle.
Note Payable -- First Union National Bank........................................ 12,285
Due in monthly installments of $357.26 which includes interest calculated at
7.75%. Matures in March of 1999. Secured by vehicle.
Note Payable -- GMAC............................................................. 16,105
Due in monthly installments of $362.68 which includes interest calculated at
10.0%. Matures in August of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 21,478
Due in monthly installments of $485.00 which includes interest calculated at
8.99%. Matures in June of 2000. Secured by vehicle.
Note Payable -- NationsBank...................................................... 29,398
Due in monthly installments of $550.46 which includes interest calculated at
9.99%. Matures in December of 2001. Secured by vehicle.
Note Payable -- First Union National............................................. 32,958
Due in monthly installments of $694.24 which includes interest calculated at
9.06%. Matures in December of 2000. Secured by vehicle.
Note Payable -- Olen Beal........................................................ 41,627
Due in monthly installments of $1,660.72 which includes interest calculated at
12.0%. Matures in April of 1998. Guaranteed by officers.
Note Payable -- First National Bank.............................................. 437,098
Due in monthly installments of $11,686.55 which includes interest calculated at
prime plus 2%. Matures in September of 1999. Secured by phone equipment,
guarantees by officers, and assignment of life insurance.
See Independent Auditor's Report.
F-58
59
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1995
---------
NOTE E -- LONG-TERM DEBT (CONTINUED)
Note Payable -- Karl Baker....................................................... 191,741
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment.
Note Payable -- First Union National Bank........................................ 2,000
Due in monthly installments of $666.67 principle plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company.
Note Payable -- Elcotel.......................................................... 11,300
Due in monthly installments of $1,341 which includes interest calculated at
16.049%. Matures in September of 1996. Secured by phone equipment and
guaranteed by officers.
---------
857,361
Less: Current Maturities....................................................... (213,426)
---------
Total Long-Term Debt................................................... $ 643,935
=========
Maturities of long-term debt in each of the next five years are as follows:
1996...................... $213,426
1997...................... 221,139
1998...................... 228,947
1999...................... 169,611
2000...................... 24,238
--------
$857,361
========
NOTE F -- INCOME TAXES
Under Financial Accounting Standards Board Statement No. 109, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax basis of assets and liabilities and are measured
using enacted tax rates.
Net deferred tax assets in the accompanying balance sheet include the
following components:
Deferred tax asset arising from:
Net operating loss carryforward........................................ $ 38,350
Valuation Allowance.................................................... (38,350)
--------
Net deferred tax asset................................................... $ 0
========
The Company has unused net operating losses available for carryforward to
offset future taxable income. The net operating loss carryforward was
approximately $250,000 at December 31, 1995 and will expire in the year 2010.
NOTE G -- LEASES
The company is the lessee of telephone equipment under capital leases
expiring in various years through 1998. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are depreciated over the
lower of their related lease terms or their estimated productive lives.
Depreciation of assets under capital leases is included
See Independent Auditor's Report.
F-59
60
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G -- LEASES (CONTINUED)
in depreciation expense for the year ended December 31, 1995. The following is a
summary of property held under capital leases:
Telephone Equipment........ $ 416,160
Accumulated Depreciation... (113,159)
---------
$ 303,001
=========
Minimum future lease payments under capital leases as of December 31, 1995
for each of the next five years are as follows:
1996............. $130,337
1997............. 84,811
1998............. 11,084
1999............. 0
2000............. 0
--------
$226,232
========
NOTE H -- RENTALS UNDER OPERATING LEASES
The Company leased various vehicles under operating leases. Several of
those leases were terminated during the year ended December 31, 1995. The
remaining operating leases will expire in 1998.
Future minimum rental payments required under operating leases that have
remaining terms in excess of one year as of December 31, 1995 are as follows:
1996.............. $ 5,016
1997.............. 5,016
1998.............. 2,508
-------
$12,540
=======
Rental expense was approximately $19,577.
NOTE I -- CONTINGENCIES
The Company is a party to a contingent payment contract with Karl Baker for
$25,000. The agreement states that if contracts purchased from Mr. Baker remain
in effect for a specified time period, the payment will be made. However, if
contracts are lost, the $25,000 is reduced by $1,000 per occurrence.
NOTE J -- SUBSEQUENT EVENTS
The shareholders of International Pay Phones, Inc. have negotiated to sell
all outstanding shares of stock to PhoneTel Technologies, Inc. The transaction
was finalized on March 15, 1996. Also, an additional loan was secured from
NationsBank on January 3, 1996 in the amount of $50,000. Interest is calculated
at 10%, and the note matures March 3, 1996.
See Independent Auditor's Report.
F-60
61
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE K -- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
NOTE L -- STOCKHOLDERS' EQUITY
The company has 100,000 shares of $1 par common stock authorized and 10,000
outstanding at December 31, 1995.
See Independent Auditor's Report.
F-61
62
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, 1995 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
/s/ Miller Sherrill Blake CPA
Lincolnton, North Carolina
F-62
63
INTERNATIONAL PAY PHONES, INC.
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 1995
SCHEDULE I
COST OF GOODS SOLD
Line Charges................................................................... $ 983,204
Telephone Commissions.......................................................... 615,527
Salaries....................................................................... 327,957
Telephone Supplies............................................................. 233,435
Auto Expenses.................................................................. 56,999
Other Labor.................................................................... 8,377
Commissions -- Sales........................................................... 26,286
Armored Car Service............................................................ 30,517
Auto Insurance................................................................. 25,353
Equipment Rental............................................................... 357
----------
Total Cost Of Goods Sold.................................................... $2,308,012
==========
See Independent Auditors' Report on Supplementary Information
F-63
64
INTERNATIONAL PAY PHONES, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
SCHEDULE II
GENERAL AND ADMINISTRATIVE EXPENSES
Salary -- Officers.............................................................. $ 90,673
Payroll Taxes................................................................... 36,850
Management Fee.................................................................. 20,800
Advertising..................................................................... 2,873
Amortization.................................................................... 38,785
Answering Service............................................................... 1,322
Bank Service Charges............................................................ 4,487
Contributions................................................................... 500
Dues and Subscriptions.......................................................... 19,425
Entertainment................................................................... 8,950
Group Insurance................................................................. 14,497
General Insurance............................................................... 14,702
Officer Life Insurance.......................................................... 5,792
Lease Expense................................................................... 19,577
Taxes and Licenses.............................................................. 30,968
Office Expense.................................................................. 9,634
Pager Expense................................................................... 5,124
Pension Expense................................................................. 3,115
Postage......................................................................... 13,721
Professional Fees............................................................... 17,434
Rent............................................................................ 22,343
Repairs and Maintenance......................................................... 10,048
Convention Expense.............................................................. 5,133
Moving Expense.................................................................. 2,100
Storage......................................................................... 9,971
Telephone....................................................................... 71,590
Travel.......................................................................... 27,961
Uniforms........................................................................ 661
Utilities....................................................................... 8,227
Miscellaneous Expense........................................................... 605
--------
Total General and Administrative Expenses............................... $517,868
========
See Independent Auditors' Report on Supplementary Information
F-64
65
January 17, 1996
INDEPENDENT AUDITORS' REPORT
Board of Directors
International Pay Phones, Inc.
107 Dave Warlick Dr.
Lincolnton, North Carolina 28092
We have audited the accompanying balance sheet of International Pay Phones,
Inc. (a South Carolina corporation) as of December 31, 1994, and the related
statements of income and retained earnings, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of International Pay Phones,
Inc. as of December 31, 1994, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
MILLER SHERRILL BLAKE CPA PA
/s/ Terri A. Blake, CPA
- ------------------------------------------------------
For the Firm
F-65
66
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
F-66
67
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
F-67
68
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
F-68
69
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 employee's deferred
salary up to a maximum of 2% of compensation. The contribution was $5,847 for
1994.
See Independent Auditors' Report
F-69
70
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
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
Note Payable -- Karl Baker........................................................ 231,643
Due in monthly installments of $5,219.19 which includes interest calculated at
8.0%. Matures in April of 1999. Secured by phone equipment
Note Payable -- First Union National Bank......................................... 9,998
Due in monthly installments of $666.67 principal plus interest calculated at
10.0%. Matures in April of 1996. Secured by assets of the company
Note Payable -- Elcotel........................................................... 24,411
Due in monthly installments of $1,341 which includes interest calculated at
16.049% Matures in September of 1996. Secured by phone equipment and guaranteed
by officers..................................................................... 906,016
--------
Less: Current Maturities.......................................................... (181,637)
--------
Total Long-Term Debt.................................................... $724,379
========
See Independent Auditors' Report
F-70
71
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt in each of the next five years are as follows:
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 carry forward........................................ $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.
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
========
See Independent Auditors' Report
F-71
72
INTERNATIONAL PAY PHONES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE F -- LEASES (CONTINUED)
Minimum future lease payments under capital leases as of December 31, 1994
for each of the next five years are as follows:
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
F-72
73
INDEPENDENT AUDITOR'S REPORT
To The Stockholders
International Payphones, Inc.
Hilton Head Island, South Carolina
We have audited the accompanying Balance Sheets of International Payphones, Inc.
(a Tennessee corporation) as of December 31, 1995 and December 31, 1994, and the
related Statements of Earnings and Retained Earnings and Cash Flows for years
then ended. These financial statements are the responsibility of the management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Payphones, Inc.
and the results of its operations and its cash flows for the years ended
December 31, 1995 and 1994 in conformity with generally accepted accounting
principles.
/s/ ERNEST M. SEWELL, CPA
April 24, 1996
F-73
74
INTERNATIONAL PAYPHONES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
------------ ------------
ASSETS
Current Assets
Cash.......................................................... $ 17,321.08 $ 25,530.67
Accounts receivable - trade................................... 48,996.42 35,913.21
Other amounts receivable (Note D)............................. 5,600.00 25,574.54
Parts and supplies inventory.................................. 9,420.00 11,625.00
------------ ------------
Total Current Assets.......................................... 81,337.50 98,643.42
Property and Equipment
Property and equipment (Note B and F)......................... 816,148.89 720,142.61
Accumulated depreciation...................................... (539,338.28) (455,592.94)
------------ ------------
Net Property and Equipment.................................... 276,810.61 264,549.67
------------ ------------
TOTAL ASSETS.......................................... $ 358,148.11 $ 363,193.09
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note F).................... $ 73,978.08 $ 48,761.05
Accounts payable - trade...................................... 2,717.23 7,822.66
Accrued payroll and payroll taxes............................. -- 10,265.07
Other accrued liabilities (Note E)............................ 18,391.81 24,220.91
Deferred income taxes (Note C)................................ 6,000.00 5,100.00
------------ ------------
Total Current Liabilities..................................... 101,087.12 96,169.69
Long-term debt - net of current portion (Note F)................ 118,654.10 81,515.83
------------ ------------
TOTAL LIABILITIES..................................... 219,741.22 177,685.52
Shareholders' Equity
Common stock.................................................. 3,321.00 3,321.00
Additional paid-in capital.................................... 106,000.00 106,000.00
Retained earnings............................................. 29,085.89 76,186.57
------------ ------------
Total Shareholders' Equity.................................... 138,406.89 185,507.57
------------ ------------
TOTAL LIABILITIES AND EQUITY.......................... $ 358,148.11 $ 363,193.09
============ ============
The accompanying notes are an integral part of this statement.
F-74
75
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
------------- -------------
Revenue.......................................................... $1,194,620.91 $1,135,734.73
Direct costs..................................................... 608,061.14 553,336.70
------------- -------------
Gross Profit................................................... 586,559.77 582,398.03
General and Administrative Expenses.............................. 563,028.15 546,365.04
------------- -------------
Earnings from operations....................................... 23,531.62 36,032.99
Other income (expense):
Interest income................................................ (665.84) --
Gain (loss) on asset sale...................................... 916.16 (2,731.45)
------------- -------------
Earnings before taxes.......................................... 25,113.62 33,301.54
Provision for income tax expense (Note C)........................ 2,300.00 2,535.00
------------- -------------
Net earnings........................................... 22,813.62 30,766.54
BEGINNING RETAINED EARNINGS............................ 76,186.57 88,677.65
------------- -------------
99,000.19 119,444.19
Less dividend distributions...................................... (69,914.30) (43,257.62)
------------- -------------
ENDING RETAINED EARNINGS............................... $ 29,085.89 $ 76,186.57
============= =============
The accompanying notes are an integral part of this statement.
F-75
76
INTERNATIONAL PAYPHONES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................. $ 22,813.62 $ 30,766.54
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities
Depreciation................................................ 91,174.16 96,689.77
(Gain) loss on disposal of property......................... (916.16) 2,731.45
(Increase) decrease in accounts receivable.................. (13,083.21) (4,610.68)
(Increase) decrease in inventories.......................... 2,205.00 32,152.00
Increase (decrease) in accounts payable..................... (5,105.43) (16,981.09)
Increase (decrease) in income taxes payable................. 3,000.00 (5,280.00)
Increase (decrease) in other accrued expenses............... (5,829.10) 3,112.86
Increase (decrease) in payroll taxes........................ (10,265.07) 9,691.53
----------- ------------
Total adjustments........................................... 61,180.19 117,505.84
----------- ------------
Net Cash Provided (Used) by Operating Activities............... 83,993.81 148,272.38
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of property............................. 18,250.06 5,312.20
Purchases of fixed assets...................................... (71,329.00) (18,225.16)
Leasehold improvements......................................... -- (10,274.42)
----------- ------------
Net Cash Provided (Used) by Investing Activities............... (53,078.94) (23,187.38)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt................................... 96,329.00 30,893.30
Decrease in other accounts receivable.......................... 19,974.54 29,012.38
Repayment of long-term debt.................................... (49,068.19) (52,552.75)
Repayment of capital lease obligations......................... (34,345.51) (59,869.12)
Repayment of stockholder loans................................. -- (22,575.20)
Dividends paid................................................. (72,014.30) (43,257.62)
----------- ------------
Net Cash Provided (Used) by Financing Activities............... (39,124.46) (118,349.01)
----------- ------------
NET INCREASE (DECREASE) IN CASH............................. (8,209.59) 6,735.99
CASH AT BEGINNING OF YEAR................................... 25,530.67 18,794.68
----------- ------------
CASH AT END OF YEAR......................................... $ 17,321.08 $ 25,530.67
=========== ============
SUPPLEMENTAL DISCLOSURES
Noncash Investing and Financing Activities:
Assets acquired through capital lease.......................... $(49,440.00) $ (66,598.00)
Capital lease used to acquire assets........................... 49,440.00 66,598.00
Cash Paid During the Year for:
Interest....................................................... $ 13,489.00 $ 20,919.00
Income taxes................................................... 2,300.00 2,535.00
The accompanying notes are an integral part of this statement.
