Item 1. Description of Business.
ETS Payphones, Inc. ("we," "us," "our," or the "Company") owns and operates approximately 16,000 public pay telephones in 29 states concentrated primarily
in the Eastern and Southern United States, as well as the District of Columbia and Puerto Rico. We are an independent owner of payphone equipment placed at locations with client site owners that
include retail establishments, convenience stores, hotels, hospitals and other publicly and privately owned businesses. These locations are owned or managed by over 5000 clients that include Fortune
100 companies as well as single store accounts and municipalities. We also provide other telecommunications products to certain clients.
contract with site owners to place payphones in their locations and once a contract is signed we install, maintain, manage and collect money from the payphones. Our revenue is
generated from coins gathered from the payphones and from funds we receive from other communications service providers, who receive revenue from calls made at our payphones using phone cards, credit
cards and other forms of non-coin payment. Substantially all of our payphones accept coins as well as other forms of payment. Our payphones generate coin revenues primarily from local
outsource our long-distance and operator service operations to a long-distance carrier and a limited number of operator service providers. When callers do not
designate a long-distance company, we route the calls to one with which we have a contract. We also receive revenue from calls made when the caller uses a "1-800" or other
toll-free number to access a provider with which we have not contracted directly. This "dial-around" revenue is provided to us as a result of Federal Communications Commission
expenses consist primarily of site commissions, line service fees, payphone maintenance and equipment, and general labor costs. In most instances the site contracts entitle the site
owner to a commission for each payphone installed on their properties, typically in accordance with a formula based primarily upon a percentage of the payphones' revenue. We pay monthly line and/or
usage charges to local exchange carriers and competitive local exchange carriers to provide service to our payphones.
utilize "smart phone" technology. The majority of our payphones are equipped with microprocessors that allow us to monitor the payphones remotely by tracking the payphone's call
traffic, operational status, and coin box amount. In addition to allowing us to track when a coin box
collecting and when a payphone needs maintenance, the smart phone technology also allows us to change rates for certain types of calls.
have approximately 130 employees. Our principal executive office is located at 1490 Westfork Drive, Suite G, Lithia Springs, Georgia 30122 and our telephone number is
Our predecessor company, also called ETS Payphones, Inc. but incorporated in Georgia ("Old ETS"), was owned and controlled by Charles E. Edwards. Old ETS
began operations with approximately 75
payphones and initially grew through obtaining new site contracts and installing payphones. Old ETS was started during a time in which there was a rapid expansion of payphone service providers who
were independent from the Regional Bell Operating Companies ("RBOCs"). Old ETS also owned and operated automated teller machines ("ATMs") and coin-operated air and vacuum machines.
late 1997 Old ETS began to aggressively pursue a business model pursuant to which they would "sell" payphones to individual investors ("Payphone Investors") at prices up to $7,000 per
phone. As part of the sales contract Old ETS agreed to immediately lease the payphone back from the Payphone Investor and manage the location, collection, and maintenance of the payphones. Old ETS was
obligated to find a location for the payphone, negotiate a contract with the site owner, and install and service the payphone. Old ETS also obtained the necessary licenses, ensured compliance with
regulatory requirements and obtained line service, long-distance service, and operator service for the payphones. Under these "sale-leaseback" transactions Old ETS agreed to
make monthly payments to the Payphone Investor, which annually totaled about 14% of the payphone sale price, regardless of the revenue generated from the payphone. For example, Old ETS agreed to pay
approximately $80 per month with respect to a phone it sold for $7,000. The agreements with the Payphone Investors generally had five year terms and obligated Old ETS to buy the payphone back at the
end of the term.
promote sales under this sale-leaseback scheme, Old ETS engaged independent sales representatives on a commission basis. These sales representatives marketed the payphones
through trade shows for entrepreneurs, direct marketing promotions, and personal solicitations.
sales effort brought in a tremendous number of Payphone Investors and most investors purchased several payphones. Old ETS was not able to negotiate site contracts and install
payphones at the rate at which they were entering into sale-leaseback transactions with Payphone Investors. Consequently, Old ETS began to acquire established payphone routes from
competing payphone companies, and assign the acquired payphones to Payphone Investors. From 1997 through 2000 Old ETS entered into various transactions and asset purchase agreements to acquire in
excess of 35,000 payphones. The total number of phones actually acquired pursuant to these sales contracts was less than the contracted for phone count. By September 2000 there were
approximately 18,000 Payphone Investors and Old ETS had entered into sale-leaseback transactions involving in excess of 70,000 payphones. However, the records of Old ETS indicate that it
was operating approximately 50,000 payphones. At that time Old ETS was the second largest payphone operator in the United States (excluding the RBOCs), with payphones located in 39 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands. Old ETS had 30 offices and employed more than 450 people.
ETS made a substantial immediate cash profit on each sale-leaseback of a payphone to a Payphone Investor. However, virtually every sale-leaseback transaction
was destined to lose money for Old ETS in the long run, as the payphones failed to generate sufficient revenue to cover (i) the lease payments to the Payphone Investors, (ii) the costs
Old ETS was paying to obtain site contracts, and (iii) operating and maintaining the payphones.
addition to problems with the financing structure of Old ETS, the effects of general industry trends were substantially reducing the revenue for payphones during the relevant time
use of cellular telephones and dial-around calls substantially reduced the call volume on payphones, negatively impacting the revenues of Old ETS. In order to fund operations
and to make the required lease payments to the Payphone Investors, Old ETS sold more payphones to new Payphone Investors.
a private company that was owned and controlled by Mr. Edwards, Old ETS did not have audited financial statements. Because of difficulties and complications with integrating
the records of the various payphone companies that were purchased by Old ETS, rapid turnover of the company's financial officers, poor internal controls on revenue and expenditures, and the loss of
records, it is not possible to know the exact financial status of Old ETS during the time period of the sale-leaseback transactions. However, it is known that by September of 2000 Old ETS
(a) had over $375,000,000 of debt obligations (including obligations to the Payphone Investors), (b) had lease payment obligations to Payphone Investors on its payphones that were not
supportable by revenue from the payphones, and (c) was not able to pay its obligations as they came due.
2000, the United States Securities and Exchange Commission ("SEC") began to scrutinize Old ETS' operations, alleging that the sale-leaseback transactions constituted the
sale of securities by Old ETS. In addition, securities enforcement agencies from a number of states initiated proceedings against Old ETS and its affiliates to enjoin securities violations. A number
of class action lawsuits were brought against Old ETS and certain of its then officers, alleging breach of contract, as well as various fraud allegations.
early September 2000, Old ETS and its affiliates filed voluntary petitions under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") with the
United States Bankruptcy Court for the District of Delaware,
In Re: PSA, Inc., ETS Payphones, Inc., ETS Vending, Inc., et al
jointly administered under Case No. 00-3570. The bankruptcy filings did not interrupt the payphone servicing operations, but in conjunction with the bankruptcy filing and settlement
of an injunction sought by the SEC, Old ETS agreed to stop entering into new sale-leaseback payphone agreements. Mr. Edwards resigned and agreed not to be involved in the management
and operations of Old ETS going forward.
September 29, 2000, the SEC filed a lawsuit against Old ETS and Charles E. Edwards in the United States District Court for the Northern District of Georgia, alleging, among
other things, that (i) the sale-leaseback transactions constituted an illegal sale of securities, (ii) the overall funding of Old ETS, in which its short term revenue from
new sales was used to fund long-term sale-leaseback obligations, constituted a "Ponzi Scheme" that defrauded the Payphone Investors, and (iii) Mr. Edwards and Old
ETS had violated the registration requirements and the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, including Rule 10b-5
thereunder. Old ETS stopped entering into the
sale-leaseback transactions and it consented to an injunction against any further such transactions, without admitting or denying any of the SEC's allegations. The District Court in the
SEC lawsuit concluded that the sale-leaseback arrangement was an "investment contract" within the meaning of and subject to the federal securities laws. The United States Court of Appeals
for the Eleventh Circuit reversed the District Court's decision. However, on appeal the United States Supreme Court, in a unanimous decision, reversed the Court of Appeals ruling, finding in favor of
connection with the bankruptcy filings, the Company retained legal counsel and financial advisors to assist in the assessment and restructuring of the Company's operations and
bankruptcy case. A new Chief Executive Officer, Guy A. Longobardo, was hired in February of 2001. The Company's management and advisors sorted out the financial situation and projections for the
Company's operations post-bankruptcy. Extensive negotiations with the committee of creditors appointed in the bankruptcy case took place over a number of months regarding the best
alternatives for liquidating or reorganizing the Company. These discussions led to the development of a business plan that contemplated streamlined payphone operations concentrated primarily on the
East and Gulf coasts.
business plan called for the sale of numerous payphone routes, including those in the U.S. Virgin Islands, California, Wisconsin, Minnesota, and elsewhere.
upon the business plan, the Company and its affiliates proposed a plan for reorganization through the bankruptcy court on July 25, 2001. The plan called for:
sale of unprofitable or non-core payphones and routes;
sale of all ATM's and coin-operated air and vacuum machines;
in operating expenses and staff reductions; and
merger of Old ETS and its nine subsidiaries into a new, reorganized corporation incorporated in Delaware.
June 19, 2001, the Company filed a declaratory judgment action with the Payphone Investors as the class of defendants, to have the sale-leaseback agreements deemed
to be investments and the payphones deemed assets of the Company. The Company's proposal for resolving the litigation with the Payphone Investors, as included in the plan of reorganization filed in
the bankruptcy case, was to issue stock in the Company to the Payphone Investors in place of their sale-leaseback agreements. The plan of reorganization and settlement of the litigation
received overwhelming support from the Payphone Investors.