F-76
77
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
NOTE A -- GENERAL
International Payphones, Inc. is a Tennessee corporation formed in 1985 to
sell, install, lease and maintain pay telephone equipment. The majority of the
Company's operations are in the eastern region of the the state of Tennessee
where it owns approximately 500 telephones and receives pay telephone coin
income and long distance commissions. Under agreements with pay phone site
location owners the Company collects the pay phone coin revenue and the long,
terms run distance commission income and pays a percentage of this revenue to
the site location owner each month. These agreements cover periods ranging from
five to twenty years.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over useful lives ranging from 5 to 7 years for equipment
and vehicles and 31.5 years for leasehold improvements. Repairs and maintenance
are charged to expense when incurred and improvements which substantially
prolong the useful lives of the assets involved are capitalized and depreciated.
The cost of assets classified by major categories is as follows:
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................................................ 131,662.90 85,096.62
----------- -----------
Total cost.................................... 816,148.89 720,142.61
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 stockholder's report and pay Federal income tax on their allocated
percentage of the corporation's net earnings. The Company does pay Tennessee
state excise tax on its net earnings at a 6% tax rate. There are timing
differences in how items of income and expense are reported on the tax return
and in the financial statements. These differences involve trade receivables for
long distance commission income which is reported as income when earned in the
financial statements but is reported as received for tax purposes. In addition,
depreciation expense is claimed under IRS Code Section 179 and using accelerated
writeoff methods for tax purposes while the straight-line writeoff method is
used for financial reporting. State excise tax is provided for in the financial
statements as the items of income and deduction are recognized therein
regardless of when they are reported on the income tax return. As a result of
these timing differences, deferred tax liabilities of $ 6,000 and $ 3,000,
respectively, have been accrued at December 31, 1995 and December 31, 1994.
NOTE D -- OTHER AMOUNTS RECEIVABLE:
The Company is affiliated through common stock ownership and control with
other companies involved in the telecommunications industry. Loans to these
affiliates on open account totaled $19,886 at December 31, 1994. Loans to
employees at December 31, 1994 totaled $7,937.
F-77
78
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- OTHER ACCRUED LIABILITIES:
Other accrued liabilities include the Company's estimate of accrued site
commissions due as of December 31, 1995 and December 31, 1994. Under the terms
of the Company's royalty agreements with its customers, site commissions are
payable after the end of the month in which the net coin and long distance
revenue is received. As of December 31, 1995 and December 31, 1994, the Company
has accrued approximately two months, respectively, of unpaid site commissions.
NOTE F -- LONG-TERM DEBT:
Long-term debt at December 31, 1995 and December 31, 1994 includes the
following:
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%........ $ 4,377.89 $ 15,269.36
Note payable to Conquest Communications dated in December, 1993 in
the face amount of $25,000 payable in monthly installments with
interest............................................................ -- 5,117.01
Note payable to First Union Bank of Georgia dated October 11, 1993
in the face amount of $24,763 payable in 60 monthly installments of
$487 including interest at 6.75%. This note is collateralized by a
1994 Ford Explorer.................................................. -- 19,773.54
Notes payable (two) to First Union Bank of South Carolina dated
September 17, 1993 in the face amounts of $15,022 each, both payable
in 60 monthly installments of $292 including interest at 6.25%.
These notes are collateralized by two 1993 Ford cargo vans.......... 18,219.80 23,457.12
Note payable to First Tennessee Bank dated January 31, 1994 in the
face amount of $13,893 payable in 60 monthly installments of $289
including interest at 9.00%. This note is collateralized by a 1994
Toyota Corolla...................................................... 9,422.68 11,681.97
Note payable to Nationsbank of South Carolina dated December 14,
1993 in the face amount of $15,596 payable in 60 monthly
installments of $309 including interest at 7.00%. This note is
collateralized by a 1994 Ford Econoline............................. 10,187.33 12,867.48
Note payable to First National Bank of Gatlinburg dated August 28,
1995 in the face amount of $25,000 payable in 23 monthly
installments of $1,000 including interest at prime plus 2.362%. This
note is collateralized by pay phones and royalty contracts.......... 21,890.59 --
Capitalized lease purchase agreement dated January 26, 1994 in the
original sum of $66,370, due in monthly installments of $2,139
through December, 1996, decreasing to $1,123 through March, 1997,
including sales tax and finance charges at 14%...................... 21,412.70 42,110.40
Capitalized lease purchase agreement dated May 5, 1995 in the
original sum of $49,440, due in monthly installments of $1,842
through March, 1998, including sales tax and finance charges at
19%................................................................. 36,981.01 --
Note payable to Nationsbank of South Carolina dated November 4,
1995 in the face amount of $71,329 payable in 60 monthly
installments of $1,484 including interest at 8.95%. This note is
collateralized by a 1995 Mercedes................................... 70,140.18 --
----------- -----------
192,632.18 130,276.88
Less current portion................................................ (73,978.08) (48,761.05)
----------- -----------
$118,654.10 $ 81,515.83
=========== ===========
F-78
79
INTERNATIONAL PAYPHONES, INC.
NOTES TO THE FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- OPERATING LEASES
The Company leases its office space from one of the stockholders under an
oral agreement at a monthly rate of $1,000 plus utilities, taxes, repairs,
maintenance and leasehold improvements. The Company also leases three vehicles
under separate noncancelable operating lease agreements dated March 25, 1993,
January 22, 1994 and April 21, 1995. These agreements call for monthly lease
payments of $509, $1,006, and $444, respectively, including sales tax. Each
agreement allows for additional charges for excess milage upon expiration of the
lease. Future minimum annual lease payments under the vehicle leases are as
follows:
Year ended December 31, 1995..................................................... $22,183.00
Year ended December 31, 1996..................................................... 18,936.00
Year ended December 31, 1997..................................................... 11,371.00
Year ended December 31, 1998..................................................... 1,333.00
----------
$53,823.00
NOTE H -- EVENTS SUBSEQUENT TO DECEMBER 31, 1995
Effective March 15, 1996 the Company entered into a merger agreement with
PhoneTel Technologies, Inc. under which 100% of the Company stock was acquired
by Phonetel and the Company ceased to exist as a separate entity.
F-79
80
INDEPENDENT AUDITORS' REPORT
Board of Directors
Payphones of America, Inc.
We have audited the accompanying Consolidated balance sheets of Payphones
of America, Inc. (a Tennessee corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Payphones of
America, Inc. and subsidiary as of December 31, 1995 and 1994, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As described in Note
B, the Company has suffered recurring losses from operations and has limited
liquidity which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KERBER, ECK & BRECKELL LLP
St. Louis, Missouri
January 30, 1996 (except for Note L, as
to which the date is February 7, 1996)
F-80
81
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
ASSETS
CURRENT ASSETS
Cash................................................................ $ 3,852 $ 147,910
Accounts receivable................................................. 377,325 367,973
Prepaid expenses.................................................... 25,754 14,315
---------- ----------
Total current assets......................................... 406,931 530,198
PROPERTY AND EQUIPMENT
Telephone equipment................................................. 3,891,230 3,831,941
Furniture and fixtures.............................................. 59,497 47,396
Trucks and autos.................................................... 201,555 154,956
---------- ----------
4,152,282 4,034,293
Less accumulated depreciation and amortization................. 1,422,621 820,509
---------- ----------
2,729,661 3,213,784
Uninstalled pay telephone equipment................................. 89,145 104,074
Building not used in operations, net of accumulated depreciation of
$5,375
for 1995 and $3,763 for 1994...................................... 59,125 60,738
---------- ----------
2,877,931 3,378,596
OTHER ASSETS
Site location contracts, less accumulated amortization of $1,000,928
for 1995 and $406,776 for 1994.................................... 1,980,822 2,530,488
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $70,377 for 1995 and $50,889 for
1994.............................................................. 709,125 728,613
Covenants not to compete, less accumulated amortization of $545,417
for 1995 and $380,417 for 1994.................................... 279,584 444,584
Other intangibles, less accumulated amortization of $59,099 for 1995
and $43,589 for 1994.............................................. 102,558 117,767
Other............................................................... 24,332 21,510
---------- ----------
3,096,421 3,842,962
---------- ----------
$6,381,283 $7,751,756
========= =========
LIABILITIES
CURRENT LIABILITIES
Notes payable to bank............................................... $ 243,750 $ 262,750
Current maturities of long-term obligations......................... 1,330,954 1,241,818
Accounts payable.................................................... 882,723 699,385
Accrued expenses.................................................... 146,063 18,656
---------- ----------
Total current liabilities.................................... 2,603,490 2,222,609
LONG-TERM OBLIGATIONS, less current maturities...................... 4,753,853 5,355,740
DEFERRED INCOME TAXES............................................... -- 284,000
COMMITMENTS
STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE preferred stock -- authorized but unissued, 10,000,000
shares............................................................ -- --
Common stock -- authorized, 10,000,000 shares without par value;
issued
and outstanding, 2,567,324 shares in 1995 and 1,033,990 shares in
1994.............................................................. 348,756 339,423
Additional contributed capital...................................... -- 132,230
Accumulated deficit................................................. (1,324,816) (582,246)
---------- ----------
(976,060) (110,593)
---------- ----------
$6,381,283 $7,751,756
========== ==========
The accompanying notes are an integral part of these statements.
F-81
82
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.
F-82
83
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (1)(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 3l, 1994.................. 339,423 132,230 (582,246) (110,593)
Net loss for the year ended
December 31, 1995........................... -- -- (742,570) (742,570)
Stock warrants exercised...................... 9,333 -- -- 9,333
Cash dividends................................ -- (132,230) -- (132,230)
-------- -------- ----------- ---------
Balance at December 31, 1995.................. $348,756 $ -- $(1,324,816) $(976,060)
======== ======== =========== =========
The accompanying notes are an integral part of this statement.
F-83
84
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.
F-84
85
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. THE COMPANY
Payphones of America, Inc. operates, services and maintains a system of
approximately 2,800 pay telephones in the Southeastern and Midwestern United
States.
2. PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiary. Intercompany transactions and balances have
been eliminated in consolidation.
3. ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
4. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable assets
to operations over their estimated service lives. Leased property under capital
leases is amortized over the service lives of the assets for those leases which
substantially transfer ownership. The straight-line method of depreciation is
followed for substantially all assets for financial reporting purposes, but
accelerated methods are used for tax purposes. Future income taxes resulting
from depreciation temporary differences have been provided for.
5. INTANGIBLE ASSETS
Site location contracts are exclusive rights to operate pay telephones at
various locations acquired through business combinations and are stated at cost.
Amortization of site contract costs is recorded using the straight-line method
over five years, the expected average lives of the contracts.
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase transactions. Goodwill is
amortized on a straight-line method over 40 years. The covenants not to compete
are being amortized over their contractual lives of five years. Other intangible
assets, including license agreements and deferred financing costs, are amortized
over the life of the agreements.
6. RECOGNITION OF REVENUE
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also recorded
for fees associated with the call.
7. CONCENTRATIONS OF CREDIT RISK
Revenues have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of 1995 revenues
were generated by the Company's pay telephones located in the states of Missouri
(36%) and Virginia (33%). No other area has a disproportionate credit risk.
F-85
86
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
8. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B -- GOING CONCERN
The Company has experienced recurring losses and has accumulated losses
since inception of $1,324,816. As of December 31, 1995, the Company's current
liabilities exceed its current assets by $2,196,559. These factors raise doubt
about the Company's ability to continue as a going concern. The Company's
continued existence as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its debt and lease obligations and to obtain additional financing
or refinancing as may be required. Historically, the Company has generated
sufficient cash flow to meet its obligations and to pay its debt and lease
obligations, and, although it cannot be assured that the Company will be able to
continue as a going concern in view of its present financial condition,
management believes that continued strategic business acquisitions and
improvements in planning and budgeting should enable the Company to meet its
obligations and sustain its operations.
NOTE C -- NOTE PAYABLE TO BANK
Note payable to bank is comprised of a $245,000 revolving line of credit
agreement with Mark Twain Bank. Interest is payable monthly at 1.50% over the
bank's corporate base rate (8.50% at December 31, 1995). The line of credit is
secured by certain equipment of the Company and other accounts receivable and
matures on February 10, 1996.
F-86
87
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31:
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
========== ========== ========== ==========
The notes payable to stockholders consist of eight unsecured loans maturing
at various dates through April 30, 2000. Interest is payable at the rate of 10%.
The note payable to Mark Twain Bank requires payments of $326 per month
including interest at the rate of 8.75%. The final payment of the entire unpaid
balance of principal and interest will be due October 15, 1998. This note is
secured by a deed of trust for a condominium.