November 14, 2001, the bankruptcy court issued an order confirming the plan of reorganization. With confirmation of the plan, there was a resolution of the declaratory judgment
action with the Payphone Investors. The recharacterization of the sale-leaseback transactions changed approximately $375,000,000 of liabilities of the Company into assets worth about
to the reorganization plan, the Company began to auction off various assets, including the payphone routes in the U.S. Virgin Islands, California, Florida, Wisconsin, and
Minnesota. In addition, Old ETS was reincorporated on November 8, 2002, under the laws of the State of Delaware and all of the operating subsidiaries were merged into the new Delaware
corporation. With the sale of the payphone routes and removal of unprofitable payphones, the Company reduced its phones in operation to approximately 19,000 from the initial 50,000.
its streamlined operations and the money raised from the sales of assets, the Company was able to exit the chapter 11 bankruptcy proceedings and fund current operations. The
Company exited from bankruptcy on December 5, 2002. Pursuant to the reorganization plan, the Payphone Investors became entitled to receive new, post-bankruptcy common stock in the
As part of the bankruptcy proceedings a trust was established to pursue certain claims and causes of action the Company had against the former management, Charles
Edwards, the independent sales agents who may have violated securities or other laws in the solicitation of the sale-leaseback transactions, and claims for money that was wrongfully
transferred from Old ETS prior to the bankruptcy filing. The trust also includes claims for the recovery of money that was paid by the Company within the ninety days prior to the bankruptcy filing.
This "Litigation Trust" was established for the benefit of the Payphone Investors and the other general unsecured creditors of Old ETS. The Litigation Trust is administered by Darryl
Laddin, Esq., of the law firm Arnall Golden Gregory LLP, a trustee selected by the creditors' committee in the bankruptcy case. The Litigation Trust's assets do not include proceeds from
potential claims the Company may have arising after September 11, 2000, or claims related to breaches of contract prior to such date, the Debtors' interest in New York Local Telephone Company,
claims arising from Old ETS' investments in Mexico, or claims related to end user common line charges that may have been wrongfully assessed by various local exchange carriers, or similar litigation.
in the Litigation Trust will not go to the Company. Eighty-five percent of the proceeds of the Litigation Trust, after expenses, will go to the Payphone Investors.
However, rights to receive payment from the Litigation Trust are completely separate from the Common Stock the Payphone Investors receive. If a Payphone Investor sells the Common Stock received, the
Payphone Investor will still be entitled to receive any proceeds attributable to them from the Litigation Trust. Purchasers of Common Stock will not receive any rights to proceeds from the Litigation
Trust with such Common Stock. The remaining fifteen percent of the Litigation Trust proceeds will be distributed to the other general unsecured creditors of Old ETS.
Company provided an initial $100,000 funding for the Litigation Trust. Pursuant to the Litigation Trust Agreement between the Company and the Litigation Trustee, in the event that
the trust has insufficient funds with which to satisfy professional fees and other expenses of the Litigation Trust, the Company is required to advance funds to the Litigation Trust. The amount
required to be advanced by ETS is subject to limitation as provided in the Litigation Trust Agreement. The Litigation Trust Agreement also provides that upon the receipt of funds by the Litigation
Trust, the Litigation Trust is required to reimburse the Company for all amounts advanced except for the initial $100,000 payment. All funds advanced by ETS to date have been reimbursed by the
Litigation Trust obtained approximately $2,004,000 in late 2004 as a result of legal settlements with Charles Edwards, et. al., working with the United States Attorney's Office for
the Northern District of Georgia. Payments to vendors and shareholders were made as of December 31, 2004 in the amount of $1,612,216, with the remainder of the settlement in the amount of
$392,118 being paid out by the end of February, 2005.
Common Stock Allocation
The Company's plan of reorganization, as confirmed in the bankruptcy court, calls for 5,000,000 shares of Company Common Stock to be distributed to the Payphone
Investors. The number of shares of Common Stock received by each Payphone Investor was dependent upon the amount of each Payphone Investor's claim relative to the total amount of all allowed Payphone
Investor claims. The claim associated with each sale-leaseback agreement was calculated by adding the amount of all monthly payments remaining to be paid under the agreement as of the
filing of the bankruptcy case plus the amount of the initial investment. Adjustments to this formula for calculating claim amounts were made for the situations that deviated from the usual
sale-leaseback transaction, such as when payphones and agreements were provided as a bonus or commission to certain sales agents.
of December 31, 2004, the total number of shares of our Common Stock outstanding, after giving effect to distributions to Payphone Investors and adjustments resulting from
reconciliation of allowed Payphone Investor Claims, was 4,987,624. Approximately 385,347 of these shares have restrictions limiting their transferability as a result of a settlement of litigation by
the Company against the holders of the shares. Pursuant to the settlement, these shareowners are, among other things, restricted from selling more than 25% of their individual aggregate ownership
during any fiscal quarter until the second anniversary of the distribution of the stock (May 12, 2005) without providing the Company notice and the right of first refusal to purchase any of the
restricted shares that are proposed to be sold. The right of first refusal does not apply in certain circumstances, including in the event a market exists for the shares and certain levels of trading
activity are met. The Certificate of Incorporation, confirmed as part of the Plan of Reorganization, authorizes the issuance of up to 6,000,000 shares of Common Stock, including those issued to the
Payphone Industry Development and Current Regulatory Environment
The initial growth of Old ETS in the 1990s coincided with a period of rapid expansion of payphone providers who were independent from the RBOCs. Before the 1984
break-up of AT&T into the RBOCs, there was no obligation to provide line service to payphones. AT&T operated essentially
the payphones, and had no incentive to provide telephone lines to competitors. AT&T paid relatively small commissions to site owners for the right to place a payphone on their premises, which AT&T
presented as more of a utility service to the business owner and their customers than as a profit source for the business.