The notes payable to Ford Motor Credit Company consist of ten loans secured
by automobiles and trucks maturing at various dates through April 22, 1999. The
notes require monthly payments of $4,329 including interest at rates from 8.12%
to 10.54%.
The notes payable to Ronald L. Coleman consist of two loans. The notes are
unsecured and mature in April, 2007. These notes require monthly payments of
$4,271 including interest at rates from 8% to 15%.
The note payable to Pay-Tele Communications, Inc. d/b/a Midwest Telecom is
secured by telephone equipment and site location contracts. The note requires
annual principal payments of $100,000 with interest at the rate of 10% through
maturity on June 1, 1998. The note is personally guaranteed by the stockholders
of the Company.
The note payable to Communications Finance Corporation is secured by
telephone equipment and site location contracts. The note requires monthly
payments of $11,895 including interest at the rate of 15% through maturity on
September 15, 1999. The note is personally guaranteed by the stockholders of the
Company.
The note payable to R. Greg Kintz and Paul Wm. Schindler requires monthly
principal payments of $7,950 plus interest at rates from 12% to 16% through
maturity on May 1, 1997. The stockholders of the Company have personally pledged
some of their common stock to the lenders as security.
F-87
88
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- LONG-TERM OBLIGATIONS (CONTINUED)
The Company conducts a portion of its business using leased pay telephone
equipment and other intangible assets. For financial and tax reporting purposes,
the present values of minimum lease payments have been capitalized. Implicit
interest rates for these leases range from 14% to 18%.
The leases, which are noncancelable, expire at various dates through 2001.
The following is a schedule of leased property and other assets under capital
leases included on the accompanying balance sheets:
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.
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)
========= =========
F-88
89
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE E -- INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are attributable to the following at
December 31:
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
==========
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
F-89
90
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- STOCK WARRANTS (CONTINUED)
Warrant six has been issued to the Company's vice president and warrant
nine has been issued to a lender.
NOTE H -- STATEMENT OF CASH FLOWS
Cash paid for interest and income taxes was as follows during the year
ended December 31:
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.
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.
F-90
91
PAYPHONES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 financial statements
to conform to the 1995 presentation.
NOTE L -- SUBSEQUENT EVENT
On February 7, 1996, the Telecommunications Act of 1996 was signed into
law. The Act recognizes that independent public payphone providers are entitled
to fair rules to compete with the Regional Bell Operating Companies and other
local exchange companies. For instance, the Act prohibits Bell operating
companies from subsidizing payphone service directly or indirectly with revenues
generated from their exchange or access services. Bell companies are also
prohibited from discriminating in favor of their payphone services. The
legislation directs the Federal Communications Commission to develop fair rules
in implementing the payphone provision within nine months. The potential impact
of this Act on the financial position of the Company is unknown at this time.
NOTE M -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of cash and
trade payables are representative of their fair values due to the short-term
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value at December 31, 1995, based on
market rates and conditions.
F-91
92
PAYPHONES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
JUN-95 JUN-96
------------- -------------
ASSETS
Current Assets:
Cash.......................................................... $ (169,071.69) $ (170,709.08)
Accounts Receivable........................................... 339,498.44 372,557.99
Prepaid Expenses.............................................. 499,311.96 39,245.11
Other Current Assets.......................................... 91,139.99 40,210.91
------------- -------------
Total Current Assets............................................ 760,878.70 281,304.93
------------- -------------
Operating Equipment
Telecommunications equipment.................................. 3,848,670.36 3,924,343.66
Telephone Equipment held for installation..................... 20,684.45 20,684.45
------------- -------------
3,869,354.81 3,945,028.11
-------------
Less accumulated depreciation and amortization................ (991,873.18) 1,533,605.18)
------------- -------------
Net Operating Equipment......................................... 2,877,481.63 2,411,422.93
------------- -------------
Leasehold improvements, equipment, furniture and fixtures net of
accumulated depreciation and amortization of $118,347.19 and
$180,991.76 respectively...................................... 167,422.68 30,706.63
Intangible Assets
Site contracts, net amortization.............................. 2,234,952.07 1,688,500.68
Non Compete Agreements, net amortization...................... 362,083.35 197,083.33
------------- -------------
2,597,035.42 1,885,584.01
Other Assets.................................................... 831,335.75 793,406.35
Total Assets.................................................... $7,234,154.18 $5,402,424.85
------------- -------------
LIABILITIES
Current Liabilities
Accounts Payable.............................................. $ 337,245.60 $ 84,690.23
Accrued Expenses.............................................. 1,255,345.44 623,809.53
Current Maturities of long term debt and notes payable........ 63,003.28 50,458.91
-- --
------------- -------------
Total Current Liabilities....................................... 1,655,594.32 758,958.67
Deferred Revenue, less current maturities....................... -- (11,522.00)
Long-term debt, less current maturities
Notes payable and obligations under capital leases............ 6,141,313.57 5,380,965.03
Notes payable to stockholders................................. 262,894.81 644,190.19
------------- -------------
Total Liabilities............................................... 8,059,802.70 6,772,591.89
------------- -------------
Stockholders Equity:
Common Stock.................................................. 348,756.03 348,756.03
APIC.......................................................... (46,133.09) --
Accumulated deficit(retained earnings)........................ (1,128,271.46) 1,718,923.07)
Total Stockholders Equity....................................... (825,648.52) 1,370,167.04)
------------- -------------
$7,234,154.18 $5,402,424.85
============= =============
F-92
93
PAYPHONES OF AMERICA, INC.
UNAUDITED CONSOLIDATED INCOME STATEMENT
JUN-95 JUN-96
------------- -------------
Revenues
Coin Calls.................................................... $1,649,738.77 $1,516,505.67
Non Coin Calls................................................ 1,937,053.41 1,539,280.30
Other Revenue................................................. 13,786.67 712,438.98
------------- -------------
Total Revenues.................................................. 3,600,578.85 3,768,224.95
------------- -------------
Cost of Revenues
Line Access Charges........................................... 866,025.91 698,365.13
Commissions................................................... 556,942.49 436,680.69
Service & Collections......................................... 777,406.11 1,060,772.30
Depreciation & Amortization................................... 679,329.58 698,211.55
------------- -------------
Total Cost of Revenues.......................................... 2,879,704.09 2,894,029.67
------------- -------------
Gross Profit.................................................... 720,874.76 874,195.28
SGA Expenses.................................................... 846,050.26 883,212.48
------------- -------------
Operating Income(loss).......................................... (125,175.50) (9,017.20)
Other Income (expenses)
Interest Expense.............................................. (479,226.62) (333,229.92)
Gain/Loss of Sale of Assets................................... 6,273.67 (55,474.76)
Other Income.................................................. 4,192.64 4,110.74
------------- -------------
Total Other Income (expense).................................... (468,760.31) (384,593.94)
------------- -------------
Income (loss) before taxes on Income............................ (593,935.81) (393,611.14)
Taxes on Income................................................. -- --
------------- -------------
Net Income...................................................... ($ 593,935.81) ($ 393,611.14)
============= =============
F-93
94
PAYPHONES OF AMERICA, INC.
UNAUDITED CONSOLIDATED
CASH FLOW STATEMENT
JUN-96 JUN-95
------------- -------------
Operating Activities
Net Loss...................................................... $ (393,611.14) $ (593,935.81)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and Amortization................................. 698,211.55 679,329.58
Gain on sale of property and equipment........................ 55,474.76 (6,273.67)
Deferred income............................................... -- --
Changes in assets & liabilities:
Accounts Receivable........................................... (20,761.30) (115,274.19)
Prepaid and other current assets.............................. (13,490.74) (15,004.01)
Accounts Payable & accrued expenses........................... (8,624.64) 250,026.04
Other......................................................... -- --
------------- -------------
Cash provided by operating activities........................... 317,198.49 198,867.94
------------- -------------
Investing Activities
Purchase of fixed assets...................................... (63,542.81) (40,442.55)
Proceeds from sale of assets.................................. -- 6,273.67
Increase (decrease) in other assets........................... 3,000.00 --
------------- -------------
Cash flows used in investing activities......................... (60,542.81) (34,168.88)
Financing Activities
Proceeds from banks, capital leases, stockholders and related
parties.................................................... 489,928.35 165,691.72
Principal payments on debt.................................... (784,764.68) (653,717.84)
Stock warrants exercised...................................... -- 9,333.34
Dividends Paid................................................ -- (114,613.68)
------------- -------------
Cash provided by financing activities........................... (294,836.33) (593,306.46)
Net Increase (decrease) in cash................................. 82,904.97 (360,269.64)
Cash (overdraft) beginning of period............................ 3,852.00 147,910.09
------------- -------------
Cash at end of period........................................... $ 86,756.97 $ (212,359.55)
============= =============
F-94
95
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined balance sheets of Amtel
Communications, Inc., and Combined Companies (Note B) as of June 30, 1996 and
December 31, 1995, and the related combined statements of operations,
stockholder's deficit, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Amtel Communications, Inc., and
combined Companies (Note B) as of June 30, 1996 and December 31, 1995, and the
results of their operations and their cash flows for the periods then ended in
conformity with generally accepted accounting principles.
The accompanying combined financial statements have been prepared assuming that
the Company will continue as a going concern. As described in Note A, on August
3, 1995, the Company filed voluntary petitions for relief under Chapter 11 of
Title II of the United States Bankruptcy Code and was authorized to continue
managing and operating the business as a debtor in possession subject to the
control and supervision of the Bankruptcy Court. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Harlan & Boettger
San Diego, California
August 23, 1996
F-95
96
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN POSSESSION)
COMBINED BALANCE SHEETS
JUNE 30,
1996 DECEMBER 31, 1995
------------ -----------------
CURRENT ASSETS
Cash..................................................... $ 422,566 $ 616,974
Accounts receivable...................................... 527,883 791,238
Inventory................................................ 2,001,072 1,874,290
Other.................................................... 137,553 180,280
------------ -----------------
TOTAL CURRENT ASSETS..................................... 3,089,074 3,462,782
------------ -----------------
FIXED ASSETS (Note C)
Property and equipment, net.............................. 462,813 1,060,119
Deferred site costs, net................................. 9,812,154 10,359,692
----------- -----------
TOTAL FIXED ASSETS.................................... 10,274,967 11,419,811
----------- -----------
OTHER ASSETS............................................... 294,619 289,216
----------- -----------
TOTAL ASSETS.......................................... $13,658,660 $15,171,809
=========== ===========
POST-PETITION LIABILITIES
Accounts payable - trade................................. $ 677,425 $ 1,010,211
Accounts payable - bankruptcy............................ 1,253,555 539,942
Accrued expenses......................................... 767,661 709,518
----------- -----------
TOTAL POST-PETITION LIABILITIES.......................... 2,698,641 2,259,671
PRE-PETITION LIABILITIES
SUBJECT TO COMPROMISE (Note D)
Accounts payable - trade................................. 6,123,480 6,123,480
Accrued sales tax........................................ 1,615,671 1,615,671
Notes payable............................................ 7,774,805 7,774,805
Lessor liabilities....................................... 65,085,000 65,085,000
----------- -----------
TOTAL PRE-PETITION LIABILITIES........................... 80,598,956 80,598,956
----------- -----------
STOCKHOLDER'S DEFICIT
Common stock, 1,000,000 shares authorized, $0.01 par
value, 400,000 shares authorized, no par value, 50,000
shares issued and outstanding......................... 50,000 50,000
Retained deficit......................................... (69,688,937) (67,736,818)
----------- -----------
TOTAL STOCKHOLDER'S DEFICIT.............................. (69,638,937) (67,686,818)
----------- -----------
TOTAL LIABILITIES & DEFICIT.............................. $13,658,660 $15,171,809
=========== ===========
See accompanying notes to the financial statements.
F-96
97
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF OPERATIONS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
REVENUE
Coin.................................................... $ 4,696,852 $ 9,689,179
LD Commissions.......................................... 1,406,593 2,848,753
Interstate.............................................. 578,681 761,181
Intralata............................................... 460,601 1,849,477
Other................................................... 62,095 1,910,550
------------- -----------------
TOTAL REVENUE........................................... 7,204,822 17,059,140
------------- -----------------
COSTS AND EXPENSES
Line charges............................................ 2,428,704 6,862,015
Location commissions.................................... 1,639,127 3,921,741
Other operating expenses................................ 321,947 2,651,734
Selling, general and administrative..................... 2,231,970 15,103,091
Depreciation and amortization........................... 777,823 1,621,029
Other................................................... -- 67,356
----------- -------------
LOSS FROM OPERATIONS BEFORE OTHER
EXPENSES AND REORGANIZATION ITEMS....................... (194,749) (13,167,826)
----------- -------------
OTHER
Interest income......................................... (1,606) --
Interest expense........................................ 6,077 7,429,502
Loss on asset disposal.................................. 453,898 429,967
Other expenses.......................................... 505,113 --
----------- -------------
LOSS BEFORE REORGANIZATION ITEMS........................ (1,158,231) (21,027,295)
REORGANIZATION ITEMS (Note E)
Professional fees....................................... 721,277 539,942
Other................................................... 68,611 --
----------- -------------
LOSS BEFORE INCOME TAXES.................................. (1,948,119) (21,567,237)
INCOME TAXES (Note F)..................................... 4,000 4,000
----------- -------------
NET LOSS.................................................. $(1,952,119) $ (21,571,237)
=========== =============
See accompanying notes to the financial statements.