older payphone systems all of the technology required to provide coin service was located at AT&T's local exchanges and was supplied to each payphone via a "coin line." The
development of microprocessor-based payphones allowed these functions to be performed within the telephone rather than at the exchanges. This technology provided the capability for independent
payphone providers to route calls and determine the proper rate charges. The new systems also included maintenance diagnostics, coin administration, credit card, and reporting features. Independent
payphone providers could now route calls to alternate long-distance and operator services, and store and retrieve call data and billing information. The technological improvements allowed
the owner to share in the non-coin long-distance revenues generated by the payphone, reduce the cost of maintenance and collection, and to monitor coin losses, among other
the break-up of AT&T the RBOCs took over the payphone businesses in their respective areas of the country. However, the court-ordered and regulatory efforts associated
with the break-up of AT&T included requirements to provide coin line service to independent payphone operators at competitive rates. Following a series of FCC and state regulatory rulings
in the 1980s and 1990s, the independent payphone sector developed as an alternative to the payphone service offered by the regional telephone companies. These independent operators found that they
could make a substantial profit even after paying the site owners higher commissions than their RBOC competition.
to 1987, coin calls were the sole source of revenues for independent payphone operators because there was no mechanism for them to receive revenue from collect and
dial-around calls. For most long-distance calls placed on an independent payphone the caller would have to insert a lot of coins or call collect. AT&T would collect and keep
all the money for the call from the other party (except the change that the caller put in the phone). Beginning in 1987, technological and regulatory developments allowed competitive
long-distance services using calling cards and other code numbers (offered by companies such as Sprint and MCI) to develop. These services, which competed with AT&T's
long-distance and operator services, offered independent payphone operators commissions for directing operator assisted or calling card calls to them. However, the payphone operators still
did not receive any revenue from calls where the caller "dialed around" the default service or placed a collect call.
1990, Congress responded to concerns about rates that some of these alternate long-distance providers charged for interstate calls from payphones and other locations (such
as hotels and hospitals) by adopting the Telephone Operator Consumer Services Improvement Act ("TOCSIA"). TOCSIA created new requirements for long-distance companies and the call
aggregators (including the payphone service providers) who utilized the long-distance operator services. In addition, the act directed the FCC to consider the need to compensate
independent payphone operators for all dial-around calls. In May 1992, the FCC ruled that independent payphone operators were entitled to dial-around compensation.
Because of the lack of a system to track compensable calls, reimbursement was originally set at $6.00 per payphone per month.
1996, Congress enacted the Telecommunications Act, eliminating long-standing legal barriers separating regional telephone companies, long-distance carriers,
and cable television companies. The Telecommunications Act also preempted numerous state laws and regulations, in an effort to foster greater competition in all telecommunications market sectors. As a
result, the Telecommunications Act
to accelerate the widespread deployment of independent payphones. Section 276 of the Telecommunications Act focused on several payphone-industry related issues:
FCC was given the power to preempt certain state payphone regulations inconsistent with the Telecommunications Act.
operators would be compensated for dial-around calls. A series of FCC and federal court actions from 1997 through 2004 established the payment amounts
and mechanisms that governed this relationship between the carriers and the payphone providers. These actions are described in more detail below.
for local coin calls would be deregulated by October 1997. Payphone service providers ("PSPs") are not permitted to require that coins be deposited in order to
use payphones for dial-around calls.
payphone operations would be removed from the regulated rate base. RBOCs were also required to make their access lines equally available to the independent, or
competitive local exchange carriers, as well as ensuring that the cost of these lines met the FCC new services test requirements.
were now allowed to select (with the site location owner) the interLATA carrier they wished to use.
now had the right to choose local, intraLATA, and interLATA providers (again, with the site location owner's involvement).
dial-around call compensation issue has developed primary importance because of the potential revenue impact for the PSPs. Many years of FCC, court, carrier, and PSP
actions have culminated in the Fifth Order on Reconsideration and Order on Remand (the "Interim Order"), issued by the FCC on October 23, 2002. This order resolved the remaining issues
surrounding the prior periods of compensation rates and the methodology of payment. Specifically, there were four time periods involved: (1) the "Early" period from June 1992 through
November 1996; (2) the "Interim" period from November 7, 1996 to October 6, 1997; (3) the "Intermediate" period from October 7, 1997 to April 20, 1999;
and (4) the "Post-intermediate" period after April 20, 1999. The FCC mandated a true-up process to reconcile over-payment and under-payment situations
created by years of different reimbursement structures that were now changed as a result of this order. The true-up process included a calculation for interest due from the initial payment
point to the reconciling payment, whether the carrier owed the PSP or vice versa.
FCC decided that no compensation was due from the carriers to the PSPs for the Early period because of the lack of tracking and accounting systems to determine a fair payment scheme.
rate for the Interim period was revised to $35.224 per payphone per month ($0.238 multiplied by a 148 monthly call industry average). The calculation had originally been 131
calls multiplied by $0.35, and had undergone several revisions from 1997 to the date of the Interim Order. Revisions for cost methodology, allowance for flexible automatic number identification cost,
and interest assessments due to the delayed nature of carrier payments (carrier call information is routed through several major clearinghouses on a quarterly basis before payment reaches the PSPs)
were all factored into the payment rationale. The FCC directed each carrier with over $100 million in annual revenues to pay a proportionate amount of the $35.224, depending on their call
volume share in the marketplace. The true-up process occurring in 2003 and ongoing currently has usually resulted in amounts owed by the carriers to PSPs, depending on their original
payments to the PSPs. In a few instances, the PSPs owed payment to the carriers.
rate for the Intermediate period also went through several modifications over time. The FCC finally established $0.238 per call (or $35.224 per phone, if call tracking was not
available) as the
for the period. This typically resulted in a net amount due the carrier since those that had previously paid did so at rates as much as $0.284 per call.
the first quarter of 1999, the FCC released the Third Report and Order and Order on Reconsideration of the Second Report and Order. This Order set the per-call
compensation rate at $0.24. This rate had undergone some adjustments that were effective for the Intermediate period. For the Post-intermediate period, the FCC established a $35.52 default
rate per phone per month ($0.24 multiplied by a 148 monthly call industry average), if no
per-call compensation had been paid by the carrier. Again, this rate varied by carrier, depending on their assessed share of the market.
August 29, 2002 and September 4, 2002 respectively, the American Public Communications Council ("APCC") and the RBOCs filed petitions with the FCC to revisit and
increase the dial-around compensation rate level. Using the FCC's existing formula and adjusted only to reflect current costs and call volumes, the APCC and RBOCs petitions supported an
approximate doubling of the then current $0.24 rate. In response to the petitions, on September 30, 2002 the FCC placed the petitions out for comment and reply comment by interested parties,
seeking input on how the FCC should proceed to address issues raised by the filings. On October 28, 2003 the FCC adopted an Order and Notice of Proposed Rulemaking (the "October 2003
Rulemaking") to determine whether a change to the dial-around rate is warranted, and if so, to determine the amount of the revised rate. In the October 2003 Rulemaking, the FCC
tentatively concluded that the methodology adopted in the Third Report and Order is the appropriate methodology to use in reevaluating the default dial-around compensation rate and
requested comments on, among other things, the cost studies presented in the petitions. In August 2004, the FCC issued an order revising the default compensation rate to $0.494 per call. The
rate became effective on September 27, 2004.
critical industry issue involves the ability of the competitive local exchange carriers to retain access to unbundled network elements ("UNE") originally mandated by the FCC.
This open access to the local exchange carriers network elements created a competitive pricing environment that benefited the PSPs. Network elements were defined as "a facility or equipment used in
the provision of a telecommunications service" that includes "...features, functions, and capabilities that are provided by means of such facility or equipment, including subscriber numbers,
databases, signaling systems, and information sufficient for billing and collection or used in the transmission, routing, or other provisions of a telecommunications service."
the 2003 Triennial Review Order, the FCC revisited the UNE issue and determined that the local exchange carriers must continue to allow competitive local exchange carriers to purchase
those elements necessary to offer local service to PSPs as an alternative to the local exchange carriers' local service. On March 2, 2004, the United States Court of Appeals overturned parts of
the Triennial Review Order, among them, the unbundling rules that affect the PSPs' access to local line service.
FCC ultimately responded to the court's decision with a December 2004 order that became effective March 11, 2005. The order significantly reduced the incumbent local
exchange carrier's obligation to make network elements available to other carriers and providers such that after a twelve month transition period, incumbent local exchange carriers will have no
obligation to provide competitive local exchange carriers with unbundled access to mass market switching. The order provides for increase pricing for such access during the transition period. While
the eventual outcome is uncertain, the effect of the order may increase costs to PSPs.
actions and market factors, often outside the Company's control, could significantly affect the Company's dial-around compensation revenues and line access
charges. These factors include (i) the possibility of administrative proceedings or litigation seeking to modify the dial-around compensation rate, (ii) ongoing technical or
other difficulties in the responsible carriers' ability and willingness to properly track or pay for dial-around calls actually delivered to them, and (iii) the
of administrative proceedings or litigation that may change UNE access by competitive local exchange carriers and therefore affect the cost of local line service to the PSPs.
a result of the changes created by the Telecommunications Act, regulations adopted by the FCC to implement its provisions, and competition from cellular and other wireless forms of
communication, we believe that the public payphone industry continues to undergo fundamental changes. The rapid growth in wireless telephone usage has resulted in declining payphone usage and
revenues. The RBOCs, which control a major share of the payphone market, are no longer permitted to subsidize their public communications businesses with profits from their regulated businesses. It is
estimated that the embedded base of payphones in the United States has contracted from approximately 2.4 million terminals in operation in 1998 to approximately 1.2 million terminals
today, and the market is expected to contract further. BellSouth Corporation exited the public communications business altogether in December 2003. While opportunities exist for the PSP,
competitive and regulatory pressures continue to create a challenging environment as the telecommunications business evolves.