F-97
98
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
------ ------- ------------ -------------
DECEMBER 31, 1994............................. 50,000 $50,000 $(46,165,581) $(46,115,581)
Net loss.................................... -- -- (21,571,237) (21,571,237)
------ ------- ------------ ------------
DECEMBER 31, 1995............................. 50,000 50,000 (67,736,818) (67,686,818)
Net loss.................................... -- -- (1,952,119) (1,952,119)
------ ------- ------------ ------------
JUNE 30, 1996................................. 50,000 $50,000 $(69,688,937) $(69,638,937)
====== ======= ============ ============
See accompanying notes to the financial statements.
F-98
99
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $(1,952,119) $ (21,571,237)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 777,823 1,621,029
Loss on disposal of property......................... 453,898 429,966
Non-cash reorganization items........................ 713,613 539,942
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................ 263,355 50,449
Inventory.......................................... (126,782) (16,077)
Deposits........................................... (5,401) (140,157)
Other assets....................................... 42,726 (175,612)
Increase (decrease) in:
Accounts payable................................... (332,786) 2,426,573
Accrued expenses................................... 58,143 2,325,189
Notes payable...................................... -- 4,556,207
----------- -------------
NET CASH USED IN OPERATING ACTIVITIES..................... (107,530) (9,953,728)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (103,518) (64,151)
Proceeds from sale of property.......................... 147,635 --
Expenditures for deferred site costs.................... (130,995) (2,866,920)
----------- -------------
NET CASH USED IN INVESTING ACTIVITIES..................... (86,878) (2,931,071)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital lease obligations................... -- (76,148)
Proceeds from lessor liabilities........................ -- 13,209,000
----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................. -- 13,132,852
NET INCREASE (DECREASE) IN CASH........................... (194,408) 248,053
CASH, BEGINNING OF PERIOD................................. 616,974 368,921
----------- -------------
CASH, END OF PERIOD....................................... $ 422,566 $ 616,974
=========== =============
See accompanying notes to the financial statements.
F-99
100
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-All. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates continuity of operations
and the realization of assets and the satisfaction of liabilities in the normal
course of business. The Chapter 11 filings, the Company's leveraged financial
structure, and recurring net losses resulting in a deficit in stockholder's
equity, raise substantial doubt about its ability to continue as a going
concern. A plan of reorganization may materially change the amounts reported in
the consolidated financial statements (which do not give effect to adjustments
to the carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of these actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in these combined financial statements.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined financial statements include the accounts of Amtel
Communications, Inc., Amtel Communications Payphones, Inc., Amtel Communications
Services, Inc., Amtel Communications Correctional Facilities, Inc. and ACI-HDT
Supply Company. The five entities are all owned 100% by the same individual.
Collectively, the five entities will be referred to as "the Company". Material
intercompany transactions and balances have been eliminated.
CASH
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
and money market funds to be cash equivalents.
F-100
101
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORY
Inventory consists primarily of pay telephones, pedestals, and enclosures
to be installed in the Company's business locations. Inventory is stated at the
lower of cost or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line basis over estimated useful lives of 3-5 years.
DEFERRED SITE COSTS
Deferred site costs consist of pay telephones and related components and
installation costs necessary to make the pay phone ready for operation. Costs
are being amortized on the straight-line method over estimated useful lives of 8
years.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
INCOME TAXES
The Company provides for federal and state income taxes currently payable
as well as for those deferred because of timing differences between reporting
income and expenses for financial statement purposes and income and expenses for
tax purposes.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes".
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. FIXED ASSETS:
Included in fixed assets are property and equipment (furniture, fixtures,
and computers) and deferred site costs (pay phones, housing and installation
costs) both of which are carried at cost.
Property and equipment and deferred site costs are summarized as follows:
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Property and equipment............... $ 989,108 $ 1,898,564
Accumulated depreciation............. (526,295) (838,446)
----------- -----------
Net........................... $ 462,813 $ 1,060,118
=========== ===========
Deferred site costs.................. $13,284,000 $13,153,005
Accumulated amortization............. (3,471,849) (2,793,313)
----------- -----------
Net........................... $ 9,812,151 $10,359,692
=========== ===========
F-101
102
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
D. PRE-PETITION LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION
PROCEEDINGS:
Pre-petition liabilities consist of secured and unsecured debt, all of
which are subject to compromise under the proposed plan of reorganization.
Certain inventory was returned to the parties claiming a secured interest in the
asset at or around the petition filing date. The claimed secured claims are
classified as subject to compromise as the value of the collateral is less than
the corresponding obligation.
Pre-petition liabilities at June 30, 1996 and December 31, 1995 are as
follows:
1996 1995
----------- -----------
Accounts payable................................. $ 6,123,480 $ 6,123,480
Accrued state sales tax.......................... 1,615,671 1,615,671
Secured notes payable............................ 7,774,805 7,774,805
Lessor liabilities............................... 65,085,000 65,085,000
----------- -----------
$80,598,956 $80,598,956
=========== ===========
A plan of reorganization may materially change the amount and terms of
these pre-petition liabilities.
Lessor liability consists of funds borrowed from independent third parties,
under which the Company agreed to sell, lease-back, install and maintain, a pay
telephone for an initial investment of $3,000 -- $3,600 per pay telephone. The
Company agreed to pay $51 per month per phone, for a five year period and then
return the initial investment to the investors. Investors had the right to have
their investment returned at any time within the five year period for a nominal
surrender fee. These transactions have been accounted for as financing
transactions and payments made by the Company have been recorded as interest
expense in the statement of operations.
Payments to investors for the six months ended June 30, 1996 and the year
ended December 31, 1995 were approximately $0 and $6,762,000, respectively.
As of the petition date, in accordance with current accounting
pronouncements, the Company discontinued accruing interest on its pre-petition
debt obligations. If such interest had continued to be accrued, interest expense
for the first six months of 1996 and the last five months of 1995 would have
been $457,628 and $379,351, respectively. Interest expense associated with the
lessor liability is not reflected in these accruals as the obligations are not
represented by formal notes.
In conjunction with the Chapter 11 case, there are differences between
claims filed by potential creditors and amounts recorded by the Company. These
differences will be resolved by negotiated agreement between the Company and the
claimant or by the Court. Additional claims may arise in conjunction with the
termination of contractual obligations related to executory contracts and
leases. As a result, recorded amounts may be adjusted but the Company believes
that any such adjustments will not be material.
E. REORGANIZATION ITEMS:
Reorganization items represent expenses resulting from the reorganization
and restructuring of the business. Since these expenses do not relate to the
Company's normal operations they are reported separately on the statement of
operations.
F. INCOME TAXES:
As discussed in Note B, the Company adopted SFAS 109, "Accounting for
Income Taxes". SFAS 109 requires the use of the balance sheet method of
accounting for income taxes. Under this method, a deferred
F-102
103
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED FINANCIAL STATEMENTS
(CONTINUED)
F. INCOME TAXES (CONTINUED):
tax asset or liability represents the tax effect of temporary differences
between financial statement and tax bases of assets and liabilities and is
measured using the latest enacted tax rates.
The provision for income taxes for the six months ended June 30, 1996 and
the year ended December 31, 1995 is as follows:
1996 1995
------ ------
Current provision.................... $4,000 $4,000
====== ======
The Company realized substantial net operating losses for the six months
ended June 30, 1996 and the year ended December 31, 1995 as well as in prior
periods. Calculation of the temporary differences between financial statement
and tax bases of assets and liabilities is complicated by the fact the Company
has not filed tax returns since 1993. A valuation reserve has been established
equal to the potential tax benefit that could result from the use of the net
operating losses for these periods since there is reasonable doubt the Company
can generate income to utilize these losses.
G. COMMITMENTS:
The Company leases building space for its six branches, including warehouse
facilities in Seattle, Washington; Denver, Colorado; Portland, Oregon; Hayward,
California; Los Angeles, California; and its corporate headquarters in San
Diego, California. The leases have expiration dates ranging from September, 1996
to October, 1998. The agreements call for a cumulative annual base rent of
$246,336.
Net future minimum rental payments required under this lease as of June 30,
1996 are as follows:
YEARS ENDED
JUNE 30,
- -------------------------------------
1997................................. $209,461
1998................................. 113,040
1999................................. 33,600
2000................................. --
2001................................. --
--------
$356,101
========
Total rent expense charged to operations for the six months ended June 30,
1996 and the year ended December 31, 1995 was $204,227 and $544,193,
respectively.
H. PROPOSED PLAN OF REORGANIZATION:
During the six months ended June 30, 1996, the Company evaluated its
long-term market strategies with the goal of reducing expenses and improving
overall operating results. As a result, the Company entered into an asset
purchase agreement with PhoneTel Technologies, Inc. (an Ohio Corporation)
("PhoneTel") dated June 26, 1996 wherein the Company will sell substantially all
of its pay phone operating assets for cash and stock of PhoneTel totaling
$13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel stock). In July, 1996
PhoneTel made a non refundable deposit of $1,300,000 to open escrow for the
purchase of these assets.
F-103
104
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS
OF AMTEL COMMUNICATIONS, INC:
We have audited the accompanying combined statement of revenues and direct
operating expenses of Amtel Communications, Inc., and combined Companies (Note
B) for the three months ended December 31, 1994. This combined statement of
revenues and direct operating expenses is the responsibility of the Company's
management. Our responsibility is to express an opinion on the statement of
revenues and direct operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and direct
operating expenses are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and direct operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and direct operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying statement was prepared to present the revenues and direct
operating expenses for the three months ended December 31, 1994, pursuant to the
Securities and Exchange Commission's communication dated July 25, 1996 described
in Note C, and is not intended to be a complete presentation of the Company's
operations.
In our opinion, the combined statement of revenues and direct operating
expenses referred to above presents fairly, in all material respects, the
revenue and direct operating expenses of Amtel Communications, Inc., and
combined Companies (Note B) for the three months ended December 31, 1994 in
conformity with generally accepted accounting principles.
The accompanying combined statement of revenues and direct operating
expenses has been prepared assuming that the Company will continue as a going
concern. As described in Note A, on August 3, 1995, the Company filed voluntary
petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code and was authorized to continue managing and operating the
business as a debtor in possession subject to the control and supervision of the
Bankruptcy Court. Those conditions raise substantial doubt about the Company's
ability to continue as a going concern. The combined statement of revenues and
direct operating expenses does not include any adjustment that might result from
the outcome of this uncertainty.
/s/ Harlan & Boettger
San Diego, California
August 23, 1996
F-104
105
AMTEL COMMUNICATIONS, INC. AND COMBINED COMPANIES
(DEBTOR-IN-POSSESSION)
COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE THREE
MONTHS ENDED
DECEMBER 31, 1994
-----------------
REVENUE
Coin.......................................................... $ 2,603,577
LD Commissions................................................ 593,370
Interstate.................................................... 68,155
Intralata..................................................... 593,842
Other......................................................... 1,509,861
-----------
TOTAL REVENUE................................................. 5,368,805
-----------
COSTS AND EXPENSES
Line charges.................................................. 1,342,855
Location commissions.......................................... 890,903
Other operating expenses...................................... 1,481,073
Selling, general and administrative........................... 4,115,854
Depreciation and amortization................................. 480,702
-----------
LOSS FROM OPERATIONS BEFORE OTHER INCOME AND EXPENSES......... (2,942,582)
-----------
OTHER
Interest income............................................... (105)
Interest expense.............................................. 2,295,382
-----------
NET LOSS...................................................... $(5,237,859)
===========
The accompanying notes are an integral part of this statement.
F-105
106
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
A. REORGANIZATION AND LEGAL MATTERS:
Amtel Communications, Inc. and its combined companies (the "Company") filed
voluntary petitions for relief under Chapter 11 of Title II of the United States
Bankruptcy Code (the "Code") on August 3, 1995 (the "petition date")
administratively consolidated under Case No. 95-08253-A11. The Company is
currently operating its business as a debtor-in-possession under the
jurisdiction of the United States Bankruptcy Court for the Southern District of
California. The Company's liabilities as of the petition date are generally
subject to settlement in a plan of reorganization, which must be voted on by
certain of its creditors and confirmed by the Court. Until a reorganization plan
has been confirmed, the Company is prevented from making payments on
pre-petition debt unless permitted by the Code or approved by the Court. Certain
contracts existing at the petition date have been rejected or assumed with the
approval of the Court. The Company continues to review all other unexpired
pre-petition executory contracts to determine whether they should be assumed or
rejected. Parties affected by the rejection of contracts and leases may file
claims against the Company.
The combined statement of revenues and direct operating expenses has been
prepared assuming the Company will continue as a going concern, which
contemplates continuity of operations and the realization of assets and the
satisfaction of liabilities in the normal course of business. The Chapter 11
filings, the Company's leveraged financial structure, and recurring net losses
resulting in a deficit in stockholder's equity, raise substantial doubt about
its ability to continue as a going concern. A plan of reorganization may
materially change the amounts reported in the combined statement of revenues and
direct operating expenses (which do not give effect to adjustments to the
carrying values of assets and liabilities which may be necessary as a
consequence of a plan of reorganization). The continuation of the Company's
business as a going concern is contingent upon, among other things, the ability
to (1) formulate a plan of reorganization that will be confirmed by the Court,
(2) achieve satisfactory levels of future profitable operations, (3) maintain
adequate financing, and (4) provide sufficient cash from operations to meet
future obligations.
The Company has commenced actions against various parties relating to the
management of the Company. These actions seek to avoid or subordinate certain
obligations incurred by the Company and to recover certain payments made by or
on behalf of the Company in connection with its operations. The Company has also
filed actions against several entities seeking avoidance and recovery of certain
transfers of interests of the Company in property alleged to be preferences
under section 547(b) of the Code. The ultimate outcome of this actions and the
potential recoveries, if any, resulting from the resolution of these actions is
unknown at this time and, accordingly, no provision for any amounts has been
recorded in this combined statement of revenues and direct operating expenses.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined statement of revenues and direct operating expenses includes
the accounts of Amtel Communications, Inc., Amtel Communications Payphones,
Inc., Amtel Communications Services, Inc., Amtel Communications Correctional
Facilities, Inc. and ACI-HDT Supply Company. The five entities are all owned
100% by the same individual. Collectively, the five entities will be referred to
as "the Company". Material intercompany transactions and balances have been
eliminated.
REVENUE RECOGNITION
Revenue is recognized when it is earned with the exception of coin revenue,
which is recognized when it is collected.
F-106
107
AMTEL COMMUNICATIONS, INC. AND COMPANIES
(DEBTOR-IN-POSSESSION)
NOTES TO COMBINED STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(CONTINUED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
ESTIMATES
The preparation of a combined statement of revenues and direct operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the combined statement of revenues and direct operating expenses and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
C. INCOMPLETE PRESENTATION:
By letter dated July 25, 1996 to PhoneTel Technologies, Inc., the
Securities and Exchange Commission (SEC) granted a waiver of Item 310(c) of
Regulation S-B which requires submission of two years of audited statements of
operations. Instead, the SEC has accepted audited statements of operations for a
twenty-one month period. This combined statement of revenues and direct
operating expenses together with the combined statement of operations from the
audited financial statements for the six months ended June 30, 1996 and for the
year ended December 31, 1996 comprise the twenty-one month period.
D. SUBSEQUENT EVENT -- PROPOSED PLAN OF REORGANIZATION:
In 1996, the Company evaluated its long-term market strategies with the
goal of reducing expenses and improving overall operating results. As a result,
the Company entered into an asset purchase agreement with PhoneTel Technologies,
Inc. (an Ohio Corporation) ("PhoneTel") dated June 26, 1996 wherein the Company
will sell substantially all of its pay phone operating assets for cash and stock
of PhoneTel totaling $13,000,000 ($7,000,000 cash and $6,000,000 PhoneTel
stock). In July, 1996 PhoneTel made a non refundable deposit of $1,300,000 to
open escrow for the purchase of these assets.
F-107
============================================ ================================
NO DEALER, SALESPERSON OR ANY OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SHARES
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY PHONETEL TECHNOLOGIES, INC.
OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATIONS THAT THERE HAS NOT BEEN ANY [LOGO]
CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
------------- COMMON STOCK
TABLE OF CONTENTS
Page
Available Information................... 2
Prospectus Summary.......................3
Risk Factors............................ 9
Use of Proceeds.........................17
Capitalization..........................18
Price Range of Common Stock.............19 --------------------
Dividend Policy.........................20
Selected Financial Data.................21
Pro Forma Financial Data................22 PROSPECTUS
Management's Discussion and
Analysis of Financial Condition --------------------
and Results of Operations ............32
Business................................44
Management..............................61
Principal and Selling Shareholders......67
Certain Transactions....................70 SOUTHCOAST CAPITAL CORPORATION
Description of Capital Stock............71
Shares Eligible for Future Sale.........76
Underwriting............................77
Legal Matters...........................79 , 1996
Experts.................................79
Glossary...............................A-1
Index to Financial Statements..........F-1
========================================== ================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Sixth of the Articles of Incorporation of the Company
provides for indemnification, to the fullest extent permitted or required
under law, of any director or officer of the Company or any person serving
at the request of the Company as a director, trustee or officer of another
entity, in connection with any action, suit or proceeding, criminal, civil
or administrative, to which such person, is or may be a party by reason of
their status as such.
Pursuant to section 1701.13(E) of the Ohio Revised Code, a
director, officer or employee is entitled to indemnification only if a
determination is made (i) by the directors of the Company acting at a
meeting at which a quorum consisting of directors who neither were nor are
parties to or threatened with any such action, suit or proceeding is
present or (ii) by the shareholders of the Company at a meeting held for
such purpose by the affirmative vote of the holders of shares entitling
them to exercise a majority of the voting power of the Company on such
proposal or without a meeting by the written consent of the holders of
share entitling them to exercise two-thirds of the voting power on such
proposal, that such director, officer or employee (a) was not, and has not
been adjudicated to have been, negligent or guilty of misconduct in the
performance of his duty to the Company, (b) acted in good faith and in a
manner he reasonably believed to be in the best interest of the Company and
(c) in any matter the subject of a criminal action, suit or proceeding, had
no reasonable cause to believe that his conduct was unlawful.
Additionally, section 1701.13(E)(5)(a) of the Ohio Revised Code
provides that, unless prohibited by specific reference in a corporation's
articles of incorporation or code of regulations, a corporation shall pay a
director's expenses, including attorneys' fees, incurred in defending an
action, suit or proceeding brought against a director in such capacity,
whether such action, suit or proceeding is brought by a third party or by
or in the right of the corporation, provided the director delivers to the
corporation an undertaking to (a) repay such amount if it is proved in a
court of competent jurisdiction that his action or failure to act was
undertaken with deliberate intent to injure the corporation or with
reckless disregard for the best interests of the corporation and (b)
reasonably cooperate with the corporation in such action, suit or
proceeding.
Section 1701.13(E)(7) of the Ohio Revised Code provides that a
corporation may purchase insurance or furnish similar protection for any
director, officer or employee against any liability asserted against him in
any such capacity, whether or not the corporation would have power to
indemnify him under Ohio law. Such insurance may be purchased from or
maintained with a person in which the corporation has a financial interest.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
Except for the Securities and Exchange Commission registration fee,
all fees and expenses are estimated and will be paid by the Company.
Securities and Exchange Commission Registration Fee.... $8,182
NASD Filing Fee........................................ 3,200
Nasdaq listing fees.................................... *
Blue Sky Fees and Expenses (including counsel)......... *
Printing and Engraving Expenses........................ *
Accounting Fees and Expenses........................... *
Legal Fees and Expenses................................ *
Transfer Agent's and Registrar's Fees and Expenses..... *
Miscellaneous.......................................... *
------
Total............................................. $ *
======
* To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During 1993 the Company issued 20,833 shares of Common Stock to
Zandec, Ltd. in connection with the exercise of certain options resulting
in proceeds to the Company in the amount of $66,250. In addition, the
Company issued 310,962 shares of Common Stock to various individuals in
connection with the exercise of Series B, C, D and E Warrants resulting in
proceeds to the Company totalling $1,272,945. The aforementioned shares
were issued pursuant to the exemption from registration provided under
Section 4(2) of the Act.
On February 13, 1993 the Company issued 8,333 shares of Common
Stock to The Cafaro Company ("Cafaro") at a value of $56,250 in
consideration for entering into a ten-year agreement with the Company to
provide Cafaro with telecommunications services. On June 30, 1993 a
director was issued 1,830 shares of Common Stock as reimbursement for
certain fees which were valued at $22,573. Both issuances were exempt from
registration pursuant to the exemption provided under Section 4(2) of the
Act.
On June 30, 1993 the Company issued 6,667 shares of Common Stock
to a director and 1,686 shares to Susan Etter in a private sale resulting
in proceeds to the Company in the aggregate of $63,916. On the same day,
the Company issued 16,164 shares of Common Stock to Zandec, Ltd.
representing the conversion of $220,957 of debt and interest into equity.
In addition, shares of 12% Preferred Stock valued at $742,584 were
converted into 123,764 shares of Common Stock of the Company. On June 30,
1993 the Company issued 12,000 and 200 shares of 8% Preferred,
respectively, to J&C Resources, Inc. and Susan Etter with proceeds
totalling $981,084. All of the aforementioned shares were issued pursuant
to the exemption from registration provided under Section 4(2) of the Act.
On July 12, 1993 an employee was issued 1,533 shares of Common
Stock as compensation in the amount of $10,350. On December 31, 1993
Standard Phone Company was issued 8,582 shares of Common Stock in
connection with the acquisition of certain pay telephones, enclosures and
the associated location contracts. The value of said shares issued was
$103,004. All of the aforementioned shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the Act.
During 1993, the Company issued 2,500 shares of 7% Preferred Stock
to Joseph Abrams with proceeds totalling $200,000. The shares were issued
pursuant to the exemption from registration provided under Section 4(2) of
the Act.
During the first quarter of 1994 a total of 87,927 shares of
Common Stock were issued in consideration of the exercise of certain
warrants and options. Proceeds from the exercise of said warrants and
options totalled $553,964. Said shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the Act.
In four private sales during March and May 1994, the Company sold
136,109 shares of its Common Stock for an aggregate of $1,478,165. Said
shares were issued pursuant to the exemption from registration provided
under Regulation S of the Act. In addition, 5,276 shares of Common Stock
were issued to Montmelion Investments pursuant the exemption provided under
Section 4(2) of the Act to pay for a portion of the financing costs, valued
at $99,690, associated with the aforementioned private placement.
On March 1, 1994 the Company issued 1,282 shares of Common Stock
valued at $11,128 to two directors as compensation for their service on the
Board of Directors. On the same day the Company issued 500 shares to a
consultant for services rendered in the amount of $4,340. On November 28,
1994 the Company issued 1,480 shares of Common Stock to two directors as
compensation valued at $12,846 for their service on the Board of Directors.
On the same day, the Company issued 2,091 shares to a director for
reimbursement of certain fees and expenses valued at $18,150 and 3,033
shares to a contractor for services rendered which were valued at $26,363.
All of the aforementioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
On March 8, 1995 and July 14, 1995 the Company issued 3,333 and
5,000 shares of Common Stock in consideration of the exercise of options
with proceeds to the Company totalling $35,000. The shares were issued
pursuant to the exemption from registration provided under Section 4(2) of
the Act.
In May 1995 the Company issued 162,498 shares of Common Stock in a
private placement to five individuals with proceeds totalling $640,000. On
May 8, 1995 the Company issued a total of 7,532 shares of Common Stock to
three former executives of the Company as compensation totalling $36,160.
On July 26, 1995 the Company issued 66,666 shares of Common Stock in a
private placement to three individuals with proceeds totalling $300,000. On
August 18, 1995 the Company issued 65,091 shares of Common Stock two
private placements with proceeds totalling $277,913 and issued 1,111 shares
of Common Stock valued at $5,000 to a director as consideration for his
service on the Board of Directors. On August 30, 1995 the Company issued an
aggregate of 116,666 shares to Ariel Fund Limited and Gabriel Capital, L.P.
in a private placement with proceeds totalling $525,000. On September 6,
1995 the Company issued an aggregate of 26,666 shares of Common Stock to
two individuals in a private placement with proceeds totalling $119,999. On
October 26, 1995 the Company issued 6,832 shares of Common Stock in a
private placement to two employees and Sanford J. Spitzer with proceeds
totalling $30,750. On November 6, 1995 the Company issued 16,666 shares of
Common Stock in a private placement to Ariel Fund Limited and Gabriel
Capital, L.P. with proceeds totalling $75,000. On November 15, 1995 the
Company issued 5,555 shares of Common Stock to an employee in a private
placement with proceeds totalling 25,000. In November and December 1995 the
Company issued 3,750 and 1,666 shares, respectively, to Moira MB Neidt and
John and Patricia McCadden with proceeds totalling $33,625. All of the
aforementioned shares were issued pursuant to the exemption from
registration provided under Section 4(2) of the Act.
On February 7, 1995 the Company issued 833 shares of Common Stock
valued at $5,000 to an employee as compensation for services rendered. In
May and June 1995 the Company issued 30,231 shares of Common Stock to five
lenders in connection with the conversion of $137,678 of debt into equity.
In July 1995 the Company issued 1,271 shares of Common Stock to a director
as reimbursement of Company related expenses totalling $5,726. In August
1995 the Company issued 3,128 shares of Common Stock to two directors as
reimbursement of Company related expenses totalling $14,083. In September
1995 the Company issued 1,018 shares of Common Stock to a director as
reimbursement of Company related expenses totalling $4,585. In October 1995
the Company issued 971 shares of Common Stock to a director for
reimbursement of Company related expenses totalling $5,127. In November
1995 the Company issued 1,719 shares of Common Stock to a director for
reimbursement of Company related expenses totalling $13,084. In December
1995 the Company issued 25,682 shares of Common Stock to two directors for
reimbursement of Company related expenses totalling $24,282. On December
20, 1995 the Company issued 12,500 shares of Common Stock to M&M Financial
Services, Inc. in consideration of services rendered in the amount of
$75,000 in connection with the World acquisition. All of the aforementioned
shares were issued pursuant to the exemption from registration provided
under Section 4(2) of the Act.
On December 26, 1995 the Company issued 56,666 shares of Common
Stock to Brenner Securities Corporation, a predecessor of Southcoast
Capital Corporation, for financial services in the amount of $340,000
rendered in connection with the World acquisition. All of the afore-
mentioned shares were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
On September 21, 1995 the Company issued 402,500 shares of Common
Stock to the former shareholders of World in connection with the
acquisition. The value of the stock issued in connection with said
acquisition was $2,716,876. The aforementioned shares were issued pursuant
to the exemption from registration provided under Section 4(2) of the Act.
On September 21, 1995 the Company also issued 530,534 shares of
10% Preferred Stock to the former shareholders of World in connection with
the acquisition. Such shares were issued pursuant the exemption from
registration provided under Section 4(2) of the Act.
On October 16, 1995 the Company issued 224,881 shares of Common
Stock to the former shareholders of Public Telephone in connection with the
acquisition at a value of $1,517,951. In addition, the Company issued
45,833 and 34,166 shares of Common Stock to Thomas Martin and James Martin,
respectively, as consideration for the execution of non-compete agreements
valued at $540,000. The aforementioned shares were issued pursuant to the
exemption from registration provided under Section 4(2) of the Act.