Our primary business is to install and operate payphones pursuant to contracts with location owners. We install public payphones in properties owned or controlled
by others where significant demand exists for public payphone services, such as shopping centers, convenience stores, service stations, grocery stores, hotels, restaurants, airports, truck stops, and
bus terminals. We service and maintain the payphones and collect the revenue generated.
The term of a location agreement with a site owner generally ranges from three to ten years and usually provides for an automatic renewal of the term of the
contract unless it is canceled by the location owner pursuant to the terms of the agreement. We can generally terminate a location agreement on 30 days' prior notice to the location owner if
the payphone does not generate sufficient total revenues for two consecutive months. The duration of the contract and the commission arrangement depends on the location, number of payphones and
revenue potential of the account.
Depending upon the revenues generated by the payphones, we may pay the location owner a commission (typically in accordance with a formula based upon a percentage of the payphone's revenue), or we may
receive a payment from the location owner for providing a payphone to the location.
of December 31, 2004, we owned and operated approximately 16,000 payphones.
Our public payphones generate coin revenues primarily from local calls. Historically, the maximum rate that we could charge for local calls was set by state
regulatory authorities at $0.25 in most cases. Since local payphone coin rates were deregulated in October 1997, we have charged $0.25 to $0.50, depending upon the location, to place a local
coin call from our payphones.
coin calls are typically carried by a long-distance carrier that has contracted to provide transmission services to our payphones. The Company pays
a charge to the long-distance carrier each time the carrier transports a long-distance call for which we receive coin revenue from an end user.
We also receive revenues from non-coin calls made from our payphones. These non-coin calls include credit card, calling card, prepaid
calling card, collect and third-party billed calls where the caller
"0" plus the number or simply dials "0" for an operator. Non-coin calls often require a number of services, including automated or live operators to answer the call, verifying
billing information, validating calling cards and credit cards, routing and transmitting the call to its destination, monitoring the call's duration and determining the charge for the call, and
billing and collecting the applicable charge. We have contracted with a limited number of operator service providers to handle these calls and perform all associated functions, while paying us a
commission on the revenues generated thereby.
accordance with the Telecommunications Act, we also receive additional non-coin revenue from carriers for "dial-around" calls made from our payphones. A
dial-around call is made by dialing an access code for the purpose of reaching a long-distance carrier other than the one designated by the payphone operator or using a
traditional "toll free" number, generally by dialing a 1-800, 888, 877, 866, or 855 number, or a seven-digit "1010XXXX" code.
As of December 31, 2004, the Company had approximately 16,000 payphones in operation in 29 states, Puerto Rico, and the District of Columbia, compared with
approximately 17,000 in operation as of December 31, 2003, and 19,000 in operation at December 31, 2002. As of December 31, 2004, the states in which we have the greatest numbers
of telephones installed were Texas, North Carolina, Georgia, and New York.
select locations for our payphones where there is typically high demand for payphone service, such as shopping centers, convenience stores, service stations, grocery stores, hotels,
restaurants, airports, truck stops, and bus terminals. We rely on a site survey that examines factors including traffic patterns as well as any available historical revenue information in determining
whether to install a payphone.
Our payphones utilize technology that provides voice synthesized calling instructions, counts coins deposited during each call, informs the caller at certain
intervals of the time remaining on each call, and identifies the amount of any additional deposit needed in order to continue the call. The payphones can be programmed from our central computer
facilities to update rate information or to direct different types of calls to particular carriers. Our payphones can also distinguish coins by size and weight, report to its central host computer the
total amount of coin in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number and immediately report attempts at vandalism
or theft. Many of our payphones operate on power available from the telephone lines, thereby avoiding the need for and reliance upon an additional power source at the installation location.
utilize proprietary and non-proprietary software to continuously track coin and non-coin revenues from each payphone, as well as expenses relating to each
payphone, including commissions payable to location owners. Technology utilized by the Company also allows us to:
track and facilitate the activities of our field technicians;
quickly to equipment malfunctions and to minimize "downtime" on our payphones by identifying service problems as quickly as possible; and
track call traffic and make more timely and accurate commission payments to location owners.
provide all technical support required to operate the payphones, such as computers and software and hardware specialists, from our headquarters near Atlanta, Georgia. Each of our
local offices maintains inventories, equipment, spare parts, and accessories for immediate deployment in the field. The Company has not conducted any Company sponsored or customer sponsored research
and development activities during the last two fiscal years.
We assemble payphones from components manufactured by outside suppliers. In addition, we rely on outside suppliers for local line access, billing and collection
services, long-distance, and operator services. We believe that multiple suppliers are available to meet all of the Company's product and service needs at competitive prices and rates, and
expect the availability of such products and services to continue in the future.
payphones comply with all material regulatory requirements regarding the performance and quality of payphone equipment and have all of the operating characteristics required by the
applicable regulatory authorities, including free access to local emergency ("911") telephone numbers, dial-around access to all available carriers, and automatic coin return capability
for incomplete calls. We employ approximately 100 field service technicians, who collect coin boxes and clean and maintain a route of payphones. The technicians also respond to trouble calls made by
location owners, by users of payphones or by the telephone itself as part of its internal diagnostic procedures. Some technicians are also responsible for the installation of new payphones. Due to our
polling and electronic tracking and trouble reporting systems and the ability of our field service technicians to perform on-site service and maintenance functions, we are able to limit
the frequency of trips to the payphones as well as the number of employees needed to service the payphones.
re-utilize parts from payphones removed from field service for repair and installation of payphones and when necessary purchase new or refurbished equipment from various
suppliers. We often assemble, refurbish, and replace payphones or component parts obtained from our inventory or purchased from component manufacturers. These components generally include a metal
case, an integrated circuit board incorporating a microprocessor, a handset and cord, and a coin box and lock.
We obtain local line access from a number of local exchange carriers and competitive local exchange carriers, including MetTel, ECI, BellSouth, Verizon, SBC
Communications, AllTel, Sprint, and a number of other suppliers of local line access. We pay monthly line and/or usage charges to these local exchange carriers to provide service to our payphones.
Long-distance and Operator Services
We outsource our long-distance calls to a long-distance carrier and our operator service operations to a limited number of operator
services providers. The revenue we receive from operator service providers is based on the volume of calls carried and the amount of revenues generated by the calls. We also receive revenues from
long-distance carriers for calls made from our public payphones, including dial-around calls when the caller dials a code to obtain access to an operator service provider or a
long-distance company other than one designated by us.
expect the basic availability of such products and services to continue in the future; however, the continuing availability of alternative sources cannot be assured. Although we are
not aware of any current circumstances that would require us to seek alternative suppliers for any material portion of the products or services used in the operation of our business, transition from
our existing suppliers, if necessary, could have a disruptive effect on our operations and could give rise to unforeseen delays and/or expenses.
Customers, Sales, and Marketing
We contract directly with businesses and also with intermediaries for location agreements. As of December 31, 2004, corporate payphone accounts of 100 or
more payphones represented approximately thirty-one percent of our installed payphone base. One customer accounted for more than ten percent of the Company's payphone operations revenues
As of December 31, 2004, the Company had 133 full-time employees, none of whom are subject to a collective bargaining agreement. The Company
believes that its relationship with its employees is good.
The Company has not experienced any and does not anticipate any material effects, during the current fiscal year, on the Company's capital expenditures, earnings,
and competitive position from compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment.
We compete with other telecommunication providers including providers of wireless services, other payphone providers, and long-distance carriers.
compete with providers of wireless communications services for both local and long-distance traffic. Certain providers of wireless communication services have introduced
rate plans that are competitively priced which have negatively impacted the usage of payphones throughout the nation.
believe that the competitive factors among payphone providers are:
commission payments to a location owner;
ability to serve accounts in various regions or states; and
quality of service and availability of specialized services provided to a location owner and payphone user.
believe we are currently competitive in each of these areas; however most local exchange carriers and some independent payphone providers that we compete against may have
substantially greater financial, marketing, and other resources than we do.
also compete with long-distance carriers that provide dial-around services which can be accessed through our payphones. Certain national
long-distance operator service providers and prepaid calling card providers have implemented extensive advertising, promotions, and distribution schemes which have increased
dial-around activity on payphones, thereby reducing coin revenues and non-coin traffic to our primary providers of operator-assisted services.
December 2003, BellSouth, which operated the largest payphone network in the nine state region comprising the southeastern United States (via its wholly-owned subsidiary
BellSouth Public Communications, Inc.), exited the payphone business. While the Company benefited from this development by obtaining contracts to replace over 2500 BellSouth payphones, the
BellSouth exit is an indication of the difficulties faced by payphone owners as a result of various competitive and regulatory factors impacting the payphone industry. It is estimated that the
embedded base of payphones in the United States has contracted from approximately 2.4 million terminals in operation in 1998 to approximately 1.2 million terminals today.
Our objectives are to continue to rationalize our overall cost structure, increase route density, improve service quality, monitor and remove underperforming
payphones, and add profitable payphones to our base.
The Company has continued the cost-reduction efforts made during the reorganization process. Components of these efforts include:
cost reductionsThe Company continues to reduce its overall line cost by consolidating where possible its local line access providers, utilizing a limited number of incumbent and
competitive local exchange carriers. These actions will optimize pricing and service quality.