On November 24, 1995 the Company issued 23,809 shares of Common
Stock at a value of $150,000 in connection with the IPP acquisition. The
shares were issued pursuant to the exemption from registration provided
under Section 4(2) of the Act.
During January 1996 the Company issued 528
shares of Common Stock to a director for reimbursement of
Company related expenses totalling $3,168. The shares
were issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
On March 15, 1996 the Company issued 555,589
shares of Common Stock valued at $1,106,506 and 5,453.14
shares of 14% Preferred valued at $245,897 and Nominal
Value Warrants to purchase 117,785 shares of the
Company's Common Stock to the former shareholders of IPP
in connection with the IPP acquisition. In addition, the
Company also issued 8,333.33 shares of 14% Preferred
valued at $375,769 and Nominal Value Warrants to purchase
179,996 shares of the Company's Common Stock to the
former shareholders of Paramount in connection with the
Paramount acquisition. On March 15, 1996 the Company
also issued 204,824 shares of Series A Preferred to the
Lenders under the Credit Agreement. The Company also
issued 3,871 shares of Common Stock to Applied
Telecommunications Technologies, Inc. representing
conversion of $30,000 of debt into equity. The
aforementioned securities were issued pursuant to the
exemption from registration provided under Section 4(2)
of the Act.
On March 15, 1996, concurrent with the Company
entering into the Credit Agreement, the Company redeemed
the 10% Preferred, 8% Preferred and 7% Preferred. In
connection with the redemption of said classes of stock,
the Company issued 34,436.33 shares of 14% Preferred and
Nominal Value Warrants to purchase 503,770 shares of
Common Stock. The Company also issued 59,695.39 shares
of 14% Preferred and Nominal Value Warrants to purchase
1,217,391 shares of Common Stock in connection with the
conversion of $3,581,723 of debt owed to related parties.
All of the securities were issued pursuant to the
exemption from registration provided under Section 4(2)
of the Act.
During April 1996 the Company issued 432,498
shares of Common Stock, in the aggregate, to J&C
Resources, Inc., Jeffrey Huffman, Alton Huffman, Thomas
Martin and James Martin in consideration of the exercise
of certain warrants resulting in proceeds totalling
$4,325. On May 2, 1996 the Company issued 539,989 shares
of Common Stock to a director in consideration of the
exercise of certain warrants resulting in proceeds
totalling $5,400. On July 22, 1996 the Company issued
62,650 shares of Common Stock to a director in
consideration of the exercise of certain warrants
resulting in proceeds to the Company totalling $627. The
aforementioned securities were issued pursuant to the
exemption from registration provided under Section 4(2)
of the Act.
On September 13, 1996 the Company issued
2,162,163 shares of Common Stock valued at $4,637,840 to
Amtel, as debtor-in-possession pursuant to a Chapter 11
bankruptcy proceeding, as partial consideration for the
Amtel acquisitions. On September 16, 1996 the Company
issued 166,666 shares of Common Stock valued at $311,665
to the former shareholders of POA, as partial
consideration for the POA acquisition. Said shares were
issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
On June 27, 1996 the Company issued 884,214
shares of Common Stock valued at $5,305,284 to the former
shareholders of World in connection with the conversion
of the convertible 10% Preferred. Said shares were
issued pursuant to the exemption from registration
provided under Section 4(2) of the Act.
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation dated August 30, 1989. (2)
*
3.3 Amendment and Restated Code of Governmental Regulations. (7)
3.5 Amendment to Articles of Incorporation dated January 3, 1992. (7)
3.6 Amendment to Articles of Incorporation dated January 20, 1992. (7)
3.7 Amendment to Articles of Incorporation dated April 9, 1992. (10)
3.8 Amendment to Articles of Incorporation dated June 18, 1993. (10)
3.9 Amendment to Articles of Incorporation dated June 30, 1993. (10)
3.10 Amendment to Articles of Incorporation dated September 22, 1995.
(15)
3.11 Amendment to Articles of Incorporation dated December 15, 1995.
(15)
3.12 Amendment to Articles of Incorporation dated February 28, 1996.
(15)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 10% Non-Voting Preferred Stock. (15)
4.3 Form of 14% Convertible Preferred Stock. (15)
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the
shares of Common Stock registered hereby.*
10.1 Stock Option Agreement between William Tymoszczuk and PhoneTel
Technologies, Inc., dated March 1, 1987. (3)
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)
10.3 Stock Option Agreement between PhoneTel Technologies, Inc. and
Richard E. George. (4)
10.4 Amended and Restated Stock Option Agreement between PhoneTel
Technologies, Inc. and Jerry H. Burger dated July 1, 1993.
(10)
10.5 Stock Option Agreement dated July 1, 1993 between PhoneTel
Technologies, Inc. and Bernard Mandel. (10)
10.6 Billing and Collection Services Agreement between Zero Plus
Dialing, Inc. and PhoneTel Technologies, Inc. dated March 5,
1991. (6)
10.7 Advanced Payment Agreement between PhoneTel Technologies, Inc.
and Zero Plus Dialing, Inc. dated March 5, 1991. (6)
10.8 Form of Stock Option Agreement between PhoneTel Technologies,
Inc. and DeBartolo, Inc. (5)
10.9 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corporation.
(10)
10.10 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Jerry Burger, together with
amendments thereto. (15)
10.11 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (15)
10.12 Lease Agreement between PhoneTel Technologies, Inc. and
Bankers Leasing Association, Inc. dated February 12, 1992. (7)
10.13 Registration Rights Agreement dated April 10, 1992 among
PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff
and Charles Stuart. (7)
10.14 Registration Rights Agreement among PhoneTel Technologies,
Inc. J & C Resources, Inc. and Allen Moskowitz. (7)
10.15 Master Agreement between PhoneTel Technologies, Inc. and The
Edward J. DeBartolo Corporation dated March 24, 1992. (7)
10.16 Second Restated and Amended National Management Agreement
between PhoneTel Technologies, Inc. and Fun-N-Games Associates
dated March 24, 1992. (7)
10.17 Form of Stock Option Agreement and Registration Rights
Agreement between PhoneTel Technologies, Inc. and The Edward
J. DeBartolo Corporation. (7)
10.18 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and William D. Moses, Jr.
dated May 11, 1992. (7)
10.19 Assignment Agreement between William D. Moses, Jr. and Edward
A. Moulton transferring the right to receive options to
acquire 5,000 shares of Common Stock of PhoneTel Technologies,
Inc. (11)
10.20 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and George H. Henry dated
March 24, 1992. (7)
10.21 Letter Agreement between PhoneTel Technologies, Inc. and The
Edward J. DeBartolo Corporation dated May 6, 1992. *
10.22 Amendment No. 1 to Amended and Restated Loan Agreement and
Registration Rights Agreement dated October 23, 1992 by and
among PhoneTel Technologies, Inc., J & C Resources, Inc. and
Allen Moskowitz. (8)
10.23 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April 23,
1992. (8)
10.24 Master Agreement between The Cafaro Company and PhoneTel
Technologies, Inc. dated December 23, 1992. (8)
10.25 Stock Option and Restricted Stock Agreement between The Cafaro
Company and PhoneTel Technologies, Inc. dated December 23,
1992. (8)
10.26 Form of Registration Rights Agreement between PhoneTel
Technologies, Inc. and The Cafaro Company. (8)
10.27 Service Agreement dated July 1, 1992 between Litel
Telecommunications Corporation dba LCI International and
PhoneTel Technologies, Inc. (8)
10.28 Amendment No. 2 to Service Agreement dated February 26, 1993
between Litel Telecommunications Corporation dba LCI
International and PhoneTel Technologies, Inc. (8)
10.29 Amended and Restated Purchase Agreement dated March 25, 1994
between PhoneTel Technologies, Inc., Alpha Pay Phones-IV,
L.P., and American Telecommunications Management Corporation.
(9)
10.30 Post-Closing Amendment to Amended and Restated Purchase
Agreement dated August 25, 1994 between PhoneTel Technologies,
Inc., Alpha Payphones-IV, L.P., and American
Telecommunications Management Corporation. (11)
10.31 Purchase Price Promissory Note ($593,119.97) and related
Purchase Price Note Security Agreement dated March 25, 1994
PhoneTel Technologies, Inc. and Alpha Pay Phones-IV, L.P. (9)
10.32 Amendment No. 1 to Purchase Price Note Security Agreement
dated August 25, 1994 between PhoneTel Technologies, Inc. and
Alpha Pay Phones-IV, L.P. (11)
10.33 Escrow Promissory Note ($300,000.00) dated August 25, 1994
between PhoneTel Technologies, Inc. and Alpha Pay Phones-IV,
L.P. (11)
10.34 Contingency Promissory Note ($7,500.00) dated August 25, 1994
between PhoneTel Technologies, Inc. and Alpha Pay Phones-IV,
L.P. (11)
10.35 Assignment and Acceptance Agreement dated August 25, 1994
between PhoneTel Technologies, Inc., Alpha Pay Phones-IV,
L.P., American Telecommunications Management Corporation and
Donovan Leisure Newton & Irvine. (11)
10.36 Consent Agreement dated October 14, 1994 between PhoneTel
Technologies, Inc., Alpha Pay Phones-IV, L.P., American
Telecommunications Management Corporation, Donovan Leisure
Newton & Irvine and U.S. Long Distance, Inc. (11)
10.37 Assignment and Assumption Agreement dated March 25, 1994
between Alpha Pay Phones-IV. L.P., American Telecommunications
Management Corporation, PhoneTel Technologies, Inc. and U.S.
Long Distance, Inc. (9)
10.38 Renewal Promissory Note ($325,750.00) and related Amended and
Restated Security Agreement dated March 25, 1994 between Alpha
Pay Phones-IV, L.P., American Telecommunications Management
Corporation and U.S. Long Distance, Inc. (9)
10.39 Renewal Promissory Note ($1,775,788.00) and related Amended
and Restated Security Agreement dated March 25, 1994 between
Alpha Pay Phones-IV, L.P. and U.S. Long Distance, Inc. (9)
10.40 Letter Agreement among PhoneTel Technologies, Inc., Alpha Pay
Phones-IV, L.P. and U.S. Long Distance, Inc. dated September
29, 1994. (11)
10.41 Promissory Note ($62,500.00) to U.S. Long Distance, Inc.
executed on behalf of Alpha Pay Phones-IV, L.P. (9)
10.42 Operator Subscriber Service Agreement dated March 25, 1994
between U.S. Long Distance, Inc. and Alpha Pay Phones-IV, L.P.
(9)
10.43 Non-competition Agreement among PhoneTel Technologies, Inc.,
Alpha Pay Phones-IV, L.P., American Telecommunications
Management Corporation, Stephen C. Fowler and Ronald T.
Huggard dated January 5, 1994. (10)
10.44 Offshore Security Subscription Agreements entered into during
March 1994 for approximately 500,000 shares of PhoneTel
Technologies, Inc. Common Stock, placed to non-U.S. persons in
an offshore transaction under Regulation S. (10)
10.45 Stock Option Agreement for WEA Investments, Inc. relative to
50,000 shares of Common Stock under option dated on or about
November 30, 1993. (10)
10.46 Stock Option Agreement with Allenstown Investments Limited
dated on or about January 10, 1994 relative to grant of an
option to purchase 126,000 shares of PhoneTel Technologies,
Inc. Common Stock. (10)
10.47 Stock Option Agreement with Douglas Abrams with respect to
45,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 10, 1994. (10)
10.48 Amendment to Stock Option Agreement dated January 10, 1994
with Douglas Abrams with respect to 45,000 shares of Common
Stock of PhoneTel Technologies, Inc. (11)
10.49 Stock Option Agreement with William Moses, Jr. relative to
75,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 29, 1993. (10)
10.50 Agreement dated January 5, 1994 between PhoneTel Technologies,
Inc. and the Estate of William Moses relative to loan in the
amount of one million dollars and providing for warrants to
purchase 100,000 shares and contingent right to acquire
warrants to purchase 400,000 shares of PhoneTel Technologies,
Inc. Common Stock. (10)
10.51 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses relative to
restructuring the repayment schedule of certain monies owed by
PhoneTel Technologies, Inc. and providing for warrants to
purchase 45,000 shares of PhoneTel Technologies, Inc. Common
Stock. (11)
10.52 Loan Agreement dated December 29, 1993 between PhoneTel
Technologies, Inc. and certain lenders identified therein with
respect to borrowing by PhoneTel Technologies, Inc. of
$400,000 and the granting of warrants to purchase, in the
aggregate, a total of 62,745 shares of Common Stock by
PhoneTel Technologies, Inc. (10)
10.53 Letter Agreement dated February 23, 1995 between PhoneTel
Technologies, Inc. and certain lenders identified therein with
respect to the extension of the maturity dates of certain
promissory notes and the granting of additional warrants to
purchase Common Stock of PhoneTel Technologies, Inc. (11)
10.54 Service Agreement dated January 20, 1994 between Rochester
Communications, Inc. and PhoneTel Technologies, Inc. (10)
10.55 Offshore Security Subscription Agreements entered into during
May 1994 for approximately 316,000 shares of PhoneTel
Technologies, Inc. Common Stock, placed to non-U.S. persons in
offshore transactions under Regulation S. (11)
10.56 Stock Option Agreement dated March 1, 1995 between PhoneTel
Technologies, Inc. and Howard Meister relative to a grant of
an option to purchase 10,000 shares of PhoneTel Technologies,
Inc. Common Stock. (11)
10.57 Stock Option Agreement dated March 3, 1994 between PhoneTel
Technologies, Inc. and George H. Henry relative to a grant of
an option to purchase 39,000 shares of PhoneTel Technologies,
Inc. Common Stock. (11)
10.58 Stock Option Agreements dated in January 1994 between PhoneTel
Technologies, Inc. and George H. Henry granting options to
purchase, in the aggregate, a total of 106,551 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.59 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (11)
10.60 Partial Assignment of Stock Option Agreement between Richard
E. George and Gary Berk dated on or about April 23, 1994 and
related Stock Option Agreement with Gary Berk a relative to
65,000 shares of Common Stock under option dated March 7,
1995. (11)
10.61 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994.
(11)
10.62 Stock Option Agreement with Donald Vella with respect to
20,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about November 15, 1994. (11)
10.63 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.64 Warrant Agreements with Richard Thatcher dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 7,500 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.65 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.66 Warrant Agreements with Gerald Waldshutz dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.67 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.68 Warrant Agreements with Steve Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.69 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.70 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.71 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
148,235 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.72 Warrant Agreements with Peter Graf dated February, March and
April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 28,750 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.73 Stock Option Agreement dated May 24, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative
to the grant of an option to purchase 50,000 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.74 Stock Option Agreement dated September 13, 1994 between
PhoneTel Technologies, Inc. and the Estate of William D.
Moses, and subsequent assignment thereof dated February 2,
1995, relative to the grant of an option to purchase 45,000
shares of PhoneTel Technologies, Inc. Common Stock. (11)
10.75 Warrant Agreement dated March 31, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative
to the grant of warrants to purchase 200,000 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.76 Agreement and Plan of Merger dated September 22, 1995,
together with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc. Phone Tel II, Inc., and World
Communication, Inc. (12)
10.77 Amendment to Agreement and Plan of Merger dated September 22,
1995 by and among PhoneTel Technologies, Inc., Phone Tel II,
Inc., and World Communications, Inc. (12)
10.78 Agreement and Plan of Merger dated October 16, 1995, together
with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone
Corporation. (13)
10.79 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corporation, and all amendments thereto.
(14)
10.80 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto. (14)
10.81 Share Purchase Agreement dated as of November 16, 1995,
between PhoneTel Technologies, Inc. and Paramount
Communications Systems, Inc., and all amendments thereto. (14)
10.82 Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation (the "Credit
Agreement"). (14)
10.83 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. (14)
10.84 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. (14)
10.85 Registration Rights Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation and Cerberus Partners,
L.P. (14)
10.86 Warrant Certificate dated as of March 15, 1996 granting
Internationale Nederlanden (U.S.) Capital Corporation the
right to purchase 102,412 shares of Series A Special
Convertible Preferred Stock of PhoneTel Technologies, Inc.
(15)
10.87 Warrant Certificate dated as of March 15, 1996 granting
Cerberus Partners, L.P. the right to purchase 102,412 shares
of Series A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (15)
10.88 Form of Warrant issued on March 15, 1996 to persons listed on
Schedule A to this exhibit. (15)
10.89 Operator Service Subscriber Agreement dated as of February 29,
1996 by and between Intellicall Operator Services, Inc. and
PhoneTel Technologies, Inc. (15)
10.90 Intellistar License Agreement dated as of February 29, 1996 by
and between Intellicall, Inc. and PhoneTel Technologies, Inc.
(15)
10.91 Relay Services Agreement dated as of February 29, 1996 by and
between Intellicall, Inc. and PhoneTel Technologies, Inc. (15)
10.92 Voting and Proxy Agreement dated as of September 22, 1995 by
and among World Communications, Inc. and certain shareholders
of PhoneTel Technologies, Inc. together with an Amendment
thereto. (15)
10.93 Voting and Proxy Agreement dated as of October 16, 1995 by and
among PhoneTel Technologies, Inc. and the former shareholders
of Public Telephone Corporation. (15)
10.94 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and Jeff Huffman, Alton L.
Huffman, Nickey Maxey and Hugh Collins. (15)
10.95 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and Nickey Maxey and Hugh Collins.
(15)
10.96 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and the former shareholders of
Paramount Communications Systems, Inc. (15)
10.97 Voting and Proxy Agreement dated as of February 21, 1996 by
and among PhoneTel Technologies, Inc. and the former
shareholders of World Communications, Inc. (15)
10.98 Employment Agreement dated May 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.99 Stock Option Agreement dated April 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.100 Separation Agreement dated July 29, 1996 between PhoneTel
Technologies, Inc. and Daniel J. Moos.*
10.101 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert.*
10.102 First Amendment to Credit Agreement dated as of
April 11, 1996.*
10.103 Second Amendment to Credit Agreement dated as
of June 1996.*
10.104 Third Amendment to Credit Agreement dated as of
August 1, 1996.*
10.105 Fourth Amendment to Credit Agreement dated as
of September 13, 1996.*
10.106 Fifth Amendment to Credit Agreement dated as of
September 13, 1996.*
10.107 Sixth Amendment to Credit Agreement dated as of
October 8, 1996.*
21.1 Subsidiaries of PhoneTel Technologies, Inc. (15)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel Technologies,
Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount Communication
Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Ernest M. Sewell, CPA
23.6 Consent of Miller Sherrill Blake, CPA, PA
23.7 Consent of Kerber, Eck & Braeckel, LLP
23.8 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature pages hereof).
-----------------
* To be filed by amendment.
(1) Incorporated by reference from the Company's Registration
Statement on Form S-18 (Registration No. 33-16962C), filed
with the Securities and Exchange Commission on September 1,
1987.
(2) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No.
33-30428, filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-16962C), filed with the Securities and Exchange
Commission on October 30, 1987.
(4) Incorporated by reference from Amendment No. 2 to the
Company's Registration Statement on Form S-1, Registration No.
33-30428, filed October 27, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1989.
(6) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1990.
(7) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1991.
(8) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1992.
(9) Incorporated by reference from the Company's Form 8-K dated
March 25, 1994.
(10) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1993.
(11) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1994.
(12) Incorporated by reference from the Company's Form 8-K dated
September 22, 1995.
(13) Incorporated by reference from the Company's Form 8-K dated
October 16, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated
March 15, 1996.
(15) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1995.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission that such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer
of expenses incurred or paid by a director, officer or controlling person of
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel that matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities
Act, treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the small
business issuer pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of
that time the Commission declared it effective.
(2) For determining any liability under the Securities
Act of 1933, treat each post-effective amendment that contains a
form of prospectus as a new registration statement for the
securities offered in the Registration Statement, and that offering
of the securities at that time as the initial bona fide offering of
those securities.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on form SB-2 and authorizes this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized,in the City of New York, State of New York, on
October 9, 1996.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
------------------------------
Peter G. Graf
Chairman of the Board
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE
APPEARS BELOW CONSTITUTES AND APPOINTS PETER G. GRAF AND TAMMY L. MARTIN,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT EITHER ONE OF WHOM
MAY ACT WITHOUT THE OTHER, WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMEND-
MENTS) TO THIS REGISTRATION STATEMENT AND TO SIGN ANY AND ALL ADDITIONAL
REGISTRATION STATEMENTS RELATING TO THE SAME OFFERING OF SECURITIES AS THIS
REGISTRATION STATEMENT THAT IS FILED PURSUANT TO RULE 462(B) UNDER THE
SECURITIES ACT OF 1933 AND TO FILE THE SAME WITH ALL EXHIBITS THERETO, AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF
THEM, FULL POWER AND AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND
THING REQUISITE AND NECESSARY TO BE DONE AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS, OR EITHER OF THEM, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Peter G. Graf Chairman of the Board, October 9, 1996
- ----------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Nickey B. Maxey Chief Operating Officer and October 9, 1996
- ----------------------- Director
Nickey B. Maxey
/s/ Stuart Hollander Director October 9, 1996
- ----------------------
Stuart Hollander
/s/ Richard Kebert Chief Financial Officer October 9, 1996
- ---------------------- and Treasurer
Richard Kebert (Principal Financial and
Accounting Officer)
/s/ Joseph Abrams Director October 9, 1996
- ---------------------
Joseph Abrams
/s/ George Henry Director October 9, 1996
- --------------------
George Henry
/s/ Aron Katzman Director October 9, 1996
- --------------------
Aron Katzman
/s/ Steven Richman Director October 9, 1996
- --------------------
Steven Richman
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
1.1 Form of Underwriting Agreement. *
3.1 Articles of Incorporation. (1)
3.2 Amendment to Articles of Incorporation dated August 30, 1989. (2)
3.3 Amendment and Restated Code of Governmental Regulations. (7)
3.5 Amendment to Articles of Incorporation dated January 3, 1992. (7)
3.6 Amendment to Articles of Incorporation dated January 20, 1992. (7)
3.7 Amendment to Articles of Incorporation dated April 9, 1992. (10)
3.8 Amendment to Articles of Incorporation dated June 18, 1993. (10)
3.9 Amendment to Articles of Incorporation dated June 30, 1993. (10)
3.10 Amendment to Articles of Incorporation dated September 22, 1995.
(15)
3.11 Amendment to Articles of Incorporation dated December 15, 1995.
(15)
3.12 Amendment to Articles of Incorporation dated February 28, 1996.
(15)
4.1 Specimen of Common Stock Certificate. (3)
4.2 Form of 10% Non-Voting Preferred Stock. (15)
4.3 Form of 14% Convertible Preferred Stock. (15)
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the
shares of Common Stock registered hereby.*
10.1 Stock Option Agreement between William Tymoszczuk and PhoneTel
Technologies, Inc., dated March 1, 1987. (3)
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)
10.3 Stock Option Agreement between PhoneTel Technologies, Inc. and
Richard E. George. (4)
10.4 Amended and Restated Stock Option Agreement between PhoneTel
Technologies, Inc. and Jerry H. Burger dated July 1, 1993.
(10)
10.5 Stock Option Agreement dated July 1, 1993 between PhoneTel
Technologies, Inc. and Bernard Mandel. (10)
10.6 Billing and Collection Services Agreement between Zero Plus
Dialing, Inc. and PhoneTel Technologies, Inc. dated March 5,
1991. (6)
10.7 Advanced Payment Agreement between PhoneTel Technologies, Inc.
and Zero Plus Dialing, Inc. dated March 5, 1991. (6)
10.8 Form of Stock Option Agreement between PhoneTel Technologies,
Inc. and DeBartolo, Inc. (5)
10.9 Extension of Stock Option Agreement between PhoneTel
Technologies, Inc. and The Edward J. DeBartolo Corporation.
(10)
10.10 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Jerry Burger, together with
amendments thereto. (15)
10.11 Separation Agreement dated September 15, 1995 between PhoneTel
Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (15)
10.12 Lease Agreement between PhoneTel Technologies, Inc. and
Bankers Leasing Association, Inc. dated February 12, 1992. (7)
10.13 Registration Rights Agreement dated April 10, 1992 among
PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff
and Charles Stuart. (7)
10.14 Registration Rights Agreement among PhoneTel Technologies,
Inc. J & C Resources, Inc. and Allen Moskowitz. (7)
10.15 Master Agreement between PhoneTel Technologies, Inc. and The
Edward J. DeBartolo Corporation dated March 24, 1992. (7)
10.16 Second Restated and Amended National Management Agreement
between PhoneTel Technologies, Inc. and Fun-N-Games Associates
dated March 24, 1992. (7)
10.17 Form of Stock Option Agreement and Registration Rights
Agreement between PhoneTel Technologies, Inc. and The Edward
J. DeBartolo Corporation. (7)
10.18 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and William D. Moses, Jr.
dated May 11, 1992. (7)
10.19 Assignment Agreement between William D. Moses, Jr. and Edward
A. Moulton transferring the right to receive options to
acquire 5,000 shares of Common Stock of PhoneTel Technologies,
Inc. (11)
10.20 Stock Option Agreement and Registration Rights Agreement
between PhoneTel Technologies, Inc. and George H. Henry dated
March 24, 1992. (7)
10.21 Letter Agreement between PhoneTel Technologies, Inc. and The
Edward J. DeBartolo Corporation dated May 6, 1992. *
10.22 Amendment No. 1 to Amended and Restated Loan Agreement and
Registration Rights Agreement dated October 23, 1992 by and
among PhoneTel Technologies, Inc., J & C Resources, Inc. and
Allen Moskowitz. (8)
10.23 Lease between PhoneTel Technologies, Inc. and Trembal
Construction Co. dba Statler Office Tower dated April 23,
1992. (8)
10.24 Master Agreement between The Cafaro Company and PhoneTel
Technologies, Inc. dated December 23, 1992. (8)
10.25 Stock Option and Restricted Stock Agreement between The Cafaro
Company and PhoneTel Technologies, Inc. dated December 23,
1992. (8)
10.26 Form of Registration Rights Agreement between PhoneTel
Technologies, Inc. and The Cafaro Company. (8)
10.27 Service Agreement dated July 1, 1992 between Litel
Telecommunications Corporation dba LCI International and
PhoneTel Technologies, Inc. (8)
10.28 Amendment No. 2 to Service Agreement dated February 26, 1993
between Litel Telecommunications Corporation dba LCI
International and PhoneTel Technologies, Inc. (8)
10.29 Amended and Restated Purchase Agreement dated March 25, 1994
between PhoneTel Technologies, Inc., Alpha Pay Phones-IV,
L.P., and American Telecommunications Management Corporation.