EliminationThe Company continues to review its support structure in order to streamline the functions that are provided. This has resulted in the elimination of job functions in
its corporate headquarters, as well as the elimination of administrative functions in Branch offices. Additionally, the Company has completed the consolidation of its warehouse and repair operations
and plans to centralize these at its headquarters.
and Removal of Unprofitable PayphonesThe Company actively monitors the profitability of its payphones and payphone accounts. The Company removes payphones that do not meet
certain profitability thresholds and, given the competitive pressures from cellular telephones and other communications products, the review and removal process is part of the Company's ongoing
ConsolidationIn addition to the efforts with respect to local line access described above, the Company has also consolidated its other coin and non-coin services with
a limited number of carriers. This has enabled the Company to benefit from the volume of its call traffic and obtain favorable rates and service from providers.
and Management Information SystemsThe Company utilizes proprietary and non-proprietary systems to track coin and non-coin revenues from each payphone,
as well as to track other statistical and financial data. The technology used by the Company also allows us to efficiently track and facilitate the activities of our field technicians, to respond
quickly to equipment malfunctions, and to minimize downtime on our payphones by promptly identifying service problems.
Payphone InstallationsThe Company has sought and continues to seek to add profitable locations to its installed payphone base. Among the factors it considers in deciding to place
phones is whether the geographic location allows us to utilize our existing field infrastructure. This permits the Company to have more efficient service and collection routes, increasing the number
of payphones that can be serviced by a technician and permitting faster response time to service problems.
of Service and CollectionIn certain areas where the Company does not have sufficient route density to permit the establishment of efficient service and collection routes, the
Company has sought to reduce costs by outsourcing such services to other providers, either by paying for such services on a per phone basis or by entering into reciprocal arrangements with other
providers. We have also been able to reduce the reliance on independent contractors in areas where we have added payphones to make the establishment of service and collection routes by our own
employees more cost effective. The Company plans to continue its review of service and collection routes to determine the most cost effective manner in which to service, maintain and collect its
The following risk factors should be considered carefully in addition to the other information contained in this Registration Statement.
The enactment of the Telecommunications Act significantly altered the regulatory landscape in which payphone companies operate. Although we believe that the
Telecommunications Act, as implemented by the FCC, addressed certain historical inequities in the payphone marketplace, uncertainties relating to the impact and timing of the implementation of the new
regulatory framework still exist. The uncertainty with the greatest potential financial impact relates to revenue from access code calls and toll-free dialed calls, also referred to as
dial-around compensation. Dial-around compensation accounts for a material percentage of our revenues. Additionally, the March 2004 Court of Appeals decision to vacate
the FCC UNE rules, and the FCC's order in response to this, will have an unknown effect on local line access pricing, but may increase prices to PSPs.
Our future performance and liquidity will depend on a number of factors, including industry performance, general business and economic conditions, the absence of
contingencies, and other
matters, many of which are beyond our control. We have limited financial resources, and it may be the case that we will not have the funds to make capital improvements arising other than in the
ordinary course of business.
We assemble payphones from components provided by outside suppliers. In addition, we rely on outside suppliers for local line access, billing and collection
services, and long-distance and operator services. We believe that multiple suppliers are available to meet all of our product and service needs at competitive prices and rates and expect
the availability of such products and services to continue in the future. However, we cannot assure the continuing availability of alternative sources.
We compete with other telecommunications providers, including providers of wireless services, other payphone providers and long-distance carriers.
Many of these competitors have substantially greater financial, marketing, and other resources than the Company.
Continuous technological change, frequent service and product innovations, and evolving industry standards characterize the telecommunications industry. We
believe that our future success will depend in part on our ability to anticipate technological changes and respond in a timely and effective manner to meet new industry standards. Any failure to keep
pace with technological change (including the technical support component required to operate payphones) and new customer service demands could have a material adverse effect on our business.
Our revenue from payphone operations is affected by seasonal variations. Because many of our payphones are located outdoors, weather patterns have differing
effects on our revenue depending on the region of the country where the payphones are located and the enclosure housing of the phone. For example, our payphones throughout the midwestern and eastern
United States produce their highest call volumes during the second and third quarters, when the climate tends to be more
Seasonal variations in revenues could have a material adverse effect on our business. Changes in the geographic distribution of our payphones may in the future result in different seasonal
variations in our results.
Our Common Stock is not listed on any stock exchange. Our Common Stock was issued to approximately 12,500 individuals and entities who entered into agreements
with Old ETS to purchase payphones. Ownership interests are tracked by the transfer agent, American Stock Transfer and Trust Company ("AST&T"), and transfers of ownership may be documented through
AST&T. The Common Stock is not traded on any recognized stock exchange, stock market or bulletin board system and there are no market makers for the Common Stock. There can be no assurance that an
active or liquid trading market for our shares of Common Stock will develop or be maintained. The number of shares of Common Stock distributed to each Payphone Investor was determined by formula
confirmed by the bankruptcy court and that formula may not be indicative of the market price for the Common Stock following registration.