(9)
10.30 Post-Closing Amendment to Amended and Restated Purchase
Agreement dated August 25, 1994 between PhoneTel Technologies,
Inc., Alpha Payphones-IV, L.P., and American
Telecommunications Management Corporation. (11)
10.31 Purchase Price Promissory Note ($593,119.97) and related
Purchase Price Note Security Agreement dated March 25, 1994
PhoneTel Technologies, Inc. and Alpha Pay Phones-IV, L.P. (9)
10.32 Amendment No. 1 to Purchase Price Note Security Agreement
dated August 25, 1994 between PhoneTel Technologies, Inc. and
Alpha Pay Phones-IV, L.P. (11)
10.33 Escrow Promissory Note ($300,000.00) dated August 25, 1994
between PhoneTel Technologies, Inc. and Alpha Pay Phones-IV,
L.P. (11)
10.34 Contingency Promissory Note ($7,500.00) dated August 25, 1994
between PhoneTel Technologies, Inc. and Alpha Pay Phones-IV,
L.P. (11)
10.35 Assignment and Acceptance Agreement dated August 25, 1994
between PhoneTel Technologies, Inc., Alpha Pay Phones-IV,
L.P., American Telecommunications Management Corporation and
Donovan Leisure Newton & Irvine. (11)
10.36 Consent Agreement dated October 14, 1994 between PhoneTel
Technologies, Inc., Alpha Pay Phones-IV, L.P., American
Telecommunications Management Corporation, Donovan Leisure
Newton & Irvine and U.S. Long Distance, Inc. (11)
10.37 Assignment and Assumption Agreement dated March 25, 1994
between Alpha Pay Phones-IV. L.P., American Telecommunications
Management Corporation, PhoneTel Technologies, Inc. and U.S.
Long Distance, Inc. (9)
10.38 Renewal Promissory Note ($325,750.00) and related Amended and
Restated Security Agreement dated March 25, 1994 between Alpha
Pay Phones-IV, L.P., American Telecommunications Management
Corporation and U.S. Long Distance, Inc. (9)
10.39 Renewal Promissory Note ($1,775,788.00) and related Amended
and Restated Security Agreement dated March 25, 1994 between
Alpha Pay Phones-IV, L.P. and U.S. Long Distance, Inc. (9)
10.40 Letter Agreement among PhoneTel Technologies, Inc., Alpha Pay
Phones-IV, L.P. and U.S. Long Distance, Inc. dated September
29, 1994. (11)
10.41 Promissory Note ($62,500.00) to U.S. Long Distance, Inc.
executed on behalf of Alpha Pay Phones-IV, L.P. (9)
10.42 Operator Subscriber Service Agreement dated March 25, 1994
between U.S. Long Distance, Inc. and Alpha Pay Phones-IV, L.P.
(9)
10.43 Non-competition Agreement among PhoneTel Technologies, Inc.,
Alpha Pay Phones-IV, L.P., American Telecommunications
Management Corporation, Stephen C. Fowler and Ronald T.
Huggard dated January 5, 1994. (10)
10.44 Offshore Security Subscription Agreements entered into during
March 1994 for approximately 500,000 shares of PhoneTel
Technologies, Inc. Common Stock, placed to non-U.S. persons in
an offshore transaction under Regulation S. (10)
10.45 Stock Option Agreement for WEA Investments, Inc. relative to
50,000 shares of Common Stock under option dated on or about
November 30, 1993. (10)
10.46 Stock Option Agreement with Allenstown Investments Limited
dated on or about January 10, 1994 relative to grant of an
option to purchase 126,000 shares of PhoneTel Technologies,
Inc. Common Stock. (10)
10.47 Stock Option Agreement with Douglas Abrams with respect to
45,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 10, 1994. (10)
10.48 Amendment to Stock Option Agreement dated January 10, 1994
with Douglas Abrams with respect to 45,000 shares of Common
Stock of PhoneTel Technologies, Inc. (11)
10.49 Stock Option Agreement with William Moses, Jr. relative to
75,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about January 29, 1993. (10)
10.50 Agreement dated January 5, 1994 between PhoneTel Technologies,
Inc. and the Estate of William Moses relative to loan in the
amount of one million dollars and providing for warrants to
purchase 100,000 shares and contingent right to acquire
warrants to purchase 400,000 shares of PhoneTel Technologies,
Inc. Common Stock. (10)
10.51 Agreement dated September 13, 1994 between PhoneTel
Technologies, Inc. and the Estate of William Moses relative to
restructuring the repayment schedule of certain monies owed by
PhoneTel Technologies, Inc. and providing for warrants to
purchase 45,000 shares of PhoneTel Technologies, Inc. Common
Stock. (11)
10.52 Loan Agreement dated December 29, 1993 between PhoneTel
Technologies, Inc. and certain lenders identified therein with
respect to borrowing by PhoneTel Technologies, Inc. of
$400,000 and the granting of warrants to purchase, in the
aggregate, a total of 62,745 shares of Common Stock by
PhoneTel Technologies, Inc. (10)
10.53 Letter Agreement dated February 23, 1995 between PhoneTel
Technologies, Inc. and certain lenders identified therein with
respect to the extension of the maturity dates of certain
promissory notes and the granting of additional warrants to
purchase Common Stock of PhoneTel Technologies, Inc. (11)
10.54 Service Agreement dated January 20, 1994 between Rochester
Communications, Inc. and PhoneTel Technologies, Inc. (10)
10.55 Offshore Security Subscription Agreements entered into during
May 1994 for approximately 316,000 shares of PhoneTel
Technologies, Inc. Common Stock, placed to non-U.S. persons in
offshore transactions under Regulation S. (11)
10.56 Stock Option Agreement dated March 1, 1995 between PhoneTel
Technologies, Inc. and Howard Meister relative to a grant of
an option to purchase 10,000 shares of PhoneTel Technologies,
Inc. Common Stock. (11)
10.57 Stock Option Agreement dated March 3, 1994 between PhoneTel
Technologies, Inc. and George H. Henry relative to a grant of
an option to purchase 39,000 shares of PhoneTel Technologies,
Inc. Common Stock. (11)
10.58 Stock Option Agreements dated in January 1994 between PhoneTel
Technologies, Inc. and George H. Henry granting options to
purchase, in the aggregate, a total of 106,551 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.59 Stock Option Agreement with George H. Henry dated in August
1993 relative to a grant of an option to purchase 150,000
shares of PhoneTel Technologies, Inc. Common Stock. (11)
10.60 Partial Assignment of Stock Option Agreement between Richard
E. George and Gary Berk dated on or about April 23, 1994 and
related Stock Option Agreement with Gary Berk a relative to
65,000 shares of Common Stock under option dated March 7,
1995. (11)
10.61 Stock Option Agreement with Vincent Mann relative to 5,000
shares of Common Stock under option dated November 15, 1994.
(11)
10.62 Stock Option Agreement with Donald Vella with respect to
20,000 shares of Common Stock of PhoneTel Technologies, Inc.
dated on or about November 15, 1994. (11)
10.63 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Richard Thatcher dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.64 Warrant Agreements with Richard Thatcher dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 7,500 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.65 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Gerald Waldshutz dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.66 Warrant Agreements with Gerald Waldshutz dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.67 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Steve Richman dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
41,177 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.68 Warrant Agreements with Steve Richman dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.69 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Janice Fuelhart dated March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
49,412 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.70 Warrant Agreements with Janice Fuelhart dated February, March
and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.71 Amendments to Warrant Agreements between PhoneTel
Technologies, Inc. and Peter Graf dated in March 1995, and
related Warrant Agreements thereto, issued pursuant to a
Letter Agreement dated February 23, 1995, relative to the
grant of warrants, in the aggregate, to purchase a total of
148,235 shares of PhoneTel Technologies, Inc. Common Stock.
(11)
10.72 Warrant Agreements with Peter Graf dated February, March and
April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 28,750 shares of PhoneTel
Technologies, Inc. Common Stock. (11)
10.73 Stock Option Agreement dated May 24, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative
to the grant of an option to purchase 50,000 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.74 Stock Option Agreement dated September 13, 1994 between
PhoneTel Technologies, Inc. and the Estate of William D.
Moses, and subsequent assignment thereof dated February 2,
1995, relative to the grant of an option to purchase 45,000
shares of PhoneTel Technologies, Inc. Common Stock. (11)
10.75 Warrant Agreement dated March 31, 1994 between PhoneTel
Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative
to the grant of warrants to purchase 200,000 shares of
PhoneTel Technologies, Inc. Common Stock. (11)
10.76 Agreement and Plan of Merger dated September 22, 1995,
together with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc. Phone Tel II, Inc., and World
Communication, Inc. (12)
10.77 Amendment to Agreement and Plan of Merger dated September 22,
1995 by and among PhoneTel Technologies, Inc., Phone Tel II,
Inc., and World Communications, Inc. (12)
10.78 Agreement and Plan of Merger dated October 16, 1995, together
with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone
Corporation. (13)
10.79 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corporation, and all amendments thereto.
(14)
10.80 Agreement and Plan of Merger dated November 22, 1995, between
PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto. (14)
10.81 Share Purchase Agreement dated as of November 16, 1995,
between PhoneTel Technologies, Inc. and Paramount
Communications Systems, Inc., and all amendments thereto. (14)
10.82 Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation. (14)
10.83 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. (14)
10.84 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. (14)
10.85 Registration Rights Agreement dated as of March 15, 1996
between PhoneTel Technologies, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation and Cerberus Partners,
L.P. (14)
10.86 Warrant Certificate dated as of March 15, 1996 granting
Internationale Nederlanden (U.S.) Capital Corporation the
right to purchase 102,412 shares of Series A Special
Convertible Preferred Stock of PhoneTel Technologies, Inc.
(15)
10.87 Warrant Certificate dated as of March 15, 1996 granting
Cerberus Partners, L.P. the right to purchase 102,412 shares
of Series A Special Convertible Preferred Stock of PhoneTel
Technologies, Inc. (15)
10.88 Form of Warrant issued on March 15, 1996 to persons listed on
Schedule A to this exhibit. (15)
10.89 Operator Service Subscriber Agreement dated as of February 29,
1996 by and between Intellicall Operator Services, Inc. and
PhoneTel Technologies, Inc. (15)
10.90 Intellistar License Agreement dated as of February 29, 1996 by
and between Intellicall, Inc. and PhoneTel Technologies, Inc.
(15)
10.91 Relay Services Agreement dated as of February 29, 1996 by and
between Intellicall, Inc. and PhoneTel Technologies, Inc. (15)
10.92 Voting and Proxy Agreement dated as of September 22, 1995 by
and among World Communications, Inc. and certain shareholders
of PhoneTel Technologies, Inc. together with an Amendment
thereto. (15)
10.93 Voting and Proxy Agreement dated as of October 16, 1995 by and
among PhoneTel Technologies, Inc. and the former shareholders
of Public Telephone Corporation. (15)
10.94 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and Jeff Huffman, Alton L.
Huffman, Nickey Maxey and Hugh Collins. (15)
10.95 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and Nickey Maxey and Hugh Collins.
(15)
10.96 Voting Agreement dated as of March 15, 1996 by and among
PhoneTel Technologies, Inc. and the former shareholders of
Paramount Communications Systems, Inc. (15)
10.97 Voting and Proxy Agreement dated as of February 21, 1996 by
and among PhoneTel Technologies, Inc. and the former
shareholders of World Communications, Inc. (15)
10.98 Employment Agreement dated May 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.99 Stock Option Agreement dated April 1, 1995 between PhoneTel
Technologies, Inc. and Daniel J. Moos. (15)
10.100 Separation Agreement dated July 29, 1996 between PhoneTel
Technologies, Inc. and Daniel J. Moos.*
10.101 Employment Agreement dated September 1, 1996 between PhoneTel
Technologies, Inc. and Richard Kebert.*
10.102 First Amendment to Credit Agreement dated as of
April 11, 1996.*
10.103 Second Amendment to Credit Agreement dated as
of June 1996.*
10.104 Third Amendment to Credit Agreement dated as of
August 1, 1996.*
10.105 Fourth Amendment to Credit Agreement dated as
of September 13, 1996.*
10.106 Fifth Amendment to Credit Agreement dated as of
September 13, 1996.*
10.107 Sixth Amendment to Credit Agreement dated as of
October 8, 1996.*
21.1 Subsidiaries of PhoneTel Technologies, Inc. (15)
23.1 Consent of Price Waterhouse LLP regarding PhoneTel Technologies,
Inc.
23.2 Consent of Price Waterhouse LLP regarding Paramount Communication
Systems, Inc.
23.3 Consent of Harlan & Boettger, CPAs
23.4 Consent of KPMG Peat Marwick LLP
23.5 Consent of Ernest M. Sewell, CPA
23.6 Consent of Miller Sherrill Blake, CPA, PA
23.7 Consent of Kerber, Eck & Braeckel, LLP
23.8 Consent of Tammy L. Martin, Esq. (included in Exhibit 5.1).*
24.1 Powers of Attorney (included on signature pages hereof).
-----------------
* To be filed by amendment.
(1) Incorporated by reference from the Company's Registration
Statement on Form S-18 (Registration No. 33-16962C), filed
with the Securities and Exchange Commission on September 1,
1987.
(2) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No.
33-30428, filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the
Company's Registration Statement on Form S-18 (Registration
No. 33-16962C), filed with the Securities and Exchange
Commission on October 30, 1987.
(4) Incorporated by reference from Amendment No. 2 to the
Company's Registration Statement on Form S-1, Registration No.
33-30428, filed October 27, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1989.
(6) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1990.
(7) Incorporated by reference from the Company's Form 10-K for the
year ended December 31, 1991.
(8) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1992.
(9) Incorporated by reference from the Company's Form 8-K dated
March 25, 1994.
(10) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1993.
(11) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1994.
(12) Incorporated by reference from the Company's Form 8-K dated
September 22, 1995.
(13) Incorporated by reference from the Company's Form 8-K dated
October 16, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated
March 15, 1996.
(15) Incorporated by reference from the Company's Form 10-KSB for
the year ended December 31, 1995.